The View from Right Field

Illinois’ Pension Mess: This Time I Rip on Republicans

When it comes to Illinois’ pension mess, I normally criticize the Democrats.  They have, after all, controlled the governorship and both houses of the legislature since 2003.  With any kind of cooperation – and responsibility, they could have passed something long ago.  But until last week, they didn’t have either 

Last week, though, enough of the Democrats finally got together with Republicans to pass something.  Too many Republicans, however, were missing in action.  I realize the pension plan was not good enough.  More needs to be done.  But this was all there was.  This was the best deal possible.  Voting against it meant putting the whole thing off for another eighteen months.  Also, we have no idea whether even this plan, which isn’t good enough, will pass muster with the Illinois Supreme Court. 

Unfortunately, the Illinois Constitution has a strict provision when it comes to changing pension plans for public employees.  Whether the clause is a good idea or not, it’s there, and we have to deal with it*.  It reads as follows (Article XIII, Section 5):

“Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

It seems clear that this means benefits for past service cannot be changed.  The question is what can be done with benefits for future service.  Public employee unions, and some politicians, say nothing can be done. They claim that once an employee starts work for the state, his or her pension plan is fixed for life – except for increases, of course.  Others say that benefits for future service can be changed.  Unfortunately, the answer is not clear. 

In light of that – and the political realities, the bill that the four legislative leaders (Messrs. Madigan and Cullerton on the Democratic side and Mr. Durkin and Ms. Radogno on the Republican) proposed was probably the best bill possible at this time.  To say that more needed to done may be correct, but it’s not relevant.  This bill doesn’t solve the problem entirely, but it helps.  Even if more needs to be done in the future, the right thing to do was to pass this bill now and make it better later. 

Also, this bill gives us a chance to see what the Illinois Supreme Court will do.  If the Supreme Court says that the state’s constitution doesn’t allow us to do this, then we know we need to change the constitution.  (Either that or default on the pensions at some point down the road.)  If the Court approves the law, its opinion might tell us what more we can do in the future.

I was, therefore, disappointed that only 15 out of 47 Republicans in the Illinois House supported the bill.  (47 out of 71 Democrats in the House voted yes.**)  The Senate was a better story.  Ten out of nineteen Republicans voted yes, which was a higher percentage than the Senate Democrats.  (Only 20 out of 40 Democrats voted yes.)

All in all, it was not an impressive performance by Illinois Republicans.  Of course, it wasn’t impressive that it took the Democrats this long to just barely provide enough votes to get something done (and the Senate Democrats didn’t even provide as many votes, proportionately, as the Republicans did).  But I expect more of Republicans, and I was disappointed how many of them didn’t do what needed to be done.
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*At least until it is changed, but that is another issue for another day.

** Given that a bill needs an absolute majority of each house of the legislature to pass, not just a majority of those voting, not voting or voting “present,” something that state Senator Barack Obama liked to do, was the equivalent of voting “No,” regardless of what the representatives and senators who did it might try to claim.

Social Security and the Fiscal Cliff

As negotiations to avoid the fiscal cliff continue (or not – who really knows), Democrats are saying Social Security is not relevant to getting the deficit under control.  Senator Dick Durbin (D-Ill) said this about Social Security:

“Social Security does not add one penny to our debt -- not a penny. It's a separate funded operation …”

White House Press Secretary Jay Carney agreed:

“We should address the drivers of the deficit, and Social Security is not currently a driver of the deficit.”

In a literal and superficial sense, these statements may be defensible.  But let’s look at the reality behind the technicalities.  While Mr. Carney claims that Social Security is not “currently a driver” of budget deficit, it is certainly increasing the amount of money that the federal government has to borrow each year in order to fund its operations.

Similarly, as Senator Durbin says, Social Security is separately funded – sort of.  There is a separate Social Security tax.  The question is, what happens when the amount of Social Security taxes coming in does not cover the amount of Social Security benefits going out.  My guess is that Senator Durbin would say this is not a problem because that extra money is just coming out of the balance that has been built up in the Social Security Trust Fund over the years.  I, on the other hand, say the federal government has to borrow the money to pay those benefits.  Let’s see who is right – and the answer will explain why Mr. Carney’s and Senator Durbin’s statements are wrong.

