With many defined benefit plans drifting towards insolvency, governments will be increasingly pressured to bailout pensions in the red. The ongoing fight in Pittsburgh between the mayor and local colleges is a harbinger of the nationwide war soon to be fought over public workers pensions.

The city of Pittsburgh has proposed a 1% tuition tax on local university and college students to help pay for the $600 million pension-fund shortfall. The proposed tuition tax would send an estimated $16 million to city workers pensions from student’s bank accounts. The underlying logic behind the tax is flawed, “students use libraries...so let’s tax them!” proponents argue. 

This tax is neither logical nor is it fair. The $16 million raised from the new tax would do little to fix the problems inherent in defined benefit plans. At best, the additional $16 million would keep the pension fund afloat for a few extra days. More obviously, taxes discourage consumption by increasing the price of an item or activity. For example, cap-and-trade, a Democratic proposal in congress, looks to reduce carbon emissions by taxing said emissions, thus, making it more expensive to use energy. It makes no sense for a city, Pittsburgh, trying to diversify from its industrial tradition to discourage higher education via taxes.

The tax is not fair because it punishes students for poorly planned/managed pension funds, something they had nothing to do with. The tax would also differentiate between students who attend different colleges: students at Carnegie Mellon would have to pay $409 under the new tax per year of school compared to the $29 students at Community College of Allegheny County. The rhetoric used to sell the education tax is that students should be taxed for using the libraries, but then why are Carnegie Mellon students taxed at 13 times a higher rate then Community College of Allegheny County students? It is clear this is just a ploy to bailout public workers pension plans.

The sad thing is that public workers have a right to be angry; many were promised the moon in retirement benefits and now will receive little to nothing. But public workers shouldn’t take out their frustration on innocent students. Raising taxes just kicks the proverbial can (in this case pension reform) down the road at the expense of a randomly selected third party, in this case students. Real reform means transitioning from notoriously bankrupt defined benefit pension plans to liquid, tangible contribution pension plans that guarantee workers a retirement account. Workers should direct their rage at pension managers not freshman.

Posted by Chris Prandoni on Tuesday, December 1, 2009 4:46 PM EST

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