Why Public Pensions Are About To Look Less Healthy

[mickeyd]

As a taxpayer, this situation is beginning to get my attention because I feel that someone will have to pay for these obligations to our public servants. I think that that someone is me.

Public pension systems, of course, are hurting in many states and cities. Some haven't been funded sufficiently to provide promised retirement benefits to teachers, firefighters or other public-sector workers. Poor investment returns have taken their toll across the board. Benefits are being curbed in some places because the costs of these pensions compete with other priorities like schools, parks, transportation and public safety.
The new problems come from the green eyeshade crowd — the Government Accounting Standards Board. Under new rules from the board, state and local governments will have to change how they present the financial health of their pension plans to the public. Although the changes are dramatic at first glance, there are some important caveats.

Today, public pension plans are allowed to smooth out the ups and downs of their investment returns. Losses from the financial crisis of 2008 aren't reflected in many plans, but neither are most gains from 2010, an up year in the stock market. The idea is that pension plans must look far into the future so short-term ups and downs are less important. At the same time this smoothing can mask serious problems for years.
The new rules would stop the smoothing. Instead, pension funds would have to show gains and losses each year. That could mean big swings in a plan's heath from year to year, especially for plans heavily invested in stocks, hedge funds or other unpredictable investments. In many ways, it's a more precise presentation. And for employees with pensions at stake, it may be a stomach churning one

Why Public Pensions Are About To Look Less Healthy : Planet Money : NPR

 

[ERD50]

IMO, both public and private pensions funding formulas should assume that the investments will do no better than keep up with inflation. If they are able to do better, then their funding level could be reduced (but this should be smoothed over several years). But then it would be only after they delivered results, not based on assumptions they can do it in the future.

That would take some 'risk' out of these projections, and seems pretty simple.

-ERD50

 

[eytonxav]

What happens to these pension obligations when a municipality goes bankrupt? Is it still something the tax payers must pay for or are all bets off in the case of bankruptcy?

 

[Lsbcal]

I know this is not going to happen for future public employees, but why should some get one deal and others get another deal? Why should public employees get one deal and private another? Why should senators get one deal and ordinary public employees another?

This involves boundaries. There are family boundaries, institutional boundaries, union boundaries, country boundaries ... and on, and on.

Wouldn't it be nice if the world were really a fair place? Everyone would get a pension after working just the same as their fellow citizens (of the world, no less).

Dream on.

P.S. If you think Lsbcal has cracked on this one, you are probably right.

 

[NW-Bound]

That is because

"All animals are equal but some animals are more equal than others." - George Orwell, "Animal Farm"

 

[eytonxav]

That is because

"All animals are equal but some animals are more equal than others." - George Orwell, "Animal Farm"

Especially those animals that have union behind them

 

[Lsbcal]

That is because

"All animals are equal but some animals are more equal than others." - George Orwell, "Animal Farm"

George was right on. I knew someone had beat me to the punch on this stuff.

P.S. I never read this but will check it out. Thanks.

 

[Bimmerbill]

I'm a public servant and I think I'll be paying for them too. I worry about the government scaling back benefits or changing the rules since I've already put so much time in.

My National Guard retirement is already "earned" and I am just waiting until I hit age 60 to start collecting. That is a tad over 14 years and a lot can happen in that time.

With 15 years in as a federal civil servant and 14 more years to go (or 10 if I can pull it off) I am already mid career and have a lot of time invested in the system.

What I would like, and I know its not possible, is for Congress to state their intentions upfront. That way I can look for another job if they intend to modify the pension in a significant way that affects me directly.

 

[Chuckanut]

The PEW Study has some interesting information on public pensions by state.

State Fact Sheets: Pew Pensions Update

Some states are doing well, others so-so and others are doing poorly. One thing to look at is the whether or not the state has a history of not paying its yearly full pension obligation. Another area of interest is how pension systems have been reformed over the years. In my home state the plans that are causing funding concerns are the old plans, that were closed to new members back in the 70's.

 

[NW-Bound]

Seriously, I think the problem with any kind of "guaranteed" pensions, i.e. defined benefit plans, is that they ignore the vagaries of economic conditions. In the last 3 decades, the economic globalization exacerbates the fluctuations in investment returns. Individuals who manage their own 401k and IRAs know the risks well, and we have told ourselves to readjust our WR downwards to 3.5% or even less. But we are the minority here.

