Pension Funds Burn Cities as $1 Trillion Shortfall Set to Grow
bloomberg.com
bloomberg.com
The voters in local elections are mostly government employees (edit: my speculation based on a few elections, but also how unpopular it is to reduce pension benefits nationwide), so you vote someone in who promises you more pay, but the pay has to be deferred so it doesn't affect the current budget. You also hire the actuary who will use the most liberal risk free rate of return (hilarious that they assume 7%+ risk free rate of return over the next 30 to 60 years), so the costs look smaller than they are.
On top of all of that, you ignore the insufficient funding requirements the actuary suggests to meet your budget somewhere else because there are no laws around funding a taxpayer funded pension...which obviously makes sense because you can just keep increasing taxes.
The only way taxpayer funded pensions make sense is for politicians and union leaders, who gain from the influence that comes from sitting on billions and billions of dollars and directing that money to money managers who will somehow return the benefit (aka corruption). If they weren't corrupt, then governments would just give the employees the cash to go out and buy an equivalent life annuity from an insurance company. Of course, the annuities don't exist or are ludicrously expensive because it's crazy to try and predict the future so many years out.
Citation needed? My anecdotal experience disagrees.
Also, I'd be very surprised if a significant amount of people even knew who their city council members were, and even their mayor unless they're in a very big city. Again, all speculation, but the professionals I know make too much and work too much to care about local elections, and the poorer people are working too much to prioritize the myriad other issues going on int heir life.
If that is true, then surely fixed annual salaries are also ridiculous, and everyone should be paid on commission? Regardless of what you might think, in the real world, annual salaries are the norm and no-one bats an eyelid.
The truth of pensions is that they are not a "perk" they are deferred compensation and a part of the package of salary, benefits etc you negotiate when you take a job. Shifting the goalposts is not reasonable when it's one-sided like this.
Predicting the future with 100% guarantees is impossible, obviously. Fortunately, humans have been able to develop models that are able to assist us in predicting the future with some reliability (the seasons for help with farming, weather forecasting for a few days, etc), but being able to say "over the next 30 years, we expect to earn an 8% average rate of return per year" is in a whole other league.
It is true that defined benefit pensions are deferred compensation. Problem is push comes to shove, the world doesn't offer guarantees. How much infrastructure will be neglected? How many cuts to education will it take? We all know the military won't be touched, in any significant way.
Defined benefit pensions are a nice dream, if you ignore the possibilities of corruption (it's still people controlling a huge pot of money, in an extremely opaque manner), not meeting expected rates of return, people living longer than expected, and finally....the tax base moving away or saying the hell with it, we'll just change the laws to tax pensions or not pay them.
These laws don't exist for taxpayer funded pensions, so politicians and union leaders can do what they see fit, and the best answer I've gotten for why there are no rules for government funded pensions is that governments have the power to tax.
If defined benefit pensions, aka life annuities, were handed off to an entity that didn't have the power to tax, I'd be interested to know at what cost it would have. I suspect most companies wouldn't even offer the kind of guarantees offered by government funded pensions.
If you look at Detroit as an example, the politicians will blame the pensioners for being "entitled" to their pensions, declare bankruptcy, and their retirees will be forced to eat cat food.
I get it - pensions are expensive. Figure out a plan to start transitioning off of them for new hires. But this is just a refusal to meet contracted obligations, while laying the blame at the feet of the people that held up their end.
The unions get big benefit from the politicians they help to elect, the politicians looking to get elected make big promises to the unions... wash, rinse, repeat.
The people who "held up their end" were the same people who provided the political force that elected the leadership that THEY wanted. The political and union leadership the unions elected created the messes that everyone is now having to deal with.
I'm not a Christie fan, but blaming him for attempting to break the dysfunctional cycle seems misplaced.
There is no shortage of people who did very little during their working career and expect to retire after 20-25 years with full health benefits and a livable pension paid for the rest of their lives. In my opinion, this is a form of freeloading and it certainly isn't sustainable.
I don't know what the solution is. I'd like to see better pension schemes for private sector workers.. particularly those who don't stay at a company for 20 years. I suppose maybe a national scheme similar to Social Security. I don't know...
