Falling into the 'only' trap

I'm remodeling my kitchen, and every time I have to make another decision, I catch myself thinking along these lines: Oh, I'm already spending several thousand dollars; what's another dollar a square foot for these tiles instead of those? What's a hundred dollars more to get this faucet instead of that one? What's a few hundred dollars more to get this range instead of that one? And on and on.

Of course, the "only" trap is not unique to me. Or to kitchen remodeling. Or to spending more money. It can be just as dangerous when the question is how to smartly spend less money.

These days, we're hearing it a lot in terms of state (and federal) budget cuts. And frankly, I'm getting more than a little tired of it. Consider the brewing battle to save money by getting our state government out of the pension business.

A recent Greenville News article noted that S.C. pension funds amount to 2.6 percent of total state spending and quoted an official with the National Association of State Retirement Administrators reassuring us that state and local government pensions "are not a major factor in contributing to fiscal problems." It also quoted a senior fellow at the Center for Budget and Policy Priorities as saying that the national average is about 3.8 percent, and in order to pay down their liabilities over the next 30 years, "it would only require on average an increase to about 5 percent of spending."

Now I'm the last person in the world to criticize putting numbers into perspective. It's what I do for a living. Telling you that the state budget has been cut by $2 billion doesn't mean a thing if you don't know whether it started at $100 billion or $3 billion. (It started at around $7 billion.)

But too often perspective is an excuse for inaction. Don't try this solution because it's not a complete solution. I've heard it in every budget debate I've covered for more than two decades, and it doesn't wash. There isn't any single item that we can eliminate in the state budget that will make our money problems go away. There aren't any 10 things we could eliminate to make our money problems go away, because our problems are huge, and most of the services we provide actually need to be provided, so you can't just get rid of them entirely.

I don't know whether we should cut off enrollment to the State Retirement System and start forcing new workers into the government version of 401(k)s. On the one hand, such defined-contribution plans are the only option available for me and most private-sector workers who are fortunate enough to have any sort of pension. On the other hand, we do rely on generous benefits to make up for the fact that state employees generally receive lower wages than people doing similar work in the private sector.

What I do know is that we can't avoid considering such options simply because the status quo costs us "only" 2.6 percent of our budget, and fully funding the pension system would cost us "only" 5 percent. Those are actually significant portions.

Like Social Security, our state employee pension system is built on an outdated model: We collect revenue from future recipients for too short a time, and pay out benefits for too long. When Social Security was created, most people didn't live long enough to collect benefits; same with pensions. But then we decided people shouldn't have to work until the traditional retirement age of 65 to collect a pension, so we created early retirement. Work for 30 years, and collect benefits, no matter what your age. Then we decided 30 years was too much to ask. In S.C. government, the standard is now 28 years, and police can retire with full benefits after 25 years. Meantime, people kept living longer and longer. The result is that today, it's not at all inconceivable - and it's going to be increasingly common - that a state employee can retire at 50 or so and draw benefits for longer than he worked. That simply is not sustainable.

Clearly, the legislature made a huge mistake when it created the 28-year-retirement option. We should be moving early retirement in the opposite direction - if not eliminating it altogether - and at the same time raising the age for regular retirement.

The problem for states is that they can't reduce pension benefits for anyone who is vested in the pension system. (That's why retirees needn't fret about talk from the governor and a handful of legislators about shutting down the pension system.) So even making drastic changes would do little for years to come to reduce that 2.6 percent of our budget that we spend every year to maintain the system. And it certainly wouldn't eat into that scary $13 billion unfunded liability that our previous governor loved to talk about, because that represents the total amount of money we will have to spend on the pensions of everyone who has worked for or currently works for the state, even if they won't retire for another 28, or 30, or 40 years.

This problem also makes shutting down the pension system a double-edged fiscal sword: Since we'd still have to keep funding the system for the next 30 or 40 years even if we shut it down, it actually could end up costing taxpayers more, for years or decades to come, because the money that new employees contribute to their 401(k)-style plans no longer would help prop up the pension system. Neither would the state's match for those new employees, which instead would be diverted into the new defined-contribution plan.

And that - rather than the fact that pension payments make up "only" 2.6 percent of state spending - is why it's not clear that shutting down the pension system is a smart part of the solution to our fiscal problems.

Contact Scoppe at scoppe@thestate.com.