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Old 07-04-2011, 05:49 PM   #21
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I see these kinds of calculations all the time but there are plenty of things on the other side of the ledger that people dont think about. For example:

You would be surprised at how many people pay into a public pension system for 2 years, 5 years, 10 years and then quit and take their money out. They get ONLY their contributions back. All of the earnings on those contributions stay in the pension fund. Someone left last year with 18 years in the pension system and took all of their money out with no earnings and no future benefit paid to them. Why? Because people are dumb. The percentage of cops who actually stay until retirement age and collect full benefits is astronomically low.
Most public pension allow people vest in much shorter period of time than 20 years. For instance CalPERs allows vestings in only 5 years. If you worked for 5 years in most California public jobs you are eligible for a reduced pension sometime in your 50s or a pension in the 10-15% of your final salary typically around 62. Even with less than 5 years you can leave your money in there and it earns 6% currently. Now the young teacher who works for 5 years or less and quits, helps the pension solvency, on the other hand there a many examples of folks in taking public service jobs as a second career in their 40 or 50s. They work 10-15 years retire in their 50s to early 60s, these folks make the financial situation worse for the pension since their/state retirement contribution have not had a chance to really grow.

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When you run your numbers thru FireCalc, a large percentage of the time there are millions of dollars left over when you die. That money passes to your heirs and your individual retirement fund ceases to exist. In a public pension fund, that money goes back into the system to pay for future pensioners. I'm speaking only for cops here...a lot of cops die at an early age after retiring (or even before they were able to retire) and never collect any where near what they thought they would over their lifetime. If they are married, she probably collects half of what he would have. If hes not, all of his money stays in the system. Many never even collect the amount that they paid into the fund, let alone collect enough to become a financial burden on the fund.

Im not an actuary, but simple math tells me that these two factors make a huge difference in why funding of a pension plan can not be compared apples to apples to the funding levels of a individual persons 401k like some people try to do.
I agree there are lots of games you can play with the system. I will tell you how I do my calculations since I am trying to make Apples to Apples comparison. I calculate the total combined (employee/employer) contributions as percent of salary. Since generally speaking a junior cop/teacher/building inspector makes 1/2 of what a veteran with 30 years of experience makes I factor in a 2.5% merit/longevity annual pay raise. At the end of 30 years this results in pot of retirement money which obviously varies a lot based on rates or return. I take that pot of money and assume that the retiree purchases a SPIA annuity with a 50% survivor benefit for the spouse. Meaning that unlike a FIRECalc run there is no money left over to pass to heirs.

I am sure there are profession like cops which die young, but I doubt overall that public employee have lower life expectancy that private employees. Given that have better access to health care than private employes my guess is that actually live longer than average.

I'm not an actuary either, although I think I've learned enough over the past years posting about this stuff to play one on the internet. I will say that when I've read the annual reports of various pension plans, that forfeitures and even deaths are not huge factor. The Bureau of Labor Statistics tracks things like turnover, and average turnover for public employees is .5%/month 6% a year this is less than 1/3 the rate of private employee turnover 1.6%/month. This also implies the average tenure of a public employee is 16+ years well past the typical vesting period.

I'd also point that the 20 year vesting period of your pension plans, along with the very large contributions that your fellow police officers and city makes, puts your pension plan in way way better financial health than the average or even the so called good pension plans. The problem is most of the country is trying to provide pensions with about 2/3 of the benefits of your plan but only paying 1/3 the cost.
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Old 07-04-2011, 06:53 PM   #22
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No, I wasn't being sarcastic. It seems to me that for a state DB pension system, getting the promised benefits to pensioners is the state's responsibility, and if they can maintain the pension fund to accomplish that with no special adjustments, that's fine, but if circumstances require them to do it a different way, why should we care? The pension fund is a creature of the state. If the trustees/governor/legislature want to play fiscal games, where's the harm, so long as in the end they fulfill their responsibilities?
If those in charge of the pension fund mismanage the retirement system, but nevertheless pay the promised benefits in full, there's no harm done to the pension recipients, true. But if meeting the promised benefit level requires a tax increase, that's a harm done to the residents of the state as a whole, who end up paying the extra taxes. Or the government employer may find some way to wriggle out of part or all of their pension obligation. I think there was a thread some time ago here at E-R (or maybe bogleheads) about states investigating possible changes in bankruptcy laws that could potentially allow them to shed their underfunded pension plans. That would be a harm to the retirees, especially since public pension systems are not covered by the PBGC.