But it is an abusive scheme.. particularly given that performance expectations usually aren't reasonable, and once someone has "gotten on", they are usually very hard to get rid of.
In the meantime, someone in the private sector is being increasingly squeezed for performance, can be gotten rid of almost on a whim and is very unlikely to have lifetime pension benefits.. particularly ridiculously unsustainable ones like public employees. True, they do have the potential of a larger salary and probably more job satisfaction. I just wish a balance could be found allowing people to actually enter productive jobs and make an effort towards improving the world while enjoying (a more reasonable version) of the pension benefits public "workers" (I use the term loosely) enjoy.
He also knows it'll take years, happen on the next guy's watch, and he can run for President in the meantime claiming that he balanced the budget and reduced expenses. See also, the pennies on the dollar we got on that big EPA settlement with Exxon (pennies now are worth something, dollars during another gov's term worth nothing), and the fact that we didn't build another tunnel to NYC, even though it's about 50 years overdue and the feds were offering to pay for 95% of it.
I'd be less offended if he had any chance at all of being a top 5 contender for the nomination. Screwing everyone for his own benefit is one thing, screwing everyone for self-delusion is a whole other level.
Moody's downgrading the cities - oh the irony. Rate junk housing bonds as triple AAA and then do your actual job on the on the city pensions.
Agreed with everyone else on the politicians - particularly those on the right - will be quick to seize on this as another supposed example of government freeloaders.
I've thought for a long time that we're on the cusp of an inter-generational finance war - with pensioners and retirees demanding what they've been promised, while the funding required has to come from non-retired generations that don't have any strong financial position themselves.
> Some career city workers even retire in their mid-50s while collecting pension benefits equal to most of their final salary. In contrast, private sector workers cannot begin drawing a full Social Security benefit until nearly a decade later – at the age of 67.
Why on Earth would you compare Social Security with public pensions? Of course private sector workers cannot draw Social Security until 67. City workers can't draw Social Security until 67 either. But private sector workers can draw on their pensions (the few that are left) and on 401(k) accounts as early as age 55, too.
Both city workers and private sector workers draw on Social Security and their retirement funds, whether those be investment accounts or pensions. Why the strange pretense that public sector pensions are equivalent to private sector retirees collecting Social Security?
We're supposed to be outraged at 'excessive' pensions that, at the extreme end, match the salary of the retiree before they retired. But that's exactly where private sector pensions are, and that's exactly what you're supposed to target in your 401(k)/IRA etc. (Of course, the reality is that the vast majority of 401(k) accounts are drastically underfunded, but as this doesn't represent a liability to anyone, nobody cares.)
Then you have paragraphs like this:
> The amount of money a career city worker contributes to his or her pension has no bearing on what that worker will receive in retirement.
...And the article then goes on to note that a) pension contributions are a percentage of your salary and b) the % of your salary depends on your years of service and c) the pension ultimately pays out your salary every year, assuming (b). So it absolutely does depend on the amount of money a career city worker contributes.
Finally, you have this comparison:
> Rhea Fries Boldman’s experience as a Chicago Public Schools teacher reveals just how out of sync city worker contributions are compared to the benefits they receive.
> Boldman retired in 2012 at the age of 59 with a final average salary of $87,057.
> Boldman is receiving an annual pension of $71,674 – and she will receive $2.4 million in pension benefits during her retirement if she lives to her full life expectancy.
> Yet she contributed just $147,032 to the pension system over her 30-plus year career. Her direct contributions to the Chicago Teachers’ Pension Fund will cover just 6.2 percent of her expected lifetime benefits. Including the interest earned on those contributions, the total would cover approximately 12 percent of her expected lifetime pension benefits.
Hopefully Boldman is earning a lot more than interest in her pension account. If not, that's mismanagement. These numbers aren't drastically different from what you'd see in a 401(k). Were I to retire at 59, my company's 401(k) projection calculator says I'd have contributed 380k and would receive 3.5 million. I expect this is optimistic, but you can still see there is nothing totally ludicrous about those numbers.
