The Pension Hole for U.S. Cities and States Is the Size of Japan’s Economy
wsj.com
wsj.com
Boohoo. Public service union members should have thought about that before pursuing a pyramid scheme retirement plan instead of a defined contribution pension like the rest of us.
Maybe the administrators of the pension accounts and financial planners for these organizations should have done better by the people who are busting their (collective) asses to provide services for you, the taxpayer?
With public sector unions, especially in smaller cities and states, the relationship is more incestuous and oftentimes the settlements aren't really made in good faith. The politicians desire the political support of the unions they are negotiating with, and figure by the time the pension bomb explodes it will be some other poor sucker's problem. Taxpayers are the ones that get screwed.
It's basically a deal negotiated by government employees among themselves, and approved by a politician who often needs to maintain favor among these employees.
Add to that the fact that these agreements only lead to a crisis long after the politician is retired (or dead), and it's no wonder these unsustainable deals get approved as a matter of course.
The federal government saw this coming 30 years ago, moved to a hybrid, mostly-defined-contribution system and (surprise!) is doing fine. Most state and municipal unions fought to keep their defined-benefit plans and now are going to suffer for it.
That National Review hit piece notwithstanding, in truth defined benefit plans are, technically speaking, the most efficient form of deferred compensation. Lowest overhead with maximum value received by the [average] retiree, which theoretically permits employers to minimize total amount of compensation.
The rub is that the employer needs to fully fund the liabilities as they accrue. Government and unions, however, have been content for state employers to "pay as you go"--use today's contributions to pay yesterday's liabilities. That's a recipe for disaster.
It sucks that we've thrown the baby out with the bath water--swapped pensions for 401(k)s. Defined benefit plans are annuities, and most economists agree that the most efficient retirement savings plan is an annuity. How we pay for that annuity is a different matter altogether. We know that people aren't rational enough to choose to put their retirement savings into an annuity, so it's obvious the employer should do this for them. The only real question is how to structure the premium payments so employers can't cheat (and employees can't be complicit in the cheating).
No insurance company would sell an annuity for as little as what governments claim they cost. And anytime you get a big pot of money, there will be corruption and cheating.
The most efficient retirement plan is having multiple successful children who are raised to take care of their parents.
Well, we are the ones paying those people's pensions, in the form of taxes, so we're the ones fucking ourselves over if they got too sweet of a deal right?
I am personally not going to get 50-100% of my maximum salary as guaranteed compensation for the rest of my life until I retire - are you? I'm not super enthusiastic about paying taxes for someone else to get a better retirement deal than me, either.
I'm fine with paying government employees what they're worth while they're working - hell, I think most of them deserve a raise. But they also should have defined contribution retirement plans, not defined benefit, like everyone else working in private industry.
And how does this square with this being a democracy ? Or to put it another way: you're also (indirectly, but ...) the ones promising sweet pensions to these people if they would just work. And they worked. Now you want to revoke your part of the bargain ?
Furthermore, if you refuse to pay for their pensions ... do future kids get to refuse to pay for yours ? (either directly, or through devaluing the currency, just in case your answer is that private sector pensions are safe)
But we all know that there's no answer here, so it'll be devaluation. At least that means private and public pensions are equally screwed (I'm leaning socialist, so I like fairness in the sense that people get treated the same).
So I think this argument actually works against you.
First, nothing can bind future generations. They can always change whatever they want to. In the United States, a future congress can revoke, alter or amend any law passed by a previous congress. So if you want your pensions to be secured, the benefits cannot be guaranteed by faith in future governments!
In this sense, a defined contribution plan is more secure than a defined benefit plan. This is because a defined contribution plan belongs to the recipient as soon as the funds are allocated - even if a future government changes the rules, the money that's already in your 401K is yours!
Consider the alternative - are you saying that future generations are always bound to the decisions of past generations, even though they may not even have been alive or of voting age? If a law is fair and benefits society, that future generation will respect it because it benefits society. If that law is unfair to them they can and absolutely should change that law! How could it be otherwise? As a socialist this should utterly appall you. Do you believe that laws put into place by capitalists and large corporations constitute binding pacts between governments and their citizens, and that any future government that seeks to amend them towards a more equitable balance is now acting unfairly?
If the median income in a nation is $40K, but the median pension given by the state exceeds that income, then who is suffering unfairly if the pension is reduced to be more in line with what the average worker earns? How as a socialist could you justify a pensioner earning more than a productive active worker?
Not so useful or interesting in terms of commentary, is it?
It's funny how you see this as a positive ? If people have this attitude, of course the result will be mercantilism, or worse : the hoarding of jobs/companies/markets and the only way to get into a specific jobs is to do whatever "the guild" wants, which I guarantee will include paying pensions.
And if you "go around" the guild, they will either regulate you out of existence or outright physically attack you. Before you say that can't work I'd like to point out that they did this in almost all of Europe for ~1200 years.
And under these conditions, I would understand that way of working.
Such things are the alternative. So, I would very much want people to have faith in government, and that very much means you have to pay up the promises made before.
> Consider the alternative - are you saying that future generations are always bound to the decisions of past generations, even though they may not even have been alive or of voting age? If a law is fair and benefits society, that future generation will respect it because it benefits society.
You mean, paying people for their work what they were promised when they started that work, for example ? Like pensions ?
> How as a socialist could you justify a pensioner earning more than a productive active worker?
I don't understand why this would be a problem for a socialist ?
> Consider the alternative - are you saying that future generations are always bound to the decisions of past generations,
What I don't understand is that as a supposed capitalist alternative you're actually advocating making promises (like pensions), then reneging on them. Your alternative is to lie. Make promises, and exploit people who believe them ...
I guarantee if there is one thing that kills markets faster than anything else it's a loss of trust. You're advocating, unless I'm mistaking, exploiting trust. This is just not going to work.