I think it's also possible that a city or county or state might find itself in a catch-22, where it is required to make up a pension fund shortfall and simply doesn't have, and can't raise, the money to do it. The city government I work for has had multi-million-dollar budget gaps the last three years, and looks like the same may happen again next year. County and State governments are just as strapped. Even though a state, county or city may be obligated by law to make up any pension fund shortfall, if they don't have the money, then they don't have the money.

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Calling it a "bailout" seems odd terminology, to me, to refer to the circumstance when the state chooses to collect the required revenues later rather than sooner.
It might be odd in the case of some pension funds, where the sponsoring government entity has delayed or withheld the contributions they should have been making all along. In that case it really is just paying later rather than sooner. But some retirement systems are underfunded despite the fact that all contributions have been paid in as promised. The system I'm a member of is in just that situation. The fund got clobbered in 2008, and there is a high proportion of baby boomers in the workforce due to retire in the next decade or so. Both employee and employer contribution rates went up this year and will go up again next year. Maybe that will be enough to put the fund back in the black, but if it isn't, the retirement system will eventually have to go to the City (and the City to the taxpayers) to fill the gap between the promised benefits and the fund's ability to pay. I hope that doesn't happen, but if it does, I don't think "bailout" is an inappropriate term for additional money needed to make up a shortfall in what was supposed to be a self-funding system.
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Old 07-04-2011, 08:21 PM   #23
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Those public pensioners who are allowed to collect SS benefits in addition to our pensions are eligible because we paid into SS in addition to pension fund contributions. We are not getting something for nothing from the Social Security Administration.

The system I'm a member of has had a contribution rate through most of my employment history of a hair over 8% each from employer and employee. Add SS tax and the retirement savings rate of a public employee can be in the 20-30% range even before any individual savings in tax-deferred plans or IRAs.

I didn't mean to imply there was anything wrong with this. I think it is actually a good thing most that state/local employes pay into SS like Federal employees. However when people on this forum talk about saving rates for retirement nobody includes the 12.4% combined employee/employer payments into SS so it is a far comparison.

Actually comparing your payments from social security check to your pension payments is a useful exercise. Now since SS also funds disability payments, and survivors, and the payments favor poorer people, it isn't exactly comparable to a pension plan. On other hand the bulk of SS money goes to fund retirement payments and it isn't in great financial shape either. So if the contributions to the pension plan is 16% vs 12.4% for SS, than logically your pensions should be larger at given age say 62 certainly 1/3 larger at perhaps 50% bigger. My guess is that your pension is probably twice as big as your SS check.
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Old 07-04-2011, 08:23 PM   #24
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I think it's also possible that a city or county or state might find itself in a catch-22, where it is required to make up a pension fund shortfall and simply doesn't have, and can't raise, the money to do it.
I can see how that is possible. What I don't see is how it can be avoided by putting more money into the pension fund previously. Wouldn't that just precipitate the fiscal crisis at an earlier time? The premise of this discussion about the soundness of pension funds seems to be that income from the fund is somehow free, while other moneys the state may use to pay pensioners are costly. I don't get that.
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Old 07-04-2011, 08:27 PM   #25
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No, I wasn't being sarcastic. It seems to me that for a state DB pension system, getting the promised benefits to pensioners is the state's responsibility, and if they can maintain the pension fund to accomplish that with no special adjustments, that's fine, but if circumstances require them to do it a different way, why should we care? The pension fund is a creature of the state. If the trustees/governor/legislature want to play fiscal games, where's the harm, so long as in the end they fulfill their responsibilities? Calling it a "bailout" seems odd terminology, to me, to refer to the circumstance when the state chooses to collect the required revenues later rather than sooner.

