Real-World Effects of Pension Debt

Debates over public pension finance often have an abstract quality, taking place outside most people’s immediate concerns. Yet, the real-world effects can be quite tangible. That’s because underfunded pension plans can take up taxpayer dollars that could have gone to public services.

The City of Bakersfield, California, is finding that out the hard way. Last December, city voters approved a 1 percent sales tax hike that was intended to pay to hire additional police and firefighting personnel. However, the city recently announced that it plans to use 25 percent of the money raised by the new tax toward paying down its pension debt. Richard Gearhart, assistant professor of economics at California State University, Bakersfield, said, “I actually think it probably would have failed if [voters] realized how much of the increase in the sales tax revenue is going to the pension debt.”

Voters in Bakersfield would be right to be angry at the city’s current politicians, but they should direct some of that anger for past city officials who negotiated generous pension packages in the first place, while leaving the problem of how to pay for them for their successors to decide.

For politicians seeking public employee unions’ support, such kicking of the can down the road is a can’t-lose proposition. They get to keep their union supporters happy while they avoid angering their constituents by passing the cost on to future taxpayers. When the bill comes due, it’s somebody else’s problem.

For more on public sector unions, see here.