'Insane' even by Illinois standards?

[ERD50]

Don

I checked out the book reviews on Amazons. The fact that it was WSJ reporter and not a Rolling Stones or Mother Jones reporter gives some credibility to your outrages. I'll put on my library list although I suspect that it will be a while before I get my hands on it. It appears from the reviews that there is another side to story. ...

I look forward to your cool-headed review.

This union trick is so far over the line it should be criminal or at the very least confined to IL and LA.

Thanks for putting it in perspective! Dang, that is bad!

Where were the auditors ?

You may have missed my quote in post #2 - this was made legal -

Gannon, former president of the Chicago Federation of Labor, was able to take a long leave from a city job to work for a union and then receive a city pension based on a high union salary. That arrangement is allowed under a state law signed by Gov. Jim Thompson on his last day in office in 1991, according to an investigation by the Tribune and WGN-TV.

Now, the people concerned with the solidity of the pension fund should be waving the red flag on this, but THAT is the crux of this problem. You've got the higher-up Union guys negotiating with politicians, but the politicians are typically put in office with the support of the Unions. So the Union is essentially represented on BOTH sides of the table. The taxpayers, and to some degree, the 'rank and file' Union workers are not represented to the same degree. So the Union higher-ups are able to wrangle these outrageous deals at the expense of taxpayers AND the people they are supposed to be representing. This system needs to be trashed.

One of the problems I note in the entire debate is that somehow people latch onto a few individual cases of people that were in a position to game a pension system. This seems to get applied to all pensions of the rank and file who are not in a position to game anything. ...

This seems to come up in these pension discussions, and I disagree. I absolutely know that not all rank and file are able to game the system. But that doesn't make these cases any less wrong. And they are not rare. The spiking issue is particularly wide-spread.

It is not as often that the story that goes rabid is one about people having the rug pulled out from under them with pensions that would have been rather modest and hard earned. ...

I think maybe you are looking at things through filtered lenses. I'm quite certain that any pension cuts made to rank and file public workers would make plenty of news. For one, I think it is pretty rare, but it would be outrageous and, I suspect, widely reported. In fact, I think there was a thread on this recently, some town that just can't afford to pay the pensions now? The prospect of making adjustments to FUTURE pensions of people not even hired yet got plenty of air-time here in IL - that's no changes to previous earned benefits, and no changes for any current workers, but it still made headlines. I can't even imagine the fever pitch of reporting if any rank-and-file got 'the rug pulled out from under them' for previously earned benefits (in fact, it appears to be unconstitutional in IL).

What is creepy is that one starts getting the similar questions about ways people's private retirement savings are decreased in potential value by forces larger than themselves like the zero return for years on simple savings accounts. No place to hide? No way to win? Sometimes I think I will see a giant clawback of any wages that were not spent as they were earned. (Just a paranoid thought.)

Are you looking for guarantees? Who is going to provide those, and how? I think we need to be honest with ourselves, and acknowledge there is risk in everything, and deal with it.

-ERD50

 

[Texas Proud]

Not really. The companies took an "over funded plan" (i.e. one that could effectively pay what was expected by its participants) add in a pile of unfunded executive pensions and then close out the whole lot. The employees got what they had already earned --- way, way different than what they expected since they were approaching high earning years and high multiple pension calculation periods. The companies got to capture the "over funding" as earnings and got to capture take the immense liabilities that would now never be realized as earnings. And, guess what. They got to blame the employees and the unions because pensions were supposedly a problem.

I did not say they got 'what they expected'.... I said they got what they were promised... a lot different meaning...

The day the plan was closed, all earned benefits (the promise) were paid by either cash to the participant or buying an annuity to pay them when they retire... no promise was made that the plan could not be changed or elminated at the whim of management...

I agree with you in that what was expected by the employees was a lot more than what they got.... but guess what They could have voted with their feet and moved to another company that had better benefits.. (yea, I know, it is not the same... and I am not trying to get in an argument here)...

When companies make these major changes to pensions or other benefits and nothing happens... then other companies do the same thing... that is why in the private sector pensions have basically gone away because the employees that had them did not do much when they were taken away...

