Reading about municipal finance makes the freewheeling world of VC look positively conservative. E.g. there's this concept of a "13th check," at the end of the year in many poorly run cities. Basically, and surplus growth in the city's retirement funds were distributed to pensioners as a sort of annual bonus, rather than left in the general account to help make up for eventual shortfalls.
There's a serious moral hazard for politicians. It's easy to give constituents services today at the expense of benefits in the future, when they'll be out of office. I wonder if a law that clawed back these government official's pensions if they were found to break from good accounting practices, would be a deterrent?
> I wonder if a law that clawed back these government official's pensions if they were found to break from good accounting practices, would be a deterrent?
No, the officials making these pension decisions are politicians who mostly, while they may have government pensions, have lots of other resources, so that the pension doesn't matter much. The only thing it will deter is non-independently-wealthy people from becoming politicians, but there are barriers to that already.
> No, the officials making these pension decisions are politicians who mostly, while they may have government pensions, have lots of other resources, so that the pension doesn't matter much.
That's likely true in large cities, but most cities (and thus most city governments) aren't large.
Even small city ex-politicians go into highly paid political consulting, where some company who wants to get into real estate development or bidding on public contracts will hire them to navigate the red tape and do introductions. They also end up as communications directors for whatever lobbyist group they did favors for, like banks and energy/utility corps making well over $300k/year. None of them need to rely on their city pensions for retirement.
> That's likely true in large cities, but most cities (and thus most city governments) aren't large.
Many small city elected officials are part-time, often unpaid or with a largely symbolic stipend: they don't have public pensions from those positions at all. So they are even less subject to “if you make bad pension decisions, we’ll take your personal pension away” leverage than fulltime big-city and state politicians, who are likely to have (but not depend on) public pensions.
>I wonder if a law that clawed back these government official's pensions if they were found to break from good accounting practices, would be a deterrent?
Yes, but the people who pass the laws are the people who would be affected. You'd have to find a simple majority of people moral enough to do it. I think today, that's a hard sell.
The only way that'd happen would be via a direct ballot measure[1]. Even then it'd be a tough sell.
More and more I'm thinking the only outcome for a lot of these States and municipalities is going to be bankruptcy. The long term austerity measures that are needed are too onerous and the entrenched powers are too corrupt to do anything about it until it's too late.
Convince me, as someone that wasn't even alive when these pensions were being granted, why I should pay for gold-plated pension plans far above and beyond what I'm expecting to get in my own retirement when I'm seeing less and less value from the services those would-be pensioners provide and in general contribute significantly less "value" to society than the work I do.
...
Note that I'm not as anarchist or libertarian as the above makes me sound, but it does emphasize the point I'm trying to make: I don't think you'll ever convince the current generation to pay for the previous one so I don't think there will ever be a collective willingness to pay "moderately higher" taxes. My bet is on an ugly outcome where the old and young battle it out in the courts between haircuts to pension plans and higher taxes with politicians muddling their way to an ugly middle ground that no one likes.
That's fine if you are angry about it, I wasn't making a moral argument about what should be done, I was making a point about the scope of the problem.
An unwillingness to collectively pay taxes is also a major reason our infrastructure is falling apart. In the scheme of things it wouldn't take all that big an investment to dramatically improve things, it's just fallen out of fashion.
If you don't, you won't be compelled to pay. Pack up and move somewhere that's not fucked.
If, OTOH, you bought property, you took on this risk in doing so. You should have priced in the pension shortfall, and the expected future tax repercussions, when you made your purchase, and the seller should have born the cost of their jurisdiction's mismanagement in the form of a reduced property value.
The states could raise property/land taxes and eliminate corporate tax cuts and tax loopholes.
That wouldn't be a 1% friendly solution though - too much of their wealth is tied up in land and equities. It might mean that landlords in the Bay Area couldn't collect rents of $6,000 a month for doing nothing. Most of that unearned cash would flow in to state coffers instead.
It's ironic, because the Howard Jarvis Taxpayer foundation (the group behind prop 13) tried to justify prop 13 by saying that raising property taxes would hurt the elderly. Californian voters believed them.
Now that their actions created a massive hole in California budgets, they advocate for stripping California pensioners of their money as the "fiscally responsible" solution.
People believe them now too.
Edit: For those erroneously believing propaganda that hiking taxes leads to an automatic exodus:
The 1% are not equally distributed, or indeed necessarily distributed at all, in all the places with excessive pension obligations. Taxing them is not a general solution.
