A pension for trouble; the next S&L crisis.

Now that most taxpayers have learned the extent of the S&L mess, they can be excused for wondering if there are any other financial time bombs waiting go off. Yes, there are. Relatively speaking, the S&L crisis was a Hiroshima-sized atomic bomb. If you're bracing for a thermonuclear economic event, try public employee pensions.

These pension programs aren't just trouble for their ability to explode into future insolvency. In the meantime, they also draw precious funds away from other essential needs - health, education, defense. We can't cure AIDS, teach our children, or clean up the environment with pension checks. The $54 billion that the federal government will spend on retirement programs for its employees this year will be more than it spends on Aid to Families with Dependent Children (AFDC), and Food Stamps, and consumer safety, and AIDS research and treatment, and hazardous waste cleanup, and low income housing, and higher education, combined.

But even more alarming is the extent to which public employee pensions will soak up future budgets. If you or I were providing for our own retirement we would regularly set aside sums that would grow, through prudent investment, into enough to cover our needs once we stopped working. It should be the same with public retirement plans, but it isn't.

In the financial vernacular, forseeable expenses required by our eventual retirement, but which we can pay for with the money we have put away now, are our funded liabilities. Any difference between what we have put away and what we know we are going to need is an unfunded liability. In general, with public pensions - at the federal, state, and local level - neither the retirees nor the governments has been owning up to predictable retirement needs.

The unfunded liabilities of the federal government's major retirement programs - taking into account employees already retired and those likely to - are stunning. They're much higher than the $100 billion to $250 billion figure usually ascribed to the $&L bailout. They total more than $481 billion for the Civil Service Retirement System alone. Combined with other programs for retired federal workers, including military and railroad retirees, the unfunded liability now tops $1 trillion.

And that's just the problem at the federal level. Across the country, there are more than 6,000 pension plans covering state, county, and local government employees - the majority of which carry unfunded liabilities. Since these plans are run according to different formulas, there's no single figure to measure their total unfunded liability. There's evidence that the situation has improved since the seventies when Hamtramck, Michigan went bankrupt over pension debts - and when pension debts helped push New York City to the brink of financial collapse. But there are still serious grounds for doubt about the fiscal health of state and local public pension funds. after all, if some seven million active-duty and retired federal employees can produce and unfunded pension liability of $1 trillion, think of the possibilities for their 13 million counterparts at the state and local level. Estimates for the sub-federal unfunded pension liability vary widely - $160 billion on the low side, $450 billion on the high side. Either way the situation inspires fear. The unfunded liability is, for example, $18 billion in Massachusetts and $10 billion each in Florida and Louisiana.

As so often is the case with fiscal crises, specialists catch the whiff of disaster before the general public does. Speaking of the federal situation, Dan McGill, chairman of the Pension Research Council at the Wharton School of Business, says, "They're in terrible shape." "Really horrible," adds Rita Horwitz, executive director of the Texas State Pension Review Board.

To be sure, these huge unfunded liabilities can be spread out over 20-, 30-, or even 40-year spans. But that doesn't mean we're not paying for them. Governments with unfunded liabilities face the Hobson's Choice of either paying more towards their pension liabilities now or continuing to carry them forward unfunded. If they do the former, they cut other essential services. If the latter, the unfunded liabilities threaten to balloon even larger. In 1984 the Grace Commission on cost control found that to amortize the liability of the Civil Service Retirement System over 40 years would require spending an additional amount every year equal to just under 85 percent of the then-current payroll costs - that is, it would require annually spending almost as much on retirees as on those currently working.

Across the country, pension expenses are hobbling government budgets. The International City Management Association has found that since 1983, per capita expenditures for U.S. retirement programs for police, fire, and refuse departments rose 47.4 percent, 35.3 percent, and 49.7 percent respectively. (By contrast, salaries for those departments rose approximately half that fast.) By 1992, it's estimated that Los Angeles will be paying as much to its retirees as it does to its active employees. In Washington D.C, as Charles Peters recently reported in "Tilting at Windmills" [June], an internal police department report found that 2,351 cops on the 3,880-member force - that's 61 percent - are scheduled to retire by 1992, thereby taking a slice out of that year's budget of at least $29 million.

Last fall in Massachusetts, there was a flap when Governor Michael Dukakis tried to use $17 million from the state teachers' retirement fund to cover a shortfall in the annual budget. That Dukakis wanted to raid the fund typifies government's tendency to play fast and loose with its pension debts. That this plan prompted as much outrage as it did shows how little is understood about the magnitude of these debts: this $17 million is nothing compared to the $18 billion in unfunded pension liabilities Massachusetts is saddled with.

