State pension inflation protections start to get cut

[MichaelB]

The math of employee cost is both simple and compelling. Cost containment results from employee reduction and slowing growth of future obligations. Taxes simply cannot increase fast enough to pay the current projected costs. Two decades of pension plan management in the private sector shows the way.

I think over time the most likely outcome is that future benefit growth for vested holders will be limited, simply because this is the where the greatest financial benefit is, and it will prove easier to limit growth than reduce current employment.

The NYT article describes a few cases in detail and then generalizes to all other public employees. This is faulty reasoning, as non-federal public employees are not one monolithic group but instead covered by thousands of different laws, employment contracts and financial conditions.

In my mind it is inconceivable that together, the team of politicians, legislators and lawyers will not find the way to accomplish this. The media will assist by not focusing on broken promises or ruined retirements but instead by promoting tales of six figure pensions paid to mid-50 types while cops and schoolteachers are laid off.

Also, to repeat thoughts I have expressed elsewhere, there are many well funded plans out there. Stakeholders need to circle the wagons to keep their funds from being raided.

Don’t know if it shows but I am not optimistic that public pension obligations will be met as currently projected.

 

[ziggy29]

My point is that you cannot expect that government workers will stand idly by while their benefits are cut ex post facto by people who don't want to pay taxes but do want to enjoy the services the government provides.

Agreed, provided we are talking about benefits for the work already performed -- changes to benefits granted for future work not yet performed are not "ex post facto."

Then again, federal law generally prohibits cutting benefits for work already performed anyway. There is typically no "contract" guaranteeing future work will be given the same pension treatment as prior work (except in collective bargaining agreements, normally, and even those are only applicable until the expiration of the contract). Even the private sector didn't take away anything for work already performed when they froze their DB pension plans -- and you know that many of them would have if it were legal to do so.

There's no more a "lifetime contract" guaranteeing the current pension deal for public employees than there is for private employees. Yet it feels like a lot of folks seem to think there is, that there's somehow legally and morally a higher standard. The only difference I see is that I, as an infinitesimally small representative of my government and what it does, don't want the blood of screwing people out of a pension they're already counting on all over my hands if we can possibly avoid it without massive tax hikes on everyone else.

 

[donheff]

There's no more a "lifetime contract" guaranteeing the current pension deal for public employees than there is for private employees. Yet it feels like a lot of folks seem to think there is, that there's somehow legally and morally a higher standard.

(empahsis added) I think you and some others are imagining that some of us said something like the above or think it. This whole discussion arose from proposals to cut guaranteed COLAs for current pensioners, i.e., to cut earned benefits! All we have griped about is governments or private employers defaulting on earned benefits. The idea that things are so much different in the private sector strikes me as disingenuous. Corporations drop pension plans all the time -- but earned benefits are preserved. Governments do the same thing. The Feds did it in my day (the switch from CSRS to FERS). Everybody knows that governments need to make changes going forward and I haven't seen arguments here that counsel against that.

 

[MichaelB]

(empahsis added) I think you and some others are imagining that some of us said something like the above or think it. This whole discussion arose from proposals to cut guaranteed COLAs for current pensioners, i.e., to cut earned benefits! All we have griped about is governments or private employers defaulting on earned benefits. The idea that things are so much different in the private sector strikes me as disingenuous. Corporations drop pension plans all the time -- but earned benefits are preserved. Governments do the same thing. The Feds did it in my day (the switch from CSRS to FERS). Everybody knows that governments need to make changes going forward and I haven't seen arguments here that counsel against that.

An earned benefit and a COLA on future payments may not be the same thing. This is where the battle will be. Can pension systems freeze the pension pay out at the current level of benefit but stop COLA increases, and change pension requirements for vested current workers.

Corporations certainly have had little difficulty doing this.

 

[ziggy29]

(empahsis added) I think you and some others are imagining that some of us said something like the above or think it. This whole discussion arose from proposals to cut guaranteed COLAs for current pensioners, i.e., to cut earned benefits! All we have griped about is governments or private employers defaulting on earned benefits. The idea that things are so much different in the private sector strikes me as disingenuous. Corporations drop pension plans all the time -- but earned benefits are preserved. Governments do the same thing. The Feds did it in my day (the switch from CSRS to FERS). Everybody knows that governments need to make changes going forward and I haven't seen arguments here that counsel against that.

Well, there is a legal question about whether a COLA can be cut on earned benefits. In other words, if they say you've already earned a $2000 monthly pension benefit off work already performed, they clearly can't cut it below $2000. But can they remove or water down the COLA provision off that $2000 benefit? I'm not sure.

