Eli Lehrer of the Heartland Institute has an article in the Weekly Standard claiming that underfunded pension plans are not the problem with state budgets. This paragraph is a good summary of his article.
In the end, many states facing very large current budget gaps—New York, Florida, Texas, and Wisconsin among them—have pension systems that are likely capable of paying their obligations indefinitely with only minimal tweaks. Even in California, where absurdly generous public employee pensions have attracted enormous media attention, both of the major pension funds have shortages of around 10 percent that the state could cover pretty easily with some combination of economic growth, tax hikes, and service cuts, if its other fiscal problems were not so severe.
I’m a fan of some of Eli’s work, particularly his efforts to bar discriminatory taxes on foreign reinsurance companies (here’s my similar take on the issue). On the other hand, I’m distressed that Eli recently endorsed higher taxes.
Writing for National Review, Veronique de Rugy of Mercatus took issue with Eli’s article. Eli responded here, which then led to comments from Yuval Levin and Nicole Gelinas.
I think Veronique wins the debate. Eli’s case is only plausible if you accept his very narrow definition that “the problem” is short-term state budget deficits.
But I think the discussion is too narrow for two reasons (though both reasons are connected to the fact that government workers are overpaid relatively to people in the productive sector of the economy).
1. The generous pay and benefits for government workers diverts labor from more productive uses. The undermines growth.
2. The generous pay and benefits for government workers is unfair to the (generally less well off) private sector workers who foot the bill.
In other words, even if Eli was right (and I don’t think he is), there are powerful arguments for scaling back the overall compensation of government employees.