The other problem is that we don't just need to come up with money; we need to find ways to convince/force governments to stop making these promises in the first place. A government promise about something it'll do 30 or 40 years in the future is not quite worthless, but it's just not an institution capable of reliably keeping it.
(Whatever politics you think drives me to say that, I mean that and I mean lots of other things too. If nothing else, in the general case, a legislative body can not truly constrain future legislatures, who can always just vote to not keep their old promises, made by people who are mostly not here anymore, for constituencies that were growing in power 30-40 years ago but are now dying off and not very useful to the current 30-40-year-olds in the legislature. Looking to governments to keep promises so many decades in advance is far more risky that many people seem to account for on all kinds of levels. The history of the 20th century suggests that counting on your government to even exist in 40 years is, in general, not the safest bet!)
In CA specifically, I don't see the threat of bankruptcy being enough to overcome prop 13.
Plus if it was in the cards there would be a massive exodus that would further erode the tax base which would be a vicious downward spiral.
> ... and eliminate corporate tax cuts and tax loopholes.
Referencing "eliminating tax loopholes" is like saying "We need to do something about guns". It's meaningless without specifics.
> That wouldn't be a 1% friendly solution though - too much of their wealth is tied up in land and equities.
Equities aren't taxed by States or municipalities, at least not from a "wealth tax" perspective. If such a wealth tax was passed I'd immediately invest in U-Haul and other mover services.
Raising income taxes enough to cover these obligations would lead to an exodus of high earners as well. That doesn't address the municipal pensions either as they don't necessarily have income taxing ability nor high earners to tax.
> Now that their actions created a massive hole in California budgets, they advocate for stripping California pensioners of their money as the "fiscally responsible" solution.
The fiscally responsible thing to do would have been to not make promises to pensioners to buy their votes. Sadly that continues to this day. Try running as a politician that's going to address this problem with any form of austerity measures for the people involved and see what happens.
If it were primarily about providing housing as opposed to monopoly access to land, there wouldn't be a burned out house on the market in the Bay Area currently going for $800k.
The amount of free money yielded in real estate appreciation and rents in California is staggering. It could easily fill any state budget hole if the political will was there to take it from the people who did not earn it and give it to the people who did.
>The amount of free money yielded in real estate appreciation and rents in California is staggering. It could easily fill any state budget hole if the political will was there to take it from the people who did not earn it and give it to the people who did.
People didn't earn the property they own? I hesitate to ask you the question, but if things are so expensive, and you don't currently own property, why live there in the first place?
I'm all for decreasing the wealth gap and the wage gap, but what you seem to be asking for is free shit.
If you bought property in the 1980s that cost you $50k and sold it today for $900k what exactly did you do to earn that $850k? Are you actually saying that it is not free money?
That's the effect that untaxing land (e.g. prop 13) has on property values. That's the money that would be going toward unfunded pension liabilities were the land not untaxed.
Paid for it, maintained it for 38 years, paid taxes on it for 38 years, paid interest on it for 30 years, paid insurance on it for 38 years, paid a realtor to sell it, made sure no junkies squatted it for 38 years, took the risk of the government force buying it for pennies on the dollar, took the risk of an earthquake destroying it, took the risk of other events completely devaluing it, didn't cash out for 38 years, etc.
Also took the risk of it decreasing in value relative to the dollar in 38 years.
I mean if it's free money, why don't you go buy up a $900K property and get some free money in 38 years? There is a little more to it, and of course, you realize, that it might not have increased in value over 38 years like it did the last 38 years.
Of course luck has a lot to do with it. I've lived in my house for about 15 years or so (not in CA). It's nearly doubled in value, but the interest payments alone over time cost about as much as the property, so it's a break even, then add inflation and I've probably lost some. I live in my house though, and I'm eagerly awaiting the day when I can live here without any more mortgage payments.
> There's a serious moral hazard for politicians. It's easy to give constituents services today at the expense of benefits in the future, when they'll be out of office.
That kind of law has so many vested disincentives to getting passed that you might as well give up on it. There are already fiduciary obligations written into the law. Those need to be enforced.
I find this new wave of going after people’s pensions to be super unseemly. All of this information has been public for decades, if you view the voter as “the board”, there’s culpability in not managing politicians and allowing this situation to spiral.