I really don't care what we call it. I just want to know where the money comes from, as Kyounge points out if the states don't have the money they don't have the money. The choices are pretty A. simple raise taxes, B. cut benefits, C. or some combination. The problem is the for to long everybody (primarily politicians, but voters, and union leaders share some of the blame) has gone for option D. kick the can down the road, and now we have almost run out of road.
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Old 07-04-2011, 08:41 PM   #26
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... has gone for option D. kick the can down the road, and now we have almost run out of road.
What's wrong with kicking the can down the road? "We have almost run out of road" -- that has a nice ring to it, but what does it actually mean? There will be no future generations?
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Old 07-04-2011, 08:51 PM   #27
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I didn't mean to imply there was anything wrong with this. I think it is actually a good thing most that state/local employes pay into SS like Federal employees. However when people on this forum talk about saving rates for retirement nobody includes the 12.4% combined employee/employer payments into SS so it is a far comparison.
point taken.

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Actually comparing your payments from social security check to your pension payments is a useful exercise. Now since SS also funds disability payments, and survivors, and the payments favor poorer people, it isn't exactly comparable to a pension plan. On other hand the bulk of SS money goes to fund retirement payments and it isn't in great financial shape either. So if the contributions to the pension plan is 16% vs 12.4% for SS, than logically your pensions should be larger at given age say 62 certainly 1/3 larger at perhaps 50% bigger. My guess is that your pension is probably twice as big as your SS check.
I am planning to retire at age 57. If I stop working at age 57, the pension I'm eligible for immediately is over twice as much as the SS benefit I'm eligible for at 62, but not twice as much as the SS I would receive at my full retirement age of 66+4 months. However the SS benefit is fully COLA'd, while the pension has a partial COLA, a fixed percentage increase per year but guaranteed not to fall below 65% of its original purchasing power, based on CPI. At historic rates of inflation it would take 23 years to hit the 65% "floor" as it's called, and I expect to be retired longer than that. Also, if I understand it correctly, my initial SS benefit will change between when I retire and when I start drawing checks, according to changes in the cost of living during that time. So I think that early in my retirement, the pension will be larger in terms of buying power, but depending on when I actually start drawing SS and on the rate of inflation, SS will eventually gain on and possibly even pass the pension. I can't even begin to guess how to make a valid comparison between the pension and SS.
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Old 07-04-2011, 09:27 PM   #28
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I can see how that is possible. What I don't see is how it can be avoided by putting more money into the pension fund previously. Wouldn't that just precipitate the fiscal crisis at an earlier time?
Some pension funds took a "contribution holiday" during the bull market of the late 20th century. If they had put in the money they were supposed to put in then, they wouldn't be underfunded now, or at least not to the extent that they are. So for those systems, no, it wouldn't have precipitated a financial crisis at an earlier time. It might have made it impossible to grant a tax reduction or increased funding to some other area of government—whatever was done with the money instead of putting it into the retirement system. Even with a system that has been paying all contributions as promised, I think an increase in contribution levels in the past would be less likely to precipitate an economic crisis than having to come up with the money to meet large and ongoing shortfalls in the future. Compare it to your personal finances. What's more likely to cause an economic crisis in your household, having ten or fifteen years to save up for a new car, or having to come up with the cash to buy one on short notice, during an economic downturn when your wages have been frozen or cut?

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The premise of this discussion about the soundness of pension funds seems to be that income from the fund is somehow free, while other moneys the state may use to pay pensioners are costly. I don't get that.
I don't understand what you mean by an assumption that the income from the fund is free. I think it is more a feeling—by employees, that we were promised a certain level of pension benefits, and by taxpayers that there has been an implied promise that employee pensions would be fully funded by the contribution rates built into the pension plan. If the pension plan then asks for more money, the taxpayers are understandably upset—they thought they had already paid for the pensions with their past taxes.

IMO, if pension fund trustees or public officials play "fiscal games", as you called it, they are failing in their responsibilities to both the employees (by risking that there will not be enough money to pay the promised pension benefits when they retire) and the taxpayers (by mismanaging what the taxpayers have already paid for this purpose and which, in a soundly designed pension plan, would have been enough to pay the promised benefits without increasing taxes later on). But I think there have also been a lot of unexamined assumptions in the past that are now being pulled out into the light, and people don't like what they are seeing. As an employee, I never gave a thought to whether the pension system was adequately funded, until it wasn't. And as a taxpayer, it never occurred to me that officials might be making promises about future benefits, without allocating the funds to fulfill them.
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Old 07-04-2011, 09:31 PM   #29
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What's wrong with kicking the can down the road? "We have almost run out of road" -- that has a nice ring to it, but what does it actually mean? There will be no future generations?
Cause research done by these guy at Northwestern and other like the Pew Center for states, show state with badly funded plans like a Hawaii funds running out of money between 2018 and 2022. In the case of Hawaii this will require a 75% cut in current retire benefits.

