First it was Social Security, with Obama’s commission calling for an eventual 22% cut in the average recipient’s benefits even though Social Security is financially quite sound. Now public pensions are in the crosshairs:
From Path Is Sought for States to Escape Debt Burdens in The NY Times:
Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
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“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”
Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits.
“States have adequate tools and means to meet their obligations,” the report stated.
What next? Raising taxes on the wealthiest the working poor – again?
Yes. They’ll probably die before the next election. We’re not in Illinois, so they can’t vote even then.
Do you really expect to tax the rich? They’re the biggest campaign contributors to the democratic party.
…has it occurred to nobody to fight for private sector pensions to be as good as the public ones?
So that the private sector could be facing the same unfunded liabilities and potential financial collapse as the public sector is?
Insurance company execs would go to jail if they wrote policies that they weren’t likely to pay off. Same should be true for the private-sector.
…but I’m tired of this being an excuse to dump on our public servants.
what reforms do you suggest?
Which is the one recommendation you don’t see in the Patrick plan. A nixon goes to china moment. If a Republican proposed the same reforms, you’d have blow-back from teachers, police, firemen, public union etc. For now, the complaints are muted.
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p>Muted, as they should be. It’s not like benefits are injuring existing employees, only new hires. And, adding 5 years to the retirement age of 55 is too obvious to be disagreeable. Patrick appears to be channeling his inner-conservative.
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p>I do question the estimate of 8.5% anticipated return. The PERAC in their ’09 report recommended nothing greater than 7-7.5%.
Want to know what interest rates I’m required by law to use in valuing liabilities for private sector plans according to the IRS (January 2011 rates)?
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p>2.94% for the first 5 years, 5.82% for the next 15 years, and 6.46% thereafter.
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p>If you want to settle liabilities right now by purchasing annuity contracts from reputable companies, you’re currently looking at discount rates between 4.00-4.25% (and those are up from what was in play for most of 2010).
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p>Contrast that with the aforementioned 8.0-8.5% typical current rates, and “prudent” rate changes mentioned of 7.0-7.50%; maybe a little more reasonable, but still unreasonable.
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p>The assumed return on investments is no longer used by law in valuing liabilities under the Pension Protection Act of 2006 (it just doesn’t factor into the IRC 430 calculations). Unless one can posit that public sector plans exist in some other investment universe, maybe the true reforms necessary consist of extending the ERISA funding rules to the government sector.
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p>Public sector plans are currently exempt from ERISA, which includes reasonable actuarial funding methods. Not sure if it is worth touting as “reform” anything that has a 20-30 year window on when plan will purportedly (at unrealistically high rates) be “fully funded”.
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p>Illinois is trying to whittle down their past due pension obligation by issuing bonds. Kind of like taking a cash advance on the Visa to pay the mortgage (and also illustrates the rock and hard place that is growing the bankruptcy talk from those who are actually faced with solving the problem, regardless of party affiliation).
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p>In substance, isn’t that what the Mass proposal does? By extending funding date from 2025 to 2040, the State defers the current payment. In effect borrowing from the pension to cure the deficit.
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p>The strategy also highlights the error of the 8.5% return.
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p>Question: Why would the state ‘borrow’ from the fund which is presumed to earn 8.5% when it could go to the debt markets at an interest cost of, say 3-4%.
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p>Answer: The 8.5% estimate is not believeable and the Government knows it.
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going with investment return as the saving grace is kind of like taking the bus to Foxwoods to make the rent.
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p>I loved in the last campaign listening to (then) Treasurer Cahill defending the pension performance over the last couple of years by saying that even though you had a 26% loss in 2008, we’re halfway back to normal because the fund did 13% in 2009. A Daryl Huff classic.
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p>Consider: you’re expecting 8% return to keep up. For an example, you start 2 years ago with assets and liabilities equal to $1,000,000. No payments out, no monies in to keep things simple. You lose 26% in the first year, so you’re sitting at $740,000. You then earn 13% in the second year, so you’re at $836,200; looks like we’re on the right track getting back to where we started. Of course, the fallacy is that given your 8% assumption that you’re using for liabilities, your assets are supposed to be at $1,166,400 at year 2, so you’re at 71% funding of where you’re supposed to be, not 84%.
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p>Fun with numbers…
…though I wouldn’t want them retroactive. Obvious reforms like one day not equalling a whole year for pension purposes.
pensions are the cause of the “potential financial collapse” of the public sector? If you do, you’re sorely mistaken.
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p>And if you don’t… if the cause of our troubles isn’t public pensions, why on earth would the solution be taking a bat to them? The failing jobs market and health insurance costs is the #1 and #2 reasons, respectively, and those problems aren’t going away. Those have the be the solutions.
