What Size?

Debates regarding the size, role, function, and influence of government at all levels have been a societal debate since the founding of the republic (1). From the Hamilitonian Federalist program (Federalist No. 27 - ". . . government enters into those objects which touch the most active springs of the human heart, the greater will be the probability and attachment of the community.”) to the Jeffersonian Republican Party (“. . . the present government is not which that will answer the ends of society . . .”) - how we view government as a society was, is, and will be a contentious and complex societal debate.

This is important because the civil engineering community is basically an extension of government. Our business space and environment significantly overlaps with societal debates regarding the size of government, the function of government, the taxes government collects, the user fees government administers, etc. The economic viability of the civil engineering business environment is directly connected to the social attitudes of the public regarding the form and function of government. Oliver Wendell Homes once said: “I like to pay taxes. With them I buy civilization.” Once society decides to buy civilization, the civil engineering community can build it. What society chooses to “buy” in the context of civilization, whether the new school or health care benefits for retired teachers, has a significant impact to the economics of the civil engineering profession.

There are deep social and generational (segmented as Silents, Millennials, Generation X, and Baby Boomers) divides in the opinions about government (2). Overall, 48% of the public prefers a smaller government providing fewer services, 41% would rather have a bigger government providing more services. This is little changed since 2009; in 2007 and 2008 opinion was more evenly divided.

Silents (born 1928 to 1945) have long favored a smaller government and this continues to be the case today: Nearly 59% of Silents favor a smaller government providing fewer services, while 25% favor a bigger government with more services. Millennials (born 1981 to 1993), by contrast, prefer a bigger government providing more services (56%) over a smaller government providing fewer services (35%). Millennials’ preference for bigger government has declined since 2007 when about two-thirds (68%) favored a larger government.

Generation X (born 1965 to 1980) is divided about evenly: 47% prefer smaller government, 45% bigger government. This marks a change from 2007 and earlier when a modest majority of Xers favored a bigger government. More Boomers (born 1946 to 1964) (54%) prefer smaller government than bigger government (35%), a point of view they have held since the 1990s. However, Boomers have not always felt this way: In 1989 more preferred bigger government providing more services (52%) than a smaller government providing fewer services (40%). This group includes 79 million individuals. How it views the role of government and what it votes to spend money on has a profound impact on the civil engineering community.

This historic societal split in the role of government has recently intensified. Changing demographics, concerns over debt/deficits, powerful and well-funded special interest groups, increasing medical costs, and new media outlets have heightened the debate and produced political paralysis at the national level. Francis Fukuyama highlights this (3):

“And then there is the United States, which has been unable to seriously address long-term fiscal issues related to health, social security, energy, and the like. The United States seems increasingly caught in a dysfunctional political equilibrium, wherein everyone agrees on the necessity of addressing long-term fiscal issues, but powerful interest groups can block the spending cuts or tax increases necessary to close the gap. The design of the country’s institutions, with strong checks and balances, makes a solution harder. To this might be added an ideological rigidity that locks Americans into a certain range of solutions to their problems. In the face of these challenges, the United States is not likely to overtly repatrimonialize public office the way ancien regime France did, but it does run the risk of coming up with short-term expedients that will delay but not avoid the final crisis, just a the French government did.”

Highway to Heaven

The generation gap, though not the watchword it was in the 1960’s, is back. Roads and/or retirements constraint is an old versus young issue in the context of societal debates regarding the future and the past. The deepening divide centers around our obligations to pay for the past (i.e., various entitlement programs) versus our desires to invest in the future (i.e., education, the environment, infrastructure improvements). This is very unfamiliar and uncomfortable terrain for the civil engineering community – which is much more familiar with hard infrastructure constraints than soft human choices. Roads versus retirements is not just a vague public policy concern (4). The recent $127 billion highway reauthorization bill was partially funded with $9 billion of budget “offsets” from allowing corporations to contribute less over the next several years to their defined-benefit pensions (remarkably given the fact that the largest 100 largest pension plans are roughly $200 billion underfunded). As the declining infrastructure crisis accelerates, three measures highlight the focus on the past at the expense of the future (5):

· Between 1992 and 2010, the net worth for those families 75 and over increased 65%. For those 65 to 74, 38%. Those under 35, a decline of 34% was recorded. For families 35 to 44, the decline was 38%.

· Between 1990 and 2010, the median incomes for those 75 and older grew 19%. For those 65 to 74, the increase was 21%. The median income for 35 to 44 declined 1%.

· Those 65 and older have a 53% share of all federal entitlements. The share of entitlements except Social Security is 39%. Medicare, Medicaid, and Social Security constituted 43% of all U.S. federal spending in fiscal year 2011. It is reasonable to assume that approximately 25% of all federal spending is directed to those individuals over 65 years old (even as polls indicate that 30% of those aged 67 to 84 are “angry with government”). Given the lack of a national organization like the American Association of Non-Retired Persons (AANRP) and our aging demographics, one should expect this unbalanced distribution of national wealth to continue and potentially grow.

