In last Term’s Janus v. AFSCME, the Supreme Court ruled that union agency fees—payments that all public employees were required to make to labor unions—violated the employees’ First Amendment rights. Since Janus, several commentators have pointed out that agency fees are not the only mandatory payments deducted from public employees’ paychecks. In most states, public workers must also pay an “employee contribution” to a pension fund, which may also be used in ways that some workers find objectionable. These writers worry that a challenge to public pension contributions could be a natural successor to Janus and would put public pension systems in jeopardy.
But there are two reasons to think that the actual impact of Janus on public pension revenue will not be severe. First, there are ways to adjust how pension systems are financed so as to avoid the argument that employees are being forced to subsidize speech. In particular, a voluntary funding mechanism is more viable in the pension setting than in the union context because there is no free-rider problem. Second, it is not at all clear that the Janus majority would conclude that compelling employees to fund public pensions, which invest in private-sector (as opposed to government) entities, creates a First Amendment problem.
Alternative financing mechanisms that avoid the risk of First Amendment injury
Both the experiences of other countries and labor law scholarship offer ways to successfully fund public pension systems without the risk of First Amendment invalidation. As a doctrinal matter, the fact that reasonable alternatives exist likely means that mandatory employee pension contributions are unconstitutional under Janus’s framework, which requires compelled speech to “serve a compelling state interest that cannot be achieved through means significantly less restrictive of associational freedoms.” As a practical matter, the availability of alternative funding mechanisms also means that a ruling striking down mandatory employee contributions will not be fatal for pension system revenue.
One such alternative is voluntary contributions. Labor unions cannot be effectively funded through voluntary payments by employees because of the well-known free-rider problem. Because federal labor law requires unions to represent all employees in a given bargaining unit—not only those who had joined the union—workers have an incentive to withhold dues because they can reap the same benefits from unions for free. Agency fees are needed, the argument goes, to prevent free riding. Public pension systems, by contrast, typically do not suffer from a free-rider concern because most pensions are not required to pay employees who have never given to the fund. Some states, such as Kentucky, even expressly treat employee contributions as a kind of “consideration” that supports workers’ contractual rights in their pension benefits. Public employees thus cannot free ride on the pension contributions paid by others. And as a result, a voluntary payment mechanism is more viable in the pension setting.
To illustrate what a state pension system financed by voluntary contributions might look like, consider New Zealand’s government-sponsored KiwiSaver pension program. New Zealand automatically enrolls public and private workers in KiwiSaver but also gives them the option to opt out. Despite this option, nearly 80 percent of New Zealand’s eligible population under age 65 and excluding children are KiwiSaver members.
Another alternative financing mechanism is the employer payment model, which has been discussed by labor and constitutional scholars as a workaround to fund unions after Janus. The basic idea is that a state could avoid any First Amendment injury by paying the pension funds directly and offsetting its employees’ salaries by the same amount. In other words, rather than requiring workers to contribute five percent of their salaries to the pension system, the employer could lower wages by five percent and give the difference to the pension funds itself. Before the recent financial crisis, several states’ pension systems, including Florida’s and Virginia’s pensions, had been entirely funded by direct employer payments—in lieu of salary increases—in this way. In fact, Virginia’s post-crisis reforms introduced the requirement that employees contribute five percent of their salaries to pensions, but also authorized a five percent pay raise to offset the mandate.
In sum, a decision barring mandatory employee pension contributions will likely not have much practical impact on public pension viability because states remain free to pay pensions directly or rely on voluntary participation. Janus might require costly short-term structural adjustments but its long-term effects on pension funds will be relatively muted.
Public-sector versus private-sector activities
The activities of public pension funds differ from those of unions in one fundamental respect: Pension funds bargain with private-sector companies whereas unions bargain with government entities. The majority in Janus stressed that fees supporting “collective bargaining in the private sector” do not raise the same free speech problems as fees supporting “collective bargaining with a government employer.” This is because “[i]n the public sector, core issues such as wages, pensions, and benefits are important political issues, but that is generally not so in the private sector.” Though Janus did not say whether private labor unions that negotiate with private employers can collect agency fees, it indicated that the public- versus private-sector distinction is highly relevant to the inquiry.
The actual operation of public pension funds fits with Janus’s intuition that pension funds, unlike unions, rarely express views of political or civic consequence. When public pension funds “speak,” their speech ordinarily concerns the internal governance of the companies that the pension funds have invested in or the fees charged by the funds’ investment managers—private matters that affect neither government budgets nor important public policies. In fact, according to Professor David Webber, pension fund trustees are often reluctant to consider the broader non-economic consequences of their investments, such as worker jobs, worker benefits, privatization, or other labor issues, because they think that their fiduciary duties prevent them from doing so. Instead, trustees tend to focus narrowly on maximizing returns and discuss their investment decisions in strictly financial terms.
To be sure, public pension funds do occasionally weigh in on political or societal topics such as apartheid, corporate sexual harassment, and climate change. But this type of “speech” remains uncommon. And importantly, when public pension funds do act on these issues, their actions—often divestment from certain types of companies—do not immediately impact the political process, unlike what the Janus majority believes happens when unions bargain with government employers. This is because, unlike government decisionmaking, private-sector decisionmaking is primarily driven by economic rather than political calculations.
Janus upsets much of the First Amendment landscape related to public employees and labor unions, but as many scholars have argued this summer, its practical effects on union revenues are utterly avoidable. The same is probably true for Janus’s impact on public pension revenues as well.