The pipe dream of public pensions

The reality is starting to hit home with State pension fund managers: the fun times are over. Heavily invested in the stock market, most public pension funds looked good as long as times were good, when in fact, they were sitting on the same shaky foundations that were holding up the rest of the Wall Street Casino.

Now, with many funds losing 40% and 50% of their value, and having to fund a golden pension plan that has to deal with people living longer, and the same retirement age from- oh, 30 years ago, there are starting to be cuts. Karl Denninger of the Market Ticker makes some suggestions based on changes being implemented in Florida. Ohio leaders still have their fingers in their ears saying “nah, nah, nah” in total denial:

  • Increases employee contributions to the pension plan ?for all future hires and many current employees by 1%.
  • Actuarial disclosure (and public posting of same) must be regularly performed and corrective steps identified to halt and reverse any unfunded liabilities.
  • Pensions are now computed based on the average compensation during the employee’s term of employment, not the last five years, and explicitly exclude any and all overtime or other “cramming” attempts. Further, the pension paid is capped at that average compensation. All “hazard pay” riders (e.g. additive amounts for police, fire and similar employees) are ended. Lump sum payments, annual leave payments (for vacation not taken) and similar are excluded. In short, only your base salary counts, and the average across your entire term of service is used, ending the abuse of playing games in the last couple of years to “goose” pension returns.
  • Retirement ages go up materially. The minimum retirement age is now typically 60, and with the exception of “special risk classes” (e.g. cops) you now need 33 years of creditable service. Pension payouts now cannot start before age 62 if retiring before July 1, 2011, and 65 thereafter. For “special risk” classes the prior 55 year age lifts to 60 as of July 1, 2011.
  • Municipalities can close their defined benefit plan, choosing instead to offer defined contribution plans (e.g. 401k equivalents.) An existing employee can transfer out of the pension system to that 401k-style system, but if they do they cannot transfer back to the pension system.
  • Finally, there is no grandfathering – this applies to all current and future employees, without exception.
  • via And Here It Comes: State Pension Systems – The Market Ticker.

If we also stopped the practice of double-dipping (working another government job while getting a government pension) we may automatically either get more use out of people-  as competent people stay on- and incompetent ones get cut loose after years of sucking at the public teat. Please also note how a some x-politicians end up with amazing pay state jobs after they lose an election for at least three years so they can get a bigger pension for life- this practice has to stop.

If the pension were really a pension- it would only be for when you stopped working, and allow those of us who are still working and paying for it, a chance to build our own pension plans- which are nowhere as rich as those provided to public servants. But, that’s a total pipe dream. Thankfully, our health care system is still not optimal and we can count on lower life expectancies since we still think it’s important to put 25% of our health care money into hands of paper pushers instead of into actual medical care. Just think if we cut that unnecessary expense and actually spent it on health care- how much longer the pensioners would collect.

Here’s the Dayton Grassroots Daily Show on the subject:

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11 Responses

  1. Greg Hunter March 31, 2010 / 7:43 am
    The NYT published an article on Sunday presenting the unfunded pension liabilities of individual states as a function of the State’s GDP.   Ohio is in terrible shape and what is not mentioned in the article is that even in those states the Cities in Ohio are probably in worse shape which will cascade down to the Taxpayers.
  2. truddick March 31, 2010 / 8:44 am
    I see that Esrati hasn’t educated himself on current proposals to stabilize Ohio’s pension systems–which already include several of the features listed here.
    Moreover, I find it unethical to tell employees that they’ll receive certain benefits in the future, and then to reneg on those promises.  The national economy hasn’t collapsed (yet), the stock market has reclaimed more than half of those 50% losses.
    Regarding the double-dipping situations: I can’t tell which is better for the system overall.  You want to  require a person to fully retire and never take another public-retirement-system job in Ohio; then you end up with an employee sticking around and getting a bigger pension in the end.  Let the person retire earlier and then be re-hired at a lower wage, and what do you get?  Lower salary for the taxpayers to fund, lower annual pension (it’s set on the final average salary at time of retirement), and continued payments into the retirement system as the person continues to work.  Which costs the taxpayer more?  Got anyone who can crunch the numbers?
    Now, when someone double-dips and is given the same salary instead of a reduced one–that’s a problem that ought to be addressed.
    All in all, this nation has been stupid about retirements.  We’ve allowed mega-corporations to make generous commitments and then to unfund them, making the contracts fraudulent.  We keep trying to make magic money to fund social security.  Now there’s a Harry Potter fix for state and municipal pension programs.  Sooner or later somebody has to pay for things.
  3. Civil Servants Are People, Too March 31, 2010 / 11:35 pm
    Interesting that one might choose the risky stock market 401k-style plans over a measurable and relatively stable source of income like a pension fund!   Seems almost contradictory to say that the market is bad, so therefore the pensions have it wrong – when they actually reduce the individual risk over the long run (in most places).
     
