ROBERT SIEGEL, host:
The impasse between New York City transit workers and the Metropolitan Transportation Authority may be a largely local matter for New Yorkers, but it involves issues that are common to many other public employers around the country. The transit workers in New York have a retirement package of a sort that's disappearing from the private sector: half pay at age 55 after 25 years on the job, with health care. Professor Olivia Mitchell is an expert on employee benefit plans and pensions at The Wharton School of the University of Pennsylvania, and she joins us from Philadelphia.
Professor Mitchell, how common is that kind of retirement plan among public-sector employees?
Dr. OLIVIA MITCHELL (The Wharton School of Business, University of Pennsylvania): In the public sector, there's something like 84,000 state and local entities, and the vast majority of them have defined benefit plans, plans which pay a benefit based on your final salary. So this is a very common model in the public sector.
SIEGEL: In the private sector?
Dr. MITCHELL: It was common 30 years ago, but increasingly that model is dying out. In fact, recently the government surveyed plans and found that a vast number of them had shut down and a larger number had been frozen. So this is really not as common in the private sector any longer.
SIEGEL: So a lot of localities, cities, counties, states, are looking ahead across the years to big retirement costs they're going to be paying out?
Dr. MITCHELL: Well, it's interesting because in the private sector, the government has forced corporations to account for those future pension liabilities. They don't always pay the whole bill, but they have to at least recognize it. In the public sector, by contrast, the employers have not been forced to account for these unfunded liabilities. However, beginning next year, the large states and then slowly the small states and small localities will have to start taking account of those pension promises. And so what's really changing is that all of a sudden the big black holes are going to be revealed.
SIEGEL: I have heard the number a trillion dollars mentioned just estimating what all the black holes might add up to.
Dr. MITCHELL: I've heard a trillion dollars; I've heard $2 trillion. So it's clear that these are going to be very bad numbers as soon as they're revealed.
SIEGEL: But what this means is that a lot of either local authorities or governments that, say, borrow money, issue bonds, have credit ratings, and until now they haven't had to include a statement of `By the way, we owe a zillion dollars over the out years to future retirees.' They will have to do that soon.
Dr. MITCHELL: They will have to do it, and it's beginning to happen already. Some cities--San Diego comes to mind--have already been forced to have their credit rating downgraded. So it will make it more expensive for those states to borrow money, and it potentially will also make it more expensive for residents to live in the states if the states end up raising taxes to cover those shortfalls.
SIEGEL: Now labor unions and people who sympathize with them will often say, `Look, the reason why in this case public employers got into what's going to be a pretty big fix is, instead of paying more in salaries, they gave away future benefits, and therefore it's just a case of the chickens that they sold coming home to roost.'
Dr. MITCHELL: There's a lot of truth to the claim that politicians offered promises they never really thought they would have to pay; they could pass the buck down the road. There's also a lot of procrastination going on in the public sector. For example, the state of Illinois hasn't paid its pension premiums since 1970. There's been a lot of borrowing from the pension fund.
SIEGEL: Well, Professor Mitchell, before you go, can you just tell us something encouraging about the economics of pensions and benefits for retirees in the public sector?
Dr. MITCHELL: Well, it looks better than the health insurance problem.
SIEGEL: That's truly small solace at this point.
Dr. MITCHELL: And I suppose I would add that it looks better than the Social Security shortfall, which is on the order of $10 trillion.
SIEGEL: Well, Professor Olivia Mitchell of The Wharton School at the University of Pennsylvania, thank you very much for talking with us.
Dr. MITCHELL: Thank you very much.
SIEGEL: This is NPR, National Public Radio.
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