Thanks To Out Of Control Pensions, Local Governments Spending More To Do Less

The right-left divide on government is between the liberal preference for high-tax, high-service government and the conservative preference for low-tax, low-service government.

But thanks to out of control defined-benefit pensions, what Americans are increasingly getting is high-tax, low service government. The worst of both worlds:

Local governments are spending less on public services because public employee retirement costs are eating up an ever-greater chunk of their budgets, according to a new study by the Manhattan Institute.

“As governments pay more and more for these benefits… policymakers find that governments have less and less to spend on the services that citizens need and expect,” the study’s author, Daniel DiSalvo, wrote. “Call it the “crowding-out” effect: skyrocketing spending on public employees reduces government’s ability to do anything else.”

In Washington, public pensions cost more than half the state budget. Chicago is closing 11 percent of its elementary schools. And New York City Mayor Michael Bloomberg said in March 2012 that every penny collected this year in personal income tax will go toward the city’s pension bill.

Los Angeles spends 91 percent of its general fund revenues on salaries and benefits, according to the Manhattan Institute. The city’s pension costs have jumped in the last decade from 3 percent of the entire budget to 18 percent, and the city’s oversight agency predicts that could rise to 37 percent by 2015.

The problem with defined-benefit pensions, whether they’re for municipal workers or Social Security the national pension system, is that you cannot guarantee benefits on a finite budget. The system inevitably collapses the the increase in the number of people paying in cannot keep pace with the number of people collecting.

Defined-benefit pensions need to be replaced with defined-contribution pensions, like 401k’s and IRA’s.