If we are going to be adults, these pensions are contractual and need to be paid out. It’s not a responsible behavior to use retirement plans as weapons at the 11th hour.
> If we are going to be adults, these pensions are contractual and need to be paid out
If we're going to be adults, we're also going to recognize that many of us were not adults when these contracts were drawn up and signed. Many of us were never even born, and some of those who were of the right age opposed them to some degree or another.
Maybe we should recognize, in a truly adult fashion, that the mistakes of previous generations should not be passed on to the current generation. Maybe adults should recognize the math just doesn't add up.
> It’s not a responsible behavior to use retirement plans as weapons at the 11th hour.
It's not a responsible behavior to over promise pensions and bankrupt dozens of states either. Nor, in the pursuit of fulfilling those reckless promises, is it responsible to bankrupt future generations.
> If we're going to be adults, we're also going to recognize that many of us were not adults when these contracts were drawn up and signed. Many of us were never even born, and some of those who were of the right age opposed them to some degree or another.
Which curiously, is exactly the solution we have in place now: reduced benefits for new employees to compensate for outsized ones for retirees. Should they stand for this?
> It's not a responsible behavior to over promise pensions and bankrupt dozens of states either. Nor, in the pursuit of fulfilling those reckless promises, is it responsible to bankrupt future generations.
You're ignoring the substantial hand states have had in making this crisis. Several have continually neglected their annual contributions. Maybe they were backed into a corner when tax reciepts fell in 2008, maybe it was a political self-inflicted wound. When states like Kansas or Colorado cut taxes and take on substantial debt, it's pretty goddamn odious to point to budget shortfalls and say "Sorry employees, we can't make our pension obligation, we have interest payments to make!"
Moreover, when demanding pensions take a cut while paying lenders 100 cents on the dollar, you're concentrating investment losses onto those least able to afford it.
> If we're going to be adults, we're also going to recognize that many of us were not adults when these contracts were drawn up and signed.
So are you okay with a future generation repudiating their contracts and obligations with you when you reach retirement age? After all, all of us are someday going to part of a "previous generation" and none of are so perfect that our generation has made no mistakes.
Why do so many people behave as if aging is something that only happens to other people?
That’s why defined contributions in individual accounts make sense. The promise is made good on a paycheck-by-paycheck basis instead of decades in the future. And the amount contributed has to make financial sense now, which eliminates the risk of inability to pay.
There are solutions that provide the benefits of retirement without pitting young against old.
I'm all for this generation deciding, collectively, that the previous generation did not appropriately fund government and making a deal -- through estate transfer taxation -- to make government whole again. How that's structured is up to debate, but let's not spike today's economy and today's society when the debt problem can be reasonably solved over a longer period, causing less downstream effects. Everyone from the previous gen. is culpable in this, but these people are also our fathers & mothers, so let's not try to handle this situation in the most abrasive way possible.
Even when pension reform proposals do not change benefits for current employees and retirees, and only apply to new hires, unions will resist fiercely, such as this case in Kentucky.
> KEA opposes the pension reform, in which new hires will have to enter a hybrid cash balance plan, which differs from a traditional pension, and would limit new sick days that teachers can put toward their retirement.
The issue being of course those same voters were in many cases are the recipients of said pensions. And those who were not and still voted for such things enjoyed the benefits of cheap government services without having to pay full freight.
Now that they enjoyed not having to fund the pensions for 30 years, they are retiring and expecting the next generation to pay for them having their cake and eating it too.
I find it very difficult to really figure out where the greater moral hazard here lies. As you state this was a problem everyone knew about when setting these public pensions up and it was easier to kick the can down the road. You will find it very difficult to convince me that the average union member in the 80's didn't know the sweet deal they were getting. It was a trope growing up in the 80's/90's to hear adults talk about "scamming" the overly generous pensions systems of the day.
I think it's interesting public unions in Illinois advocated 30 years ago for enshrining pension benefits into the state constitution. That language was added specifically because the public unions knew the deals they were making with politicians were not fiscally sustainable.
At this point I don't see a good way out and something major will break at a societal level before it gets fixed. There simply is no way to pay for these promised benefits and still maintain local and state government at a functional level in many states. I don't think bailing them out federally is an answer either - again for moral hazard reasons. I also don't think quadrupling taxes on the next generation is morally any better either.
In many ways this discussion is moot. The math is so overwhelmingly bad in some places it's simply not fixable from the revenue side only. Everyone is going to have to share some pain here, and that includes those receiving benefits.
