News Details

Requiring Workers in Nonsafety Jobs to Retire Later Could Save the System

By KEITH RICHMAN
President, California Foundation for Fiscal Responsibility

February 27, 2007

The cost of keeping the promise of generous retirement benefits for state and local government employees is starting to break California taxpayers and government agencies. Elected officials hoping to avoid accountability for massive public debts have mustered only a timid response to this growing fiscal crisis.

In recent years, many state and local governments increased pension and retiree health care benefits with little public concern. Indeed, some public employees now retire at age 55 with generous benefits packages that often replace most of their working income and sometimes include full family medical coverage worth more than $500,000. These additional years of comfortable leisure come at time when private-sector baby boomers are working longer and living longer.

The California Legislative Analyst estimates the retiree health care debt for state and local government agencies may exceed $140 billion. The shortfall in state and local government pension reserves may also exceed $100 billion. Orange County alone owes $1 billion more for retiree health care and $2.3 billion more for promised pension benefits. These huge past-due bills must be paid by future taxpayers from future budgets with money that will be needed for education, health care, transportation and public safety priorities.

The days are numbered of using easy "pay as you go" payment plans for retiree health care costs as government bond rating agencies will use information from new accounting rules to downgrade the creditworthiness of government agencies that are not controlling their costs and reducing their debts.

But instead of designing and negotiating a more fiscally responsible retiree benefit package for new employees, most government leaders are ignoring the growing crisis or waiting for another booming stock market to make the problem go away. Orange County Supervisors Chris Norby and John Moorlach are two of the handful of government officials who have the courage to take on this difficult fiscal issue.

Clearly the first step to getting out of any financial hole is to stop digging. Although benefits for current employees and retirees are protected by law, there is no reason why new employees should be offered the same unsustainable benefits. Indeed, reducing benefits for new employees will reduce future benefit costs, and the savings would help pay for the unfunded retiree benefits debts owed to current employees.

One simple solution that would reduce both pension and retiree health care costs is increasing the retirement age to 65 for new, nonsafety public employees. Experts estimate conforming government retirement ages to Medicare eligibility would reduce pension costs by at least 50 percent (10 more years of payments into the pension fund per employee, 10 fewer years of payments going out and 10 more years of interest) and retiree health care costs by about one third (providing only Medicare supplement coverage).

It is important to note that the physical demands of police and firefighter jobs make 55 a responsible retirement age for public safety employees. Indeed, 55 was the common public-safety retirement age in California before 2000 and remains so for most of the nation.

To protect other state and local budget priorities, we must establish a responsible statewide cap on retirement benefits that is fair to public employees and fair to taxpayers. Any additional compensation needed to attract and retain employees should come from salaries.

During the past decade, state and local officials have been unable to find a retirement package that fairly balances the interests of employees, employers and taxpayers. Raising to 65 the retirement age for new, nonsafety public employees establishes an outer bound for public generosity. There is simply no defensible reason why clerks, diesel mechanics, cooks and bureaucrats working for public agencies should retire 10 years earlier than their private-sector counterparts.

Hopefully, Gov. Schwarzenegger's commission on public employee retirement benefits costs will propose legislation to raise the retirement age for new employees. Nevertheless, a citizens initiative is needed to spur action on a fiscally responsible solution and to serve as a financial backstop should political leaders fail to deliver one of their own.