    Obviously, the pension funds need to be solvent.   If not, reasonable changes should be made to correct them.  Compare STRS to PERS and see the difference — PERS wins hands down.
     
    I agree it seems unfair to change the policy on existing workers.   Some will work in government as a form of service to the country regardless, but others have made life choices based on the benefits offered to them when they started or changed careers.
     
    On the other hand – shouldn’t we be encouraging the marketplace to provide better, more stable plans for our future senior citizens?    Having a strong public pension system (in some form, perhaps not the current form) will encourage the best and brightest to become public servants, and provide a more stable future for the middle-class.
     
    The market should step up, instead of asking the government employees to step down.
     
  4. David Esrati April 1, 2010 / 7:25 am

    @CSAPT “the market should step up”- you’ve got to be joking?

    It’s the sell-out by our “public servants” to special interest groups, that allowed the “Casinoization” of Wall Street- and hence the shady accounting used to mask the real costs of pensions and almost everything else.

    If you’d read the post properly- the 401K option is a Florida solution- not one that I’d recommend. Florida is run by some pretty stupid Republicans (remember- they elected Jeb Bush governor too).

    We need to rewrite our banking rules- and regulate stock markets to be investment tools- not a gaming table.

    And @Truddick- the stock market “rebound” is still smoke and mirrors- just because the valuations are up- that hasn’t made most institutional investors any where near pre-crash whole. Investors took it on the chin pretty hard- sucking all that money out to pay those huge bonuses to failure bankers came from somewhere.

    Pension systems with their guarantee’s for indefinite payouts- till death- are really unfunded mandates. If there is one place there should be a “maximum benefit payout” it’s here- not for health insurance (thankfully, the health care reform fixed that part). If you want a retirement pension- that’s guaranteed- do something like buy a rental property- or two, or invest in a real business that pays dividends and doesn’t play stock option games so execs can cash out with huge bonuses earned with YOUR money.

    It’s time for a total economic re-write of financial rules in this country – and a reevaluation of what kind of government we can afford.

  5. Greg Hunter April 1, 2010 / 9:39 am
    I love Karl and why should I write when he does it so much better.

    Some of these services are indeed important – or even essential.  But over the last 20 years or so we have changed a government job from something you do because you want to be of service to something you do to extract as much money as possible from your neighbor across the street – or next door.
    Witness the pension abuse loopholes that are being closed – and are generating the loudest screams.  The usual practice for years has been to use take the last handful (frequently three or five) years of service as the salary base, then pay that.  But “salary base” has nearly always included overtime, “hazard pay” and any other “add-ins”, including in some cases pay taken in lieu of accrued vacation time off!  The result is that many people “retire” from these positions with six-figure pensions that frequently exceed the base pay that they would have earned while on the job.  Further, any of these systems allow people to retire at 50 or 55, instead of the private-sector standard of 65 or even 67 (as is now the case for full Social Security benefits.)  Many of these pensions also provide full medical coverage – all paid in full.  And then you have the abusive changes made to state law and constitutions which effectively protect these payments as “super-senior” obligations that cannot be renegotiated or defaulted upon.
    Contrast this with a private pension plan which can and sometimes does default.  When private sector employees push too hard and abuse their pension systems, forcing them underwater, the PBGC comes in and takes over the plan.  This results in the plan forcibly resetting back to whatever it can actually fund, which frequently results in a 50% or more reduction in benefits for pensioners.
    Those who think that the “pain is over” need to look at state finances.  There’s nothing good going on in this regard and layoff notices are increasing rapidly at the state and local government level.  There isn’t a thing that can be done to fix this, as the distortions that drove the so-called “economy” over the last three decades are so outrageous as to expect them to be able to be maintained is laughable.
    Yet that’s a huge part of the “juice” behind the calls of “economic recovery” – the premise that we can pay retired firefighters and cops $150,000 pensions plus full medical insurance for 30 or more years as we can let them retire at 50 with full benefits.  At the same time we can have public employees that are dramatically overpaid relative to the private sector in their current jobs.
    All of this can be done while the entirety of the underpinning of the consumer and business sector – living beyond our means via home equity withdrawal – has literally disappeared and there is no possibility for that cycle to be restarted as more than a third of all mortgages are underwater on valuation.  And don’t look at commercial real estate loans – yesterday we were treated to a report showing that CMBS deterioration hit another record for the current month.

