Are Teachers 'Special'? Is Anyone? Why?

By: Mike Shedlock | Thu, Feb 3, 2011
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In response to New York Mayor Seeks Pension Overhaul; New Jersey Governor Tells Unions "Sue Me" Over Pension Cuts I received yet another email stating a line I frequently hear, that some occupations are "special" and need protection.

Here is the exact statement: "I think that teachers are special and must be separated out in this debate and protected."

Ironically, if anyone is "special" in the student-teacher relationship, it is the students (and those who cannot protect themselves), not the teachers!

With no disrespect to teachers or any other profession, no one is "more special" than anyone else.

People who believe they are special are a huge part of the problem. Everyone wants their group protected at the expense of everyone else. Every group has their own excuse why they are special. It's one of the reasons we are in this mess.

The person who emailed me has decidedly biased opinion (his wife is a teacher). I also hear it from police think they are special because their lives are on the line.

However, stats show that agricultural work is far more dangerous than police work. Fishing and roofing are of the most dangerous professions of all. Should fisherman, roofers, and agricultural workers get "special" pension benefits?

It is time to stop kidding ourselves and admit that no working class is more special than any other class.


Correcting Outrageous Pensions

Having laid sound rationale that no one is special, I recognize there are many teachers and others whose pensions are not that large. It is generally police, fire, administrators, and politicians whose pensions are most outrageous.

I have already proposed a solution to that problem: Tax pension benefits above a certain level, take the money out upfront, and put it back into the pension plans to make them solvent.

Many police, fire, school administrators, now collect $75,000 pensions and up. Worse yet, many retire at age 55. There are many who receive well in excess of $100,000 a year annually, then continue to work as contractors. This is preposterous.

First, the retirement age needs to increase to some realistic level, preferably pegged to the same level as the SS retirement age, but certainly no sooner than age 62.

Next, we should tax excessive pensions heavily. I do not know what the precise point, but it should be set at a level that will make the pension plans solvent in a reasonable period of time, say 10 years, with a reasonable discount rate of the lower of 5% or the long-bond yield.

As a side note, from this starting point in Case-Shiller PE ratios, 5% is actually far too generous.


Higher Taxes Will Not Fly

The alternative to my proposal is bankruptcy or default. Higher taxes will not fly.

People have had enough of higher taxes that go to ungrateful union members who think they are entitled to "special" benefits the average person can only dream about. It is very important for unions to see that.


Bankruptcy vs. Default

In bankruptcy, a judge may very well smack everyone equally. In a default, (Pritchard, Alabama is a good example) no one may get anything at all.

In case you missed it, please consider Alabama Town Defaults on Pensions, Breaks State Law; Renewed Calls For San Diego Bankruptcy; "Prichard is the Future"

The dubious honor of being the first city in the nation to completely default on pension obligations goes to Prichard, Alabama. The city has sought bankruptcy protection twice and is flat broke. It faces a choice of paying to keep city services like police and garbage running or pay pensions. It selected the former.


Vallejo Wins Right to Unilaterally Change Contracts

Vallejo, California went bankrupt and won the right to unilaterally change contracts. I discussed that situation in Vallejo Bankruptcy Plan Offers Unsecured Creditors 5-20%; JPMorgan CEO Forecasts More Municipal Bankruptcies; Bernanke Will Not Rescue Cities


Benefit Haircuts Coming

Here's the deal. Like it or not, benefit haircuts are coming in one of four ways.

  1. Haircuts can be realistically negotiated now
  2. Haircuts can be painfully renegotiated over time in multiple contentious negotiations
  3. Haircuts can be settled via default
  4. Haircuts can be settled in bankruptcy court.

Those are the options. The status quo does not work.

In terms of fairness, (assuming fairness is one of the goals), those with the most outrageous benefits should be the ones to bear the brunt of the reform. Think that will happen in bankruptcy court, when the judge has his benefits to protect?

A properly set tax level on excessive benefits combined with changes in retirement age and contribution levels should be sufficient to protect the benefits of most of the members.

If unions stopped insisting on what they cannot get and instead focused on something viable, union members should endorse the above proposals (alternatively, any other proposals that fix the problem with raising taxes or putting the public at risk).

 


 

Mike Shedlock

Author: Mike Shedlock

Mike Shedlock / Mish
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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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