I'll tell you if Hawaii jacks up my taxes by huge amount to pay in 5 or 6 year for the state employ pensions. I am moving. If on the other hand people start addressing the issue now that would be better.
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Old 07-04-2011, 10:06 PM   #30
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What's wrong with kicking the can down the road? "We have almost run out of road" -- that has a nice ring to it, but what does it actually mean? There will be no future generations?
In the case of the pension system I'm a member of, it means that the fund lost about 27% in the 2008 crash and (as of the end of the first quarter) still has about 10% less total assets than it did three years ago. It means the City workforce is largely made up of of baby boomers who will be retiring over the next decade or so, which will mean a big increase in what the pension fund has to pay out in benefits. It means even with the upcoming increase in contribution levels, there will be significantly less going into the fund than the actuaries say is needed to get back to 100% funding within 30 years, and that's with a perhaps overly optimistic assumed annual return of 8% (less 0.25% expenses). It means with 20% of total payroll (10% each employer & employee) going into the retirement system starting next year, there is not much room to increase the contribution rate further, and IMO certainly not higher than the actuaries' recommendation of (IIRC) about 26%. It means that even without having to pay for a pension fund shortfall, the City is facing multi-million dollar budget gaps the rest of this year, possibly next year, and who knows how many years after that. It means the slow economic recovery may result in a permanent reduction in the numbers of City employees, meaning less employee contributions and less employer match coming into the fund in the future. It means interest rates are at historic lows, so the fund doesn't really have the option of shifting to a more conservative allocation so it won't be hit so hard in any future market crash, because unless bond rates come up, it will certainly not make the 8% return needed to reach full funding if it does.

That's less money coming in, more money going out, what's looking like it may be a long period of economic doldrums, and no room to dodge a future market downturn. "Running out of road" means reaching the point where the only options will be a benefit cut, a tax increase, or both.
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Old 07-04-2011, 11:26 PM   #31
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"Running out of road" means reaching the point where the only options will be a benefit cut, a tax increase, or both.
But why are those the only options? The road down which the can is kicked is borrowing against future revenue, isn't it? So you must mean that it will become impossible to borrow against it. I just don't understand why you think that. Do you think there will be no future revenue?
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Old 07-04-2011, 11:37 PM   #32
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I'll tell you if Hawaii jacks up my taxes by huge amount to pay in 5 or 6 year for the state employ pensions. I am moving.
So Hawaii's problem is that if it raises taxes to pay state pensions, you'll leave. Do I have that straight? Personally, I would hate to see you go, but this doesn't seem to be a systematic problem for the whole state.
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Old 07-05-2011, 01:50 AM   #33
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"Running out of road" means reaching the point where the only options will be a benefit cut, a tax increase, or both.
But why are those the only options? The road down which the can is kicked is borrowing against future revenue, isn't it? So you must mean that it will become impossible to borrow against it. I just don't understand why you think that. Do you think there will be no future revenue?
I think future revenue and the ability to borrow against it are both finite. I would expect that, if a government goes too far into debt, its bond rating goes down, which means it has to pay higher interest on later bonds. At some point it would become impracticable, if not absolutely impossible, for it to borrow any more.

