The State Pension Funding Gap
pewtrusts.org
pewtrusts.org
http://www.mlive.com/news/detroit/index.ssf/2013/10/10_thing...
There's a serious moral hazard for politicians. It's easy to give constituents services today at the expense of benefits in the future, when they'll be out of office. I wonder if a law that clawed back these government official's pensions if they were found to break from good accounting practices, would be a deterrent?
Yes, but the people who pass the laws are the people who would be affected. You'd have to find a simple majority of people moral enough to do it. I think today, that's a hard sell.
More and more I'm thinking the only outcome for a lot of these States and municipalities is going to be bankruptcy. The long term austerity measures that are needed are too onerous and the entrenched powers are too corrupt to do anything about it until it's too late.
That wouldn't be a 1% friendly solution though - too much of their wealth is tied up in land and equities. It might mean that landlords in the Bay Area couldn't collect rents of $6,000 a month for doing nothing. Most of that unearned cash would flow in to state coffers instead.
It's ironic, because the Howard Jarvis Taxpayer foundation (the group behind prop 13) tried to justify prop 13 by saying that raising property taxes would hurt the elderly. Californian voters believed them.
Now that their actions created a massive hole in California budgets, they advocate for stripping California pensioners of their money as the "fiscally responsible" solution.
People believe them now too.
Edit: For those erroneously believing propaganda that hiking taxes leads to an automatic exodus:
https://www.cbpp.org/research/state-budget-and-tax/state-tax...
The other problem is that we don't just need to come up with money; we need to find ways to convince/force governments to stop making these promises in the first place. A government promise about something it'll do 30 or 40 years in the future is not quite worthless, but it's just not an institution capable of reliably keeping it.
(Whatever politics you think drives me to say that, I mean that and I mean lots of other things too. If nothing else, in the general case, a legislative body can not truly constrain future legislatures, who can always just vote to not keep their old promises, made by people who are mostly not here anymore, for constituencies that were growing in power 30-40 years ago but are now dying off and not very useful to the current 30-40-year-olds in the legislature. Looking to governments to keep promises so many decades in advance is far more risky that many people seem to account for on all kinds of levels. The history of the 20th century suggests that counting on your government to even exist in 40 years is, in general, not the safest bet!)
In CA specifically, I don't see the threat of bankruptcy being enough to overcome prop 13.
Plus if it was in the cards there would be a massive exodus that would further erode the tax base which would be a vicious downward spiral.
> ... and eliminate corporate tax cuts and tax loopholes.
Referencing "eliminating tax loopholes" is like saying "We need to do something about guns". It's meaningless without specifics.
> That wouldn't be a 1% friendly solution though - too much of their wealth is tied up in land and equities.
Equities aren't taxed by States or municipalities, at least not from a "wealth tax" perspective. If such a wealth tax was passed I'd immediately invest in U-Haul and other mover services.
Raising income taxes enough to cover these obligations would lead to an exodus of high earners as well. That doesn't address the municipal pensions either as they don't necessarily have income taxing ability nor high earners to tax.
> Now that their actions created a massive hole in California budgets, they advocate for stripping California pensioners of their money as the "fiscally responsible" solution.
The fiscally responsible thing to do would have been to not make promises to pensioners to buy their votes. Sadly that continues to this day. Try running as a politician that's going to address this problem with any form of austerity measures for the people involved and see what happens.
Other than provide housing in an extremely high demand area.
Property taxes are an interesting solution. Of course people who don't own property will still pay them indirectly through rents.
The amount of free money yielded in real estate appreciation and rents in California is staggering. It could easily fill any state budget hole if the political will was there to take it from the people who did not earn it and give it to the people who did.
Do you mean "ownership?"
>The amount of free money yielded in real estate appreciation and rents in California is staggering. It could easily fill any state budget hole if the political will was there to take it from the people who did not earn it and give it to the people who did.
People didn't earn the property they own? I hesitate to ask you the question, but if things are so expensive, and you don't currently own property, why live there in the first place?
I'm all for decreasing the wealth gap and the wage gap, but what you seem to be asking for is free shit.
That's the effect that untaxing land (e.g. prop 13) has on property values. That's the money that would be going toward unfunded pension liabilities were the land not untaxed.
Also took the risk of it decreasing in value relative to the dollar in 38 years.
I mean if it's free money, why don't you go buy up a $900K property and get some free money in 38 years? There is a little more to it, and of course, you realize, that it might not have increased in value over 38 years like it did the last 38 years.