There's a reason most historical capitalist societies had extreme versions of holding people to their promises. Slavery, debtors' prisons, forced labor, indentured servitude, ... were "solutions" used by past societies to avoid this problem. There was presumably a reason they did this ... do you really want to go back ?
> If the median income in a nation is $40K, but the median pension given by the state exceeds that income, then who is suffering unfairly if the pension is reduced to be more in line with what the average worker earns?
If government pensions pay out more at retirement than the median worker makes while working, would you agree that under socialism this would be considered unfair to the worker, and overly exploitative for the pensioner?
No, because, firstly, this isn't true. The government simply has started to pay less. From any individual's perspective, I assure you they don't earn more in retirement than when they were working. If you have heard differently, I assure you that's propaganda.
Secondly, I would simply say that current government employees have the right to be paid the same as their predecessors. Lowering pensions ? No way I'd agree to that as a socialist. No way in hell. But you should raise the conditions for government employees.
They earn more than the average worker overall. In California the average government pensioner earns 26% more than the average non retired, currently working worker.
Source:
https://californiapolicycenter.org/what-is-the-average-pensi...
That's too much. As a socialist, I would find it clearly exploitative that a non worker is making more than an active worker. That's completely unjustifiable under socialism.
The point of a pension is to provide an income so a retiree doesn't live in poverty. Paying a pension that exceeds that of a younger worker who is actively working full time completely goes against that.
I don't understand where this is coming from. Personally, I am a socialist and I think it's too little.
If I look at it from a capitalist's perspective, I ... also think it's too little.
I'm sorry, just to be clear, are you saying that as a socialist, you think a young worker who is actively working and only making $40K a year should pay more to support someone who is making $50K a year but isn't working at all, because $50K is too little?
My dad (retired) was a career public employee. He paid into his pension every month of his entire career. He earned every damn penny he's getting right now.
This is not just a problem of public employees or their unions. You are on the hook for these payments and will remain on the hook even if starting today everyone had a defined-contribution plan. Yes, this is your problem too.
This feels like the crux of the problem, but we've got the politicians we voted for. I'm starting to wonder if its even possible for the average person to vote in the long-term interests of their community against their own short-term interest. Some will... but the majority?
For the most part the average citizens do everything they should and a bit more. Sadly resources are mismanaged and citizens carry the burden because our system is collectively failing to stop bad actors at every stop.
Every good solution ive heard comes at the expense of higher taxes especially on rent seekers and high income/ wealthy individuals and families. Ignoring the political suicide of going after those classes, the entire proposal is a catch 22. How can these victims be expected to trust a politician when they've been taken advantage of by politicians their whole lives?
When you can't resolve unsustainable debt without bankruptcy, then you will go bankrupt and credit rating be damned.
Detroit, Chicago, Illinois are just warm ups for the big battles over the next few decades.
That said, the pension shortfall is a disaster playing out in slow motion. We're just waiting for the hard cash constraints to bite - when they do it's not going to be pretty.
So $2200 was being spent on benefits for a population that had 1 worker for every 2.5 retirees.
In California, School Districts are increasing pension contributions from 8 percent of their payroll in 2013 to 19 percent in 2020. This is already creating havoc as teachers unions are threatening to strike unless they get pay increases because districts were saving money to prepare themselves for the 2020 budget math!
https://calmatters.org/articles/california-teacher-pension-d...
If I say that a brachiosaurus was the size of a house, I'm not saying that your current dwelling is comparable to a 65-million-year-old pile of death and dust.
Huge numbers are essentially meaningless to the human mind. But "all economic output of Japan in a year" is something that most people can wrap their heads around a little more easily. We know it's a fairly rich, industrialized nation, and so therefore that's a crapton of money.
We all know they meant "in a year", but the article isn't explicit about it -- it just says
>> the output of the world’s third-largest economy
Not "annual", not even "GDP". I bet a lot of readers came away thinking "a shortfall as big as Japan".
And maybe not just lay readers -- a "smart but not knowledgeable" reader might try to convert the stock into a flow or vice versa by assuming some interest rate and doing a back-of-the-envelope net present calculation and be off from the real numbers by an order of magnitude.
I agree with it but then again I'm not opposed to paying taxes. Why shouldn't we provide for the retirement of our workforce?
Given all of that, I'm not too excited about propping-up their pension shortfalls.
Put simply, representatives need to be on a personal financial hook (or penalty) for laws, rules and policies, even after they've exited office.
Don't worry though. This exact same thing is also happening to Social Security, which will crash around the same time, or shortly after, so everyone working now will get the shaft.
Of course, the latest date I've seen (2038) is almost exactly when I should have been eligible to start drawing on it.
States cannot go bankrupt, without a change to federal law. Cities can and have, and pensions have already been addressed in that context. It's not a new question.
> and the people affected are going to sue. It will take at least a decade to work up to the Supreme Court, who will find (no matter WHAT the liberal/conservative makeup at the time) that, surprise, surprise, the government is NOT legally obligated to pay out the benefits they said they would.
It's already been established that pensions can be cut in bankruptcy, so, yeah, that's not even a question.
> Various governments will try to implement various forms of austerity to make it work,
They already are to prevent running into the major crises (e.g., recent pension funding requirements reforms in California.)
> Don't worry though. This exact same thing is also happening to Social Security, which will crash around the same time, or shortly after, so everyone working now will get the shaft.
Social Security won't crash; even with scenarios projecting Trust Fund exhaustion it still ends up paying at worst something like 2/3 of eligible benefits out or current revenues out to the limit of projections.
Minor nitpick, but it’s in Illinois’ state constitution that pensions cannot be reduced. Republicans want to change the constitution to remove this rule, but Illinois is an overwhelmingly Democratic state so that’s never going to happen. It will be interesting to see how all of this plays out.
Major nitpick, but in the event of municipal bankruptcy (the context of the store you responded too), federal bankruptcy law trumps state law—including the state constitution—because Supremacy Clause. The bankrupt entity doesn't cut pensions, the bankruptcy court does.
