One of the biggest challenges awaiting our next president is the long-term funding shortfall in federal old-age entitlements. How might some of the prospective candidates tackle the problem? We can look for clues in how they address public-pension shortfalls in their own states. In the case of New Jersey governor Chris Christie, the situation is not encouraging.
As an NJ.com article from last week points out, Christie certainly did not create New Jersey’s $83 billion pension shortfall. Before he took office, the state had a longstanding habit of increasing promised pension benefits while decreasing its contributions to the fund. But under Christie the shortfall has grown rather than shrunk. Just this year, the state contributed less than one-fifth of what is supposedly needed for the fund to avoid even more red ink.
Accruing pension benefits are unrelated to how much the government pays into the system. Whether the state pays all of its annual required contribution or none of it, New Jersey public workers continue to earn future pension benefits at exactly the same rate called for under their contracts. That’s why skipping the contribution is so insidious: The state can claim a balanced budget even while falling deeper and deeper into debt.
To his credit, Christie has called for pension reform, and he negotiated a 2011 agreement that increased public-employee contributions. But it wasn’t nearly enough. Now the state awaits the recommendations of a special fiscal commission, which will not offer any easy answers. To federal budget hawks concerned about Social Security and Medicare, this whole situation should sound awfully familiar — lots of talk, little action, and a worsening problem. Would President Christie tackle fiscal challenges more effectively than Governor Christie? So far, there’s not much reason to think so.
Politics aside, the New Jersey experience illustrates the inherent problems with defined-benefit pensions in the public sector. In theory they can work, and there are some places — such as Wisconsin under Governor Scott Walker — where pensions are in decent shape. But the bad incentives are difficult to avoid. Since public employees accrue benefits as they work but do not collect until they retire, allied politicians can finagle the accounting to increase benefits without an immediate hit to the budget. Similarly, states can appear to close holes in their budgets by reducing pension contributions, even though such “cuts” do not save any money at all.
“We wouldn’t have this shortfall if the state had simply made its required contribution every year.” That’s the standard refrain from public-employee unions, but it’s somewhat disingenuous. The annual contribution needed to guarantee benefits is often so high that taxpayers would likely revolt if handed the bill in full. Benefit cuts would have already occurred if the state had not been allowed to kick the pension can down the road. The unions know that, which is why they take an active interest in concealing the full costs.
It’s a messy system that Christie has inherited — one that can hurt taxpayers and ambitious politicians alike.