Pension Reform: Grab the Bull by the Horns

by Sven Larson

What can state pension reform advocates learn from Masutatsu Oyama?

A great deal. Mr. Oyama - or Sosai Oyama as he should properly be referred to - was the founder of kyokushin karate, one of the toughest striking styles of martial arts ever invented. To prove just how tough his style was, Sosai Oyama fought full-grown bulls using nothing but his hands, his feet and the devastating techniques that constitute kyokushin karate.

Needless to say, only a few top experts in kyokushin karate would ever survive an encounter with a bull, let alone defeat it. But what Sosai Oyama proved is that you can overcome even the toughest challenges, so long as you have the right training and the desire to rise to the challenge.

When it comes to state pension reform, sadly it looks like the pro-reform warriors have not quite understood the challenge they are up against. In the past few years many free-market think tanks around the United States have focused a lot of staff time - and a lot of donor money - on changing the formulas by which those pensions are calculated and paid out. Less money out, more money in.

Sounds simple enough, doesn't it?

The only problem is that it does not hold up in court, a point I have been making for several years now. When this public policy fad spread across the think tank landscape a few years ago I argued that you neither should nor can change contractual obligations. A retirement system is a contract between an employer and an employee, or as in the case with Social Security the entitlement dispenser (the federal government) and the entitlee (everyone qualifying for Social Security). A contract should not be changed after the fact, at least not involuntarily. People plan their lives around government and employer promises, a fact that is particularly important when it comes to financial planning for retirement.

An often-heard counter argument is that state employees retire lavishly compared to most private employees, and that there is some sort of lack of fairness in this. I agree - it is entirely unfair since the state, unlike private employers, can forcefully grab people's money. But lack of fairness is not an argument for breaking a contract.

Now the courts are proving me right. In New Jersey a legal challenge to Governor Christie's much-touted state pension reform is making progress in the courts:

The 2011 pension law cut benefits by increasing employee contributions to the state pension fund and eliminating cost-of-living adjustments. When Christie signed it, his office pledged that it would "bring to an end years of broken promises." But subsequent tax revenues fell well below state projections, prompting Christie to unilaterally withhold state pension contributions. That was hard to square with language in the pension bill — the political price paid for legislated cuts — stating, "members of the public-pension systems shall have a contractual right to the annual required contribution amount."

It looks like the entire reform package is going to fall apart - and so for good reasons. A contract is a contract.

At the same time, a ruling by a court in New Jersey does not change the fact that state retirement systems are fiscally unsustainable. So what to do about them? What bull should we grab by the horns?

One moment. First, let us pay a quick visit to Illinois:

The Illinois Supreme Court on Friday struck down a 2013 law that sought to fix the nation's worst government-employee pension crisis, a ruling that forces the state to find another way to overcome a massive budget deficit. In a unanimous decision, the seven justices declared the law passed 18 months ago violates the state constitution because it would leave pension promises "diminished or impaired." "In enacting the provisions, the General Assembly overstepped the scope of its legislative power. This court is therefore obligated to declare those provisions invalid," Justice Lloyd Karmeier said in writing the court's opinion. The decree puts new Republican Gov. Bruce Rauner and Democrats who control the General Assembly back at the starting line in trying to figure out how to wrestle down a $111 billion deficit in what's necessary to cover its state employee retirement obligations. The hole is so deep the state has in recent years had to reserve up to $7 billion -- or one-fifth of its operating funds -- to keep pace.

I am not going to go into details about what think tanks have done what in promoting this kind, or similar versions of, pension reform. The point here is not to cast blame. The point is instead that the movement has wasted millions of donor dollars and countless hours of manpower on the wrong challenge - trying to recalibrate the existing system - when there is a big bad bull waiting for them.

Called the "welfare state" it consists of a myriad of entitlement programs, dispensing hundreds of billions of dollars every year to groups of citizens deemed "entitled". The more programs there are, and the larger those programs become, the more government employees will be needed to run them.

End the entitlement programs - terminate the welfare state - and the problem with large masses of retiring state workers will solve itself.

Entitlement reform is not easy. But it can be done, at the state level as well as with federally sponsored programs. It requires a whole lot more work upfront, especially in convincing legislators and the general public that it is the way forward. But if we are not willing to grab that bull by the horns, then why are we in this fight in the first place?