The federal bailout is exactly what is going to happen. The Pew numbers are somewhat optimistic in terms of overall liabilities. My estimation (and its just that) is that when we really dig in we are going to find that things are much, much worse. Some states will have their budgets overwhelmed with pension costs and I don't think there will be the political will to say, "Well Massachusetts, best of luck. This is what you voted for and now the tab has arrived."
Washington will also look at this as an opportunity to take more power from states and move it to DC. Of course they can also print/borrow money do this.
>I think it's interesting public unions in Illinois advocated 30 years ago for enshrining pension benefits into the state constitution. That language was added specifically because the public unions knew the deals they were making with politicians were not fiscally sustainable.
More likely it was added because they knew that there would eventually be a concerted political effort to strip them of their pensions )and raid those pensions) by a combination of business lobbies and wall street.
>I also don't think quadrupling taxes on the next generation is morally any better either.
What is your moral objection to taxing unearned income at a higher rate?
If you propagate debts far enough, you are effectively trasferring wealth from not-yet voters to existing voters. In other words, taking from those who don't have a political voice yet.
Wall St (well most of it) would not want to strip people of their pensions. There is too much money in managing the assets in those pensions and they would I am sure advocate for federal money to make up for the shortfall.
In many cities, they will be impossible to pay out. In the 2030s, my city will need to double its revenue to pay pensions as well as maintain services, but that won’t happen since revenue is falling. If contracts are going to be broken due to insolvency anyway, it makes sense to gently break them now to let younger employees react while taking care of the eldest who can change nothing.
My personal problem with the deficits is that the people who agreed to these terms are retiring and got either inflated pensions or lower taxes (as a result of under-funding the pensions).
So, younger adults who are just entering the workforce are going to shoulder the burden for paying for these deficits based on decision made when they were children or not even born.
These situations happen not because of any particular cases of mismanagement or lack of overseeing from the voting public. They are a fundamental feature of how incentives are structured. The idea that people can just "manage politicians" better is ridiculous.
The whole point of a pension is to accept lower pay today to not have to worry about tomorrow. It's a structural way of dealing with the fact that most people don't know how to plan for the future and, before, just ended up dying in the streets in their 60s.
That doesn't answer the question of why they shouldn't face counter party risk like everyone else though. Obviously, the government also doesn't know how to plan for the future.
What's wrong with dying in the streets in their 60s? They're better off than the 99% of humanity that lived before them. Why should the next generation pull the weight of the previous?
In Kentucky, the situation is dire. KY’s pension system is ranked as the worst in the nation across several metrics and agencies. The pension system was written into our constitution as an “inviolable contract” with state employees. [0]
Our current governor is the first to attempt to do anything about it in decades, and is being blasted by unions, the press, and the public for it. He’s most likely destroyed any chance of re-election by pushing hard for reform. He also hasn’t done a great job of building consensus, to be fair.
The NEA/KEA especially has vehemently disagreed with any proposed reform. Teachers have walked out today in protest of a bill that did not affect any current state employees.
It boggles my mind that people respond to this topic so irrationally. It’s like a patient arguing with their doctor over a diagnosis of cancer.
The problem with Kentucky and many other states is that the politicans raided the pension fund during good times to fund government operation, and then acts surprised when it's facing a huge shortfall. So it's disingenuous to paint this as greedy teachers and public servants when it was grossly mismanaged on the state politician side. However that seems to be a certain faction's goal.
In addition, Kentucky teachers have worked under the assumption of getting a pension because the state never extended social security to them. They worked with lower wages and no future social security with the promise of pension would be there for them, sometimes as their only retirement income. How can you go back and threaten this pension when teachers took these low paying jobs under that assumption?
"move fast and break things". Seriously though, short-sightedness and disregarding externalities like other people's lives is endemic in all areas of life. Sad world we live in.
Yes, I totally agree that the problem does not come from teachers. The problem comes from decades of shortsightedness of lawmakers.
I only mentioned teachers because of their response, which is largely irrational. No ones benefits are being taken, the state is just ending a program that is unsustainable.
The private sector did this decades ago.
What happens if the state government goes bankrupt? That is not outside the realm of possibility with the current crisis.