Of course luck has a lot to do with it. I've lived in my house for about 15 years or so (not in CA). It's nearly doubled in value, but the interest payments alone over time cost about as much as the property, so it's a break even, then add inflation and I've probably lost some. I live in my house though, and I'm eagerly awaiting the day when I can live here without any more mortgage payments.
Fixing that doesn't require long term austerity, it requires a few years of collective willingness to pay moderately higher taxes.
...
Note that I'm not as anarchist or libertarian as the above makes me sound, but it does emphasize the point I'm trying to make: I don't think you'll ever convince the current generation to pay for the previous one so I don't think there will ever be a collective willingness to pay "moderately higher" taxes. My bet is on an ugly outcome where the old and young battle it out in the courts between haircuts to pension plans and higher taxes with politicians muddling their way to an ugly middle ground that no one likes.
An unwillingness to collectively pay taxes is also a major reason our infrastructure is falling apart. In the scheme of things it wouldn't take all that big an investment to dramatically improve things, it's just fallen out of fashion.
If you don't, you won't be compelled to pay. Pack up and move somewhere that's not fucked.
If, OTOH, you bought property, you took on this risk in doing so. You should have priced in the pension shortfall, and the expected future tax repercussions, when you made your purchase, and the seller should have born the cost of their jurisdiction's mismanagement in the form of a reduced property value.
If we are going to be adults, these pensions are contractual and need to be paid out. It’s not a responsible behavior to use retirement plans as weapons at the 11th hour.
So, younger adults who are just entering the workforce are going to shoulder the burden for paying for these deficits based on decision made when they were children or not even born.
Now that they enjoyed not having to fund the pensions for 30 years, they are retiring and expecting the next generation to pay for them having their cake and eating it too.
I find it very difficult to really figure out where the greater moral hazard here lies. As you state this was a problem everyone knew about when setting these public pensions up and it was easier to kick the can down the road. You will find it very difficult to convince me that the average union member in the 80's didn't know the sweet deal they were getting. It was a trope growing up in the 80's/90's to hear adults talk about "scamming" the overly generous pensions systems of the day.
I think it's interesting public unions in Illinois advocated 30 years ago for enshrining pension benefits into the state constitution. That language was added specifically because the public unions knew the deals they were making with politicians were not fiscally sustainable.
At this point I don't see a good way out and something major will break at a societal level before it gets fixed. There simply is no way to pay for these promised benefits and still maintain local and state government at a functional level in many states. I don't think bailing them out federally is an answer either - again for moral hazard reasons. I also don't think quadrupling taxes on the next generation is morally any better either.
In many ways this discussion is moot. The math is so overwhelmingly bad in some places it's simply not fixable from the revenue side only. Everyone is going to have to share some pain here, and that includes those receiving benefits.
More likely it was added because they knew that there would eventually be a concerted political effort to strip them of their pensions )and raid those pensions) by a combination of business lobbies and wall street.
>I also don't think quadrupling taxes on the next generation is morally any better either.
What is your moral objection to taxing unearned income at a higher rate?
We’re just arguing about the amount of the transfer at this point.
Washington will also look at this as an opportunity to take more power from states and move it to DC. Of course they can also print/borrow money do this.
Pensioners in the private sector do face those risks.
If we're going to be adults, we're also going to recognize that many of us were not adults when these contracts were drawn up and signed. Many of us were never even born, and some of those who were of the right age opposed them to some degree or another.
Maybe we should recognize, in a truly adult fashion, that the mistakes of previous generations should not be passed on to the current generation. Maybe adults should recognize the math just doesn't add up.
> It’s not a responsible behavior to use retirement plans as weapons at the 11th hour.
It's not a responsible behavior to over promise pensions and bankrupt dozens of states either. Nor, in the pursuit of fulfilling those reckless promises, is it responsible to bankrupt future generations.
> KEA opposes the pension reform, in which new hires will have to enter a hybrid cash balance plan, which differs from a traditional pension, and would limit new sick days that teachers can put toward their retirement.
https://www.cnn.com/2018/04/11/us/kentucky-teachers-pension-...
So are you okay with a future generation repudiating their contracts and obligations with you when you reach retirement age? After all, all of us are someday going to part of a "previous generation" and none of are so perfect that our generation has made no mistakes.
Why do so many people behave as if aging is something that only happens to other people?
There are solutions that provide the benefits of retirement without pitting young against old.
Which curiously, is exactly the solution we have in place now: reduced benefits for new employees to compensate for outsized ones for retirees. Should they stand for this?