It's not just former employees that will suffer. Everyone suffers when states have to pay higher interest rates on their bonds because of poor credit ratings (that's what bankruptcy does to a state) or have to pay more for workers and contractors. Everyone will have to pay higher taxes and everyone will receive less from the government.
I cannot understand the logic of not making good on government obligations. You can take the position that the government should stop promising pensions, but how can anyone think it is a good idea for the government to fail to pay for the pensions it already promised people (or, frankly, any other promise the government made)?
It is going to be HUGE and do incredible damage. Retirees will be hurt catastrophically, costs of government borrowing will skyrocket, programs will be cut massively, workers will abandon government.
The issue is that the costs of meeting the prior obligations will be completely impossible. States, cities, and school districts will go bankrupt, massive numbers of people will be fired, and taxes will go up while service goes down.
Unfortunately the politics prevent a fix today and prevented a fix 10 or 20 years ago when it would have been much cheaper. The fix will happen in 10 to 20 years and it's going to be horrific.
As for Roth IRA. I don't trust the government to honor their end of the deal. I can see them taxing withdrawals for the top 10% in the future.
The union leaders and the politicians - typically in their 50 to 70s - who made the promises will be dead by the time the 25 year old new hires try to collect their pensions at 55 or 65. The incentives are all sorts of screwed up and it's very difficult to create a healthy set of constraints for this kind of bargaining.
They should simply put the burden of new obligations (debt or pension guarantees) on individuals rather than on the city. If you live in a municipality when they take on a bond for a stadium, or agree to pension payments, then you pay those debts regardless of where you have moved to. Or put the obligations on property, so people have an interest in not burdening themselves or their investments.
Why is there a fourth option for banks and not for pensions? Why is Quantitative Easing left out of this discussion?
The pensions don't have enough money so easy access to debt does nothing to help them solve that problem.
Any loan at an interest rate lower than the rate of return that can be earned by investing that money is essentially free money.
Pensioners were given a promise and now we're changing the rules. It feels wrong even if the promise was unrealistic.
There is a slight difference between the two situations you describe. That being that the promises being made to the unions were not being done by disinterested parties. Public services unions are notorious for being some of the largest donors to state and local candidates. The negotiators on the management side of the table are deeply beholden to the unions and have no personal interest in paying the obligations they are agreeing to, it's all put on the tax payer.
In fact, this problem of unfunded pensions has impacted municipal credit ratings and wound up costing taxpayers more in higher interest rates than they would have had to pay in higher taxes to stabilize the pension funds.
Thomas Jefferson's view of deficit finance was that one generation has no right to impose its debts on the next. He would have refused deficit spending that would not be completely paid back within 19 years (roughly, a generation).
I don't think many people listened to him on that. Here we are.
I think we do have the right to ask this question. We should have the option of denying that the previous generation ever had the right to impose this upon us.
At the very least, we should learn from this, recognize these types of short-sighted promises for what they are, and reject them when we see them. This is one big way we can be better than our forefathers.
This is way too absolute and simplistic. Past governments can make bad policy. Past governments can be corrupt or make decisions based on personal interest against the public or incomplete or bad information at the time. The obligation of future governments has to be balanced with whether the past government instituted good policy or not.
Second, old people vote. If you drive a political wedge between the young and old, I can't say what will happen, but it won't involve the young ending up on top.
Third, retirees are a huge consumer group, and also a non-obvious but important source of support for families.
In fact, telling young people that they will see nothing of social security is a propaganda position intended to drive that wedge.
You're falsely trying to paint the choice as only between driving retirees into poverty and paying the full pension.
I certainly won't be receiving 60-100% of my maximum salary forever after I retire, and I won't need nearly that much in order to not be in poverty. And IMO it borders on unjust to underfund a pension with tax dollars while those workers are working, then force younger workers that weren't even old enough to vote when those benefits were created to now shoulder the burden.
Why can't we cut pensions, without eliminating them? Why can't the state switch from defined benefit to defined contribution plans, like practically ever other non-government employee gets?
> If you drive a political wedge between the young and old, I can't say what will happen, but it won't involve the young ending up on top.
This is true only up to a point. The old aren't exactly going to be the ones who will win if the economy collapses or the country descends into chaos, are they?
I left the UK partly because between insane housing prices and paying for the triple-locked pensions of the elderly - the economy has little to offer young people and there are better opportunities elsewhere.
The other thing to keep in mind is that the problem is not merely that future pension obligations for new hires might not be funded. In some cases the problem is immediate or very near-term -- pension funds have become so depleted in some states and cities that retirees may not receive their checks, and in some cases people have been forced to accept less than they were promised (see the article for examples).
Well, yeah, because then 5 years down the road, when the city tries to shift pension contributions from the city to covered employees on the defined benefit plan, newer employees have no incentive to support the older employees and the employer can split the union. Which is why unions resist anything that gives different covered employees radically different contract interests.
Candidate A says, "We need to cut benefits now to make sure the pension has enough money in the future." Candidate B says, "No we don't." Everyone votes for Candidate B.
It's not like we accidentally elected people who don't value the long term. It's that voters don't value the long term when there's real short term money at stake.
The US has a massive problem with the perception of "government usefulness", heck you've got whole political wings solely trying to appeal to "the only good government is no government" mentalities.
As a result, barely anybody wants to pay taxes for anything, in their extremely egotistical and narrow-sighted definition of "freedom".
The reason why many on the right are wary of government programs is because they’ve watched the government horribly mismanage their tax money over and over and over again. It’s not necessarily because politicians and bureaucrats are necessarily stupid or evil, it’s because the government is generally not incentivized to do a good job, since they don’t face competitive pressure like businesses in the private market.
Isn't that exactly the kind of mindset that facilitated this whole situation in the very first place? "Government can't handle money, that's why we gotta privatize everything".
