Thursday, February 25, 2010

USA: Public-Sector’s Retirement on Privet Sector’s Dime

The political arguments over the federal debt levels have been raging in Washington for decades. We have heard political leaders preach responsibly and then pass bills that spend needlessly. It seems to me the United States public has resigned itself to these wasted promises and accepted the status quo. If all the debt problems stayed in Washington, accepting the status quo might be an acceptable path for the public to take because eventually Washington will not be able to spend any more. However, the debt crises is striking much closer to citizen’s homes and not staying in Washington.

States across the nation are facing an immediate pension shortfall in the next few years. All 50 states pension budget gap, between benefits promised and assets to pay, total a staggering $1 Trillion dollars in December 2008. Making the predicament even more worrisome is the shortfall has gotten worse since 2008 but the actual figures have not been calculated yet. The recession has hit state pension plans hard for a variety of reasons but it is clear if adjustments are not made soon, entire states may have to file for bankruptcy which would add to the federal debt load and hurt many states credit ratings.

The question I had was how states had shortfalls when most states are not legally allowed to borrow money like the federal government? States have the pesky problem of balancing the budget on a yearly basis unlike Washington but I could not find were the money was going. I found the problem lies in municipal employees. For decades public-sector jobs have seen huge increases in salaries, benefits and pensions compared to private sector jobs. Increases in all of these areas are not a problem by itself but the spending balloons when unions get involved with government bureaucracy.

37% of state government workers are unionized compared to 7% private sector workers in 2008. Public unions have held above 30% of the work force for 25 years and in the process have pushed harder and harder for more benefits, greater job security and larger pensions. This has created expensive city budgets that have come under greater stress over the last few years. For example, 61% of spending in Philadelphia is spent on the work force and the benefits that go along with those workers. The system is becoming hard to hold up but how much do government employees make compared to private workers?

Government employees earn 21% more than private workers and have a 24% greater chance of receiving full health care benefits. 84% of state and local workers have defined-benefit retirement plans compared to 21% of private workers. Many might feel that it is not a big deal but the problem is states and cities can no longer afford such extravagant retirement plans. In 2008, Vallejo, California went into bankruptcy because of the labor costs and retirement plans and still has not gotten out of bankruptcy court due to public unions striking and refusing to give up pensions. Many more cites are about to follow. Harrisburg, Pennsylvania is trying to make a $2 million payment by March 1 due to union worker costs.

Some cities and states are making the adjustments required to save budgets but union workers are not taking cuts quietly. Many public workers go on strike and shut down services to cities and states. These strikes are devastating to local economies because many public works have a monopoly on services leaving the citizens that pay their salaries at the mercy of the strikers and government officials trying to balance the budget have to give in due to the fact new workers cannot be hired quickly enough to get basic services running again.

So that leaves the rest of us to pay for the shortfall so our state or city does not go belly up. Not only do we pay government workers more money then private sector jobs, but we get less productivity as well. It is also very hard to reform workers to get more productivity due to union contracts that retain workers for decades even if they do little to no work. After decades of low productivity the rest of us pay for their fat tax free retirement pensions they did not have contribute to. The private sector has to pay higher taxes and cut services we pay workers to take care of. It is a vicious circle of fewer services for more money. No wonder Greece is going bankrupt for the same reasons. Everyone one in the private sector better get out our check books because we have to pay public sector retirement out of our savings. Also, Municipal bond holders might want to watch out.

2/18/10 The Wall Street Journal “Municipal threat”
12/10/09 The Economist, “Public sector unions, welcome to the real world”
2/20/10 The Economist, “State-Level Pensions: Promises to keep.

Wednesday, February 24, 2010

It is All Greek to Grecce

Every morning I log onto the Wall Street to read the finical headlines and just about everyday there is an article dedicated to the massive debt Greece is finally having to come to terms with. When the world discovered Greece might default on the national debt a month ago the world had a panic attack. Investors across the globe worried Greece was the first in a long chain of nations to go belly up in financial Armageddon.

However, the dominions have not tipped quite yet and it seems Germany will come to the aid of Greece on several conditions. Germany is willing to help if Greece cuts back on spending and creates a long term plan for paying off the debt. Investors relaxed and went back to watching Olympic curing on CNBC with the comforting knowledge the world might not end before Ice Dancing is wrapped up. The problem with relying on Germany to save the world is many investors and political leaders are forgetting the social unrest that Greece and other socialized countries face when they try to cap their huge budget shortfalls.