Compare all this bad news about public pension costs to the goings-on with private pensions - although they are hardly worry-free, only 20 percent of them even have unfunded liabilities.

The real Wright scandal

The notion of decent pensions for retired government and military employees is noble and pragmatic. They were designed to compensate for what were originally rather low salaries, as well as for the dangers faced by soldiers. But government pension costs kept going out of sight even when the salaries got better and whether or not real dangers were faced. How did the simple and fair idea of a government pension get so monumentally fouled up?

Here's how. Public pension benefits are generous in the extreme. The average private pensioner can expect to earn approximately $200,000 during his or her retirement; the average federal civil servant, $718,000.

The real Jim Wright scandal may not have been his shady book or oil well deals but his perfectly legal pension deal. His congressional pension will be calculated at 80 percent of his final three years' salary, including the $115,000 per year he earned as Speaker. (Wright earned more than the standard congressional salary of $89,500 because being Speaker carries with it a salary bonus.) Wright's annual pension will start at $83,070, according to the National Taxpayers Union. His total lifetime benefits will likely be nearly $2 million. Had the congressional pay raise been approved, Wright's annual pension would have been around $140,000, and his total benefits would have been $3 million.

The rest of The Speakers Bureau isn't faring too badly either. Tip O'Neill receives an annual pension of $65,000. His predecessor, Carl Albert, takes down around $100,000. (It should be mentioned that Albert is one of the few politicians who has endorsed calls for pension reform.) Retired Senator J. William Fulbright receives a pension of about $75,000, while small-government conservative Barry Goldwater gets about $83,000. Perhaps the all-time champion federal retiree is Mike Mansfield, the former Senate Majority Leader and ambassador to Japan. He annually receives more than $136,000.

The National Taxpayers union found that 163 of the 346 retired congressmen currently getting benefits can expect to collect more than $1 million. And more than one-third of these congressional retirees receive more in annual pension payments than they earned in Congress.

State and local politicians also frequently hit this sort of pension paydirt. Barred by state law from seeking reelection, two-term Georgia Governor George Busbee retired from the statehouse in 1983 at age 55 and qualified at once for a $43,000-a-year pension under a rule providing immediate pensions to state employees whose jobs are abolished or who have been fired. Former California Governor Pat Brown, who left office 23 years ago, collects an annual pension that exceeds the current governor's salary of $85,000.

Obviously, not all civil servants retire on this kind of money. There's Hilda Weldon, for instance. Her "29 years, 3 months, and 17 days" in the civil service took her from wartime service at the Naval Supply Center in her hometown of Norfolk, Virginia, to accounting work at the Government Printing Office. Retiring in Washington after attaining the lower/middle civil service job grade of GS-9, Weldon receives less than $15,000 a year in pension benefits. "When they say that senior citizens are rich, they're not talking about the same people I know," Weldon says.

But it's not just congressional fat cats who do so much better than Weldon. Many civil service retirees do. Concern about the federal civil service retirees payout is not focused on the tens of thousands of top-level GS workers or the 7,000 Senior Executive Service people above them. It's about the much larger number of mid-level civil servants who retire rather lucratively. According to estimates offered by the Office of Personnel Management, the average civilian federal retiree gets out at grade GS-11. (Currently there are 189,000 federal workers in that grade.) The typical monthly benefit for a GS-11 retiring after 30 years' service is approximately $1,500 a month. Weigh that against the monthly $516 the average Social Security retiree gets - it's nearly three times as much.

Boon over Miami

And consider what actuaries call the "replacement ratio" - how much of your best active salary you get back annually in retirement. A respected actuarial firm, The Wyatt Company, found that at the top 50 businesses in the Fortune 500, employees retiring at age 55 after 30 years' service average a replacement ratio of 29.5 percent. By contrast, recent surveys show that for civil service retirees in the same category, the replacement ratio averages 53 percent - nearly twice as high.

Boom states have certainly thrown their pension dollars around. Phillip Longman, a journalist specializing in old-age entitlements, has described how Florida's phenomenal growth was matched by its public pension irresponsibility. When the state public retirement plan was established 19 years ago, a state employee at age 65 with 45 years' experience became entitled to a pension equal to one half of his or her salary. Today however, a typical state worker with just 30 years' experience receives a pension, which, when combined with Social Security, replaces 78 percent of the average of his or her five peak salary years. Under pressure from public employee unions, Florida has continued to raise pensions - recently, police and fire pension benefits were jacked up by 50 percent.

But, amazingly, poor states are just as profligate. In West Virginia, teachers can retire after 30 years' service and receive 60 percent of the average of their best five years' salary.