And if that would be true, how come it wasn't a private business that took us the moon, with all the resulting auxiliary inventions, but the combined effort of a whole nation in education and research [0]?
"A better job" isn't always the one that "makes more money", some ventures don't need to be directly financially profitable, in some fields introducing a profit-incentive can have rather negative consequences (Education, Healthcare) and in others, it's just perverse (for-profit prisons).
Would any private company have taken the risk, of flying to the moon, back then? Hell no, because there was literally no money in it back then, it was all just a big venture of "wasting money".
That's why I don't think literally everything needs to be "profitable", we can't eat money and money doesn't make anybody a better person.
It's also friggin weird how on issues like this there's never "enough money", but when it's about tax-cuts for massive corporations, which is, in essence, nothing but handing out free money to private businesses, then there seems to be always plenty of enough money to justify it.
Too bad that "nothing" is my generation and we'll be putting our "contributions" into a pit that will give us actually nothing in return when it's time for us to retire.
As I get older I realize why people say if you're not a liberal at 20, you have no heart but if you are not a conservative by 30, you have no brain (or something to that effect).
The same generation that mindlessly claims that millennials are spoiled while we field $10K+ medical bills for things like childbirth when they cost <$1K for them. I haven't seen any data to back this up but I suspect they're also far higher in diabetes diagnoses which is another reason our care costs so much more.
Being liberal and conservative is what got us here in the first place. Expansion of political ideas is only now becoming popular as this generation really feels the effects of wishy-washy American liberalism and conservatism that favors the already extremely wealthy.
This is why in both cases out-sourcing/privatization is popular. It shows a short term benefit, the long term is someone else's problem.
How can we expect politicians to care about the pension fund if the problem isn't going to materialize for tens of years pass the end of their term limit?
And if they were a "hero" and increased taxes to try and tackle it, they'd only get voted out next election, so someone else can come in, undo it, then spend all the savings.
In a theoretical Parliamentary Democracy, the "upper house," with lifetime terms would exist primarily for this function, consider the long term interests over the short term point-scoring. But no country that I know of can be described as having an effective upper house.
George H. Bush is one of the few important fiscal conservatives elected in my lifetime, and he is despised for it, especially by people who like to claim they are fiscal conservatives.
Retirees are also living longer thanks to advances in healthcare. It would not have been easy to predict those longer lifespans decades ago when they were first promised their pensions, but the pension still has to keep paying as long as they live.
None of this is to say that governments have no share in the blame for this. Failing to take action to stabilize these funds, or worse, cutting taxes when the money could have been used to help keep the funds solvent, was a bad decision too many states made.
Corporations have largely shunted the responsibility for retirement savings onto individual workers. Now said workers have no pensions and have uncertain retirements. Instead of asking why they have no pensions they seek to equalize status by falsely believing we can't afford any sort of pension.
As a nation we need to seriously rethink the role and purpose of government and how taxation is a part of the proper functioning of government.
[1] https://www.taxpolicycenter.org/briefing-book/how-do-us-taxe...
https://en.wikipedia.org/wiki/Atlas_Shrugged#Influence_and_l...
Edit: She did flee a terrible situation in Russia, which I think probably explains (but does not excuse) her positions on socialism vs. capitalism.
I wouldn't bundle military expenditure with the rest of public spending. Our military budget currently stands at a staggering $639bn (that's billion) for FY2019.
In fact, there's a good argument that if we diverted some of these enormous funds to invest in other areas, those problems you mentioned (infrastructure, etc) would be fixed.
> The situation is easy to fix in economic terms but not in political terms.
The article is about defined-benefit pensions. Nobody has those anymore, not in the US. This is a large group of privileged individuals, who years ago got themselves a sweetheart deal as employees of the state. It's basically another case of the previous generation mandating extremely comfortable benefits for themselves, and passing the bill to the next generation.
These are people who worked for the government their entire lives. They may not be rich, but they were generally comfortable, and certainly not the neediest part of the population. They can stand a modest cut to their pensions.
Otherwise, your argument is that all of us should pay substantially higher taxes to bankroll these lucky few individuals who got themselves a sweetheart deal thanks to their affiliation with state and local government. In most places, you'd call that "corruption".
I have no interest in seeing Chicago fix its pension problems by using funding taken from the US military. Chicago made its bed by intentionally, dramatically over-promising, it gets to sleep in that bed. National high speed rail? That would get my vote, so to speak.
We could throw some money at the university cost problem. However that's not lacking funding at all. In fact it has far too much funding, we need to deprive it of the federal slush money and legally mandate how funds can be spent (ie restrict admin spending). It's a massive theft cartel run by the admins at the universities, they're the ones that have universally benefitted by perpetually raising the cost. You can see that represented in the charts comparing the extreme expansion of admin cost & employment at universities, vs the employment of eg professors, over 30 years.
Taxpayer money should be not be used to fix any of these over-promised pension problems, and certainly federal tax money should not bail out corrupt, irresponsible local governments.
The issue is that those pensions have been comically mismanaged; edit: and were not sustainable in the first place
Of course, the fact these pensions were managed by state government (read: mismanaged) only accelerated the inevitable crisis.
[1] https://www.investopedia.com/articles/retirement/10/demise-d...
Perhaps the observation of government wastefulness is conflated with feeling overtaxed. There are two ways the government can raise more money:
1) Raise taxes
2) Use existing taxes more efficiently
If you look at where the tax money is going, infrastructure is one of the smallest pieces of the pie. Why not divert defense and/or social service tax to infrastructure for a few years?
One thing I really appreciated about Bernie Sanders was that he did not shy away from the term "socialist". It's engendered a conversation America really needed to start having.
Precisely. But in fact, it's worse:
The people doing the promising and those receiving the benefits are in fact the same.
Who makes the promises? Local and state government employees.
Who receives the benefits? Local and state government employees.