EDIT: My own back-of-the-hand calculations indicate 'optimistic' is perhaps an understatement. Hm.
Because both are paid for with tax dollars, while private sector pensions and 401(k) accounts are not. Moreover, the public can't be forced to raise taxes to bail out underfunded private sector pensions, while courts are doing just that with public pensions.
> We're supposed to be outraged at 'excessive' pensions that, at the extreme end, match the salary of the retiree before they retired.
The fact is, that if you were an employee whose private sector employer went bankrupt or you didn't put enough into your 401k, then you're stuck with whatever you get from Social Security. I love paying my taxes, but I don't want to see that money go to giving former public employees a standard of living beyond that enjoyed by those who worked for private employers that failed.
Both private sector and public sector employees receive Social Security benefits. It makes no sense to pretend that Social Security benefits are exclusive to private sector employees. The article makes it seem as though only public sector employees can retire at 59 and expect to get anything, while hardworking private sector employees must wait until 67. This is certainly not the case. Private sector employees are (sometimes) offered pensions and (almost always) offered 401(k)s, both of which allow for early retirement.
> I'm outraged because I'm paying for it with tax dollars. I love paying my taxes, but now that we're at the point where a dollar that goes to pensioners is a dollar that doesn't go to schools and infrastructure, it's definitely legitimate to question how comfortable a living we want to provide to public employees at taxpayer expense.
We should pay them every dollar we owe them. It isn't their problem if they paid in every year and the government did not meet its obligations. If you must, cut off pensions for new employees. Don't change the rules on the old ones.
As for 'taxpayer expense', you may be interested in this:
https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...
If too many private pensions start failing, taxpayers may still be on the hook.
It's a lot more complicated than that. School districts can unilaterally give raises to teachers, which increases the tax-payer's burden via additional pension obligations when that teacher retires. The most egregious form this takes are large raises in the few years before someone retires to "supercharge" their pension. Should the tax-payers be on the hook for obligations that were unilaterally created by local school districts? If a school board creates a new assistant/associate/full superintendent/principal position and elevates an existing teacher to that position, they've just added hundreds of thousands of dollars to the tax-payer's bill in the form of additional pension obligations with no approval whatsoever.
People on public pension systems are owed a fair deal that gives them a secure retirement. Obviously at a minimum they should receive what they paid in, compounded yearly at 6.7% (adjusted for inflation). But they're also going to have to bit the bullet for the greater good, just as I'm going to have to do when I lose at least 25% of social security when I retire. We've got a fixed pie of blood and treasure and we owe it to all people to spend that pie wisely, even if it means adjusting pensions.
The Pension Benefit Guaranty Corporation (a government agency) explicitly exists to bail out private sector pensions with tax dollars. These taxes are already "raised" so the public isn't being forced to do anything in addition. This is just to say that we do spend tax revenue backstopping private pensions beyond just social security.
One other thing I would point out is that the courts are forcing the public do pay pensions because the public wrote it into law (the frickin' state constitution in the case of Illinois). It was truly an idiotic idea, but the public and the lawmakers need to undo it, not the courts.
> The fact is, that if you were an employee whose private sector employer went bankrupt or you didn't put enough into your 401k, then you're stuck with whatever you get from Social Security.
Plus PBGC payouts, as mentioned above.
> I love paying my taxes, but I don't want to see that money go to giving former public employees a standard of living beyond that enjoyed by those who worked for private employers that failed.
Definitely. The yearly caps for PBGC coverage of private pensions (http://www.pbgc.gov/news/press/releases/pr14-12.html) would be a good place to start for public pensions. More serious reform is probably needed though. The math doesn't lie. We can't be mortgaging our future to fund unsustainable retirement payments. Cap existing payouts, close the plan to future participants, bolster self-managed retirement options like 401ks, and strengthen the social safety net by injecting some capital into social security. It definitely would be a raw deal for many people, including some people who are very close to me. However, there's just no other way to make the numbers work out.
Are you sure? From what I'm reading it draws the money it uses for payouts from premiums and the assumed assets of failed plans.
http://www.ebri.org/pdf/publications/facts/0107fact.pdf http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/66xx...
