Of the many challenges New Jersey faces — sky-high taxes, budget projections that keep falling short, a Supreme Court that likes to mandate spending — there is no darker cloud over the state’s future than its massively underfunded pension system.
That much ought to have been clear when Gov. Chris Christie last month suspended promised state contributions to the pension system to close a budget shortfall. He promised to lay out a plan for pension reform some time soon.
It can’t come soon enough. Back in January, a report from the Common Sense Institute of New Jersey warned that without serious reforms, the system is headed for bankruptcy. The main reason for this is the outdated system of promising defined benefits rather than the defined-contribution system that dominates in the private sector.
As one coauthor of the report put it: “Defined-benefit plans and politics are a toxic combination.”
Gov. Christie recognizes that. In 2011, the governor and the Legislature took a stab at reform, and they improved things somewhat. But it simply wasn’t enough. Steve Malanga of the Manhattan Institute points out that Jersey’s problem is far larger than anyone has admitted: The Garden State now devotes 14 percent of its tax revenue to pensions — four times the norm.
The governor is right that the pension crisis has been decades in the making, and he’s inherited a big fat mess from his predecessors. He’s right that the Democratic solution — raise Jersey’s taxes even higher — won’t work. And he’s right, too, that the state needs to shift pensions for new public employees away from a traditional defined benefit to a 401(k) investment plan or some combination of both.
But the governor also needs to take the lead in addressing the spending that has driven the state into the ditch. Pension reform is necessary, but so is cutting spending so the state can make its pension payments. The truth is, genuine reform will require unpopular cuts in spending.
If the governor’s suspension of pension payments leads to honest talk about the size of the problem before Jersey and a radical restructuring of its pension program, Christie will have done Jersey a real service. But if all we get is half-measures and no hard choices about spending, it will only mean kicking the can further down the road.
Douglas Roberts, who as state treasurer under then-Gov. John Engler engineered Michigan’s fix in 1996, says pension reform is possible only when you have “a very strong leader who is basically willing to go where other people haven’t gone.” This is Chris Christie’s moment — if he’ll take it.