> It's not a responsible behavior to over promise pensions and bankrupt dozens of states either. Nor, in the pursuit of fulfilling those reckless promises, is it responsible to bankrupt future generations.
You're ignoring the substantial hand states have had in making this crisis. Several have continually neglected their annual contributions. Maybe they were backed into a corner when tax reciepts fell in 2008, maybe it was a political self-inflicted wound. When states like Kansas or Colorado cut taxes and take on substantial debt, it's pretty goddamn odious to point to budget shortfalls and say "Sorry employees, we can't make our pension obligation, we have interest payments to make!"
Moreover, when demanding pensions take a cut while paying lenders 100 cents on the dollar, you're concentrating investment losses onto those least able to afford it.
Moral hazard? That's the backbone of politics
No, the officials making these pension decisions are politicians who mostly, while they may have government pensions, have lots of other resources, so that the pension doesn't matter much. The only thing it will deter is non-independently-wealthy people from becoming politicians, but there are barriers to that already.
That's likely true in large cities, but most cities (and thus most city governments) aren't large.
Many small city elected officials are part-time, often unpaid or with a largely symbolic stipend: they don't have public pensions from those positions at all. So they are even less subject to “if you make bad pension decisions, we’ll take your personal pension away” leverage than fulltime big-city and state politicians, who are likely to have (but not depend on) public pensions.
Our current governor is the first to attempt to do anything about it in decades, and is being blasted by unions, the press, and the public for it. He’s most likely destroyed any chance of re-election by pushing hard for reform. He also hasn’t done a great job of building consensus, to be fair.
The NEA/KEA especially has vehemently disagreed with any proposed reform. Teachers have walked out today in protest of a bill that did not affect any current state employees.
It boggles my mind that people respond to this topic so irrationally. It’s like a patient arguing with their doctor over a diagnosis of cancer.
[0] - https://www.courier-journal.com/story/news/politics/2017/08/...
That bill is essentially a reduction in compensation for future employees, isn't it? You might not agree with their priorities, but there's nothing irrational about teachers objecting to that.
> The NEA/KEA especially has vehemently disagreed with any proposed reform.
Did any of the proposals include just raising taxes to fix the pension fund? Mathematically, it's not like there is really a wide array of options if you're going to honor the constitutional "inviolability" of that contract (which I'm sure the teachers want KY to do) and actually keep the pension going.
Some oversimplified calculation: $15,000 over 30 years would be $500/year, equivalent to a 20% tax increase.
Increased taxation cannot resolve the crisis alone.
But, the larger point is that there has not yet been any reform of the current situation
Kentucky also gives favorable tax treatment to retirement and pension income, so if you wanted to reduce a percived moral hazard of who pays and who benefits, KY could simultaneously reduce the preference given to lower the required rate changes further.
Increased taxes can solve the situation fairly trivially, and still leave KY in the middle of the pack for total tax burden.
None of the numbers you mentioned support that conclusion at all.
I mean if your lifeboat is sinking why would you insist on cramming more people on? Axing pension benefits for future employees is much preferable to what would happen to current ones if the state goes bankrupt.
I assume the teachers understood that those are not the only two options.
This is why people are anti-union. It's unbelievably short-sighted.
Now you want to hold the Union accountable?
In addition, Kentucky teachers have worked under the assumption of getting a pension because the state never extended social security to them. They worked with lower wages and no future social security with the promise of pension would be there for them, sometimes as their only retirement income. How can you go back and threaten this pension when teachers took these low paying jobs under that assumption?
https://www.bondbuyer.com/news/bevin-citing-pension-pressure...
https://www.courier-journal.com/story/news/education/2018/03...
I only mentioned teachers because of their response, which is largely irrational. No ones benefits are being taken, the state is just ending a program that is unsustainable.
The private sector did this decades ago.
What happens if the state government goes bankrupt? That is not outside the realm of possibility with the current crisis.
Union: pay raises!
Elected Municipal CFO: we can't. No more money.
Elected Politician: what about retiring 5 years earlier?
Unions: we will take that!
Elected Politician: retiring earlier costs nothing right now correct?
Municipal CFO: yes but...
Elected Politician: Fine let's give everyone 5 years earlier retirement. My successor will deal with that when I will be gone.
Unsurprisingly when the shortfall comes the same politicians who borrowed will be shouting how pensions are unsustainable.
In New York, the pension fund is firewalled from the state budget and run fairly independently.