Who pays for them? Us ordinary taxpayers who can only dream of such sweet defined-benefit pension deals.
Yet some folks see this as reason we should pay even higher taxes, and sacrifice our own pensions, which are already lower and less secure than these privileged government pensioners.
Unbelievable.
That's the key point. Budget broken so we can't pay for something? Let's talk about putting money in. Systemic problem where the people making decisions about spending the money are the same people receiving benefits? You can't write a check to fix that. This isn't a traditional "how much do we tax and what do we spend our money on?" public policy discussion.
Systemic problems are another kind of problem entirely. They deserve and require non-partisan attention and discussion.
There's simply no reason to believe that throwing more money at these systemic problems will fix them. In fact, it may well exacerbate them instead.
California has, along the US states, a fairly moderate pension issue measured per capita or per GDP. It has big absolute numbers, as with nearly every other issue, because it's a very big state.
A more important question is how much room to manoeuvre does California have?
If California increases taxes by 5% to fix the issue how many businesses and highly paid employees will leave?
Also, no reason to believe just 5% will fix the issue.
That's very hard to say.
> If California increases taxes by 5% to fix the issue how many businesses and highly paid employees will leave?
Even if it was a simple as taxes being a single number where distribution of the taxes doesn't matter, there's no consensus on the average effect of increases. And, in reality the distribution probably matters intensely.
(And, of course, taxes aren't the only lever; maybe California instead radically cuts back on mass incarceration; to the extent that California has less room to maneuver in taxes it has more on spending, which in some ways is better for this purpose—spending cuts tend to also inherently reduce the rate at which the problem is made worse, before you even consider how the savings are applied. Either spending or tax, though, may take ballot action or legislative supermajority, because much of State spending in CA is programmed by Constitution/ballot measure, and tax increases can't be done with a simple legislative majority.)
There is no such thing on significt public policy issues; if it matters, and there are different opinions, it will become partisan.
It costs money to run government. Employees need to be paid. We have had lay offs when budgets were constrained. The funding per pupil has steadily decreased the last 30 years and hence tuition has similarly increased. Our salaries relative to purchasing power has decreased over this time.
Exactly. So one group of state government employees (your state's DoE) meets another group of state government employees (your union) and decide to give each other an incredible defined-benefit pension deal that nobody outside of government can even dream of.
State government employees are giving each other dream pension plans, that are unsustainable and wildly over-budget even if they were well-managed (which generally they are not).
You know why nobody outside government has defined benefit pensions? Because they were proven to be unsustainable decades ago. Yet government employees keep conferring them upon themselves.
Then, when the inevitable deficit arises, as any economist would predict, you have a great solution: me and my peers in the private sectors should pay more taxes to bankroll your party!
I hope this slow-motion trainwreck would be a wakeup call, but either way, know this: there is no amount of taxes that will prop up your unsustainable pension plans. State and local governments wasted billions mismanaging these funds, that are unsustainable even under the best management.
Any more taxes you collect will just fuel this fire for a couple more years, before the inevitable next crisis arises.
You can't fix fiscal irresponsibility with more money, because all that money (and no accountability) is what created fiscal irresponsibility in the first place!
Your state government needs to start applying the same basic fiscal responsibility that every single business in your state is adhering to.
My pension plan is not a good one. You characterization of one group of state employees giving a dream set of benefits to another is not based in reality. Administration does not negotiate strongly with us the contract won't be approved by the legislature or signed by the governor. Our wages relative to buying power has not been going up or remaining steady.
If pensions are inherently unsustainable then you must conclude that it is unsustainable for a society to care for itself.
Please read the link I posted above:
https://www.investopedia.com/articles/retirement/10/demise-d...
Defined Cost pensions are sustainable. That's what we in the private sector have: 401k and Roth.
Defined Benefit pensions aren't sustainable. That's why nobody outside of government has them, and the ones sponsored by the government suffer huge deficits and are slowly but surely edging towards bankruptcy.
How do you figure?
It is unsustainable for us to support all people over e.g. 60. But we can support the 5% over 60 who really need the support and can't look after themselves.
We are all to blame (if you are older than about 25).
Collectively, we have known the pensions are unsustainable for at least the last 40 years.
Yet we have refused to face the problem head on and vote in people who will fix it. Instead we push the problems onto the next generations.
Teacher unions are also responsible for keeping bad teachers employeed. See NYC rubber rooms.
The critical error that pension providers made was to buy equities and 'alternative' investments instead of bonds. Had they bought bonds, their assets would have matched their liabilities. Instead, they assumed riskier investments would grow faster, effectively making pension promises cheaper.
Following the financial crisis, rates were cut aggressively, making bond prices and the present value of pension liabilities soar. IMO this is an under-appreciated facet of the financial crisis that's still waiting to bite us.
You are looking at the wrong table. Look at the next table instead and see just how high the US is relative to other countries.
The only thing we don't tax is goods, but that's to help lower income people - the same people you want to help.
Yes.
> shows only the relative percent of where taxes come from. It does not describe tax rates.
I know. But if the US is to raise rates they would raise them on Goods and Services, not on income because the tax is already very heavily skewed toward income.
And regardless of that, the breakdown alone shows that the US tax code is more progressive than other countries.
All the right politicians bleat about lowering taxes - you really can't, the rich are already paying for everything as it is now, we can hardly get more progressive (on income taxes at least). You can't lower taxes on the bottom 75%, it's just pandering. The left bleats about the well-off not paying their fair share, somehow paying for nearly everything isn't a fair share. They're both wrong as usual. More plausibly, to pay for ballooning entitlement costs, infrastructure, expanding healthcare, etc. taxes need to go up on everyone.
More accurately: we can't afford the pensions we've promised with the taxes we're willing to pay. It's not a normative argument but a descriptive one.
And within the American free market, there is little incentive for people to pay more taxes to close that gap. Why pay more taxes to Illinois--and not get any increased public services from those taxes, because the money is going to people who have already retired--when you can move to Tennessee or Texas and pay less?