It works this way in a number of other states. Ohio teachers (perhaps only some, I'm not sure) give up their social security in order to collect from the state teacher's pension fund, regardless of whatever they've already paid into social security. Seems a little crazy, although until very recently the pension fund appeared to be doing quite well. (they just suspended a cost of living increase for the first time ever, which is not the worst thing in the world, but I certainly am curious as to why their fund's performance has been so mediocre as of late)
> Teachers have walked out today in protest of a bill that did not affect any current state employees.
That bill is essentially a reduction in compensation for future employees, isn't it? You might not agree with their priorities, but there's nothing irrational about teachers objecting to that.
> The NEA/KEA especially has vehemently disagreed with any proposed reform.
Did any of the proposals include just raising taxes to fix the pension fund? Mathematically, it's not like there is really a wide array of options if you're going to honor the constitutional "inviolability" of that contract (which I'm sure the teachers want KY to do) and actually keep the pension going.
> You might not agree with their priorities, but there's nothing irrational about teachers objecting to that.
I mean if your lifeboat is sinking why would you insist on cramming more people on? Axing pension benefits for future employees is much preferable to what would happen to current ones if the state goes bankrupt.
KY annually generates $2,600 of revenue Per capita through taxes. There is an estimated $15,000 liability Per capita over the next 30 years. That is if nothing gets worse.
Some oversimplified calculation: $15,000 over 30 years would be $500/year, equivalent to a 20% tax increase.
Increased taxation cannot resolve the crisis alone.
But, the larger point is that there has not yet been any reform of the current situation
Kentucky's state income tax rate is between 2-6%. If it would only take 20% increase in state tax receipts to make their pension system solvent, that's just a little over 1% increase in effective tax rate, which would still leave KY in the lower half of states by tax burden. If you make the tax rate change a bit more progressive, say 2% at the top, it could be zero change in income tax burden at median income and below.
Kentucky also gives favorable tax treatment to retirement and pension income, so if you wanted to reduce a percived moral hazard of who pays and who benefits, KY could simultaneously reduce the preference given to lower the required rate changes further.
Increased taxes can solve the situation fairly trivially, and still leave KY in the middle of the pack for total tax burden.
More like politician or candidate hires the actuarial consultant which will use the most liberal assumptions they can to make the costs appear as cheap as possible. And then not even fund to those calculations, because who is going to force them to?
Or in many states, use the surplus from pension funds to operate the government, writing an IOU they know future governments won't be able to pay.
Unsurprisingly when the shortfall comes the same politicians who borrowed will be shouting how pensions are unsustainable.
In New York, the pension fund is firewalled from the state budget and run fairly independently.
After the last recession, the pension fund made several changes in conjunction with the unions:
* Ensured the forecasted return estimates were in-line with reality (7%, which it has exceeded in the past decade)
* Introduced a new tier so new employees contribute for their whole career, with contribution rates progressively increasing as you earn more
* Introduced a limit on the final average salary that determines pension payout
* Lengthened the window of final salary calculation and introduced rules preventing large overtime variances counting towards this calculation.
Still a decent pension system if you can vest, but with reasonable expectations set. As a result, NYS is one of the best funded pensions in the country and in the upper 90s% of future funding levels.
We need to eliminate all public employee defined benefit pensions and replace them with defined contribution plans. Pensions are simply too risky for both taxpayers and retirees. Politicians can't be counted on to fund pensions properly. Many local governments will go bankrupt in the coming decades due to inability to meet pension obligations, which will result in cuts to critical government services and retirees forced by bankruptcy judges to take benefit cuts.
>retirees forced by bankruptcy judges to take benefit cuts
These people have already sold their services for a promised benefit which is now not being given to them. If there is bankruptcy it should come at extreme costs to the extent that the voters in the location feel pain equal to those who are having their pensions cut. Clawbacks, criminal convictions, liquidations, ensuring that the pain is not felt just by those who are having their benefits stolen and given to someone else.
That's not how bankruptcy laws work. Voters will suffer some pain in the form of municipal service cuts and possibly higher taxes. But if current services are cut too far or taxes raised significantly then residents and businesses will simply leave, thereby further eroding the tax base and making it even harder to meet pension obligations.
This is reality and no amount of whining about fairness or past promises will change it.
Bankruptcy laws should not allow a private entity to go through bankruptcy and continue to operate while discharging its debts. The same should apply to public entities as well. That they may currently allow this is something we need to fix.
If we cannot ensure debts to be met under law, then we should forbid the debts from existing to begin with.