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p>The private sector could be doing fine if it had to contribute to a real pension system. In fact, it IS doing fine. Lots of sectors of this economy are making record profits. Everything from the financial sector to Detroit to Broadway is back to making healthy profits — in fact, on the whole, the 2000s saw decent growth. The problem is the growth is not being shared with the middle and working class. We don’t have a revenue problem, David, we have distribution problem — and it ain’t the poor taking from the rich. It’s the obscenely rich taking from everyone else, whether it’s shipping our jobs overseas or taking 80 cents out of every dollar of new growth in the economy since the year 2000, and putting it in their own pockets.
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p>E tu, David?
rather than just your assertions that pension obligations aren’t contributing to instability of municipal and state finances. If you’re right, great.
I think the notion of states declaring bankruptcy and thus ducking existing pension obligations is a pretty bad idea. However, the pension reforms recently floated by Governor Patrick all seem pretty sound to me. And even with those reforms, we have to push the full-funding date from 2025 out to 2040 in order to avoid shelling out a billion bucks this year that we don’t have. It’s not like these are trivial amounts of money.
But mention doing the same on the investment class and you’ll hear much tisk-tisking about how that’s unfair and we’ll dearly pay for it.
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p>Fixing these problems is straightforward. The wealthiest Americans are being taxed at historically-low rates, one-third the rate they were taxed in the booming 1950s. They pay federal taxes at a much-lower blended rate than I do, and I’m not rich by a long shot.
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p>We need to raise taxes on the wealthy to rates that are consistent with history, and consistent with other industrialized countries. As we saw, a recent poll found that 61% of Americans named raising taxes on the wealthy as their number one choice for solving government fiscal problems. If that’s the first choice of 61%, then 80% or more have to be in favor.
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p>Now we need politicians to show the same courage in office that they claim to possess when campaigning for the office.
from today’s report from the State House News
My father paid tens and tens and tens of thousands of dollars into his pension, and he’s not eligible for social security even though he had an entire career before he was ever a teacher and would be eligible for it in almost any other state. In a day and age when politicians are trying to tell Americans they should work till they die, or pretty darn close to it, I watched my dad basically trying to do that at 61 while working with Leukemia, a 14 year old and 16 year old still in school, desperately trying to cling on until he’d get something even resembling his full pension.
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p>Screw anyone who tries to take a bat to his pension, or anyone else’s, or wants to shit on the middle class. These are NOT dollars and cents we’re talking about… these are people’s lives. I refuse to bow down to republican hack speech, wherever it comes from.
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p>As for data… I’m not going to waste my time. How many billions and billions of dollars of revenue have we lost during this recession, because of our jobs problem? 6? 10? How many billions have we lost because of the absurd hikes in insurance premiums? If we didn’t have fucked up priorities in the people who currently control politics, we wouldn’t be having these problems. Fix health care costs and grow jobs before you take a bat to pensions. If that means the wealthy have to step up and pay their fair share, so be it.
There are plenty of others in your father’s position of being told they can’t “double-dip”, but it seems to me that if you double-pay (ie over the course of your life you pay into BOTH SS and state pension) you SHOULD be able to “double-dip”.
Massachusetts is one of the few states in the country where public employees can’t get SS if they were otherwise eligible for it. I think it’s something like 2-3 states that don’t allow it, including us.
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p>Novel idea!
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p>Hmmm…maybe the employer could contribute, say 7 or so percent of the employee’s wages to the pension and invest it in Treasuries and pay it out at age 65. The employer could also hold back some of the employee’s wages too. Say another 7 or so percent. We could name the program Social Pension, or Secure Pension, Pension with Security…I’ll think of something.
When you ask So that the private sector could be facing the same unfunded liabilities and potential financial collapse as the public sector is? that is ignoring the underlying truth of the past 20 years or so:
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p>Executives in private enterprise, and in the public sphere, like Christine Todd Whitman.
Meanwhile, Republicans have cut, cut, cut taxes on the highest levels of wealth, and some Democrats (like our President) have gone along.
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p>The solution is for the party-goers to start paying their fair share. But Christine Todd Whitman was just on Colbert, never mentioning her party’s giveaways to the highest levels of wealth, soberly affirming that middle class people must sacrifice the dignity of their old age.
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p>I know, David, that you would prefer a more progressive tax system, and the Governor would, too. But progressive leaders lose the long term gain when they only focus on the short term (“we need to make cuts now”) and rarely state the long term problem (“those at the top need to chip in their fair share”).
treating these long term assets as if they were fair sources of revenue to cover short term costs.