I would consider that a benefit cut on earned benefits personally, but the governing question may be as to whether or not the COLA is something that has already earned according to federal pension law. That some states are looking at it suggests they don't think so, but personally I disagree and expect to see it in the courtroom eventually.

 

[donheff]

Well, there is a legal question about whether a COLA can be cut on earned benefits. In other words, if they say you've already earned a $2000 monthly pension benefit off work already performed, they clearly can't cut it below $2000. But can they remove or water down the COLA provision off that $2000 benefit? I'm not sure.

Fair and legal are two different things. If a benefit program includes the promise of a COLA'd pension and you work 30-40 years under that system you have earned your pension with the COLA. If the system didn't specify when, how and if COLAs would be paid, that is an entirely different mater. Government retirees will gripe if they lose benefits they already earned just as private sector employees will, and rightfully so in both cases..

 

[ziggy29]

Fair and legal are two different things. If a benefit program includes the promise of a COLA'd pension and you work 30-40 years under that system you have earned your pension with the COLA. If the system didn't specify when, how and if COLAs would be paid, that is an entirely different mater. Government retirees will gripe if they lose benefits they already earned just as private sector employees will, and rightfully so in both cases..

To go off on a slight tangent (but related to employer retirement benefits), another one that hit many of us is the loss of retiree health insurance coverage. Now technically this is a benefit that one hasn't "earned" yet since they don't consider it earned until you retire (and it's not related to pension law so they could legally take it away even from current retirees, but so far few have as that would be a PR disaster), but still, there were people working at my first Megacorp who had been there for 20 years, maybe in their mid to late 40s, and were planning to retire at 55 with employer-provided health insurance until 65 (at which time they would be on Medicare).

Suddenly, at close to age 50, that retirement at 55 -- suddenly gone. Poof. Yes, you still have the pension (and you would get whatever has accrued until they froze it) -- but without the health insurance you thought you'd have covered, that dream is gone. Especially since they froze the pension a year later. Now you've been kicked in the gut for staying there all those years, primarily staying put for the retirement benefits you wouldn't be able to get if you left and had to "start over" at an older age elsewhere.

And that's the most unfair thing about these takeaways: you don't get a mulligan. When you get screwed after a decade or more on the job, you can't get on a time machine and retroactively choose a career with an employer which you know will still have top-notch legacy retirement benefits when you are ready to call it quits. When my employer froze the pension I couldn't get those ten years back to start over with a new employer. There's no way I could get the 30+ years of service needed to really get a pension large enough to live on. Add to that the retiree health insurance takeaway and it's a double-screwing. At that point I saw no reason to stay there any more, since there were no more "rewards" for longevity, especially if I could find higher pay or better job security somewhere else.

It's this lack of a "do-over" option that makes taking away retirement benefits particularly offensive. And I don't want to be responsible for ramming through on others what happened to me, but other than taking away what's already been earned, at some point everything has to be on the table and there's a lot of shared sacrifice ahead for public employees AND for taxpayers.

 

[chinaco]

Some states are in worse shape than others... fortunately my state is in decent shape. The underfunding is due to losses from the melt-down.

http://downloads.pewcenteronthestates.org/The_Trillion_Dollar_Gap_final.pdf

I suppose the good news is there is an awareness of the problem.

Some states are hugely underfunded. Citizens of those states can probably expect hefty tax increases to make up for not funding the pension fund appropriately in the past.

 

[Spanky]

Some states are hugely underfunded. Citizens of those states can probably expect hefty tax increases to make up for not funding the pension fund appropriately in the past.

Tax can only be raised to a certain limit! Citizens of those states will begin to question why paying someone who do not contribute or work anymore.

 

[Leonidas]

Tax can only be raised to a certain limit! Citizens of those states will begin to question why paying someone who do not contribute or work anymore.

Kind of like Social Security?

 

[ERD50]

Kind of like Social Security?

Exactly like SS. That needs 'fixin' too.

-ERD50

 

[MichaelB]

To go off on a slight tangent (but related to employer retirement benefits), another one that hit many of us is the loss of retiree health insurance coverage. Now technically this is a benefit that one hasn't "earned" yet since they don't consider it earned until you retire (and it's not related to pension law so they could legally take it away even from current retirees, but so far few have as that would be a PR disaster), but still, there were people working at my first Megacorp who had been there for 20 years, maybe in their mid to late 40s, and were planning to retire at 55 with employer-provided health insurance until 65 (at which time they would be on Medicare).

Suddenly, at close to age 50, that retirement at 55 -- suddenly gone. Poof. Yes, you still have the pension (and you would get whatever has accrued until they froze it) -- but without the health insurance you thought you'd have covered, that dream is gone. Especially since they froze the pension a year later. Now you've been kicked in the gut for staying there all those years, primarily staying put for the retirement benefits you wouldn't be able to get if you left and had to "start over" at an older age elsewhere.

