Despite boasting one of the highest per capita incomes in the country, San Jose, Calif., is running large and growing deficits. And on Dec. 6, the City Council is expected to declare a state of "fiscal emergency." The main reason is pensions and other benefits for retired city workers, such as health insurance.
San Jose's problems are severe, but hardly unique. In recent years, pension costs have become a central concern both in the U.S. and in Europe.
On Wednesday, Britain saw its biggest strike in decades, as government workers protested pension cuts that will see them working longer and paying more toward their own retirements.
Last month, Rhode Island also raised its retirement age for state workers, while cutting benefits in an attempt to slash $7 billion worth of pension debts in half.
Governments simply can't afford to keep funding pensions at the levels promised in the past, says San Jose Mayor Chuck Reed. "We are draining money out of services and pouring them into retirement benefits," says Reed. "However you define unsustainable, it's unsustainable."
But some argue that pension shortfalls, however deep, are not the result of economic pressures but came about through spending and taxing choices that are going to leave retirees short.
"This is not a matter of affordability; it's a matter of political choice," says Eric Kingson, who co-chairs Social Security Works, an advocacy group that argues against benefit cuts.
We are draining money out of services and pouring them into retirement benefits. However you define unsustainable, it's unsustainable.
An Increasing Cost
Retirement costs ate up $73 million of San Jose's budget a decade ago, but that figure has already jumped to $245 million. By 2015, the total will be $430 million, or close to a third of the city's budget, according to Reed.
As a result, San Jose has eliminated 1,600 city jobs over the past four years, or about a quarter of the total. Libraries and roads and other services will continue to suffer unless retirement costs are brought under control.
Pension battles have become endemic up and down the California coast. Gov. Jerry Brown has unveiled a plan to scale back pension benefits for public employees, joining dozens of other states that have addressed the issue over the past couple of years.
Nationwide, the gap between promised pension benefits and the money states have set aside to pay them has topped $1 trillion, according to the Pew Center on the States.
The problem is not limited to the United States. As France and other European countries have made moves in recent years to shrink pension shortfalls by raising the official retirement age, protesters have taken to the streets.
France raised its retirement age from 60 to 62 in 2010, while Spain increased the official age from 65 to 67 earlier this year.
Math Problem Or Politics?
To many politicians like Reed, the pension issue is simply a math problem. In an aging society, where people are living longer, the level of lifetime benefits that had been guaranteed in the past is no longer affordable.
"Social Security is, essentially, 100 percent a demographic problem," says Andrew Biggs, a former deputy Social Security commissioner in the Bush administration.
"We have boomers retiring at the rate of 10,000 a day and we don't have 10,000 new workers a day to replace them," says Biggs, now a resident scholar at the American Enterprise Institute. "Over the next decade, this imbalance is going to grow rapidly as boomers shift from being workers paying into the system to being recipients of the benefits."
There's no question that population aging is putting pressure on Social Security and other pension systems, says Kingson, a professor of social work at Syracuse University. But he argues that Social Security's problems can be readily fixed.
"The cost of extending the Bush tax cuts for the top 2 percent of U.S. households is roughly what it would cost to address the long-term financing of Social Security," he says.
European Erosion
Similar arguments are being heard across Europe. Debates about the affordability of traditional pension levels that were already running rampant across the Continent have become more urgent because of the fiscal problems deepened by the euro crisis.
"There is a long-term demographic effect, but what we will be dealing with for the next five years is the consequence of government debts," says Jan Iwanik, an actuary and blogger in London. "The Irish example is the perfect one. They say the whole society has to contribute to the bailouts, so the pension system is a perfect place to look because the money is there."
But many economists say European governments have no choice but to cut back. Pension levels are generally more generous than Social Security benefits in the U.S., and many European countries face greater strains from rapidly aging populations.
"The generosity of benefits has eroded quite considerably in recent years, both because of the need for short-term austerity and to address the long-term demographics that are in many cases much more severe than ours," says Richard Jackson, director of the Global Aging Initiative at the Center for Strategic and International Studies.
No More Private Coverage
Jackson says he is not aware of a single private employer left in Britain that has a guaranteed pension program open to new workers.
The fall-off in private pensions in the U.S. hasn't been quite that dramatic, but it has been steep. Most employers are shifting to "defined contribution" plans, such as 401(k)s, that do not provide guaranteed or "defined benefit" levels for life.
Over the past 30 years, the share of private employers offering defined-benefit plans has fallen from 38 percent to 20 percent, according to the National Institute on Retirement Security. The number offering defined-contribution plans has risen over the same period from 8 percent to 31 percent.
It's only in the public sector that most workers still have guaranteed pensions. That disparity has made pensions for public workers a political issue across the country.
Public-sector unions have sought to defend employee pensions by arguing all workers should enjoy such protections. They say cutting pensions for public employees who have long counted on them will only fuel a race to the bottom.
That argument hasn't had much resonance, and states like Illinois and Rhode Island have made big cutbacks. But it may be the case that the whole question of adequate funding for retirement will become more potent.
"We're just beginning to have cohorts retiring who are solely dependent on 401(k) accounts," says Alicia Munnell, director of the Center for Retirement Research at Boston College.
Most of them simply haven't saved enough, she says. According to a recent Wells Fargo retirement survey, 30 percent of Americans in their 60s had saved less than $25,000 for retirement.
Munnell says that even the $75,000 to $80,000 saved in the average 401(k) account won't go far in retirements that could last for 15 or 20 years.
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