Ponzi Pensions & Reality

Dog said:
Sad situation. But I'm shocked at a $48k pension for 29 years of service specifically for a small town in a depressed area. She must be doing pretty well with with SS and her pension compared to her neighbors.


Sent from my iPhone using Early Retirement Forum
Click to expand...

She might not get SS, it depends how it was set up. I know some state employees do not participate in SS.
 
I do not understand why there is so much pushback on the city when CALPERS, supposedly the premier pension folks in USA charged 30K per year to fund a pension with only 4 retires who were paid over 100K per year, how in the world did that work out. Obviously the city dropping out was a mistake but really why was CALPERS ok with 30K per year when they needed 1.6 million and are charging 7.5 percent interest on the balance?
 
Running_Man said:
I do not understand why there is so much pushback on the city when CALPERS, supposedly the premier pension folks in USA charged 30K per year to fund a pension with only 4 retires who were paid over 100K per year, how in the world did that work out. Obviously the city dropping out was a mistake but really why was CALPERS ok with 30K per year when they needed 1.6 million and are charging 7.5 percent interest on the balance?
Click to expand...

You're not looking at the bigger picture: the city started contributing when the workers started working. They worked 25-30 years before collecting the pension. That money grew - they didn't start paying into CALPERS in 2001.

And with an annual pension payout to the retirees of (I think) $120k/year, CALPERS would need a decent chunk to finish paying out those pension payments for the projected life of the retirees.

In many pension funds, there is some allowance for current contributions funding current retirees. For instance, my fiance is a teacher in Missouri. Missouri state teacher's pension is pretty decent as far as financial footing - and even they rely on roughly 20% +/- of the current retiree pension check to be covered by current workers' contributions, AND about 20% covered by current school district's contributions, with only about 60% covered by investment earnings. And MO teachers are not covered by social security, so their plan is probably a little more conservative than others....although I see on their website where they are targeting (and probably assuming) an 8% return on investments for their actuarial assumptions.

However, similar to Social Security, the % of salary that the school districts and teachers have had to pay into the system has steadily increased over the years (14.5% now, but was around 10% or so many years ago).
 
If anybody wants to delve into the minutae of the problems with Calpers, the website nakedcapitalism has done a number of articles. See: You searched for calpers | naked capitalism Many of these are so technical that they go right over my head. One of the most fundamental issues however is that they're predicting ROIs that are more than what they're actually getting. Thus, "Ponzi" is pretty close to reality.

Things will get ugly, it's only a question of when (like with Detroit's pensions, and soon Chicago's)
 
Something doesn't smell right. It would cost about $707k just to buy a SPIA to pay Betty's pension benefits ($4,000/year for life) so if she is at all indicative then the $1.6 million Calpers is demanding for 4 retirees doesn't sound that bad... but it is hard to tell given scant information.
 
Look for this scenario to play out in many more municipalities in the years to come.
 
MooreBonds said:
......
In many pension funds, there is some allowance for current contributions funding current retirees. For instance, my fiance is a teacher in Missouri. Missouri state teacher's pension is pretty decent as far as financial footing - and even they rely on roughly 20% +/- of the current retiree pension check to be covered by current workers' contributions, AND about 20% covered by current school district's contributions, with only about 60% covered by investment earnings. And MO teachers are not covered by social security, so their plan is probably a little more conservative than others....although I see on their website where they are targeting (and probably assuming) an 8% return on investments for their actuarial assumptions.
......
Click to expand...

This sounds pretty terrible, having current employees paying the pension of retired ones, because it means the contributions of the retired ones was too low to be self funding.
So the current employees are not even getting their full investment set "aside" for themselves as 20% is being siphoned off to pay for the retired ones. This means the current employees are going to be really cheated.
This truly seems like a ponzi scheme.
 
jazz4cash said:
My point was just that the numbers are not huge.


Sent from my iPhone using Early Retirement Forum
Click to expand...

Yes. It's hard to believe the city can't cut some corners and raise taxes a bit to accommodate these four aging retirees until they no longer receive their pensions. The $30k a year the city is saving by not funding the pension system is a start.
 
The ponzl reference is being taken way to far in this thread. I know it's a good way for the author to create interest but just because current income is being used to meet current liabilities doesn't make it a ponzi scheme. The big crime in a true ponzi scheme is lack of legitimate investment activity IMO.
 
jazz4cash said:
The ponzl reference is being taken way to far in this thread. I know it's a good way for the author to create interest but just because current income is being used to meet current liabilities doesn't make it a ponzi scheme. The big crime in a true ponzi scheme is lack of legitimate investment activity IMO.
Click to expand...

Perhaps the definition is being loosely applied. But even most ponzi scheme do perform some investing of the money, rather than have it all sit around in bags on the floor.

But the pension plans that use current contributions to pay for retired folks is much like a ponzi scheme. If they wanted to fund it from current contributions, then there was no need for the retired folks to contribute a penny until one of them hit retirement, then tax everyone to pay for the retired fellow.
Here there is lack of investing or sufficient contributions for each retired person to actually retire.
 
Sunset said:
............
But the pension plans that use current contributions to pay for retired folks is much like a ponzi scheme. If they wanted to fund it from current contributions, then there was no need for the retired folks to contribute a penny until one of them hit retirement, then tax everyone to pay for the retired fellow. .............
Click to expand...
Hey, wait a minute. Isn't this exactly how SS works? And didn't the initial recipients basically get something for nothing? :LOL:
 
travelover said:
Hey, wait a minute. Isn't this exactly how SS works? And didn't the initial recipients basically get something for nothing? :LOL:
Click to expand...

