wiser today

A man should never be ashamed to own that he is wrong, which is but saying in other words that he is wiser today than he was yesterday.

Roger Lowenstein

While America Aged

Beginning in 2001, when he became chairman of the New York Metropolitan Transit Authority, Peter S. Kalikow worried constantly about the agency's pensions. The MTA oversaw New York's subway system, along with bus service and various commuter-rail lines. From 2000 to 2005 the pension bill for the city subway and bus systems soared tenfold. And the agency was projecting an alarming continued escalation.

This crisis was partly due to demographic trends, which made the pension math unworkable as workers lived longer. In the subways a typical employee in an earlier generation worked for 40 years and then lived off his pension for, say, another 10 years. Now employees retired after 25 years, after which they were likely to collect a pension for an equivalent quarter-century or even longer. It was as if two conductors were aboard each train—one of them doing the steering and the other lazing in his rocker—and both at taxpayer expense.

To Kalikow this seemed inherently unsound. He worried that the MTA was repeating the mistakes of General Motors. A serious car buff, Kalikow had admired GM as an undergraduate and followed its fortunes ever since. He found it astonishing that a company once emblematic of success—a company that had been profitable even during the Depression—was now on the verge of collapse. Kalikow once told an aide, 'The greatest company in America is going broke over pensions. We have to do something before it catches up to us here.'

By the time Kalikow took office, though, the problem had caught up to the public sector—and not just in New York. It's no accident that many states and municipalities are in bad shape, because negotiations in the public sector are inherently tilted in the direction of higher benefits. Public unions can organize politically and influence elections—which is to say that, unlike GM employees, they can vote their bosses out of office. Politicians thus face huge temptations to increase benefits, even though this is costly in the long run.

Public-sector pensions also enjoy an enhanced legal status that makes them ultimately far more costly. A private company at least has the option of 'freezing' its plan. When that happens, employees keep the benefits already accrued, but from the time of the freeze onward, they do not accrue more credits. To employers this can be a very significant saving. In contrast, a public agency can never stop the meter—not even with a union's permission. And governments do not even have the option of escaping pensions via bankruptcy.

Though GM's benefit structure had been ruinous to its shareholders, it had not hurt the public at large. Public pensions are different. The MTA pensions, for example, are financed by taxes and fares; they are paid for by the public, especially the riding public. And riders and taxpayers, more than the employees, were Peter Kalikow's chief constituency—or so he maintained. Why should the public pay for employee pensions? Most of the people riding the trains could not hope to retire after 25 years, nor did they earn as much as the average transit worker, who made $58,000 a year in 2005.

As it was, the public was already footing the bill. Squeezed by rising costs, Kalikow had been forced to defer subway expansion projects; he was trimming service, eliminating bus routes, closing token booths and reducing late-night operations. The fare had been bumped, from $1.50 to $2. The MTA's capital needs were massive, and Kalikow was in a perpetual battle for state and federal subsidies.

The pension obligation was simply staggering. Transit contributed $381 million, or 14 percent of the payroll, to the city pension funds. By 2009 the bill was expected to nearly double, to $620 million—more than four times the total of a decade earlier. Health care cost the authority an additional $410 million, and it, too, was rising at double-digit rates. And transit workers contributed only 2 percent of their salaries for pensions and nothing for health care. Meanwhile, they as well as spouses and dependents got full medical coverage including vision and dental—for life—with free generic drugs and a minimal $15 copay on doctor visits.