That comment displays a rather shocking ignorance of the intent behind bankruptcy laws. When a private company is insolvent it's almost always better for the creditors, employees, and other stakeholders to work things out in reorganization rather than liquidating. Removing the option to reorganize would increase the cost of capital, reduce economic growth, and increase unemployment.
While municipal corporations can dissolve, that wouldn't solve anything. County and state governments can't afford to pick up pension obligations on behalf of cities. And we'll probably find that some entire states such as Illinois can't pay their pensions. There's no way for a whole state to simply stop existing.
> We need to eliminate all public employee defined benefit pensions and replace them with defined contribution plans
How does this solve the problem? 401(k)s in the private sector have been a complete disaster. Most 401(k)s are also hugely underfunded.
As far as I can tell, the only thing defined contribution plans accomplish is shifting the blame for underfunding and poor investment performance to employees, while enriching the financial companies that collect account and transaction fees.
Individuals have control over their own IRA/401(k) contributions. They are "fully funded" up to whatever that individual wants them to be, and that amount of money will be available to them when they retire (+/- investment gains/losses). You can argue that people aren't putting enough money in their IRA or 401(k)s to retire, but that's not "hugely underfunded", that's short-sightedness or circumstance.
Pensions are hugely underfunded because states haven't been setting aside enough for promised benefits. The equivalent would be me sending a check to my IRA or 401(k) institution and them taking 20-30% of that money intended for my retirement account and putting it somewhere else instead. That's fraud and it's illegal in the private sector (c.f. Bernie Madoff). Makes you wonder whether it should be illegal in the public sector, too?
> You can argue that people aren't putting enough money in their IRA or 401(k)s to retire, but that's not "hugely underfunded", that's short-sightedness or circumstance.
The end result is the same: most people don't have enough money to live comfortably on in retirement. That's what I mean by shifting blame. Sure, it's not the government's fault you don't have a healthy retirement account, they didn't rob your pension fund, you were just "shortsighted".
There's no mystery here, we've known since the institution of Social Security that almost nobody saves enough money for retirement if left to their own devices. Shifting to (nominally) employee-controlled defined-contribution plans just means we have only ourselves to blame for what will be the same societal problem: impoverished retirees.
And the problem will be just as hard to solve, because it will be seen as an issue of people failing to be responsible, so why should we bail them out?
Not when you're taking small data samples. If you look at past years of investment, you'll either have a sample size too small to be meaningful, or your start lumping years that don't reflect today's realities into the mix.
These investments are basically saying, "the market will always get 10% return", so we're going to put future tax payers on the hook for 10% returns. The average guy investing his 401k doesn't get guaranteed results at the expense of other people's work.
Even if there is a historical 10% return that holds, that's still going to produce underfunded (and overfunded) pensions based upon fluctuation in yearly returns and population dynamics (like if an unusually large number retire in a down year).
Then there is the pension spiking, and maybe even no consideration that people are paying into the pension at low rates but tend to retire at high pay rates.
As individual you can't really compensate for the update and downs of the market but a pension system with an eye on the long term could do this. Sometimes it's overfunded, sometimes underfunded but in the end it will converge to the average.
I agree funding our way out of this mess is the right solution, with the caveat that there might not be enough local revenue to do so, in which case the pension should be transferred to the US Pension Guarantee Corp and funded by the federal government.
That's largely already happening with the shift from defined benefit plans to defined contribution plans.
It is not necessarily a better outcome for the employees but it has better alignment of incentives and doesn't create obligations for future taxpayers.
For me it's closer to "it worked in the past but even if it doesn't I'm going to be in the same boat as basically everyone else". Which is very different than the kind of promises pensions make.
Or stop raiding pensions and other tax receipts to pay for other underfunded government obligations (resulting from inane tax cuts that only benefit the very wealthy)?
Typically pensions themselves are the largest underfunded government obligation - consider California, where Gray Davis passed a retroactive pension benefits increase with a reduction in pension funding. At the national level, the math is different because of the military, but state and municipal governments pay a ton of their budget to retirees.
Several times now various bills and projects have relied on withdrawing funds from social security/pension pools. On the promise that the money will be returned of coarse.
The Social Security Trust Fund owns an awful lot of US treasuries (almost $3 trillion), but I don't think that really meets the bar for "controversial" as treasuries are the only investment it is allowed to buy (by law).
There are additional cases I can find, but a quick search turned this up about Kentucky doing this to the state employee health insurance fund for nearly a decade. I believe they have done this to the general pension fund as have other states.