It seems like some feel it's a catch 22, that citizens don't want to pay for things yet they want things. But in reality, those clamoring for the improvements and government assistance are rarely those that don't want to pay and/or recognize government fallacies wrt spending. If you want to tackle the problems, you need to first be honest with where they lie...and not having enough money is not where the problems lie.
In my experience your average voter who opposes higher taxes isn't a Randian. Rather, they feel like they're not getting enough in return for what they pay in taxes. (And when you look at data about how we spend more to get less in education, transit, etc., turns out they're right!)
Right. You cannot begin fixing the first problem in a democracy until you begin fixing the second. The solutions cannot happen in parallel either. So we either need to better prioritize our complaints or accept that attempts to fix the first problem is often just flushing people's money that they may need. Perfection is not a requirement, just some level of mediocrity could be enough to restore some trust.
I certainly don't advocate throwing money at the situation. I advocate that as a nation we take a step back on reassess what our views on government are. We've largely bought into the false beliefs that government is always incompetent, government regulation is inherently bad, and taxation is bad. I don't see how to get out of the mess we are in. These are structural problems in the nation and I think secession is going to occur in the next 50 years or so.
Gotta start at the top. Transparency and clarity of spending coupled with simplification of the tax code. In the meantime, deference to smaller regions can help (but not on everything) where accountability is more real.
> These are structural problems in the nation and I think secession is going to occur in the next 50 years or so.
Nah, apathy wins in these situations where boats are not rocked significantly on either side.
chicago is a poster child for the corruption that has created a system which will bankrupt in three years [1]. It was never sustainable but its continued expansion kept politicians in office. just look at the numbers in the story I linked, what reasonable group of people would have ever signed off on this? Chicago isn't alone. Its rampant. six figure retirements? no public service job warrants that.
and it isn't just the public sector employees, there are story after story of city bureaucrats making a quarter million or more and that is just up front money. simply put, they control the piggy bank and they are willing to loot it for gains today because they don't plan to be in office when the bill comes due
[1] https://chicagocitywire.com/stories/511130434-projection-chi...
IMO corporations should be taxed in a way that the more they make with fewer people the more they get taxed relative to other companies who make the same but have more people.
Productivity in the age of digitalization is not what it used to be and I don't think it's a good way to measure anymore as we have way more supply than we have demand.
Today it's more about technology leverage.
You need to go further however, as the vast budget deficit is ultimately an inflationary tax on the US people (we'll follow the Japan scenario, and debase the dollar to deal with it over time, hammering the standard of living). You can see that represented by the dramatic damage to the US dollar during the Bush deficit years, which simultaneously sent the dollar plunging, commodities soaring and all other nation GDP figures soaring (when priced in dollars).
Total spending is about $7.1 trillion, between Federal + State + Local. What kind of return are Americans getting for their $22,000(!) per year? An absolutely horrendous return, that's what.
The US state + local spending is like an entire extra Federal Government stapled on.
I'm not concerned with slashing spending as some are, I'm overwhelmingly concerned about using that spending effectively instead. There's vast progress to be had in focusing just on that.
Maybe it's ignoring corporate taxes? or ignoring other things on our W-2, like L&I and social security/medicare? It 's also probably ignoring local taxes, a 10% sales tax is hard to ignore.
I once calculated my effective marginal tax rate at 45%, and it stopped me from pursuing a higher paying job, since my take home didn't change enough to be worth the higher stress and the money I'd have to spend to combat said stress.
If you earned $500k, and were single/no deps, and just took the standard $12K deduction, your Federal tax would be 29% ($145K). I can't imagine someone with that income not having more deductions or IRA/401 contributions that would minimize the tax burden, but I suppose there's always someone out there completely clueless.
Aren't you ignoring Social Security? For example, average Social Security monthly payments appear to be around $1400/month [1]. Spain, as an example of a high-tax, cradle-to-grave care system, provides pensions that appear to average a little under 800 euros/month ($940/month) [2]. And that's ignoring all of the Roth and 401(k) extras available out there. Am I missing something?
[1] https://www.investopedia.com/ask/answers/102814/what-maximum...
[2] https://www.20minutos.es/noticia/3287811/0/cuanto-cobra-medi...
It always depresses me to read comments like this. Rand's central themes were about corrupt relationships between pseudo-capitalists and government, the immorality of a desire for the unearned, and the consequences of what will happen to a society that can't be bothered to concern themselves with ethics.
Well, one of these days these chickens are going to come home to roost, and instead of people hanging their heads in shame and regret because they ignored her supremely confident warnings, instead they're going to charge her with the crime. The irony.
"The Objectivist ethics holds that human good does not require human sacrifices and cannot be achieved by the sacrifice of anyone to anyone. It holds that the rational interests of men do not clash - that there is no conflict of interests among men who do not desire the unearned, who do not make sacrifices nor accept them, who deal with one another as traders, giving value for value."
As a cherry on top, while there's still time to recover from mistakes of the past (there is a great deal of ruin in a nation, as they say), rather than eating a little humble pie, listening for a change to those who said "I told you so", and getting our affairs in order, we will actually choose to blaze straight ahead at full throttle on the exact same trajectory. And in the end, we'll end up selling off infrastructure, piecemeal, for pennies on the dollar, some to the very criminals we were warned about, and the rest to other nations who were smart enough to crack a book.
a) Do you think it is responsible to be opaque on whom you are attributing the belief to, particularly considering the topic of conversation and the fact that her warnings on the matter were clear?
b) These people you cite, are they Ayn Rand supporters, or critics who "think", despite no actual evidence beyond 4th hand also-uneducated opinions, that Rand's philosophy was anything remotely resembling "I've got mine, fuck you." Here's a fun experiment: try to google up a statement by an actual Objectivism supporter that supports anything near that sentiment, and observe how many false hits you get of the latter in your search.