After the last recession, the pension fund made several changes in conjunction with the unions:
* Ensured the forecasted return estimates were in-line with reality (7%, which it has exceeded in the past decade)
* Introduced a new tier so new employees contribute for their whole career, with contribution rates progressively increasing as you earn more
* Introduced a limit on the final average salary that determines pension payout
* Lengthened the window of final salary calculation and introduced rules preventing large overtime variances counting towards this calculation.
Still a decent pension system if you can vest, but with reasonable expectations set. As a result, NYS is one of the best funded pensions in the country and in the upper 90s% of future funding levels.
[a] http://www.finra.org/investors/5-longest-bull-markets-infogr...
https://upload.wikimedia.org/wikipedia/commons/7/7e/S_and_P_...
Our housing bubble just surpassed the housing bubble of 2007.
Interest rates are at all time lows and unemployment is at all time lows.
If they are having trouble now when it's the best of times, what are they going to do when we have a recession?
"It worked in the past" isn't financially sound decision making. It might be lucky from time to time.
Regarding public pensions they should just adapt to reality and fund them higher. This was willful negligence for a long time.
It is not necessarily a better outcome for the employees but it has better alignment of incentives and doesn't create obligations for future taxpayers.
These investments are basically saying, "the market will always get 10% return", so we're going to put future tax payers on the hook for 10% returns. The average guy investing his 401k doesn't get guaranteed results at the expense of other people's work.
Even if there is a historical 10% return that holds, that's still going to produce underfunded (and overfunded) pensions based upon fluctuation in yearly returns and population dynamics (like if an unusually large number retire in a down year).
Then there is the pension spiking, and maybe even no consideration that people are paying into the pension at low rates but tend to retire at high pay rates.
That's a determination the average guy has to make, and he doesn't run the risk of bankrupting the entire state when he misjudges his risk profile.
(the report places much blame on aggressive assumptions about investment performance)
For states, I am interested in specific cases.
If a state is going to have pensions they need to be independently managed and firewalled from the hands of politicians.
https://kypolicy.org/shifting-health-costs-employees-become-...
>Kentucky has shifted more of the responsibility to pay for health benefits to public sector workers in recent years and then used the savings to help fill holes in the budget. Even after these transfers from the employees’ health plan, its fund balance is continuing to grow, making it a target in the new budget. Governor Bevin’s budget plan includes transferring $500 million out of the plan in 2018 into a new “permanent fund.”
>Over a period of years, balances built up in the state’s plan as more was collected in employer and employee contributions than was paid out in claims. In recent years, the state began to transfer those monies to plug other holes in the budget. Kentucky transferred $50 million in 2009 and $93 million in 2015. For budget year 2016, the state will shift another $63.5 million from the plan to the state’s rainy day fund.
http://www.latimes.com/projects/la-me-pension-crisis-davis-d...
These people have already sold their services for a promised benefit which is now not being given to them. If there is bankruptcy it should come at extreme costs to the extent that the voters in the location feel pain equal to those who are having their pensions cut. Clawbacks, criminal convictions, liquidations, ensuring that the pain is not felt just by those who are having their benefits stolen and given to someone else.
This is reality and no amount of whining about fairness or past promises will change it.
Bankruptcy laws should not allow a private entity to go through bankruptcy and continue to operate while discharging its debts. The same should apply to public entities as well. That they may currently allow this is something we need to fix.
If we cannot ensure debts to be met under law, then we should forbid the debts from existing to begin with.
While municipal corporations can dissolve, that wouldn't solve anything. County and state governments can't afford to pick up pension obligations on behalf of cities. And we'll probably find that some entire states such as Illinois can't pay their pensions. There's no way for a whole state to simply stop existing.
How does this solve the problem? 401(k)s in the private sector have been a complete disaster. Most 401(k)s are also hugely underfunded.
As far as I can tell, the only thing defined contribution plans accomplish is shifting the blame for underfunding and poor investment performance to employees, while enriching the financial companies that collect account and transaction fees.
[1] https://www.fool.com/retirement/general/2016/01/26/20-retire...
[2] https://www.wsj.com/articles/SB10001424052748703959604576152...
That's a disingenious way to state that.
Individuals have control over their own IRA/401(k) contributions. They are "fully funded" up to whatever that individual wants them to be, and that amount of money will be available to them when they retire (+/- investment gains/losses). You can argue that people aren't putting enough money in their IRA or 401(k)s to retire, but that's not "hugely underfunded", that's short-sightedness or circumstance.
