Some elected Democrats have asked me why I agreed to serve on a pension commission to help Chris Christie solve a complicated pension problem. I agreed to serve because the unfunded pension liability of anywhere between $37 billion and $83 billion, depending on investment assumptions, could effectively bankrupt the state. In turn, this would leave its workers with little or no retirement security. I would have helped any governor who asked.
My best guess is that the true unfunded liability is in the middle of these estimates or about $60 billion. This is twice the state’s annual budget. This liability arises from the failure of the last six governors to contribute to the pension system in anywhere near the amounts recommended by actuaries, plus lost earnings on those sums. Newspaper editorials and others warned as early as 1995 that this would lead to a financial crisis down the road.
You can’t solve a problem this big with good choices. The commission came up with the least bad alternatives. We didn’t pick and choose from a menu of options, because despite numerous well-meaning suggestions, a panel composed of some of the nation’s top experts couldn’t find any other realistic options. A solution will require bipartisan cooperation, and since the problem grows by billions each year, delay will likely make a solution impossible.
The basic outline is a tradeoff of reduced benefits in return for finally getting real security around retirement benefits. This requires coming up with over $3 billion more each year in pension contributions over the next 30 years just to make sure that there is enough money to make good on existing pension promises. Since politicians have failed to live up to past promises and even statutory requirements to fund the pension system, only a constitutional requirement will suffice.
The last round of pension reforms in 2011 never addressed where the money would come from, and as I voiced at the time, was therefore destined to fail. This commission has identified three clear sources of revenue. First, public employees receive health care benefits that cost about 50 percent more than what large private companies provide. If those benefits are aligned to private sector norms, the money saved can be recycled to help fill the pension gap.
Second, benefits will have to accrue at a slower rate going forward and the state and employees will have to share the investment risk. That concept still needs refining.
Third, even these measures are unlikely to close the entire gap, so some new revenue will likely need to be pledged to the pension system especially for transitional issues.
Public approval of a constitutional amendment may be difficult to achieve if it involves substantial new revenues, even if just over the short term. At the same time, not all of the savings needed to fund the existing pension liabilities can come from benefit cuts without unfairly penalizing public workers. A small amount of preventative medicine now can save us from a debilitating financial disease within the next decade.
Some politicians may appeal to union leaders to oppose reform until the next gubernatorial election, at which time a “friendlier” administration might offer a better deal. My advice to such leaders: Don’t fall for the sweet talk yet again.
Gov. Whitman gave you statutory protection in return for your support of the ill-fated pension bonds. That protection did you no good. Jim McGreevey on the campaign trail promised public employee unions that he’d be the best friend they ever had in the governor’s office, and then barely contributed to the pension system. Jon Corzine courted the unions, but the pension liabilities only increased on his watch. What would make you think it will be different next time?
There is a deal on the table now that is financially responsible, backed for the first time by clearly identifiable revenues and a constitutional guarantee that those revenues will go into the pension fund. The widening funding gap suggests that there will never be a better deal for public employees. It offers them more control over the structure of their benefit packages. It is also a deal that will save taxpayers big money over the long term.
Demagogery will never disappear from politics, but we can’t let it cost untold billions. We need to act now to give public workers a decent and reliable deal, and taxpayers a reasonable cap on what they will spend on public sector pensions and benefits.
That means that the legislature needs to put a carefully drafted constitutional amendment on the ballot, and voters need to approve it in order to prevent New Jersey from sinking into a financial abyss.