Because in same cases employees covered by a pension plan don't participate in Social Security. This was true of Federal Workers who were hired before 1984 for example and I believe there are some state employees in that situation as well possibly even a few private companies covered by pension plans though I'm not 100% clear on what mechanism allows that.
We can argue about what the correct public policy is to correct the problem - any number of solutions exist. Governments have failed to make the required changes - but they have also consistently failed to pay in the funds (this isn't limited to States - companies have done this as well).
None of the solutions will likely include keeping benefits for retirees where they currently exist.
The States seem to be playing a game of chicken - waiting until it is a crisis because they know, politically, discussing changes to the pension system for those currently in it or about to enter it is effectively political suicide.
Who will be labled as "takers," when all they did was what was agreed.
Here's how it works: Town's short on money. Revenue is up 2% and a fair cost of living raise is more like 3%, let alone the fact that health insurance has been going up by >10% every year for the last 15 years.
How do we balance it? The unions are pros at this, some local politician is in there for a couple terms at most while the unions are playing a game measured in decades. Well, we could balance it with some deferred pension benefits in exchange for a 1% COL raise this year, right? That make everyone happy?
Fast forward a couple decades and here we are.
How do we balance it? We balance it the way we tend to do things in this country - we wait until the system is on the verge of collapse and then the pensioners will either get their benefits cut, or taxes will be raised. Outcome will likely depend on the makeup of a given State or system.
How long before one of the States with a good system starts advertising for young people to move there to avoid the problem?
Everyone has their head in the sand
Asset class returns: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/...
Stocks: 11.53% Ten year T's 5.28%
7% return is easily obtainable.
Not guaranteed, but very probable.
50% stocks and 50% bonds, should on average return 8.5%
[ This analysis is not inflation adjusted ; average annual inflation is about 3.2% ; subtract this number for "real" returns ]
http://www.nytimes.com/interactive/2011/01/02/business/20110...
Since these are also average returns (which don't account for private equity/hedge fund/alternative investments), there are numerous funds that won't get to the average, and end up with a shortfall. Assuming that the return on stock market is the expected return of a pension fund is guaranteed a risk free benefit with a non risk free investment.
On the other hand, the federal government requires non taxpayer funded pension plans to use government and highly rated corporated bonds to calculate their expected rate of return, which is far less than the 7% to 9% of government funded pensions.
That's a great link. Thanks! Worst case in history was break even after 22 years. Retirement investing should start with a 50 year horizon.
http://www.nytimes.com/2015/06/18/business/dealbook/kenneth-...
Break even does not work for pension funds, they have thousands of people to pay, and as mentioned before, these are benefits sold as being GUARANTEED, as DEFERRED compensation. If these benefits were sold as just another 401k from the beginning, there would not be a problem with riding the market. They were sold as being risk free, written into law as being guaranteed, and therefore do not lend themselves to risk (which, as I said before, is crazy because there is always risk in this world, especially the further you go into the future).
To make the intuition clear: if you were to go to the market and purchase an asset whose cash flows exactly match those of a riskless DB pension, what return would you expect on that outlay? Stock market returns? Of course not, that would represent a clear and huge arbitrage opportunity. The rate of return would be the risk-free rate for that horizon. 30 year treasury bonds earn ~3.1% today.
This is the historical average returns for assets classes.
It's very imprudent to ride "risk free" for a lifetime. 50% stocks and 50% bonds is a very safe base over time.
You should take some risk.
DB pensions have no risk at all, tell it to them.
A government’s ability to back its currency is the basis of currency value; not hoarding metal bars.
Churchill considered his return to the gold standard the greatest mistake of his life. https://en.wikipedia.org/wiki/Winston_Churchill
But I'm talking about FDR's Executive Order 6102 (https://en.wikipedia.org/wiki/Executive_Order_6102), which seized the nation's private gold bullion stores at $20.67/oz, and then repriced it for international transactions at $35/oz. Per Wikipedia and the current BLS inflation statistics, that was $51.40 billion in 2015 dollars confiscated from the American people.