  6. Jeff (the other one) April 6, 2010 / 8:58 pm
    I would love to know where some of these numbers come from.  I know of no firefighters or cops who retire with $150,000 pensions and full medical insurance.  The firefighters that I see retire are paying well over $900 a month for health care and only receive 60% of their salary.  They are not fat cats living high on the hog, they are broken men limping into their golden years after 25 or 30 years on the line.  You Democrats can sell your friends, you can point your fingers and lump everyone who is promised a pension into a  group of abusers, but I won’t.  The lion share of pension receivers worked under the premise of 25 or 30 years for a little security and they damn well deserve it.  I have no problem with reform, tightening the loop holes and doing away with double dippers, increase the amount you pay in and increase the retirement age but you  should get what you were promised when you were hired.  How proud you must be to endorse a plan that does not grandfather those who are retiring or soon will be.  Let them figure it out, I mean, after all, rules change, sorry about your luck.  Just how many door greeters can Walmart hire?
    I am dumber now for having read some of the pension reform ideas.
  7. David Esrati April 6, 2010 / 9:29 pm

    @Jeff- the other one. These changes aren’t being put in place by “Democrats”- it was done in FL- home of a Republican governor and state assembly.

    Please pay attention.

    And- Firefighters and police officers are a very small part of the overall pension system for public employees- stop taking everything personally.

  8. Greg Hunter April 8, 2010 / 3:55 pm
    To summarize, unless we see our economies produce record growth levels over the next ten years (they won’t), we will live in a world where parents are pitted against their children, and neighbors versus neighbors. To understand that, look at the present funding gaps in all the pension systems, and combine that with the rate at which pay-outs increase, as well as the rate at which that rate increases.

    It will become clear to the working population that the soon unprecedented amounts and percentages of their wages that will go towards pension plans, will not be used for their own retirement, but are needed for that of the generation before them. And that will happen at a time when downward pressure on wages by unemployment will be massive.

    The only solution would be for the baby-boomer generation to voluntarily cut their own pensions by 50% or more, and return the remainder to the funds. That will not happen. Neither will there be politicians brave -let alone numerous- enough to force such cuts in any meaningful sense, not until the baby boomers are no longer the largest voting block in our societies, and rest assured, by then it will be way too late.

    For those of you who are already retired or will soon do so, your pensions will be cut drastically within probably 5 years, and certainly 10 years. Think a 75% cut. For those of you under the age of 50, assuming you’d retire at 65, and this is something I’ve said many times before, there will be no pensions, period. 

    What there will be is enormous generational battlefields, both metaphorically and literally, in your families, communities and societies. A situation in which pensioners sit by their private pools while their grandchildren scavenge for food would never last long.

    The age of entitlement is already over, but, except for the one in a million, you will be far too late in recognizing and realizing that. Let alone adapting to it.

    A little more on pensions from the Automatic Earth.  Good Stuff…

  9. Greg Hunter June 15, 2010 / 1:37 pm
    More on pensions from Karl and the Great State of Illinois who brought us the audacity of a dope, the sellout to Wall Street – Barak Obama.
     

    Yes, derivatives.  In teacher pension funds.  How bad is it?

    After losing $4.4 billion on investments in fiscal year 2009, and 5 percent on investments in fiscal 2008, the teachers’ pension is now underfunded by $44.5 billion, or 60.9 percent, according to the Commission on Government Forecasting and Accountability’s March 2010 report.

    They have 40 cents of every dollar they need.
    So what does someone who has no accountability – that is, who won’t be jailed if they make it worse rather than better, do?
    Why they go to Vegas and bet it all on Red with a crooked croupier in a crooked casino!
    Seriously.

     
     

  10. Herb Kelpman June 15, 2011 / 5:02 pm
    LOL no pensions for the public sector. I’ve been collecting over 100k for the past 10 years assholes. Frak you two losers!

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