Pretty much. And while my fiance's pension that I cited as an example doesn't have as great of a history of SS withholding increases there has been a definite increase payment over time, currently at 14.5% paid by employee and 14.5% paid by school district. I wouldn't be surprised if that continues its steady increase, to be 15% each, then eventually 16% each...much like SS will probably also increase the % tax.

What really wakes one up is when you consider that SS withholding started out at something like 1% withholding on just the employee, then increased over time to become the current 12.4% total employee/employer (and likely going higher still). Increases like that are nothing to sneeze at, and show just how ill-fated the initial plans were, where you have to hike funding from just 1% to 12.4% per worker!
 
My main question, which the article does not address, is are public pensions protected at all by the State of California or its constitution.

If the laws are written so that the pensions are only protected subject to a municipalities willingness to pay, then that is no protection at all.

My guess, from how this went down, is that there is no legal protection for public pensions in California at the state level.

Would be interested if anyone knows the details on this.

-gauss
 
Last edited:
gauss said:
My main question, which the article does not address, is are public pensions protected at all by the State of California or its constitution.

If the laws are written so that the pensions are only protected subject to a municipalities willingness to pay, then that is no protection at all.

My guess, from how this went down, is that there is no legal protection for public pensions in California at the state level.

Would be interested if anyone knows the details on this.

-gauss
Click to expand...
California courts decided that the pensions were guaranteed but came up with a hair brained idea that pension guarantee is only for a "reasonable" pension and that calculation can be changed if the state is not able to pay, so in essence if there is no money government can cut
California county unions appeal to state supreme court on pension decision | Northern California Record

But more interesting is that starting next year all business in California with more than 4 employees will be required to join funds in with the CALPERS, which is woefully underfunded, unless they already have a pension plan. California’s pension deficit is $77,000 per household and CALPERS is requesting that the rate of contribution be changed from 3 percent presently approved to 5 percent and rising over 5 years to 10 percent of California worker’s salary.
http://www.washingtonexaminer.com/the-state-government-pension-crisis-you-will-be-made-to-care/article/2604191
 
Last edited:
When you fund your own pension, you understand just how much it takes.
 
@Running_Man
Thanks for filling in the legal details on how this can occur.

-gauss
 
CALPERS is huge and until now I didn't know they were in trouble.

My girlfriend has an interest and me thinks I will advise her to transfer to an IRA.

I do not trust pension plans.
 
I think that is the risk the employees took. Just as she would have said before the issue arose that anyone could have gotten a government job and received a great pension too.

No pension is 100% safe. Public or private. It's not right, but unless there is some sort of claw-back provision, it is what it is.

The reality is, Governments receive plenty of money; they just prefer to spend it on other things than a pension program.
 
I saw some paperwork they sent her, she asked for my advice.

She is divorced from her husband who is a CA Fireman.

CALPERS gave her some choices, take the dough (10% penalty, not 59.5), transfer to IRA or just leave it here for 6% forever. Six percent forever sounded good to me...

Now it doesn't sound good anymore.
 
RobbieB said:
CALPERS is huge and until now I didn't know they were in trouble.

My girlfriend has an interest and me thinks I will advise her to transfer to an IRA.

I do not trust pension plans.
Click to expand...

As a local agency, miscellaneous member of CalPERS, I have been collecting a small pension from CalPERS for around 10 years. I worked for a large local government in the 80's and easly 90's that has always paid its contributions to CalPERS and is in no financial danger of not doing so.

The crediting rate for contributions is high, around 7 percent when I was accruing, before I retired. Over time, that crediting rate may not be sustainable, and agency and member contributions may increase. That does not mean the system will fail.

I would NOT advise someone to pull their money out of CalPERS based on a headline story. Dire predictions for CalPERS' future have been circulating for many years, even decades. If you are nearing retirement age and you do/did not work for a small, broke member entity, you are likely better off leaving your contributions in the system and collecting the pension.

Do the math, and then keep a close eye on the health of the system. And, of course, save and invest in other vehicles as part of your multiple streams of income approach to retirement security.
 
RobbieB said:
I saw some paperwork they sent her, she asked for my advice.

She is divorced from her husband who is a CA Fireman.

CALPERS gave her some choices, take the dough (10% penalty, not 59.5), transfer to IRA or just leave it here for 6% forever. Six percent forever sounded good to me...

Now it doesn't sound good anymore.
Click to expand...

Sorry, I missed this. If she is close to retiring or at least to taking the CalPERS annuity, have her make an appointment with CalPERS to get them to do the annuity calculation. Then do the math. In general, most people are better off with the monthly retirement check.
 
Thanks.

She is 51 and a half and has a split (divorce decree) of her husband's pension and I have no idea how this works. She is working as a sub in the CA public school system now.

I'm going to have to research this some me thinks.
 
Did/does he work for a local agency or did/does he work for the state? Employees of local agencies are "miscellaneous members." Miscellaneous members are not eligible for CalPERS health insurance and some other benefits. Retirement ages and percentages also vary by agency.

I'm not sure what divorced spouses are entitled to, so my suggestion is to get as much information as you can about her account on-line. If she is entitled to an annuity at 50, go with her to a CalPERS retirement appointment and have them run the calculations.

ETA: Make sure CalPERS has a copy of the divorce decree. They need that to make the allocation.
 
Last edited:
I'm sure they have it, that's why they sent her the paperwork. As I remember an annuity was not an option. She could cash out, transfer to IRA or leave it in the system at 6%.

He is a city/county fireman, she was a stay at home Mom after the first child and has not worked in the 15 years from first child to divorce.

I'll look at it again to be sure.
 
You must log in or register to reply here.

Latest posts

Back
Top Bottom