But back to my point... the employees got what was 'promised'... the overfunding of the plan would never have gone to the employees in any case...

 

[ziggy29]

that is why in the private sector pensions have basically gone away because the employees that had them did not do much when they were taken away...

It sure made me willing to leave and look for greener pastures.

 

[MichaelB]

Private sector pensions have not gone away, they were changed from defined benefit to defined contribution plans for employees and most management. Most senior executives still have defined benefit plans.

 

[ziggy29]

Most senior executives still have defined benefit plans.

Why am I not surprised? Talk about "haves" and "have nots" and the decline of the middle class...

That might explain why we stiffs in the trenches haven't sniffed a raise in several years.

 

[MichaelB]

Why am I not surprised? Talk about "haves" and "have nots" and the decline of the middle class...

That might explain why we stiffs in the trenches haven't sniffed a raise in several years.

A different set of rules are in place for executives compensation vs most workers. Employees and workers compensation is subject to global marketplace competition while executives [-]manipulate[/-] influence their own compensation and restrict competition for their own positions.

 

[youbet]

Where were the auditors ?

I watched some fairly in-depth local news coverage on the boob tube last night after my last post.

There seem to be 2 issues:

1. The head of the pension board is using a very "loose interpretation" of pension legislation to allow the shenanigans to occur as opposed to outright fraud. I don't think there was actually anything for auditors to catch as far as the 2 union bosses go. It's an issue with the legislation and the interpretation. And that's typical of most public pension "spiking" and double/triple dipping scenarios.

2. The head of the pension board himself may be in more trouble. This is just surfacing. He's been filling out time cards as an employee of the union but never actually doing any work for the union. This yields him a current paycheck and is setting him up for a double dip pension situation as well.

It'll be interesting to see who winds up "sleeping with the fish" over this. Like our situation with former Gov Blagojevich, someone will be punished for getting caught and causing the negative publicity (NOT for the actual deed which in itself is an accepted part of our culture) and will do some time or wind up as land fill at one of our "shovel ready projects."

Mayor Rahm Emanuel is saying we need a long term investigation and corrective action plan rather than any knee jerk reactions to the specifics of this particular revelation.

 

[Texas Proud]

Private sector pensions have not gone away, they were changed from defined benefit to defined contribution plans for employees and most management. Most senior executives still have defined benefit plans.

True... bad on my part... I should have narrowed it to DB plans...


I think that a DC plan, or a cash balance plan is the best way to go for both public and private.... you get a % of money set aside and it earns an average bond type rate (IOW, it is not at market risks)...

So, if you are working part time for most of you life, you only get cash at your part time wage.... if you are low paid, same thing.... there is no spiking, no outrageous pension based on a few days or even a few years of high salary... your pension is based on your income earned during your working career... nothing more, nothing less....

How fair is that....

 

[youbet]

So, if you are working part time for most of you life, you only get cash at your part time wage.... if you are low paid, same thing.... there is no spiking, no outrageous pension based on a few days or even a few years of high salary... your pension is based on your income earned during your working career... nothing more, nothing less....

How fair is that....

It's very fair. But the concept is a real culture shock in many parts of the country, mine included.

Heavy duty spiking, at least for public school teachers, State of Illinois employees and City of Chicago employees has been rampant. (I can't speak for employees working for counties or smaller municipalities.) It's a major cause of pension fund underfunding.

An employee progresses to a salary of $60k over her career. And pension fund dollars are contributed by the employee and by the gov't to fund a pension based on the current formula and that level of salary. Then, suddenly, at career end the employee makes $80k, $85k and $90k for the last three years qualifying her for a much larger cola'd pension. Funds were not set aside for that level.......

Recent legislation in Illinois has subdued spiking for educators. They're now limited to having only the first 6% of raises during their final 3 years count towards pensions (with, of course, some exceptions for promotions and the like). It's causing a real uproar as generous spiking had become so common it's current limitation is being referred to as a "broken promise!" Other legislation which limits the amount "retired" public employees can work (at the same job they retired from) while collecting their pensions is also being fought.

 

[ziggy29]

I think that a DC plan, or a cash balance plan is the best way to go for both public and private.... you get a % of money set aside and it earns an average bond type rate (IOW, it is not at market risks)...