> I'm not critiquing her personally or her philosophy.
Of those HN'ers who hold an opinion on Rand, you belong to a very exclusive club in my experience. Regardless, your sentiment now being explicit is good enough for me, thanks for straightening it out.
I asked a question specifically about that above, see: (b)
Is asking for substantiation of a claim, an insulting claim at that, now considered improper etiquette around these parts?
Ask yourself this: how do you know this to be true? Can you share where you've encountered Randians in sufficient numbers to form an opinion with high certainty? And, can you no longer find any trace of these people and their words?
Thank you for the courtesy.
It costs NYC $2.1B per mile to build the Second Ave subway while in Europe it costs $200-500M per mile. There's California High Speed Rail, and then there's just the cost to build a condo in San Francisco (see the "historic" laundromat in The Mission).
You have interlocking legislation, many reasons and opportunities to sue, esoteric work rules. Regardless of the validity of each element the structure as a whole is patently absurd and abhorrent.
Then you have government spending. A university does not need much beyond some blackboards and some professors to teach most everything from Philosophy to French to Advanced Data Structures to Topology. Certain PhDs need more equipment but essentially all the expensive equipment should be paid for by research grants or contracts.
Over the past decades more and more classes are taught by adjuncts at Starbucks level wages. Meanwhile the percentage of staff and spending on administrative functions has climbed dramatically. Adjusting for inflation, from 1947 to 1995, overall university spending increased 148 percent. Administrative spending, though, increased by a whopping 235 percent. Instructional spending, by contrast, increased only 128 percent, 20 points less than the overall rate of spending increase.
Obama promised to invest in "shovel ready jobs". There was a backlash because so much money was being spent on construction and thus, due to the current makeup of construction workers, the vast majority of money would go to men. Spending was adjusted to include other projects so that the gender balance of spending would be more palatable.
So to get $1 in new infrastructure spending you need an additional $1 in net new other government services. Or possibly much more than $1, depending on the various worker populations. This in an environment where you're getting only 25% to 10% of your initial money's worth.
So $1 in net new infrastructure costs $20 or more.
Let's not pretend like this was ever seriously going to be sustainable. It's just a big middle finger to future generations while an opportunistic generation got to suck the system dry in prosperous times then peace out.
There’s a bit of nuance to it. Predictions were made based on historical market returns we’re only now discovering are unrealistic going forward (7-8% historically, 4-5% predicted going forward).
The only issue is that no “relief valve” was constructed in the event predicted returns turned out to be inadequate to fully fund the system, triggering benefits cuts. This is the part that is generationally regressive.
Of course, there is no benefit to anyone whose wants to solve this prior to insolvency, only pain. So the sinking ship continues and the band plays on. Taxes, local, state, and federal, are going up eventually to pay for all of this. Plan accordingly.
This is a crisis that has been unfolding in sloooooow motion. They had been warned, and warned, and warned some more--for decades!
Boomers decided to add it to the credit card anyway.
edit: Also, I don't know a single sane person who ever believed that 7-8% was long-term maintainable.
My understanding (which is from a distance, and could easily be wrong) was that even when made, the estimated returns were optimistic - not necessarily wildly optimistic, but toward the top end of the historic range of returns. This reduced the burden of funding the pensions at the time they were defined, making funding them less painful for the people running things at the time they were granted.
For the period 1950 to 2009, if you adjust the S&P 500 for inflation and account for dividends, the average annual return comes out to exactly 7.0%
But, now economists are speculating that was an exceptional period (the post-war period) and "normal" return is probably more like 4-5%.
But, those projections don't include unplanned pension benefit increases for existing retirees, which happens periodically.
Why not? Each year machines become more efficient, and productivity has gone up. The main problem has not been to create wealth, it has been on how to share it.
Politicians also say that health care for everyone is impossible, but there is a lot of countries that do just that.
This is about setting expectations. If you convince your citizens that paying pensions is wasteful and not sustainable, you can diverge that money to other places.
Look at tax breaks and you will find where your pension is.
That actually highlights a lot of problems with defined-benefit plans: sometimes economic circumstances change so drastically based on social or technological change that the promises of the past are no longer viable. How could places like Detroit or Puerto Rico continue to pay their promised pensions when their economic base has evaporated?
As a manager of a small team, I had this problem. My team was composed of very senior people and I had a big bag of money to share for salary increases. Another manager had a very junior but very brilliant team and his bag was quite small.
We joined efforts, and we joined the bags. Now we had the flexibility to give the correct salary increase to everybody.
The way to solve this problem is to share the burden. That is the base for insurances.
Governments should offer an insurance against local changes. As the economy goes global, it should be a global effort. This is easier said than done. But it is the real solution.
1) the State Treasurer presented 3 options (low - 6%, middle - 7%, high - 8%), but said high was dangerous 2) the State picked high, since they were voting on their own pension payments 3) the municipal unions went to the mayoral candidates across the state and said, "if you want our support on election day, support 8%" 4) the courts have ruled that once a pension plan is approved, it can't be repealed for existing members 5) the San Jose mayor actually tried to repeal it to prevent city bankruptcy, and was ground into the dust by the public unions and courts 6) the last city employee in each city will be the Treasurer, to sign pension checks. There will be no city services (fire, police, libraries, etc.) - just pension payments. This is already happening in California 7) Public union members receive higher salaries now (thanks to COLA) than the private sector, plus multi-million dollar pensions. My dentist calls them "royalty" because their benefits are on a different level than the private sector.
What's ironic is that Marx predicted that in a democracy, the voters would eventually vote themselves ruinous entitlements. He was correct, but all it took was the public unions.
I’m a teacher in NY. My pension plan is self funded by our membership (teachers). Taxpayer dollars account for the annual school budget (you vote on!) which does include salary and employer healthcare contribution however it also pays for grounds and buildings, transportation, extracurriculars, etc...
