The Angry Economist

Pensions, Benefits and Public Employees
Posted by William P. McGowan, Ph. D. on Jul 24, 2005 - 7:56:00 PM

The opinions expressed on this page are those of the writers; they do not necessarily reflect the opinions of Canyon News.           

Several years ago I attended a party where the main topic of conversation was pensions and benefits. No, this was not some gathering of accounting geeks, but rather a social gathering of folks who all worked for United Airlines, a company currently on the brink of bankruptcy. The conversationalists were international flight attendants, and they made a point of letting me know that a) they were the cream of the flight attendant crop, and b) they’d never go back to humdrum workaday routines of domestic travel.

Silently, I knew that the jobs they described, with seven-day work months paying $80-$90,000 a year with benefits, couldn’t last.  They didn’t. Today, of the three ladies at that party, two took early retirement, while the third couldn’t afford to leave United.  She now works four-day weeks as a domestic flight attendant and is thankful to have the job. 


While the convenient excuse for the collapse at United (or any other airline) is to blame 9-11, the reality is that airline worker benefits and salaries were at unsustainable levels long before the terrorist attacks.  The minute United stopped flying, and its cash flow was interrupted, the entire house of cards came tumbling down. Simply put, the airlines were paying too much to their employees and too little to their stockholders.  In the end, both got burned.


United Airlines' experience is important because we are now seeing its repetition in the public sector, where benefits and pensions have gotten so far out of whack that they are, like those cushy jobs at United Airlines, unsustainable.   Before anyone attacks me for being anti-bureaucrat on principle, recognize that my argument is based on the economic principle of capitalistic competition. No matter what, in a capitalist economy, success breeds emulation, which in turn brings down prices. If United Airlines charges $600 for a one-way flight from San Francisco to Los Angeles, it creates an opportunity for someone like, say, Southwest Airlines, to come in, offer a lower price and still make money.


The problem arises when the innovator fails to respond to the challenges of the upstart.  That’s what happened in the airline sector: companies and their unions (especially at United) refused to recognize the competition Southwest and others brought to the market.   The same can be said of public employee unions, who refuse to recognize that the work place has changed.  Full benefits for private sector employees and their families are a rarity, if not completely outdated, but not in the public sector.  Most public jobs offer full benefits, not only for the employee, but also for the entire family.  In many Southern California counties, public sector jobs allow retirement at 100 percent of annual pay after just 20 years of service.  


The reason the private sector doesn’t do this is because it is economically unsustainable.  Sure, companies can pay out big benefits when times are good, but when times get tough, they can’t pay their operating costs, much less their pension obligations.  Public employees, like those three United flight attendants, foolishly believe their pensions and benefits are immune to economic fluctuation because of the strength of their employer.  In 2000, United Airlines seemed invincible; not today. State, county and city workers believe they are immune from the same problems because they work in the public sector, where their benefits are guaranteed.  And to a degree, they’re right.


The problem is that their unions have been so successful in getting benefit increases for their members that many counties in California are going broke funding them---they’ve committed so much of their resources to paying benefits that they are running out of money to fund day-to-day operations, which forces them to go back to taxpayers for more money. In essence, California’s pubic employee unions are playing a game of financial chicken, hoping the taxpayer will flinch before the inevitable collision.


In state with a history of taxpayer revolt, that’s a risky game to play.



You can reach William P. McGowan at