When the going is good, if corporations or municipalities do not cut back on the funding, I suspect they would project and promise even more wonderful payouts to employees, which would cause bitter disappointment when these rosy projections do not bear fruits.

A similar thing happens with income taxes. During the economic boom time of 2000, California raked in mucho taxes on capital gains due to the dot-com explosion. They expanded their spending, only to suffer when that extra income tax turned out to be short-lived.

Back on retirement savings, I will do some more reading into the Australian superannuation plan to see how that works. I think that by letting the workers see that their investment return is tied to how well the national economy is doing, that would enlighten them to other economic policies that the government mandates. That would force them to have "skin in the game", and hopefully make them decide what would be good for society, because that will also be good for them.

Oh, I am just dreaming, I know...

 

[rodi]

I know this is not going to happen for future public employees, but why should some get one deal and others get another deal? Why should public employees get one deal and private another? Why should senators get one deal and ordinary public employees another?

This involves boundaries. There are family boundaries, institutional boundaries, union boundaries, country boundaries ... and on, and on.

Wouldn't it be nice if the world were really a fair place? Everyone would get a pension after working just the same as their fellow citizens (of the world, no less).

Dream on.

P.S. If you think Lsbcal has cracked on this one, you are probably right.

I don't think federal senators and congress reps get different pensions. I've seen several places that debunk this idea. If they were fed employees (in office, or as staff/agency/etc worker) before the mid 80's they get the same nice pension that older fed workers got. If they started life as a public servant (elected or otherwise, after the mid-80's they get the same pension as current federal workers.

U.S. Senate: Reference Home > Is it true that . . . >

As far as have's vs have nots. I'm a private sector worker who has had 2 pensions frozen out from under me. Rather than resent my public servant friends - I want to see pensions come back to the private sector... In other words - I want things to revert to the 80's and early 90's when most large corporations offered some form of pension. I'd like to see pensions go back to part of the "cost of doing business" for corporations - same as paying in to SS, paying for part of health care, and maybe providing an annual Christmas party.

The market involves risk. You can't get a decent return on fixed income streams. Pensions, in combination with 401ks, provided a safety net. Now the risk is all on the employee.

 

[ERD50]

... - I want to see pensions come back to the private sector... ... I'd like to see pensions go back to part of the "cost of doing business" for corporations...

The market involves risk. You can't get a decent return on fixed income streams. Pensions, in combination with 401ks, provided a safety net. Now the risk is all on the employee.

I would actually prefer that companies do not provide pensions (in the form of promises). There is no free lunch, the employee pays for that pension one way or another, and I'd rather have the cash than a promise.

I think the idea that a pension removes risk is an illusion. As NW-Bound says:

Seriously, I think the problem with any kind of "guaranteed" pensions, i.e. defined benefit plans, is that they ignore the vagaries of economic conditions.

Think about it - how does the employer remove risk? They are investing that pension fund in the market. It simply keeps the employee one degree further removed, it doesn't really change anything. If their investments fail, there is no 'magic' to 'guarantee' the pension to the employee. We have the PBGC as insurance, but they have to be properly funded (I think that is the real topic of this thread). It might make good sense to collect premiums and spread the risk as they do, but you can't pull money out of a hat. We pay for it one way or another (including the insurance premiums). Personally, I'd rather be one degree closer to my money, and take full responsibility for it.

-ERD50

 

[Lsbcal]

...
As far as have's vs have nots. I'm a private sector worker who has had 2 pensions frozen out from under me. Rather than resent my public servant friends - I want to see pensions come back to the private sector... In other words - I want things to revert to the 80's and early 90's when most large corporations offered some form of pension. I'd like to see pensions go back to part of the "cost of doing business" for corporations - same as paying in to SS, paying for part of health care, and maybe providing an annual Christmas party. ...

Sounds like a reasonable approach. I'd guess we cannot easily go back because promises have been made and it is necessary to keep the illusions alive for at least as long as the politicians can stay in office.