Additionally, the current tier 6 of NY state workers pays a “retirement fee” into their retirement which is how the TRS in NY is funded. This fee is not a % of salary, it is an annual fee spread over pay periods.
So just to debunk one point, most public worker retirement funds are self funded by members.
It cost Rupert Murdoch some part of $5billion when he bought Dow Jones for that price.
Another way of saying it: rich people were unhappy they have to pay taxes.
Another way of saying it: I don't think your summary is particularly fair or accurate.
https://ballotpedia.org/Article_XIII_A,_California_Constitut...
3 is arguable. They usually look for 7%
S&P went from 1565 Oct 07 2007 to 735.09 Feb 27 2009.
We're now up to 2818 but if we had delivered 8% since october 07 we'd be at 3649 by this Oct 5. So we're 28% short!
If you use S&P peak in 2000 it's 1552 and to deliver 8% since then we'd need to be at 6209!!!
Catching back up to steady state growth, especially after a 50% loss, is unfathomably hard!
What makes it worse is that the present value of obligations skyrocketed as interest rates went to 0. In 07 the Fed Funds rate was 4.5% and it's currently 2%. This rate was 0.25% until the end of 2015. For a payout of $50k per year for 10 years, ten years in the future, the present value is $481,031 at 0.25%, $368,442 at 2%, and $254,761 at 4.5%.
So the current obligation is 44% higher than it was in 07 and the amount of money is 28% lower than expected. And this is AFTER the S&P has had an incredible run from 735 to 2818!
Another is that monetary policy has made fixed income securities a low yield investment. Funds need to diversify and add risk.
Another reason is that folks writing these things assume workers work a full career. The reality today is that many government workers start in their 30s and 40s, and only get the rich benefits if they work until their late 60s. That neutralizes the problem, as they will be dead sooner.
Personally, I think the WSJ and other anti-pension people overplay the liability. The drivers of pension expenses are police and firefighters, and these (mostly) guys tend to die young.
They also tend to report on the problem in masse, while it varies from outright disaster (Illinois) to Oregon, which is overfunded.
How is this possible? The state that he lives in hasn't changed the rules for vesting/collection? That seems like an absurd amount of money for what I'm assuming is a career that's lasted less than 30 years.
If you join at 18, at 50 you'll have 32 years, which in many departments means seniority to get alot of overtime. It's a decision that the municipality makes -- they understaff to preserve cash and dump the longer-term problem on the bigger pension fund.
The early retirement is important, as the life expectancy for police/fire drops significantly based on retirement age. But the polices re: overtime as it impacts pensions are often too generous. These issues are "fixed" for normal employees in most places -- for example in NY non-public safety employees and teachers have caps (~10%) on how much your salary can increase for pension purposes and either eliminate or cap how overtime applies.
My wife worked for a public employer who had a way to let overtime go into an optional 401k-type plan at a higher rate so that blue collar employees would have an easier time retiring on time. (Many blue collar folks basically depend on OT)
I'm quite satisfied with my subscription.
The problem is everyone cheers on the politician that says you can have the $5 AND the $50.
politicians should be held accountable like CEOs. They should be able to be sued. Screw over the company? your ass is going to get kicked. Say you didn't know? you shoulda listened to the people giving you the numbers. didn't have the numbers? shoulda hired people to give you the numbers.
there needs to be a lot more repercussions on those people making bad decisions.
And once that politician is gone, if one of the new candidates says "no you can't", that candidate will not be elected.
I wonder how significant that amount is. I’m a Scala jockey and I bookmark a totally different part of the internet, I'd love the input of someone who has a better idea of these numbers...
Why? It's nearly impossible that taxes won't start skyrocketing soon.
[edit] Yes for people who are permanently injured, its great we have these systems in place. But for otherwise healthy retired individuals, I think the 21st century western 'retired' lifestyle is a bit rich in comparison to what the rest of the world is living.
"Nothing that really helps towards perfection costs more than is within the means of every person who reads these pages. The expenses connected with daily meditation, with the building-up of mental habits, with the practice of self-control and of cheerfulness, with the enthronement of reason over the rabble of primeval instincts--these expenses are really, you know, trifling."
We have a problem in the US where no one wants to be told what to do my the government but they also expect government handouts regardless of their behavior, and this is a bipartisan issue so it's not some minority of the population that needs to be convinced
Source: https://www.taxpolicycenter.org/briefing-book/how-do-us-taxe... Figure 2.
The figure 2 breakdown also does not distinguish between taxes on Income + "profits", and capital gains and corporate taxes where the wealthy accrue significant wealth are very low in the US...
i.e. the US taxes the wealthy much more than virtually any other country.
If the wealthy are the most taxed in the US, how is it what inequality of both income and wealth is massively skyrocketing in the US?
Asset appreciation - a massive bull run in the stock and housing markets. The side effect is that those who own assets benefit far more than those who don't.
When everyone talks about Bezos making a huge amount of money this year, they're talking about his unrealized gains. If he actually tried to realize those gains into USD (at which point he'd pay taxes), his wealth would shrink very quickly as Amazon's market price dropped.
Also, VAT is a relatively regressive tax.
The United States spends the better part of a trillion dollars per year on its military. A relatively small fraction of that would solve any issues their social welfare programs currently have.
It's a matter of prioritization and the perspective of those leading the discussion. Instead of turning focus towards changing priorities (the priorities are already seemingly in their favor), they turn to how expensive and unmaintainable the programs are that they wish to further de-prioritize. In the process, they draw attention away from the stark contrast of funding between various government programs. Namely social welfare vs military, or improving their society vs destroying others.
And what would you do with the large number of unemployed people that would result?
You can't just change one thing and ignore any consequences.
And don't forget that the broken window fallacy only applies to economies where everyone is working full time. If they are not then it does not apply, and your analysis needs to be more thorough.
US demand for labor is at an all time high.
They can find employment in the private sector and produce goods and services that benefit others.