Sometimes A Pension Cut Is Just a Pension Cut

Sometimes A Pension Cut Is Just a Pension Cut

Sometimes A Pension Cut Is Just a Pension Cut

Moneybox
A blog about business and economics.
June 7 2012 11:56 AM

Sometimes A Pension Cut Is Just a Pension Cut

When state and local governments make tax and spending plans, they do so relative to some underlying assumptions about revenue levels. Those revenue assumptions are, in turn, driven by assumptions about macroeconomic conditions. When actual macroeconomic conditions prove to be worse than previously anticipated, it's necessary to revise those tax and spending plans. Municipal governments, in particular, have no real ability to impact national and global macroeconomic trends. The relevant decisions are above their pay grade. If macro stabilization policy fails, all local authorities can do is decide how many unexpected tax hikes and unexpected spending cuts to make.

Since one thing that all municipal governments spend money on is employee pensions, you'd expect some local governments forced to revise their previous tax and spending decisions to respond in part by cutting employee pensions.

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That seems like a simple enough story to me.

But a lot of people are instead responding to public sector pension cuts in San Diego and San Jose as part of a broad wave of hostility to labor unions in general or public sector unions in particular.

I think this largely reflects political pundits' difficulty getting inside the heads of normal people who are much less soaked in politics. There's a tendency in political circles where every time a controversy arises about which unions have strong feelings to construe people's feelings on the issue as reflecting feelings about unions. But this seems mistaken to me. Consider it from the other direction. Unions would, for obvious reasons, rather not have their pensions cut. They might prefer tax hikes as an alternative. You could go around wondering why labor unions have all this hostility to taxpayers, why are they always trying to get their money, etc., but the truth is that there's nothing to be explained here. The union isn't hostile to taxpayers, the union is hostile to having its pensions cut! Conversely, if voters choose pension cuts over taxes that's not because they don't like unions it's because they don't like taxes.

Note that at the federal level everyone from Barack Obama and Nancy Pelosi on down agrees that it would be unconscienable to ask the American middle class to pay higher taxes. The entire debate is about raising taxes on 1-3 percent of the population. Municipalities operate with a much broader and more regressive tax base than the federal government so that option's not open to them. Consequently, a bad economy leads to reduced spending on all kinds of things. Including pensions. Which is bad for the workers whose pensions get cut and naturally unions will fight back. And to a deeply political person that may look like a controversy about the decades-long decline of American labor unions and the macro structure of American politics, but to a normal person it's just a question about paying more taxes or less.