You seem to be implying it would always be possible for a local or state government to borrow as much as it needs to meet any possible pension shortfall, without decreasing its other expenditures nor raising taxes either now or in the future—that the day would never come where there were no other alternatives than to raise taxes or cut benefits—that the can could always be kicked without ever reaching the end of the road. Am I mistaking your meaning?
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Old 07-05-2011, 02:47 AM   #34
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I would expect that, if a government goes too far into debt, its bond rating goes down, which means it has to pay higher interest on later bonds.
Now, I think we are approaching clarity. Running out of road means the state's bond rating is going down?
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You seem to be implying ... that the can could always be kicked without ever reaching the end of the road. Am I mistaking your meaning?
No, that's what I was implying.
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Old 07-05-2011, 04:13 AM   #35
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Now, I think we are approaching clarity. Running out of road means the state's bond rating is going down?(snip)
No, I think it means we disagree about a fundamental assumption. You think there will always be more road to kick the can down. I don't. It's possible for an individual to get so deeply mired in debt that they are unable either to meet their obligations or to borrow more. I don't see why it wouldn't be possible for a government to have the same problem.
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Old 07-05-2011, 08:02 AM   #36
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But why are those the only options? The road down which the can is kicked is borrowing against future revenue, isn't it? So you must mean that it will become impossible to borrow against it. I just don't understand why you think that. Do you think there will be no future revenue?

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No, I think it means we disagree about a fundamental assumption. You think there will always be more road to kick the can down. I don't. It's possible for an individual to get so deeply mired in debt that they are unable either to meet their obligations or to borrow more. I don't see why it wouldn't be possible for a government to have the same problem.
I agree with kyounge1956 here. IIRC, GregLee was saying much the same thing in another thread a few months back, or at least questioning the 'conventional wisdom' that there is a limit to the amount a govt can borrow. I think it was GoneForGood who posted some background on borrowing limits (% of GDP, revenue in/out?) - at some point the revenue just can't support the debt. But I don't recall if there was enough follow up to conclude what that point was.



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I'll tell you if Hawaii jacks up my taxes by huge amount to pay in 5 or 6 year for the state employ pensions. I am moving.
So Hawaii's problem is that if it raises taxes to pay state pensions, you'll leave. Do I have that straight? Personally, I would hate to see you go, but this doesn't seem to be a systematic problem for the whole state.
Actually, it is a systemic problem. IL for example, raised corporate tax rates, and several large corps threatened to leave if they didn't get a tax break (and they got it). Now, smaller corps don't have enough weight to throw around to demand a tax break - but you can bet that they are thinking of leaving, or if they are expanding, will look for options over the border in more business-friendly states. Indiana, Wisconsin, and even New Jersey have been actively seeking IL businesses. I think you can fine examples of this in other states as well, but you don't really need data to predict this, it's simple supply/demand.

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Old 07-05-2011, 11:07 AM   #37
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Indiana, Wisconsin, and even New Jersey have been actively seeking IL businesses.
So which businesses, I wonder, would relocate to Indiana if Hawaii dares to raise tax rates ... Bound to be some, since it's just simple supply/demand.
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Old 07-05-2011, 11:19 AM   #38
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So which businesses, I wonder, would relocate to Indiana if Hawaii dares to raise tax rates ... Bound to be some, since it's just simple supply/demand.
It's all a matter of degrees. Every business has decisions to make when it is time to expand (or maybe consider moving current facilities offshore). A big part of that decision will be just how 'business friendly' the area is. There is bound to be a consequence to raising taxes. It might not be a headline, like 'mega-corp moves 1500 jobs to Indiana' - it is more likely decisions made in board room that never hit the news. If they open the new office in Indiana rather than HI, the news won't be that HI 'lost' jobs, but in fact they didn't share in the growth. But the overall effect will be that the business friendly areas will tend to get more jobs over time. Is there really any doubt of that?

Heck, you can see it right on this forum - how many threads have there been discussing which are the most tax-friendly states for retirees? It's not the only consideration, but it is a consideration.

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Old 07-05-2011, 11:22 AM   #39
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So which businesses, I wonder, would relocate to Indiana if Hawaii dares to raise tax rates ... Bound to be some, since it's just simple supply/demand.
It's not always relocation of existing businesses. It could also be business that decide to expand out of state, or new businesses deciding to form elsewhere. The net effect, though, is roughly the same.

I'm not a fan of big corporations demanding tax breaks that their smaller competitors can't get (that's a type of favoritism/crony capitalism that should be outlawed IMO), but in terms of fair and consistent tax policies that apply to *all* people and businesses, the "states as 50 laboratories" approach is always instructive as you can clearly watch the cause and effect unfold.
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