Current societal trends and public policy that favor the elderly at the expense of the future and young have significant negative consequences for the civil engineering business community. The civil engineering community is interested in designing roads on earth and not funding highways to heaven. Buying and building civilization has a tense that is future oriented; but current policies that are past tense go against the Principle of Intergenerational Neutrality - one that requires citizens of every generation to be treated equally (6). This principle has important implications for many of our societal problems - from new bridges to climate change. Present generations are obligated to take the interests of their threatened descendents as seriously as they take their own. Putting off the rehabilitation and renewal of our public infrastructure until the next generation places under the microscope the ideas of generational fairness as distributive justice and a more nearly equal distribution of societal benefits.

The New York Times recently highlighted the trend of younger voters, who get less from government, are leaning to the left (5):

“What seems clear is that the market gurus are finally right: today’s young really are different. They view a boisterously diverse United States as a fact of life, and they view life as clearly better than it used to be. But they are also products of the longest economic slump in 70 years, and they would like a little help. They wish the country would devote more attention to its future, especially on education and the climate. They, of course, will have to live with that future.”

Pension Tension

Bankruptcy in Stockton, California highlights a pressing issue the civil engineering community faces as states and local communities lose ground in their efforts to cover the long-term costs of their employees’ pensions and retiree health care. As The Wall Street Journal highlighted in a recent editorial (7):

“Still, debt financing is not the city’s main cost driver. That would be labor costs, specifically retirement benefits. The city has a little over $300 million in general-fund backed debt, but an $800 million unfunded liability for pensions and retiree health benefits.

The latter, which are not pre-funded, are expected to grow by 7.5% annually for the foreseeable future. Pension costs are about 40% of what the city pays on worker salaries and are also growing. The average firefighter costs the city about $157,000 a year in pay and benefits and can retire at age 50 with a pension equal to 90% of his highest year’s salary plus neatly free lifetime health benefits.”

In fiscal year 2010, the gap between states’ assets and their obligations for public sector retirement benefits was $1.38 trillion, up nearly 9 percent from fiscal year 2009 (8). Of that figure, $757 billion was for pension promises, and $627 billion was for retiree health care. Fiscal 2010 is the latest budget year for which complete numbers are available from all 50 states.

Although a national issue, huge regional differences are apparent in the data. Considering just public sector pensions (i.e., not including health benefits), this is the view from five states (in thousands):

State	Liability	% Funded	Required Contribution	% Paid
Indiana	$39,005,478	65	$1,476,131	94
Kentucky	$37,006,999	54	$1,023,900	58
Ohio	$175,368,439	67	$3,770,640	67
West Virginia	$14,986,050	58	$602,221	93
Texas	$163,417,834	83	$3,363,531	82

Many experts say that a healthy pension system should be at least 80% funded. In 2000, more than half of the states were 100% funded, but by 2010 only Wisconsin was fully funded and 34 states were below the 80% threshold – up from 31 in 2009 and just 22 in 2008. It is also interesting to note that Texas has over twice the population as Ohio, but over $10 billion less in public pension liabilities.

States have responded with an unprecedented number of reforms – but higher employer contributions should be anticipated. According to The Pew Center on the States (8):

“Higher employer contributions are anticipated for many years, according to a March 2012 survey by the U.S. Government Accountability Office (GAO) of state and local pension fund officials in eight states. Georgia’s public pension fund managers told the GAO they expect their state’s contribution rates to nearly double in the next five years. In addition, demographic pressures and rising medical cost will increase the price tag of offering retiree health care.”

Pension tension is the local version of a damaged or broken social contract between the generations. It is perhaps not surprising that a majority of current voters should support policies of intergenerational inequality, especially when older voters are so much more likely to vote than younger voters. Both the short-term and long-term issue facing the civil engineering community is the extent that policy actions of Pastville and Presentville have damaged the opportunities available in Futureville. These numbers at the federal, state, and local levels represent nothing less than a vast claim by the generation currently retired or about to retire on their children and grandchildren, who are obligated by current law to find the money in the future, by submitting either to substantial increases in taxation or to drastic cuts in other forms of public expenditures.

Bibliography

1. Wood, Gordon S. Empire of Liberty. New York : Oxford University Press, 2009.

2. Center, Pew Research. The Generation Gap and the 2012 Election. Washington, DC : Pew Research Center, November 3, 2011. www.pewresearch.org.

3. Fukuyama, Francis. The Orgins of Political Order. New York : Farrar, Straus and Giroux, 2012.

4. Highway to Heaven. Review & Outlook The Wall Street Journal. 2012, June 30, 2012.

5. Leonhardt, David. Old vs. Young. Sunday Review. New York : The New York Times, June 24, 2012.

6. Sunstein, Cass R. Worst-Case Scenarios. Cambridge : Harvard University Press, 2007.

7. Down and Out in Stockton. Review & Outlook The Wall Street Journal. New York : The Wall Street Journal, 2012. June 23, 2012.

8. States, The Pew Center on the. The Widening Gap Updates. Washington, DC : The Pew Center, June 2012. www.pewstates.org/state-pensions-update.