Pensions are hugely underfunded because states haven't been setting aside enough for promised benefits. The equivalent would be me sending a check to my IRA or 401(k) institution and them taking 20-30% of that money intended for my retirement account and putting it somewhere else instead. That's fraud and it's illegal in the private sector (c.f. Bernie Madoff). Makes you wonder whether it should be illegal in the public sector, too?
The end result is the same: most people don't have enough money to live comfortably on in retirement. That's what I mean by shifting blame. Sure, it's not the government's fault you don't have a healthy retirement account, they didn't rob your pension fund, you were just "shortsighted".
There's no mystery here, we've known since the institution of Social Security that almost nobody saves enough money for retirement if left to their own devices. Shifting to (nominally) employee-controlled defined-contribution plans just means we have only ourselves to blame for what will be the same societal problem: impoverished retirees.
And the problem will be just as hard to solve, because it will be seen as an issue of people failing to be responsible, so why should we bail them out?
What I read about whenever these stories hit the news is they assume they can take from the pool either directly or by under contributing thinking they can just pay it later
The International Forum of the America's holds an annual pension conference where the data on the coming run on public sector pensions can be found, such as all the risky investments to make up for poor returns. Interestingly, private sector pension schemes are fine.
An aspect in this that I find very interesting is the realities behind the numbers which will be revealed as the situation plays out. The money is a bit of an illusion, retirees need an available reserve of wealth (be it in the form of productive land, goods, labour, rock solid infrastructure and houses with little need of maintenance) to sustain them when they can no longer produce.
Where will this wealth reserve come from? Who will have to go without? What compromises will be made?
Undoubtedly one part of any proposed solution is 'tax the rich', because there are no other wealth reserves in America, but if this is a more fundamental problem of demographics and ratios the real resources might not be available to meet peoples expectations. Somebody is in for a very rough 20 years.
401Ks have a lot of issues, and definitely aren't superior to a pension scheme in general, but pension schemes are so poorly run and have so many corruption-like issues that at least with a 401K it is just a simple vested savings account I can move if need-be.
I guess what I am saying is, trust in traditional pensions is so low to some, getting a worse but safer alternative looks nice by comparison.
At this stage, there is literally no way to even pay back the pension (it'd be $20k per person in the state, if we needed to pay it back today).
That was over a year ago - the folks left are still working without a contract. That doesn't necessarily mean they won't get any pension if they retired today, but it puts it at even more risk than it already was.
A really good intro to the city level issues would be the Dallas police and firefighters pension (just duckduckgo it)
A family member has a state pension in one of the states known for having some of the worst of these problems.
However, their corner of state employment was smart and set up an independent pension management situation. It remains fully funded and not at risk. Well, except that the state keeps trying to break down the firewall and raid it.
However, people who instantiated it did a good job of guarding against this.
Pensions aren't "evil". And who wouldn't mind worrying less about making retirement decisions as an amateur investor on one's own, and focusing more on doing a good job and raising a family and having a happy life?
What is "evil", is structuring them without defense against expropriation of funding for other purposes. As far as I'm concern, that is "theft", plain and simple. And failing to fund them per established schedule is breach of contract. You are essentially not paying employees for work done.
Maybe given that, well defined in law and practice, organizations also wouldn't make unrealistic pension commitments in lieu of providing better immediate compensation and benefits.
In addition to all the rest, there is the aspect of the turn to 401K's and similar vehicles, that money managers saw and pushed an opportunity to grow the fees they collect.
I held off from writing it a couple of paragraphs ago, but I'll say it now. Pensions aren't a fundamental problem. Banksters and their political enablers are.
And as more and more investment moves into them, they become mono-cultures vulnerable to large-scale exploitation.
I'm using some right now, but I don't count on their indefinite viability and performance.
Remember how LIBOR exposed fundamental problems and manipulation with respect to indexing and pricing?
Different aspect of finance. Nonetheless, you're pinning everything to indexes someone manages -- and to systems performance versus competition.
They do reflect a similar aspect; taking the average investor's attention away from individual purchases and sales, where most get fleeced to varying degrees.
Wherever your investments, you have to keep paying attention.
P.S. Have an upvote. I'm not disagreeing.
If it was simply a fact of more money == inflation, we'd be screwed since the money supply is almost constantly growing through bank lending.
At the end of the day, all spending carries inflation risk (since all spending adds to aggregate demand). This equally applies to money saved earlier, new money created in the banking system, or new money created by the Government (say, QE). It's at the time of spending that's the risk, not the time of creation.
The limits of Government money creation therefore have more to do with the productive capacity of the economy.