If a state is going to have pensions they need to be independently managed and firewalled from the hands of politicians.
>Kentucky has shifted more of the responsibility to pay for health benefits to public sector workers in recent years and then used the savings to help fill holes in the budget. Even after these transfers from the employees’ health plan, its fund balance is continuing to grow, making it a target in the new budget. Governor Bevin’s budget plan includes transferring $500 million out of the plan in 2018 into a new “permanent fund.”
>Over a period of years, balances built up in the state’s plan as more was collected in employer and employee contributions than was paid out in claims. In recent years, the state began to transfer those monies to plug other holes in the budget. Kentucky transferred $50 million in 2009 and $93 million in 2015. For budget year 2016, the state will shift another $63.5 million from the plan to the state’s rainy day fund.
I'm all for this. If we were to cut welfare benefits to fund state pensions, it could be sold as transferring wealth from those who don't work, to those who do which is much easier than hiking tazes
I'm not "insanely wealthy" and I am getting a benefit from the tax cuts, as are most people. Or we can get rid of other obligations like welfare to fund it as well - give money from the non-working (and in some cases arguably useless) to the working.
Someone's got to bear the risk. And, indeed, most private companies have switched from defined benefit (e.g. pension) plans to defined contribution (e.g. 401-K) plans. This isn't a bad thing and generally lines up better with the reality that people mostly aren't with employers for decades. But it means it's now in the hands of the individual to properly fund their retirement given great uncertainty about investment returns.
Defined benefit can work as long as people aren’t being shady. It costs more up front. Pensions are in trouble because they have not made the contributions over the life of the employment. Also, and independent third party management with proper controls.
What I read about whenever these stories hit the news is they assume they can take from the pool either directly or by under contributing thinking they can just pay it later
All these pensions are going to be wiped out soon in the coming run. Most funds currently assume 7% to 8% future rates of return but the ability to generate returns like that have been impossible for a long, long time now. To compensate for low returns, pension funds have dumped money into stocks, private equity funds and illiquid and very risky investments, like subprime auto loan securities and commercial real estate. Some pension funds have as much as 20% of their assets in private equity. When the stock market inevitably crashes a little, it will wipe pensions out. Then politicians will be forced to admit there's a problem, and everybody is going to immediately do a run on their pensions to try and cash them out. For anybody who doesn't know if your job offers a pension scheme and you quit before retirement, you are paid out a lump (taxable) sum. There's no way these states like CT or NY with massive unfunded liabilities can afford 20%+ of their employees trying to cash the pensions.
The International Forum of the America's holds an annual pension conference where the data on the coming run on public sector pensions can be found, such as all the risky investments to make up for poor returns. Interestingly, private sector pension schemes are fine.
My memory of the statistics is that the median voter does not save. The government's approach to creating reserves of wealth follows on from that naturally.
An aspect in this that I find very interesting is the realities behind the numbers which will be revealed as the situation plays out. The money is a bit of an illusion, retirees need an available reserve of wealth (be it in the form of productive land, goods, labour, rock solid infrastructure and houses with little need of maintenance) to sustain them when they can no longer produce.
Where will this wealth reserve come from? Who will have to go without? What compromises will be made?
Undoubtedly one part of any proposed solution is 'tax the rich', because there are no other wealth reserves in America, but if this is a more fundamental problem of demographics and ratios the real resources might not be available to meet peoples expectations. Somebody is in for a very rough 20 years.
In Kentucky, we're going through a pension reform as we speak. Of course, the Republicans are claiming to have fixed it and the Democrats are protesting it, saying they're hanging future retirees out to dry. What no one is saying is that the hole is so deep there's no way to get out of it. If I were a state employee, I would start planning now for my pension not to be there when I retire.
As someone who works in a different state, this is why when given the option I went 401K only.
401Ks have a lot of issues, and definitely aren't superior to a pension scheme in general, but pension schemes are so poorly run and have so many corruption-like issues that at least with a 401K it is just a simple vested savings account I can move if need-be.
I guess what I am saying is, trust in traditional pensions is so low to some, getting a worse but safer alternative looks nice by comparison.
That is why those pensioners, who are allowed to do so according to their contract, are taking their pension as a lump sum payment when they retire. And they are doing so in larger numbers which is further eroding the financial health of the municipalities.
Yea.. Illinois is in bad shape. My father-in-law retired from Western Illinois University a little earlier than he had initially planned so that it would be before his union contract expired.