National level politicians are already starting to talk about helping themselves to private retirement money; my major point is that there's no guarantees in this domain (once you go beyond your family).
Why not back a currency with tin or lead? I know! Cattle would be the best commodity. No? How about gasoline?
According to this ... http://www.nma.org/pdf/gold/his_gold_prices.pdf Gold was not $35, it was $26 ounce at the time. After a recent run up no less. Where did you get your info, some Rand Paul/Zero Hedge site?
FDR did this to expand the money supply. The U.S. was suffering from deflation.
Do any countries actually back their currency with gold?
Any modern country ? Not "stores a bunch" but actively exchanges currency for gold on a consumer level?
As for where I got my specific figures, the notorious "Rand Paul/Zero Hedge" site known as Wikipedia, a link to which I included, specifically https://en.wikipedia.org/wiki/Executive_Order_6102 for prices (and this matches my memory from other, independent sources, including the history that got brought up when Ford signed a bill in 1974 allowing us to again own gold):
Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 (equivalent to $376.58 today[4]) per troy ounce....
[ Exemptions. ]
The price of gold from the Treasury for international transactions was thereafter raised to $35 an ounce ($587 in 2010 dollars). The resulting profit that the government realized funded the Exchange Stabilization Fund established by the Gold Reserve Act in 1934.
Click through the latter link for the value I then plugged into http://www.bls.gov/data/inflation_calculator.htm to get 2015 dollars.
For all but the most compelling cities, this situation ends with their tax base moving to non-Union cities in the south.
:D
First of all there is redistribution within EU - there are structural and agricultural funds within member states that are geared toward development of less developed regions [1]
Second the only thing Germans sucked from Greeks is the bad debt that they had to socialize to keep their banks from imploding (along with the France, Italy, Spain, Netherlands and a bunch of other countries). It might have put Greek economy on bad terms because they weren't competitive with Western Europe (consistent trade deficits) but Greeks improved their standard of living in the last decade mostly because of Euro economic credibility [2]. Meanwhile Greek economy was a small trade partner to Germany [3]. They already wrote off a significant part of Greek debt (50% on some of it) and they are unlikely to recover much from it down the road.
[1] https://en.wikipedia.org/wiki/Structural_Funds_and_Cohesion_...
[2] https://upload.wikimedia.org/wikipedia/commons/e/ea/Long-ter...
[3] http://4.bp.blogspot.com/-lN_Ft3vo4XU/T0wZW92xhrI/AAAAAAAAAU...
It has now led to NYT Dealbook,the Sac Bee and the California treasurer picking up the scent.
And, by the way, this lack of fee transparency is just one of the the factors that contribute to private equity being a very overrated asset class. Yves Smith of Naked Capitalism has been sounding the alarm. If you're interested, she's one to follow.
And if it works, even if you like the ends, those means should scare the shit out of you. The government can go after anyone unpopular at any time just by carefully crafting an income tax.
http://www.nytimes.com/2013/01/06/opinion/sunday/social-secu...
You can't expect fund managers to consistently return 7% without taking risks and having exposure to market downturns. You know who else offered a consistent market return on stocks year after year for decades? Madoff
There are also a couple of key distinctions:
1) The Supreme Court decided in Fleming v. Nestor that people do not have a contractual right to their social security benefits. Therefore, the benefits can be changed at any time. In contrast, several states have a constitutional amendment protecting public pension benefits.
2) Most of the liabilities are Medicare, which doesn't have a defined benefit at all.
3) Unlike the states, the Federal government can print money to reduce the real value of benefits.
4) The tax base is far less mobile between countries than between cities and states.
I can't say that dissolves my worry about this...
In Illinois, Gov. Rauner's modest attempt to reform the pension situation in the state was shot down by the Illinois Supreme Court because the state has a constitutional amendment guaranteeing pension benefits. Under Fleming the federal government can reduce Social Security and Medicare benefits if necessary. It'll be politically divisive, but it'll be possible. You won't have the situation you have in Illinois where the courts are telling the electorate they can't make certain reforms.
rayiner, I have seen you make this same argument about police misconduct. The police are citizens representatives, if they are out of control, the same citizens need to pay. Why should pension funds, especially the kind that isn't town-sized be treated different?