So, if you are working part time for most of you life, you only get cash at your part time wage.... if you are low paid, same thing.... there is no spiking, no outrageous pension based on a few days or even a few years of high salary... your pension is based on your income earned during your working career... nothing more, nothing less....

How fair is that....

I'd add one more thought: given today's realities, this should be portable and not depend on a single "job for life." I think it would be a good idea -- if done properly -- to have some form of "portable pension" that isn't largely at the whim of the market. Too many folks in the "401K generation" are simply too dependent on the market and are participants in the "lottery" of what the market is doing at the time they want to retire.

IMO such a pension should reduce the dependency on "retiring at the right time" -- reducing the discrepancy of folks who retire in 1999 being far better off than those who retire in 2007, both of whom contributed the same amounts to their 401Ks and IRAs and used the same asset allocation but one having a MUCH more comfortable retirement than the other. The place for pensions and SS is to smooth this out somewhat.

 

[donheff]

I did not say they got 'what they expected'.... I said they got what they were promised... a lot different meaning...

The day the plan was closed, all earned benefits (the promise) were paid by either cash to the participant or buying an annuity to pay them when they retire... no promise was made that the plan could not be changed or elminated at the whim of management...

I agree with you in that what was expected by the employees was a lot more than what they got.... but guess what They could have voted with their feet and moved to another company that had better benefits.. (yea, I know, it is not the same... and I am not trying to get in an argument here)...

When companies make these major changes to pensions or other benefits and nothing happens... then other companies do the same thing... that is why in the private sector pensions have basically gone away because the employees that had them did not do much when they were taken away...

But back to my point... the employees got what was 'promised'... the overfunding of the plan would never have gone to the employees in any case...

In those instances where companies managed pension plans in good faith and were forced to close plans because they were under financial stress and without a good alternative I would agree that employees got what they were promised. But in many, many cases the plans were not managed in good faith. In these cases employees got what they had earned to date. But not what they were promised because when companies set up plans like these (which they were not forced to do) there is a statutory promise (effectively unenforceable) that they will manage the programs in good faith. This book provides ample evidence that the companies did not manage the plans in good faith. They plundered the plans to the benefit of executives and share holders and they spun the resulting demise to make most of America believe the fault lay with the plans themselves.

 

[youbet]

I'd add one more thought: given today's realities, this should be portable and not depend on a single "job for life."

The MegaCorp I retired from referred to the cash balance plan as the "Portable Plan."

IMO such a pension should reduce the dependency on "retiring at the right time" -- reducing the discrepancy of folks who retire in 1999 being far better off than those who retire in 2007, both of whom contributed the same amounts to their 401Ks and IRAs and used the same asset allocation but one having a MUCH more comfortable retirement than the other. The place for pensions and SS is to smooth this out somewhat.

The problem here is convincing the guy who is retiring with favorable market conditions in 2007 to give some up for the guy who retired in 1999. Will you be willing to do that if you get lucky when your time comes around?

 

[ziggy29]

The MegaCorp I retired from referred to the cash balance plan as the "Portable Plan."
The problem here is convincing the guy who is retiring with favorable market conditions in 2007 to give some up for the guy who retired in 1999. You will to do that if you get lucky when your time comes around?

Maybe -- but the problem with the high dependence on DC plans is that retirement becomes more like a lottery. If you are born at the right time and retire at the right time, you "win" even though someone else who played by the same rules and made the same choices "loses" because they came around at the wrong time.

 

[youbet]

employees got what they had earned to date. But not what they were promised

This sounds much like some of our Illinois public pensions where currently employees are receiving what they earned (per formula) when they retire but are having "spiking" benefits subdued by recent legislation. Extreme spiking was so prevalent that many public employees considered it a promise and now consider receiving only the formula amount a promise broken. A lot of bitterness.

 

[youbet]

Maybe -- but the problem with the high dependence on DC plans is that retirement becomes more like a lottery. If you are born at the right time and retire at the right time, you "win" even though someone else who played by the same rules and made the same choices "loses" because they came around at the wrong time.