That was over a year ago - the folks left are still working without a contract. That doesn't necessarily mean they won't get any pension if they retired today, but it puts it at even more risk than it already was.
You think states are bad, you should check some of the city level pension issues, which I think are much larger in aggregate per state than the state pension funds.
A really good intro to the city level issues would be the Dallas police and firefighters pension (just duckduckgo it)
I imagine not too many devs have the option of a pension like I do so I'll relay what was told to me about my pension. ~4.5 years ago I was told along with all the new hires in the room we would be the last generation of new hires with an option for pension. I opted not to take it as that said to me this would be the hardest to fund pension ever. Really my matching 401K and superior insurance do the trick for me even if the returns aren't high. After the '08 crash I've hedged against private stubbornly and admittedly have been pretty jealous of other benefits devs in the private sector get.....until now.
Pensions would work a lot better if they were independently managed and firewalled from the employer.
A family member has a state pension in one of the states known for having some of the worst of these problems.
However, their corner of state employment was smart and set up an independent pension management situation. It remains fully funded and not at risk. Well, except that the state keeps trying to break down the firewall and raid it.
However, people who instantiated it did a good job of guarding against this.
Pensions aren't "evil". And who wouldn't mind worrying less about making retirement decisions as an amateur investor on one's own, and focusing more on doing a good job and raising a family and having a happy life?
What is "evil", is structuring them without defense against expropriation of funding for other purposes. As far as I'm concern, that is "theft", plain and simple. And failing to fund them per established schedule is breach of contract. You are essentially not paying employees for work done.
Maybe given that, well defined in law and practice, organizations also wouldn't make unrealistic pension commitments in lieu of providing better immediate compensation and benefits.
In addition to all the rest, there is the aspect of the turn to 401K's and similar vehicles, that money managers saw and pushed an opportunity to grow the fees they collect.
I held off from writing it a couple of paragraphs ago, but I'll say it now. Pensions aren't a fundamental problem. Banksters and their political enablers are.
And as more and more investment moves into them, they become mono-cultures vulnerable to large-scale exploitation.
I'm using some right now, but I don't count on their indefinite viability and performance.
Remember how LIBOR exposed fundamental problems and manipulation with respect to indexing and pricing?
Different aspect of finance. Nonetheless, you're pinning everything to indexes someone manages -- and to systems performance versus competition.
They do reflect a similar aspect; taking the average investor's attention away from individual purchases and sales, where most get fleeced to varying degrees.
Wherever your investments, you have to keep paying attention.
I agree that there is concern for large scale manipulation, but it seems like that concern is still there with actively managed investments. Especially from governments manipulating via bailouts. At least with passive index, you're only paying a few basis points.
That is what will happen. Each US dollar will become less valuable, and the nominal debts will be satisfied. Hope you're invested in inflation resistant assets. Some of the pension recipients who don't have enough clout to force the federal government's hand will lose though.
That's an intuitive theory, but inflation doesn't really have that much to do with the quantity of money, because the value of money is almost entirely based on what you can buy with it. Price inflation happens when the aggregate demand (the sum of all the spending over a certain period) outstrips the amount of goods and services produced (or held in inventory) in the economy. Yes, adding more money can increase aggregate demand, but it is also saved or invested in productive ventures that mean more goods or services are produced.
If it was simply a fact of more money == inflation, we'd be screwed since the money supply is almost constantly growing through bank lending.
At the end of the day, all spending carries inflation risk (since all spending adds to aggregate demand). This equally applies to money saved earlier, new money created in the banking system, or new money created by the Government (say, QE). It's at the time of spending that's the risk, not the time of creation.
The limits of Government money creation therefore have more to do with the productive capacity of the economy.
In an environment where income and wealth disparity is growing, and birthrates are just at replacement level or lower for those with wealth, wouldn't aggregate demand outstrip goods and services produced?
The underfunded part is sadly not unusual or unpredictable and neither are the unrealistic performance expectations. On the other hand, the poor returns some of the funds have seen in recent years is quite a surprise. How badly designed did the average portfolio have to be to only gain 1% in 2016?
http://www.mlive.com/news/detroit/index.ssf/2013/10/10_thing...
There's a serious moral hazard for politicians. It's easy to give constituents services today at the expense of benefits in the future, when they'll be out of office. I wonder if a law that clawed back these government official's pensions if they were found to break from good accounting practices, would be a deterrent?