FWIW, I do not really resent public employees' deals. Just wish I could have gotten a better deal myself . What I do resent is the political games that keep the high assumed returns of funds intact and the attempts to raise taxes for other things to cover the (real problem) pension funding. We see that later smoke screen at the local county level where I live. Luckily the papers seem to keep the stories on this stuff alive rather then letting the politicians work in secret to fudge things.

Regarding senators and representatives: let's see, I think they do get Social Security. And they get the pensions mentioned in your link Rodi. And as I recall they get a very sweet deal on health care -- but could be wrong on this. However, I would not focus too much on them from the cost standpoint, too few of them to matter. This may affect their attitudes to the rest of the country though. Feels to me like they are a bit too piggy and entitled. But that is life in a rich country.

 

[NW-Bound]

If we were to "guarantee" anything, it had to be set at a fairly low amount, at bare subsistence, so that it would be achievable under bad economic conditions. Else, we would create two types of "animals": the older "animals" (i.e. retirees) who would have their living conditions guaranteed while the younger "animals" face higher taxes and high unemployment during economic downturns.

The above would create social tension because, to borrow from Orwell, "All animals are equal, but the older animals are more equal than the young ones". Additionally, levying more taxes to support the retirees while the young people are struggling would choke off the economy further. Greece now has to cut back pensions and benefits, and that hurts the retirees, but how does that compare to the unemployment rate of 50% among young Greeks under the age of 25?

I just did a bit more reading about Australian superannuation scheme, and I like it a lot. It was the result of a social reform in the 90s, and has 3 parts. To borrow from Wikipedia, the 3 components are

1) A safety net consisting of a means-tested Government age pension system
2) Private savings generated through compulsory contributions to superannuation
3) Voluntary savings through superannuation and other investments

I recently found that the safety net part was at $20K/yr for homeowners, and as such, quite generous compared to the US SSI. It seems to me that at that level, they can eliminate most of other forms of welfare such as food stamp, housing assistance, utility assistance, etc... and simplify a lot of red tape. Just guarantee old and poor people some basic money to live on and let them figure out how to spend it.

And then, for most people, they can save via parts 2 and 3 above if they want to retire on more than $20K/yr. However, it is not guaranteed. If the national economy does well, they do well. Else, everybody has to take a cut. They are in it together.

I think I would be content with such a social system.

 

[rodi]

I would actually prefer that companies do not provide pensions (in the form of promises). There is no free lunch, the employee pays for that pension one way or another, and I'd rather have the cash than a promise.

That made me laugh out loud.

I'd rather have the cash too. But that will never happen.

I can't imagine any current fortune 500 company actually increasing pay/compensation to offset the lack of pension contributions. Might increase the Corporate-Suite stock options/bonuses on the money they "saved" on the backs of the employees. But the line worker employees would never see a penny.

I'm jaded, but that doesn't mean I'm wrong.

 

[ERD50]

That made me laugh out loud.

I'd rather have the cash too. But that will never happen.

I can't imagine any current fortune 500 company actually increasing pay/compensation to offset the lack of pension contributions. Might increase the Corporate-Suite stock options/bonuses on the money they "saved" on the backs of the employees. But the line worker employees would never see a penny.

I'm jaded, but that doesn't mean I'm wrong.

No, but I think it is two different things. Companies provide only as much total compensation as required to keep the employees they need. Too little, and the employees go elsewhere. Too much and they are short-changing their shareholders, their customers and the long term health of their business.

In this economy, workers don't have as many options, so they will accept these cuts. So no, workers are not seeing any of this in their pockets. You may not like it, but that is the way it is. I also recall a time when it was pretty routine for people to 'job-hop', and were routinely getting +20% increases with each job hop. Were they crying for the companies that hired them? The pendulum has swung.

We all act this same way - we look for bargains, and when we can buy some electronics for half of what it was a few years ago, we don't offer to pay more, just so that company that has been impacted by competition can have a 'fair shake'. If we don't do it for a MegaCorp, can we expect the MegaCorp to do it for us? Free markets cut both ways.

And I might agree with you that the corporate 'suits' are working in a less-than-free market (with a BOD that is in the pocket of the CEO), but that's a separate issue that we have discussed before, and will likely discuss again.