I agree with you. But you missed my question. How do we average out the performance of the economy to the satisfaction of those who would have received more had we left it as is?

It really is going to be hard to ensure equal investment results vs time for people saving for retirement. I think the first page of the FireCalc instructions explains it pretty well.

 

[MichaelB]

I agree with you. But you missed my question. How do we average out the performance of the economy to the satisfaction of those who would have received more had we left it as is?

It really is going to be hard to ensure equal investment results vs time for people saving for retirement. I think the first page of the FireCalc instructions explains it pretty well.

The issue is that the individual faces greater investment risk than the pension fund because the fund can share the risk and the individual cannot. The individual doesn't need higher performance but lower risk. A "public pension fund" - like a non-for-profit annuity type fund would be a valuable option for the worker. Individual risk can be reduced and time horizon can be extended, which both lead to a more favorable outlook for the average person.

 

[ziggy29]

I agree with you. But you missed my question. How do we average out the performance of the economy to the satisfaction of those who would have received more had we left it as is?

It really is going to be hard to ensure equal investment results vs time for people saving for retirement. I think the first page of the FireCalc instructions explains it pretty well.

I'm not saying the concept of DC plans should be scrapped or replaced. I just think it would be good if people had other alternatives -- perhaps pooled investments run more like a (responsible) pension fund -- where people who are *willing* to forego potential growth for increased retirement security and certainty would have more ability to put retirement savings there.

Those who wanted to "play the birth lottery" and rely exclusively on the market could still do so -- and then if they fell short, it would be their own decision to choose the high risk/high reward route. As it is now, though, people who would prefer the stability and security of a pension instead of the risk/return of a 401K/IRA-based retirement really don't have much choice. Sure, they can "buy a pension" by rolling their DC plans into an SPIA when they retire but the amount they have is still highly dependent on the market.

 

[youbet]

A "public pension fund" - like a non-for-profit annuity type fund would be a valuable option for the worker. .

So something like voluntary extra contributions to SS (on the part of the employee) resulting in a larger payout at retirement? I could go for that.

A "risk taker" puts his contributions in a low cost 401k and choses an investment AA to suite his style and lives with the outcome........ Or, a risk adverse person sends the money as voluntary extra contributions to SS which result in higher SS payments that are perhaps higher or perhaps lower than he would have gotten going with the 401k.

Current SS would still be mandatory as a safety net.

 

[ziggy29]

So something like voluntary extra contributions to SS (on the part of the employee) resulting in a larger payout at retirement? I could go for that.

A "risk taker" puts his contributions in a low cost 401k and choses an investment AA to suite his style and lives with the outcome........ Or, a risk adverse person sends the money as voluntary extra contributions to SS which result in higher SS payments that are perhaps higher or perhaps lower than he would have gotten going with the 401k.

Current SS would still be mandatory as a safety net.

More or less. I think the idea is that those who don't have access to a traditional DB pension plan (but wish they had one) could at least have the option to funnel some of their 401K/IRA contributions into a somewhat "pension-like" vehicle which trades potential for certainty. And yes, it should be optional and folks should be educated about the tradeoff.

 

[Texas Proud]

In those instances where companies managed pension plans in good faith and were forced to close plans because they were under financial stress and without a good alternative I would agree that employees got what they were promised. But in many, many cases the plans were not managed in good faith. In these cases employees got what they had earned to date. But not what they were promised because when companies set up plans like these (which they were not forced to do) there is a statutory promise (effectively unenforceable) that they will manage the programs in good faith. This book provides ample evidence that the companies did not manage the plans in good faith. They plundered the plans to the benefit of executives and share holders and they spun the resulting demise to make most of America believe the fault lay with the plans themselves.

I love how you use the words 'plundered the plans to the benefit of executives and share holders'....

Nowhere did the companies say 'we will never change this plan... ever ever ever'.... and the companies paid what was PROMISED, which is what the employee had earned to date... you are not suggesting that an employee should be paid something they did not earn do you And in fact there were many employees who actually did get more than promised since if you were not vested, you became vested when they shut down a plan...

