Friday, May 21, 2010

Public Sector Pensions and non-Ricardian Voters

The question of whether the US will become Greece is surely too pessimistic. But the article in today's NYTimes on public pensions does take away one's breath.
In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year.
Apparently police officers perform overtime to jack up their payments. Some of this overtime is actually paid work for Con Ed, and according to State Law should not count as overtime.
The city has even arranged for its police to put in overtime as flagmen on Consolidated Edison construction sites. Though a company is paying the bill, the city is actually reporting the work as city overtime to the New York State pension fund, padding future payouts — an arrangement at odds with the spirit of public employment, if not the law.

A spokesman for the New York State comptroller’s office said that the city was in error and pointed to a 1986 decision by the Supreme Court of New York that found that hours worked by police for outside businesses could not be included in their state-paid pensions.

“It has long been established that such overtime from private special duty cannot be included,” said the spokesman, Mark Johnson.

Of course the problem is not special to New York. Roger Lowenstein wrote about this in his book, While America Aged.

The problem is one of political economy. Public sector unions are important vote machines, and pensions impose future costs not present one. Of course if voters were Ricardian this would not work. The Ricardian Equivalence Theorem (which Ricardo did not believe in) says that what matters is the present value of taxation not its timing. So the fact that votes are bought by promising future pensions that are not funded should be completely understood by voters who would consider current taxes to be an equivalent burden. But clearly voters are not Ricardian since they vote for politicians who impose these future burdens all the time.