A Different Drummer

Zero sum game

Geoff Schoos
Posted 11/16/11

There are times when there are just so many topics to choose from that it’s difficult to select what to write about. There are the tragic events enveloping (un)Happy Valley. There’s the …

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A Different Drummer

Zero sum game

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There are times when there are just so many topics to choose from that it’s difficult to select what to write about. There are the tragic events enveloping (un)Happy Valley. There’s the Republican presidential candidate who can’t remember who his accusers are or what he is accused of. There’s another Republican candidate who can’t remember which departments he wants to shut down. Then there’s the economic disaster formerly known as Europe. I could even write this week about money in politics and its influence on policy.

But I think I want to write about the pension reform to be voted on by the General Assembly. It’s not my intent to get into the weeds on this proposal. Rather, I want to get into a broader policy discussion about the process by which this “reform” will be enacted.

I have to say from the outset that if I had to vote on this proposal, I really don’t know how I’d vote. On the one hand, we have an economically unsustainable obligation that is grossly underfunded. If nothing is done and the state pension system is allowed to continue without adjustments, the taxpayers are on the hook for paying a lot of dollars into the system at the exclusion of other necessary services. It’s even more critical for our cities and towns.

The state’s taxpayers, many of whom are hanging onto their homes and jobs by a thread, and still others who have no income or fixed incomes, are already strapped. They can’t be asked to financially double down on a system that is teetering on the brink of financial ruin. Financial reform of the pension system is imperative.

On the other hand, cutting benefits to those who already have retired and had planned on these defined benefits seems immoral. These workers met their obligation and now, rightly it seems to me, insist that the state (or cities and towns) do the same. We read about the retirees who receive pensions almost equal to, and in some cases more, than they earned during their work lives. However, there are many more that we don’t hear or read about. These are the retirees who didn’t have the well-paying jobs and who are receiving considerably more modest benefits than those reported on the front pages of the statewide newspaper or railed against on talk radio.

Last week, amendments related to COLAs and retirement age were offered and were approved by the House and Senate Finance Committees. We are told that these amendments will not impact the underlying financial integrity of the reform proposal. Of more concern to me than any amendment is the projected 7.5 percent annual rate of return on investment of pension funds over the life of the reform. If I understand the proposal correctly, this rate of return is integral to the plan’s success.

I’m generally optimistic, but this projected rate of return seems almost Pollyannaish to me. When I read that projection, I couldn’t help but think that sometimes authors of such proposals stick in a projection like this in order to make the math work. I’m not saying that’s the case here. I’m just saying that to my cynical eye, it looks like it could be the case.

But while I’m at it, I want to address a point that’s raised every so often about public employee pension systems. Some complain that the system is a defined benefit system in a world where private sector employees rely on pensions based on defined contributions. Critics of the public system point and ask why the public system, which guarantees a basic standard of benefits, can’t be more like the non-guaranteed benefits in the private sector? To that I would ask why the private sector isn’t more like its public counterpart.

The defined benefit versus defined contribution argument is nothing more than not-so-disguised union bashing. Some blame the unions for getting all these neat benefits. However, there were those in management, we call these guys officeholders, who gave the public employees those benefits. In exchange, they hoped the unions would favor them in the next election, which they did.

However, the problem wasn’t born of the granting of negotiated benefits. Rather it was born by these same officeholders not funding these pension benefits. Year after year, at both the state and local levels, these pensions were underfunded. The reason was simple. In order to fund these pensions, money would need to come from increased taxes, reduced services, or both. Better to kick this can down the road and deal with it another day.

All that aside, when all is said and done, what we’re left with are two competing groups, each with legitimate concerns. On one side we have cash-strapped taxpayers. On the other, we have pensioners living on fixed incomes.

In order for one side to prevail, the other side must lose. This is the quintessential zero sum game. And this is what I really want to write about.

As I see it, there are two problems with the assumptions at the heart of this plan. It exists in a vacuum without ever being influenced by any externalities, and it implicitly assumes a relatively static economy. The problem is that externalities do impact policy, and we (hopefully) do not live in a static economy.

What do I mean by externalities? One example would be for retirees living beyond their projected life expectancies. That will obviously lead to increased pension payments, and would likely increase the cost of health care for these longer living folks. If more retirees live longer than projected, then it’s less likely that we’ll achieve our goal of having the pension system 80 percent funded in 19 years. And if not, then what?

I didn’t memorize all 122 pages of the proposed reform legislation, but I did give it a glance and didn’t find much about how the economy will grow over the next two decades. Yet that must’ve been a consideration because where else would the authors of the plan have come up with a rosy projection of 7.5 percent return on investment?

This is an incremental plan that, if left on its own, will likely fail in its goals, and then we’ll be back doing this all over again. However, if linked with a real comprehensive program of economic development and reform, then the implementation of pension reform would likely be fairer and less divisive. And who knows? It might even work.

For in the end, this plan strikes me as another in a long line of plans and programs designed to balance the budgets and pay for the sins of the past from the decreasing resources of low-income and middle class Rhode Islanders.

In the last analysis, writing this column has made me see what really bothers me about this reform. It’s that it is the same old, same old. Where clarity of vision is called for, we get myopia. Where creativity is called for, we get the same tired approaches to problems. Where we see the zero sum game involving two known groups, hidden is the unseen zero sum game where one group, exempt from contributing its fair share to the community, wins while the rest of us loses.

Who says that writing a column can’t be occasionally therapeutic and cathartic?

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