And again, the excess funding of ANY plan would not go to the benefit of the participants.... if you were in a DB plan, you got your DB.. nothing more... if the plan was fully funded or 100% over funded, you got your DB... so who actually 'owns' that excess funding The company... surprise....

I still do not see where the companies were not acting in 'good faith'... sure, the employees lost a benefit going forward, or was receiving a different benefit... but that is life... tomorrow my boss can come in and say 'we are cutting your salary by 20%'.... I don't view that as 'bad faith', just that I got shafted... to bad for me...

 

[youbet]

As it is now, though, people who would prefer the stability and security of a pension instead of the risk/return of a 401K/IRA-based retirement really don't have much choice. Sure, they can "buy a pension" by rolling their DC plans into an SPIA when they retire but the amount they have is still highly dependent on the market.

I disagree. But perhaps the 401k I participated is unique. We had an investment option called "money market." It was very stable and safe. Or, if you wanted to take a tad bit of timing risk, you could go with the short term bond fund. In either case, you could at the end then buy an SPIA.

I think the problem you're battling is wanting returns like you're in risky investments but stability and security like you're in ultra-conservative investments. It's hard to have it both ways. Unless some subsidization (probably tax payer) is going on.

 

[ziggy29]

I disagree. But perhaps the 401k I participated is unique. We had an investment option called "money market." It was very stable and safe. Or, if you wanted to take a tad bit of timing risk, you could go with the short term bond fund. In either case, you could at the end then buy an SPIA.

But that actually highlights the point: At the individual level, the only way to "avoid risk" is to put your money into money market funds currently earning 0.1%.

Pension funds, on the other hand -- assuming they are responsibly managed and don't overpromise -- can (relatively) safely take more risk over a very long period of time and no one participant shoulders the "market risk" where the timing of their retirement determines how much they get -- and indeed, whether they can retire at all.

Again, much like insurance, the goal of a pension fund is (or should be) to offload "market risk" away from the individual. It can be done responsibly if invested appropriately (and again, if they don't overpromise benefits). In other words, many people would rather forego the potential of 10% returns on their 401K if they could participate in something that would pretty safely be able to assume (say) 5-6% returns with the risk spread out among all participants to smooth out the ride.

Seeing as this would be optional, I don't know why those who don't like the concept would oppose it. It's not like I'm suggesting the end of the 401K as Teresa Whats-her-name was doing a while back.

 

[MichaelB]

More or less. I think the idea is that those who don't have access to a traditional DB pension plan (but wish they had one) could at least have the option to funnel some of their 401K/IRA contributions into a somewhat "pension-like" vehicle which trades potential for certainty. And yes, it should be optional and folks should be educated about the tradeoff.

+1

 

[MichaelB]

But that actually highlights the point: At the individual level, the only way to "avoid risk" is to put your money into money market funds currently earning 0.1%.

Pension funds, on the other hand -- assuming they are responsibly managed and don't overpromise -- can (relatively) safely take more risk over a very long period of time and no one participant shoulders the "market risk" where the timing of their retirement determines how much they get -- and indeed, whether they can retire at all.

Again, much like insurance, the goal of a pension fund is (or should be) to offload "market risk" away from the individual. It can be done responsibly if invested appropriately (and again, if they don't overpromise benefits). In other words, many people would rather forego the potential of 10% returns on their 401K if they could participate in something that would pretty safely be able to assume (say) 5-6% returns with the risk spread out among all participants to smooth out the ride.

Seeing as this would be optional, I don't know why those who don't like the concept would oppose it. It's not like I'm suggesting the end of the 401K as Teresa Whats-her-name was doing a while back.

In addition to market risk, the pension fund can also deal with age and longevity risk, which the individual cannot. So the "pension-plan" type offering for someone with DC/401(k) is potentially very desirable.

 

[ziggy29]

In addition to market risk, the pension fund can also deal with age and longevity risk, which the individual cannot. So the "pension-plan" type offering for someone with DC/401(k) is potentially very desirable.

I see it as a potential way to restore the "three legged stool" of retirement that fewer and fewer people have available to them as time goes by. I think FERS pretty much got it right, and I could easily see such an "optional portable pension-lite" as serving roughly the same purpose as the DB pension portion of FERS retirement would provide.