And it's not just that public pensions are an incredibly good deal; they're an incredibly good deal you often can latch onto at an absurdly young age. Access to gevernment pensions is just too easy - out of whack with ordinary notions of "retirement." Normally, full civil service pensions kick in after only 30 working years - which usually means at about age 55. According to OPM, in 1987 (the most recent year for which figures are available) there were 343,288 retired civil servants in their fifties receiving full benefits. Should we really be supporting the equivalent of a city the size of Miami full of retirees in their fifties? In most private plans, walk away in your fifties and you suffer a significant financial penalty.

With military pensions, this problem is even worse. They take effect after just 20 years. Since many service members enlist immediately after high school, this means that uniformed retirees can start getting full benefits at age 37 or 38. In fact, one-fourth of all military personnel retire in their thirties. The average age of a retiring officer is 43 - younger than Rolling Stone guitarist Keith Richards. Early retirement is the main reason a veteran can expect to receive six times more pension income over his lifetime than a private pensioner.

These excessively early retirements create longer and hence larger payouts to retirees and make it possible for them to layer pension on top of pension in the still-legal variants of "double dipping." No wonder the Grace Commission concluded that "there is probably no other retirement system which is as liberal and costly as the U.S. Military Retirement System." No wonder the unfunded liabilities of the Military Retirement System are $449 billion.

Fattening COLAs

Despite such debts, there's a nationwide trend toward earlier access to public pension benefits. In 1984 seven states lowered their retirement ages. The military pension plan's 20-year benefit gate has become standard fare in many police and fire departments, according to the Police Executive Research Forum. With New York State's pension system, firefighters can start their golden years after 20 years' service - with no minimum age requirement. In Columbus, Georgia, cops can start collecting benefits after just 10 years.

Lest you think it's just GIs and cops who dip so early into the public coffers, consider the case of Dan Mica, a former congressman from Florida, whose pension lust was first reported in Roll Call, the Capitol Hill newspaper, and later elaborated on in The Washington Times. Mica, who in January left the House after 19 years, returned almost immediately to his old stomping grounds to serve as a consultant on the payroll of the House Foreign Affairs Committee. Why the sudden homecoming? Did he miss the aroma of the Senate's famous bean soup? No, he's back because he needs one more year of service to make the Magic 20 - and thus rake in a $ 36,054 congressional pension. Mica is just 45. Had Mica retired at 60 he would have received an average of $40,826 a year for a likely total of $1,653,657. But by retiring at 45, he stands to haul in $897,560 more. In short, no matter how many more careers Mica pursues, if his life is of average length, he can count on at least a $2.5 million government pension.

Despite such generous payouts, public pension plans often require only negligible financial contributions by those covered. The amount of total benefits paid in by civil service retirees is about 7 percent of their salary; for the military, it is zero percent. Of the $54 billion the federal government will spend on retirement next year, only $8.3 billion will have come from the employees themselves.

Public pensions are also subject to cost-of-living adjustments (COLAs), which, although well-mentioned, have driven up costs out of all proportion to any good they produce. COLAs have gone wrong for two main reasons:

One, they are not applied year after year to a base pension figure but instead are compounded year after year - piling COLAs on top of COLAs. In just 10 years at 4 percent inflation a $20,000 pension costs the government $33,000 more through compounding the COLA than it would if the adjustment were applied only to the base amount. Compounding COLAs the government way frequently makes COLAs outpace inflation. (And there are other ways COLAs can do that - between 1969 and 1976, civil service retirees received a COLA-plus-1-percent increase in their pension.)

Two, they are applied to every government pensioner's take no matter how lavish, instead of being focused on those meager pensions truly requiring anti-inflation protection. COLAs have fattened payments for many who were already doing just fine. Why should federal retirees be inflation-proofed when so many others in great need - blue collar wage-earners in high-cost cities, those on AFDC, low-income families with serious health problems, etc. - are not? COLAs have contributed immensely to the overall expense of public pension funds. The Congressional Research Service estimates that they now account for 47 percent of all federal pension payouts. This uncritical use of COLAs has meant that some 400,000 federal retirees make more now than they did when they were working.

Power vs. perspective

Politics makes the pension problem worse. Legislators are easily tempted to dole out benefits to an important constituent group when the debts they thereby create are so distant, and more importantly, so invisible that no counter-wave of public indignation ever materializes.

Retired federal employees form a huge bloc. There are five states - California, Texas, Florida, New York, and Virginia - in which there are more than 100,000 federal pensioners and beneficiaries. taking into account both civil service and military pensioners, there are 2.3 million retired federal employees.

