Jared Meyer interviewed former San Diego City Council member Carl DeMaio on March 24 on the subject of what can be done to solve the growing problem of the state and local pension debt crisis. DeMaio now chairs Reform California, a political action committee seeking to place pension reform on the ballot statewide.
JM: Could you describe the pension reforms that you instituted in San Diego and what they accomplished?
CD: The public sector government pension programs are Ponzi schemes—there’s no better way to describe them. The formulas and the benefits used are unsustainable, and the financial forecasts and models use erroneous numbers and assumptions. At the end of the day, taxpayers will be left holding the bag with fewer services, higher taxes, and billions in debt.
What we did in San Diego was shut down that failed system and moved public sector retirement funds to 401(k)s. These 401(k)s shield taxpayers from losses and force politicians to pay for bills in the year in which services were provided. With a 401(k), employees pay their own contributions in that year. This means no hidden debt. Defined contribution plans also provide for a public sector worker’s retirement that’s benchmarked against what the local labor market provides private sector employees—no better, no worse.
JM: How large is this problem right now if we’re looking at the entire United States?
CD: This is a huge problem in three ways.
No. 1, we’re talking billions of dollars in debt, and it’s not just the official debt. When you true up the numbers with realistic assumptions, you find that the amount of debt is far greater than government officials are willing to admit. In California, the official number is around $150 million. But, with realistic return on investment assumptions and mortality rates, you find that the real number is closer to $500 billion—half a trillion dollars—just for California alone. In San Diego, they say the debt is $2 billion. Well it’s more like $4 billion.
Second, to pay the debt service, you are seeing services cut and taxes and fees increased. This unfunded liabilities problem is having an immediate effect on the quality of life, and it will continue to have a growing negative effect as the costs rise.
Third, we’re talking about retirement security that is not going to exist. You will have systems that go bankrupt, and, when the Ponzi schemes collapse, who will be responsible? What these unions are doing to numerous members is unconscionable. The union bosses know that they’re going to get their fat checks. Their attitude is “who cares about what’s going to happen to the next generation?”
Well, I care. And I think that taxpayers want affordable pensions for government employees to protect the quality of their services, but they also want to know that we treat our employees properly and that they have retirement security.