The forgotten factor in all of the international wheeling and dealing is the citizens of the socialist countries. The people of Greece have been promised every type of social program imaginable in return for votes. However, taking the benefits without paying the taxes has created an enormous deficit which needs to be controlled if Greece has any hope of getting aid from the European Union or Germany. According to The Wall Street Journal, Greece has pledged to cut their deficit from 12.7% of GDP to 8.7% by the end of the year. These austerity cuts will come in the form of a freeze on public worker’s raises, cuts in public-sector entitlements by 10% and closing many tax loopholes on civil servants and the wealthy.

Greek’s responded with a massive nationwide strike yesterday that crippled the country. The international airport closed, the newspapers closed, many schools and universities closed, when all the public workers took to the streets with signs that said, “keep your hands off our benefits” and “people are more important than markets and banks.” The president of the civil servants labor union stated, “we can’t take any more austerity measures.”

The problem with not cutting back on spending is the government will default on its loans in March and send the country into a depression. There is no question about what will happen but the public sector unions do not seem to realize the situation and the part they play in the problem. Public sector employees are paid 14 months of wage every 12 months; this essentially is a mandatory bonus the government pays. In addition all government employees pay 10% less taxes then their private counterparts. One in three workers in Greece are civil servants and these workers can retire as early as 54 with 96% of their post-pension wages. These civil servants are earning full payment for being retired. The private sector workers can’t retire until 62.

The lesson the rest of the world should take away from Greece is balancing a budget is not a burden, it is a reality. It is fine to have a socialist system if that is what the citizens’ want but the country has to pay for the socialism, the money does not grow on olive trees. The civil servants of Greece have become spoiled on high government checks and avoiding most taxes yet they blame the rich and the European Union for causing the budget shortfalls. The question for America, can we keep holding out our hands for benefits without paying taxes? Eventually America will end up like Greece. It might be time to readjust our opinions of federal handouts.

Wall Street 2/24/10 “Greek Strikes Cripple government”

Thursday, February 18, 2010

Bi-Partisan Agreement on Nuclear Energy

Earlier this week President Obama held a press conference to discuss the new loan options for a new wave of nuclear power plants. The President added over 8 billion dollars of loan guaranties to creditors and utility companies that decide to invest in nuclear energy. These new guaranties bring the total of nuclear loan funds to 58 billion dollars.

After 37 years America can once again tap into the most efficient energy source in the world. Both parties in congress have already made progress on bi-partisan support for new nuclear power plants in the United States. In a time of gridlock in Washington, this new development is a fresh breeze in a stifled energy market. The recession has strained alternative energy sources such as wind and solar due to their high operating cost and inability to help base power grids with energy consumption.

Nuclear energy solves several political and economic problems in the United States. Conservatives want energy production to increase within in the United States’ boarders. This would help create jobs, stabilize the economy, increase federal revenues, and curtail US dependence on foreign oil. Liberals want to cut CO2 emissions, create jobs and focus on the environment. Nuclear energy accommodates both liberal and conservative views. Nuclear reactors emit zero CO2, provide jobs in construction and manufacturing, cuts dependence on forging oil, and allows stable base-power load for renewable energy.

However, the transition to new nuclear energy will not be easy due to lobby groups that feel the danger of nuclear energy is not the solution the country needs. These anti-nuclear sentiments are rooted deep in the American psyche. From the three eyed fish that lives outside the nuclear plant on The Simpson’s to Three mile Island in New York, Americans fear the unknown dangers of nuclear energy. Because of this strong public opinion on nuclear energy the US has not built a nuclear power plant that is still operating since 1973 yet nuclear energy still accounts for 20 percent of electricity in the US.

Something has to give. The United States is the richest country in the world but still runs on the same coal technology that started the first industrial revolution. Renewable energy will not reduce CO2 emissions in the short or long term without coal, oil, natural gas, or nuclear energy. The grid needs to be upgraded and building nuclear power plants will encourage new grid technology to be utilized. In addition, America cannot support standing armies in the Middle East defending oil supplies or allow OPEC to dictate oil prices. Nuclear energy is the only solution to all of these problems.

Fortunately, the newest generation of nuclear power reactors can be constructed in factories and shipped by rail. According to the Wall Street Journal (WSJ 02/18/10 A-1) these small reactors can be produced in factories rather than building them onsite which cuts down on cost and building time for new power plants. The time for nuclear energy is here and it is time to readdress many unfounded fears about nuclear energy and radiation in America.