And that constituency is well organized. Recently, the National Association for Retired Federal Employees helped shoot down a Bush administration proposal to pare back COLA provisions. Boasting over 490,000 members, NARFE was the fifth largest contributor (of the nation's 4,263 PACs) to federal campaigns during the last election cycle, putting it just behind mega-political lobbiers like the National Association of Realtors and the American Medical Association.

Organized power of this magnitude hurts pension reform because it makes it much harder for politicians to discriminate between, say, the very real needs of widows retiring from the bottom rungs of government salary scales on the one hand, and on the other, 40-year-old ex-army officers who will collect a second full salary for the next 30 years.

As bad as this all seems, the pension morass isn't hopeless. Some reforms have been started. In 1986, Congress created a more restrained plan for new civil servants, which gave them the option to make higher contributions to wards their own pensions and rewarded them with generous matching funds and tax benefits for doing so. Under this arrangement employee contributions have gone up. But it still allows the civil servants it covers to stay with an old-style pension if they choose. and although this fact has already saddled the new system with a $5 billion unfunded liability, the 1986 change is still a small step in the right direction. So is the recent change in military pensions that makes it less remunerative to get out after 20 years than it used to be.

But we can do more.

We could improve things if we insisted on eliminating the guilty factors: no more political escapism. We have to admit that fat sums of the Mike Mansfield variety are a waste and a perversion of the basic idea of a pension. No more free rides - pensioners should be required to make meaningful contributions to their own futures. And no more across-the board or compounded COLAs -save that kind of protection for those who really need it.

And most important of all, no more handsome retirement benefits after less than half the average working life. Obviously, there's hardship and danger in some military jobs, but most work in uniform is a far cry from Chuck Yeager. The GAO has found that 93 percent of all military jobs are not combat-related and that 31 percent of all armed service members have never seen combat-related duty. And even for the handful who have spent 20 years in combat-related specialties, the answer is to assign them lighter duty as they get older - not allowing them to retire while they're thirty-something. There is even less reason for civilians to walk away from their government work 10 years earlier than the normal civilian retirement age.

And what's so good about early retirement anyway? Almost everything we know indicates that meaningful work is good for you. That so may 40- and 50- year-old military and civilian retirees with big pensions still throw themselves into second careers that they enjoy ought to tell you that they want to work. Why not have them continue to work in the area they know best and where they contribute the most to the country? At the very least, military personnel should be required to work through their forties, and civilians at least through their fifties. Only then should we pay them to retire.

Cost of luxury

One of the few places where you'll get a perspective on pensions sharply contrasting with that of lobbies like NARFE is on Connecticut Avenue in Washington, a boulevard lined with elegant law firms and elegant lobbying firms, but with some older, less upscale office buildings sprinkled in. There, in one of the nondescript walk-ups, you'll find the rundown offices of Hastings Keith. Since 1981, the 74-year-old ex-congressman has been trying to stir up public concern about public employee pensions through his own man-the-barricades lobby, the National Committee on Public Employee Pension Systems. Keith's own exorbitant benefits dramatically exemplify the excesses of public pensions.

Keith began his career as a fed with military service before, during, and after World War II. In 1958 he was elected from the congressional district that encompasses Cape Cod and in 1972 he left to work in the Nixon administration. After a few months of that, Keith retired. He was only 58.

Because of cost-of-living increases - "cost of luxury increases," Keith dubs them - his retirement, just from civil service, is up to more than $50,000 a year. But as they say on the TV game shows: "Wait! That's not all!" Each year he collects more than $13,000 in military benefits and another $11,000 from Social Security. His annual take: $78,500. All told, Keith has received more than $800,000 from the federal government in the past 17 years without working a day.

Even though Keith's story has gotten media coverage, up against lobbying powerhouses like NARFE, his calls for reform have failed to make a significant dent in the national news. And local pension crises seem to have come to the fore in only a few cities and states. They know who they are, because their troubles have been big local stories, but these fiscal disasters and the others like them waiting to unfold have not yet grabbed national attention.

Maybe that's the biggest part of the pension story - it's been kept so quiet. Neither the U.S. Conference of Mayors, nor the League of Cities, nor the National Association of Counties, nor the National Association of State Budget Officers currently has any materials prepared on the subject. This prompts a worrisome thought: At this point, like S&L officials before them, maybe the politicians on the line for the pension problem are simply hoping it won't draw notice until it's so gargantuan that drastic help will have to be provided from outside, which means from taxpayers of course.

Matthew Cooper is a contributing editor of The Washington Monthly. Research assistance was provided by John Larew, Daniel Mirvish, and David Urbanczyk.