I'm a big believer in democracy over pretty much anything else. There is nothing democratic about one generation binding the discretion of future generations. At the federal level, democracy is still operative. The decision whether to raise taxes or cut benefits (or some combination of both) will be left to the people who will actually have to pay those taxes. At the state level, democracy has been subverted by the courts telling voters what they should do with their tax dollars.
When someone brings up the figure, the point is, "hey, there is a huge bill coming due, and not paying it would screw over a lot of people". When you dismiss that on the grounds that:
- We can just not pay it
- We can debase its real value
- It wouldn't be a default in the legal sense
then you are not addressing the core point. I don't see how someone can read your post and say, "oh, I guess I don't have to worry about this anymore", and if your post is not arguing to that effect, then I'm not sure what it adds to the discussion. At most, you're just saying, "you shouldn't totally freak out because the figure is just $60 trillion."
Let's assume for a minute that Illinois did have legal recourse -- say, but implementing a special tax on pensions. Would you feel any better? I wouldn't; someone is still getting screwed, the situation is still bad.
Distinguishing them isn't pedantic at all. First, there is a big difference between a defined benefit pension and say Medicare (which is the bulk of the unfunded liability). The former is a dollar amount people expect to receive. The latter is a general public service. It's like school funding or transportation. Nobody has an entitlement to receive a particular level of any of those services, even if they rely on them.
Second, and perhaps more importantly, not being able to "honor expensive obligations" is not the end of the story. It certainly matters what happens when the ends don't meet.
> "oh, I guess I don't have to worry about this anymore"
I didn't say we don't have to worry about it anymore, I said it's a different problem. The pension crisis in many cities and states is an existential problem. They can't cut benefits, so they have no choice but to raise taxes and cut services, driving away their tax base. It'll lead to a vicious cycle that'll gut these local economies. At the federal level, cutting retiree benefits will hurt some people, but the government won't be forced into a position of fundamentally compromising its competitiveness vis-a-vis other countries.
> Let's assume for a minute that Illinois did have legal recourse -- say, but implementing a special tax on pensions. Would you feel any better? I wouldn't; someone is still getting screwed, the situation is still bad.
Yes! I'd rather see pensioners get less than they expected than see tax hikes and service cuts that accelerate the trend of people migrating from places like Illinois to places like Georgia.
Then why did you present the evidence as contradicting the OP's point when it actually supports it? It seems your post should have read:
"That figure understates the severity of the problem because some of the liabilities are promised by states and localities that are far more constrained in their ability to get out of paying."
Also, if governments are serious about honoring pensions, they should be accounted for on par with their bonds. If not, they should help future pensioners plan against the risk of non-payment. Framing it as "like tentative road construction" is trying to have it both ways: expect people to work as if the pension is guaranteed by the credit of the state, but really keeping it separate therefrom.
The term "US" here means "United States i.e. the federal government" not "United States as a whole country," since in the second sentence it is comparing the federal government's problems to those of cities.
And the reason I think OP overstates the severity of the problem is because state finances aren't your problem if you don't live in that state, while federal finances are everyone's problem. Essentially, what OP is saying is: "even if you don't live in Illinois or California, you'll be facing the same problems in 30 years because the federal government has problems that are just as bad." But the federal government's problems are a lot less bad. Which is good, because you can move out of Illinois or California much easier than moving out of the U.S.
> Also, if governments are serious about honoring pensions, they should be accounted for on par with their bonds
The crucial distinction is that re-negging on bonds affects your finances going forward (increases borrowing costs), while re-negging on pensions does not.
> Framing it as "like tentative road construction" is trying to have it both ways
I think you misread my post here. I didn't say pensions are like just another public service, I said Medicare is, unlike pensions. Nobody bargained for a particular number of Medicare dollars in 30 years in return for doing a particular job. That's why the Federal government is in better shape--most of its obligations are things that aren't considered (legally and politically) guarantees in the same way as pensions.