And that's the most unfair thing about these takeaways: you don't get a mulligan. When you get screwed after a decade or more on the job, you can't get on a time machine and retroactively choose a career with an employer which you know will still have top-notch legacy retirement benefits when you are ready to call it quits. When my employer froze the pension I couldn't get those ten years back to start over with a new employer. There's no way I could get the 30+ years of service needed to really get a pension large enough to live on. Add to that the retiree health insurance takeaway and it's a double-screwing. At that point I saw no reason to stay there any more, since there were no more "rewards" for longevity, especially if I could find higher pay or better job security somewhere else.

It's this lack of a "do-over" option that makes taking away retirement benefits particularly offensive. And I don't want to be responsible for ramming through on others what happened to me, but other than taking away what's already been earned, at some point everything has to be on the table and there's a lot of shared sacrifice ahead for public employees AND for taxpayers.

You know, I just can't help thinking how similar this situation is to that of many other countries in the past, when they were facing the consequences of fiscal mismanagement and we were creditors. How quick we were to condemn their bad habits and how easily we mandated spending cuts + tax increases much more severe that those we face.

 

[donheff]

You know, I just can't help thinking how similar this situation is to that of many other countries in the past, when they were facing the consequences of fiscal mismanagement and we were creditors. How quick we were to condemn their bad habits and how easily we mandated spending cuts + tax increases much more severe that those we face.

Yup, the World Bank and us - finger wagging nannies.

 

[Surfs_Up]

Next, the retirement bubble ?

This guy thinks the next bubble to pop is the retirement bubble. He seems to be pushing for semi-retirement as a way help us get out of this mess. He has some interesting ideas in his blogs on transitioning from full time work to part time work that you like (life sabbatical). His ideas and tone may be a tough sell on this forum.

Next, the Retirement Bubble - The Barron's article

 

[haha]

Here is one of his blog posts. Very intersting. It strikes me as funny, since most blogs seem to feature a lot of happy talk to attract fantasy needing readers, and fantasy selling advertisers. I have only read a few of his articles, but so far it seems anti-fantasy. A hard sell usually.

Ha

 

[Spanky]

"The three-year sabbatical can turn a threat into an opportunity."

I prefer a 30-year sabbatical with good pay.

 

[clifp]

I think missing in the discussion of cutting benefits by saying that they are applied retroactively for work already delivered is missing an important fact. Many of current retirees started working under pension programs that were far less generous than that started off working under. They have benefit from increase pensions benefits that were given to them retroactively for work already performed.

Imagine Joe, a 70 year old retired state employee, who worked for 30 years and has been receiving a pension for 10 years. This person started working in 1970, in many cases they start work without a COLA provision. Then inflation took off in the 70s and by 1980s COLA were common for most public pension. But Joe spent 10 years working without the promise of a COLA to his pension and was granted a retroactive benefit. Even worse many states changed their pension calculations. For instance California use to give workers credit for 2% per year and than about 1985 they increased it to 3%/year. So now Joe instead of getting a pension of 30% (15 years * 2%) now finds his pension is increased 45% (15 years *3%) This enables Joe to collect 90% of his salary and retire at age 60 instead of the 70% he was counting on and retiring at age 65.

Meanwhile in the 1990s health insurance started to become a big issue. Guys like Joe near retirement age start to become very active in public employee Unions. They succeed in getting health benefits for early retirees. Once again although Joe is going only work for 5 more years he gets a nice retroactive benefit for the 25 years that worked.

Now realistically it would be an administrative nightmare to say Joe you only get 2/3 of COLA since the first 10 years you worked were without a COLA provision 1/6 of the health care subsidy etc. However, when we are talking about cutting benefits retroactively, it is worth noting that many current pensioners 'earned' these same benefits retroactively.

 

[chinaco]

If state pensions were too generous... Those states will find a way to adjust the equation. If it is just a matter of an underfunded pension plan... they will come up with the money through some sort of tax increases.

The biggest issue is underfunding of the pensions (over years) and for some pensions... perhaps being too risky managing the pension plan (as opposed to being too generous).

Unless we have a growing population and economy... many of the state pension programs are going to have to be managed differently.


They can balance the books without decreasing the pension benefit.

I suspect some of that tax money will come from increases in inheritance taxes at the state level. That income source will track right along with the boomers population (front end helps fund the back end). While no one likes taxes... they tend to care more about the money being "pried from their live warm hand" than being "pried from their cold dead hand".

 

[Running_Man]

I think missing in the discussion of cutting benefits by saying that they are applied retroactively for work already delivered is missing an important fact. Many of current retirees started working under pension programs that were far less generous than that started off working under. They have benefit from increase pensions benefits that were given to them retroactively for work already performed.