I previously talked about how Social Security is financed in my post “How Social Security Fits Into Our Deficit/National Debt/Entitlement Spending Problem”.  Let’s review the situation today.  But first, let’s look at some history, especially as it relates to what happens when Social Security taxes and Social Security payments do not match.  As I said in my earlier post, when Social Security is in surplus, i.e., when we are collecting more in Social Security taxes than we are paying out in Social Security benefits (which is the way it used to be), the Social Security Administration takes the extra money that comes in and “invests” it in U.S. government bonds.  In other words, it gives it to the U.S. Treasury and gets back an IOU.*

Today, however, Social Security is no longer in a surplus situation.  Today the Social Security Administration is collecting less money in taxes than it is paying out in benefits.  So where does the Social Security Administration get the extra money to pay these benefits?  It goes to the U.S. Treasury and asks for some of its money back.  And where does the Treasury get the money to pay to the Social Security Administration?  Simple, it borrows it – along with all of the other money it has to borrow each year.

In other words, politicians can claim that Social Security does not add “to our debt” and that it is not a “driver of the deficit,” but it does add to the amount of money the Treasury has to borrow each year, which seems like debt and deficit to me.  And with more and more the baby boomers retiring each year, it is only going to be worse unless our politicians face up to what is really happening, as opposed to technicalities that sound good and let them put off tough decisions. 

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* In other words, in spite of what some politicians may have told us in the past, there is not and there never has been a “lockbox” where people’s Social Security money was put and protected.  The excess money in Social Security was always given to the U.S. Treasury and used to fund government operations.  When the Social Security Administration needs the money back, the Treasury has to go out and borrow it, unless it has some extra money laying around, which it clearly doesn’t at this point.

Paul Ryan Tells the Truth to AARP

Paul Ryan, the man who, according the President Obama and his campaign, wants to do unspeakable things to Medicare, went to talk to the American Association of Retired Persons on Friday.  This is from an editorial in The Wall Street Journal today*:

“The headlines this weekend were all about the boos Paul Ryan elicited on Friday when he addressed the AARP ….

Mr. Ryan deserves credit merely for showing up ….

AARP CEO Barry Rand used his opening remarks to defend President Obama's health-care bill ….  He then turned the event over to President Obama, who via satellite attacked Mitt Romney and Mr. Ryan for wanting to deny medical care to seniors.

Mr. Ryan … didn't soften his message that Medicare is on a path to bankruptcy if it isn't reformed. …

Largely unreported … was the applause Mr. Ryan received. That came in response to his criticism of ObamaCare's Independent Payment Advisory Board, the 15 ‘unaccountable bureaucrats’ empowered under the Affordable Care Act to make cuts to Medicare that Mr. Ryan rightly said will ‘jeopardize access to care.’ The payment board is largely shielded from Congressional review precisely so it can ration care with little democratic oversight. This is how Mr. Obama will rein in Medicare costs—whether seniors like it or not.

The Wisconsin Congressman was also cheered for his promise that his Medicare premium-support reform would ‘force insurance companies to compete against each other to better serve seniors, with more help for the poor and the sick—and less help for the wealthy.’

Perhaps most striking, Mr. Ryan even earned some applause when he discussed Social Security reform, including ‘slightly raising the retirement age over time and slowing the growth of benefits for those with higher incomes.’ …

The press corps likes to whine that politicians duck the ‘hard choices,’ but when a politician doesn't duck they quickly call it politically foolish and a lost cause. …

Everyone knows that Medicare spending can't continue on its current course, and one difference in this campaign is that Mr. Ryan is willing to say so ….”

In 2003 Don Rumsfeld, then Secretary of Defense, famously said that “you go to war with the army you have, not the army you might want or wish to have at a later time.”  The same is true about political campaigns.  You campaign for the candidates you have.   

Mitt Romney is better than Barack Obama.  Mitt Romney and Paul Ryan are so much better than Barack Obama and Joe Biden that the choice is easy.

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* “Ryan at the AARP,” The Wall Street Journal, September 24, 2012.  You may be able to find it online here.

What Does Social Security Say About Our Kids’ Math Skills?

In those international rankings of how well students do in various subjects, American students often do poorly, especially in science and math.  Their math scores are frequently near the bottom.  But I am not sure that is fair.  I think our kids are pretty smart at math.