-ERD50

 

[NW-Bound]

+1

 

[travelover]

I go back to my old standby, Travelover's Rules:

1. Anyone who has less than me was just too lazy to work as hard as I did to get what I deserve
2. Anyone that has more than me surely either stole it or came by it though unfair means

 

[frayne]

I go back to my old standby, Travelover's Rules:

1. Anyone who has less than me was just too lazy to work as hard as I did to get what I deserve
2. Anyone that has more than me surely either stole it or came by it though unfair means

Funny how many people actually believe each of those two points.

In reality though the system is rigged and not in the favor of the little guy, no level playing field here.

 

[eytonxav]

I go back to my old standby, Travelover's Rules:

1. Anyone who has less than me was just too lazy to work as hard as I did to get what I deserve
2. Anyone that has more than me surely either stole it or came by it though unfair means

I like it, but maybe you need add to item 2. as follows: Anyone that has more than me surely either stole it or came by it though unfair means or benefited from a nice big inheritance

 

[travelover]

I like it, but maybe you need add to item 2. as follows: Anyone that has more than me surely either stole it or came by it though unfair means or benefited from a nice big inheritance

As a trust fund baby, that fits under "what I deserve".

 

[Mulligan]

Just speaking generally, many of these pension funds could probably be financially sound with a few tweaks and small sacrifices from the pensioners. For example our system went from about 75% pre funded to close to 90% last year by lowering the annual COLA from CPI to 2% annually. Have a graduated system where current workers work a few months to a few years longer, and lower the multiplier for newcomers and I wouldn't be surprised if most become significantly more healthier immediately. Now the ones under 50% funded, I have no clue. My hope is that the political climate is good enough to address the issues now instead of ignoring the situation until the $ well runs dry. This scenario would not benefit the pensioner or the tax payer in my opinion.

 

[westcoast]

Read WSJ reporter Ellen Schultz's RETIREMENT HEIST. Pensions for many private sector workers were essentially stolen by their employers - used to fatten pensions for top executives or diverted to other purposes that increased corporate value. The fact that this happened to private sector workers is no reason to bash public sector workers - though pension spiking needs to be eliminated and the 3% at 50 for public safety employees doesn't seem sustainable.

 

[MichaelB]

Notwithstanding Travelover's brilliant rules this thread is headed down a troubling path.

 

[Htown Harry]

Notwithstanding Travelover's brilliant rules this thread is headed down a troubling path.

I agree. Twenty-four posts in, and no one has made a direct comment on the article.

I'll give it a shot...

Hypothesis #1 - This GASB change will have minimal real consequences.

Why?

1. The choice of a unit of measure has no effect on the size of the object being measured.

2. Fitch pretty much yawned:
http://www.fitchratings.com/web/en/...rally-Positive-for-U.S.-States-and-Locals.jsp

GASB Rules Generally Positive for U.S. States and Locals

Fitch believes two new reporting standards approved by The Governmental Accounting Standards Board (GASB) will narrow the variability of pension reporting and generally will improve comparability and transparency of pension data...

The new accounting standards will modify how governments calculate and report their liability for unfunded pension obligations and the associated annual expense. Calculations under the new standard will reflect a narrower range of assumptions and will recognize changes in a more conservative manner than current standards allow.

More thorough information will be available under the new standards for financial statement users, such as requirements for cost-sharing plan participants to report the same data as governments in other kinds of plans...

One change that causes some concern is an actuarially calculated annual required contribution (ARC) will no longer have to be reported if the government does not fund its plan on an actuarial basis...

3. GASB got it wrong.
http://www.statebudgetsolutions.org/doclib/20120716_PensionFinancingUpdate.pdf

page 19:
GASB's revised pension accounting rules may have been designed to placate critic of their current approach without excessively angering public pension administrators, who are effectively GASB's "customers". However, these changes neither accurately measure the value of unfunded public pension liabilities nor eliminate incentives for pensions to take excessive investment risk.

Hypothesis #2 - This GASB thing is a Big Deal, because of it's impact on public opinion and, presumably, on public policy decisions

This analysis says the commonly reported (and debated) metrics will look a lot worse using the new measuring stick. That in itself will fan the flames seen in the posts above.

http://crr.bc.edu/wp-content/uploads/2011/11/slp_23.pdf