Imagine Joe, a 70 year old retired state employee, who worked for 30 years and has been receiving a pension for 10 years. This person started working in 1970, in many cases they start work without a COLA provision. Then inflation took off in the 70s and by 1980s COLA were common for most public pension. But Joe spent 10 years working without the promise of a COLA to his pension and was granted a retroactive benefit. Even worse many states changed their pension calculations. For instance California use to give workers credit for 2% per year and than about 1985 they increased it to 3%/year. So now Joe instead of getting a pension of 30% (15 years * 2%) now finds his pension is increased 45% (15 years *3%) This enables Joe to collect 90% of his salary and retire at age 60 instead of the 70% he was counting on and retiring at age 65.

Meanwhile in the 1990s health insurance started to become a big issue. Guys like Joe near retirement age start to become very active in public employee Unions. They succeed in getting health benefits for early retirees. Once again although Joe is going only work for 5 more years he gets a nice retroactive benefit for the 25 years that worked.

Now realistically it would be an administrative nightmare to say Joe you only get 2/3 of COLA since the first 10 years you worked were without a COLA provision 1/6 of the health care subsidy etc. However, when we are talking about cutting benefits retroactively, it is worth noting that many current pensioners 'earned' these same benefits retroactively.

In many cases those retroactive benefits were taken in lieu of a salary increase. And the COLA benefit was reflecting what occured with Social Security. Many of these state workers had 8 percent of their salary withheld and are not eligible for Social Security and are receiving 22K on average, at least this is the case in the state of Illinois, I am not sure about Colorado and Minnesota although I expect their cases to be similar

 

[ziggy29]

This guy thinks the next bubble to pop is the retirement bubble. He seems to be pushing for semi-retirement as a way help us get out of this mess. He has some interesting ideas in his blogs on transitioning from full time work to part time work that you like (life sabbatical). His ideas and tone may be a tough sell on this forum.http://www.theretirementbubble.com/barrons.html

Frankly I think it makes some sense IF we can finally decouple health insurance from full-time employment.

 

[haha]

In many cases those retroactive benefits were taken in lieu of a salary increase.

If that is true, why does study after study show equal or better current pay, without regard to benefits, in the public sector?

More "protect me for I am special" pleadings.

 

[Bimmerbill]

OK, I have two COLA pensions. One is "in the bag," my reserve component military pension that starts paying in 2026, when I turn 60.

The other is my FERS pension. I'm still working, so still contributing and building this pension.

How do I plan my future retirement with all the pension uncertainty?

Quit public service, get a job in private sector with big salary increase and no pension and save more in the 401K?

What if the best and brightest all did this? Leaving behind the deadwood/unemployable.

 

[donheff]

OK, I have two COLA pensions. One is "in the bag," my reserve component military pension that starts paying in 2026, when I turn 60.

The other is my FERS pension. I'm still working, so still contributing and building this pension.

How do I plan my future retirement with all the pension uncertainty?

Quit public service, get a job in private sector with big salary increase and no pension and save more in the 401K?

What if the best and brightest all did this? Leaving behind the deadwood/unemployable.

You are in great shape. The Feds have no pension problem. When they set up FERS they made the employee and agency contributions actuarially complete - i.e. they cover the full costs of the system. Of course the retirement trust fund is like the SS trust funds -- it is just IOUs from the Treasury. But that is no different than other Treasury securities. When the Feds get around to dealing with the deficit it will not involve reneging on Treasuries or FERS.

 

[ziggy29]

OK, I have two COLA pensions. One is "in the bag," my reserve component military pension that starts paying in 2026, when I turn 60.

The other is my FERS pension. I'm still working, so still contributing and building this pension.

How do I plan my future retirement with all the pension uncertainty?

Agreed with donheff here -- I don't think anyone with federal pensions have anything at all to worry about. The federal program is more solvent for one thing, having watered down the unsustainable CSRS pensions with FERS more than a quarter-century ago. Also, unlike states, the federal government can regularly spend into deficits and print money.

I wouldn't lose a wink of sleep over worry about federal pensions. All the ticking time bombs in that department are in state and local governments.

 

[clifp]

In many cases those retroactive benefits were taken in lieu of a salary increase. And the COLA benefit was reflecting what occured with Social Security. Many of these state workers had 8 percent of their salary withheld and are not eligible for Social Security and are receiving 22K on average, at least this is the case in the state of Illinois, I am not sure about Colorado and Minnesota although I expect their cases to be similar

As I have shown in many posts in the past, the 8% (which use to be lower) contribution by state employees results in a pension benefit which is 50-100% more generous than a private benefit.

Finally it is the exception not the rule for state workers to not be covered by social security.