I was talking to our daughter recently, and she told me that people her age (i.e., under 30) don’t expect to ever collect anything from Social Security.  They look at things like these:

• More and more boomers are retiring and the number of workers isn’t growing that much.
• Social Security is paying out more in benefits than it is collecting in taxes.
• The date that the Social Security Trust Fund will run out of money keeps getting sooner and sooner.  It’s now in the early 2030s.  A few years ago it was in the late 2030s.
• But it doesn’t really matter when the Social Security Trust Fund is going to run out of money because the Social Security Trust Fund doesn’t really exist.  When we were collecting more Social Security taxes than we were paying out in benefits, Social Security just gave the extra money to the federal government and got back IOUs.  Now Social Security has to collect on those IOUs in order to pay benefits.  And as the gap between Social Security payments being made and Social Security taxes being collected gets bigger, Social Security will need to get more and more money from the federal government – at a time when the federal government has a huge deficit.
• The Democratic leadership in Congress says we don’t need to worry about Social Security because the [pretend] Social Security Trust Fund won’t run out of IOUs (except they say “money”) until the 2030s.  We can worry about it later, they say; i.e., after they’re out of office.

Our daughter and her friends look at these facts, and they add up the numbers.  And they have decided Social Security won’t be there when it is time for them to collect.  Sounds to me that they understand math pretty well.

Social Security Trust Funds Running Out of Money Even Faster

The trustees of the Social Security trust fund issued their annual report yesterday.  And once again, the projected date that the trust fund has been moved up.  Now it’s 2036.  The disability trust fund is in even worse shape.  Its trustees say it is going to run out of funds in 2016, two years earlier than was predicted just last year.

And what is the Obama administration’s response?  Here’s what The Wall Street Journal reported this morning.  First on the disability trust:

“Treasury Secretary Timothy Geithner said the Obama administration would seek to work with Congress to come up with a long-term solution to repair the solvency of the disability trust but didn’t offer specifics. ‘The best thing to do is a long-term solution,’ he said.”*

And on Social Security itself:

“President Obama’s re-election campaign used the new data to attack Mr. Romney …, saying [Romney] would make ‘devastating cuts to Medicare and Social Security’.”*

But what is the President suggesting?:

“The Obama administration has said it would support changes to Social Security to improve the program’s solvency but hasn’t proposed any.”*

In other words, we’re just the Administration.  We can’t be expected to have a program.  Barack Obama doesn’t have a proposal.  He’s just the President.  He’s got an opinion on Trayvon Martin, but nothing on Social Security.  It’s like what Secretary Geithner told Representative Paul Ryan about Representative Ryan’s plan to solve our country’s long-range budget problem: We don’t have a plan.  We just know we don’t like yours.

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* Damian Paletta, “Stress Rises on Social Security,” The Wall Street Journal, April 24, 2012.

What Constitutes Pension “Reform” In Illinois

The headline in Wednesday’s Chicago Tribune (print edition) read: "Pension reforms go to Quinn”.  And it was a good bill.  It stops union leaders from adding time they spend working for the union to the time they spend working for government to get a higher government pension.  While I am sure there was a logic to the original rule, it doesn’t take into account that union salaries are higher than government salaries and that the people involved are getting pensions from the union for the same time.  It got so egregious that two different teachers’ union people were set to get teacher pensions for a combination of one day of teaching and a lot of time as a union official.  (Remember that the next time somebody from a teachers union says they are only interested in the kids.  I am sure is true for many of them, but it certainly isn’t true for all of them.)

In any case, while the headline made this seem like a big deal, it’s really small potatoes.  The real problem is not the pensions these people are getting or were going to get from the state.  It’s the pensions that the state has promised to all of its employees and which it is not funding.  It’s no news by now that Illinois’s public pensions are among the least funded in the nation.  At some point, not only are we going to have to start paying the full amount of our current contribution, we are also going to have to start making up the deficit, too.  And we are going to have to do that at a time when the current contribution is going up.

The situation actually reminds me of the story I heard (and I mentioned before) about the quality triangle: Good, fast, and cheap – pick any two.  Well, if we don’t do something about pensions in Illinois, we are going to have a state government triangle: pay pensions; have semi-reasonable taxes; and properly fund schools, social services, roads, public safety, etc.  And just like the quality triangle, Illinois will be able to pick any two because we won’t be able to have all three.

If our leaders in Springfield don’t want to face up to this, that’s fine.  They can put it off.  But it will happen.  And the longer it takes to deal with it, the worse it’s going to get.

Means-Testing Social Security and Medicare. Why Should We Be Giving Money to the Rich?

As at least some people in Washington struggle with the deficit and what to do with various entitlement programs, there was, a couple of weeks ago, a fascinating exchange, at least in the media, between Republican Representative Paul Ryan, chairman of the House Budget Committee, and Senator Bernie Saunders of Vermont, an independent who calls himself a democratic socialist and who caucuses with the Democrats.

According to Representative Ryan, “Means-testing is an obvious solution to our fiscal problems.  The alternative is everybody gets cut, so why don’t we put the money where it should go -- to the people who need it.”

Senator Sanders, on the other hand, doesn’t agree.  “The strength of Social Security and Medicare is that everybody is in.  Once you start breaking that universality and you say that if you’re above a certain income, two years later that income goes down and 10 years later it becomes a welfare program.”

I don’t know if we can afford Senator Sanders’ position, but I understand his point.  Means-testing could turn Social Security into just another welfare program.

On the other hand, those who favor some kind of means-testing for social security and Medicare, argue like Democratic Representative Steny Hoyer of Maryland:  “I don’t adopt the premise that you’ve got to treat Ross Perot the same as Mr. and Mrs. Jones, who are making $40,000 a year.”  And Karl Rove: “When he start receiving Medicare, Bill Gates should bear a greater share of his healthcare costs than the less healthy or less wealthy.”  And finally, Senator Dick Durbin of Illinois: “We have to acknowledge that some in the highest-income categories, frankly, can take care of themselves.” 

The problem with these comments is that, when you start to look at them, you realize how similar they are to proposals to balance the budget by taxing the rich.  And just as you can’t solve the deficit by taxing the rich (because the money’s not there), you can’t solve Medicare’s problems, or ensure Social Security’s solvency, by cutting benefits for Bill Gates and Ross Perot – or even the people “in the highest-income categories”.* 

To solve the problems of Social Security and Medicare by means-testing, you need real money.  To get at real money, you have to go to at least some part of the middle class.  And if you do this, people are going to be surprised how low those “highest-income categories” wind up going.  I’m not saying it shouldn’t be done.  I’m just saying we need to understand what such proposals really mean and not hide behind references to Bill Gates and Ross Perot.

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* This is not to say that you shouldn’t restrict certain benefits for the really rich.  Just because the money is small, is no reason not to do it.  Every little

Promising Pensions. Paying for Pensions.

Chicago Mayor Richard Daley is mad.  He is complaining about a law that Illinois Governor Pat Quinn signed last week.  The new law requires Chicago to have the pensions for its public safety employees funded at the 90% level by 2035.  And this is making Mayor Daley mad.  He says it will require a 60% in Chicago’s property-tax levy. 

I can see why Mayor Daley is upset.  That would be a huge increase in property taxes.  And it’s not like Mayor Daley has had anything to do with the underfunding.  It’s not like he has been mayor for the last 22 years while the underfunding got worse and worse.  It’s not like he could have done anything in the ‘90s or the 2000s to try to address the problem earlier.  It’s not like he has had anything to do with the fact that worker contributions for their pensions have not increased in 34 years (or at least the last 22 of them).

Oh, wait.  He could have done something about this situation.  He’s been mayor since 1989.  He knew what the problem was.  He wasn’t surprised by what happened – other than the fact the State of Illinois is actually trying to force cities to pay for the pension promises they make.

This is actually a very simple situation.  You promise pensions.  You pay for pensions.  Very simple.  But Mayor Daley doesn’t like it.  He’d actually have to pay for his own promises.

Means-Testing Social Security

Earlier this week, Ross Douthat suggested, in The New York Times, that a new Republican agenda could include means-testing Social Security and Medicare. The Wall Street Journal mentioned the same idea in an editorial on December 29, 2009, though, not surprisingly, they did not mention it in a favorable way.

One concern about means-testing Social Security: If you means-test Social Security, so that people with more money would get lower payments than they would have otherwise received, or maybe no payments at all, even though they paid into Social Security every year while they were working, haven’t you destroyed the universal nature of Social Security – and of the taxes that are paid to support it.

If you means-test Social Security, aren’t you changing Social Security, and the tax monies that support it, into nothing more than just another welfare program – and thus undermining the social consensus that supports Social Security?

Inflation-adjusted increases in Social Security over the last 35 years have helped protect our senior citizens from poverty once they stop working. Those increases were possible because of the consensus supporting Social Security. There never has been this kind of support for programs to aid poorer Americans, and money paid out under those programs has decreased, in inflation-adjusted terms (except for medical care expenses), over the years. (Here and here.) If Social Security becomes just another welfare program, would the same thing happen to it?

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Update (1/8/10 12:08 pm): Added links in the last paragraph.  Also, added the parenthetical to the third sentence in the last paragaph.