Unlike Social Security, state public pensions really are a major medium- and long-term structural budget issue. However, this idea of providing bankruptcy options for states is a disastrous idea that would just make things worse. The municipal bond market would be decimated, resulting in massive increases in immediate costs to state budgets.
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p>Republicans love to blame Democrats for “spooking the market” with new regulatory ideas, but apparently they have no idea how much even talking seriously about allowing state bankruptcy threatens to affect the municipal bond market. Pretty typical hypocrisy on the GOP’s part.
because municipalities haven’t been paying in what they were supposed to. Even if they weren’t, and we somehow got a handle on our jobs problem and health insurance costs, pension issues would not be a problem. As it is, they’re a manageable ‘problem’ that perhaps require a few tweaks here and there… not a bat to the face, and certainly not a 401(k) system.
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p>This is 100% correct.
with the SS Trust Fund. Because it hasn’t been kept separate from general revenues, it is now considered by many to be insolvent.
This is outrageous. Borrowing from pension accounts by public or private entities without their strongest commitment to repay that debt is malfeasance.
Unfortunately those who are owed this money are regarded as parasites (Alan Simpson’s “310 million tits” and the constant assaults on public employees).
The difference between the social security “trust fund” and the state/municipal pension funds is that the latter have actual pools of assets that are invested and professionally managed.
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p>It has been my understanding that the funds are short because the parties all agree (with a wink) that the funding should will grow much faster than it actually will. CALPERS is an important example of this because it is so large.
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p>The linked piece reports that a built in assumption in the CALPERS funding model is that the asset pool will grow at a rate of over 7% a year, even though this was only ever achieved for a few years in the late 90s. During the last decade, the growth has been less than 3%. If a lower growth rate assumption is adopted, then the existing employee paycheck deduction, and the current expense to the employing agency, has to go WAY up.
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p>This, in a way, is a return to the initial criticism of public sector unions: they sit on one side of the bargaining table, and wield enormous political power over the other side of the bargaining table.
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p>Thus, the employee side can demand extremely generous pension benefits (retire after 20 years, benefit based on last year’s earnings, including overtime, first day of January = the year, etc.), and the political control of the municipality has incentive to agree to such demands, in order to avoid confrontation with a politically powerful force. Then, both sides have an incentive to adopt the rosy-growth assumptions, so that hefty tax bills don’t cause the other voters to upset the applecart. Eventually, however, these other voters are stuck with the deal that “we” made.
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p>In any event, I have not seen reports of local or state governments raiding the pension funds for general revenues. If that happened, I think that would be an absolutely appalling scandal.
I’m thinking specifically about
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p> * benefit based on most recent (or largest) year of earnings [instead of, say, last 3 or 5 years]
* 1 day is a year [instead of using decimals]
* retire after 20 years [instead of a higher year count or simply ratcheting it up over time — more years == more pension]
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p>There are Fed workers, state workers, and muni workers. How much of these sorts of situations exist, as a percentage, for each of the three groupings?
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p>I ask because I wonder if it would be acceptable for the Feds to pass legislation for new employees/contracts amending these rules. I don’t think it’s fair to reduce a benefit that somebody’s already signed on to earn, but I do think it’s fair for the Feds to acknowledge this interesting problem between public employees and gov’t officials, and to set up tighter boundaries on what is fair and reasonable.
I would note that pensions owed by county or local governments are rather plainly at risk. If the town or city doesn’t have and can’t raise the funds to pay the pension, it won’t pay them. The debt obligation can already be restructured in bankruptcy.
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p>What is curious is that, unlike private pensions, are not guaranteed by the PBGC, so if the city restructures them away, they are gonzo.
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p>What is even more startling to me is that it seems that in Massachusetts, public employees don’t contribute so social security. So that means that if their public pension goes belly up, they have no income at all save welfare.
why on earth should they pay into something they can’t take out of?
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p>Furthermore, many — probably most — teachers have paid into Social Security throughout their life times that they’d be fully eligible for it… but because of our system in Massachusetts, not even those people can get it.
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p>I suggest you stop digging.
Depending on their contributions if they worked a private job, they will get something.
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p>Or if you work for the state for 10 years – the state pays your health insurance, forever.
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p>Lets also not forget that while private pensions and 401K plans are taxable by the state of Massachusetts, state pensions are not. So Mr. Bulger is pulling his 250K pension state tax free.
“Public employees get social security”
for time they worked in the private sector.
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p>That is equivalent to asserting:
“Republicans get time in jail”
because Tom DeLay was convicted of money laundering.
their pensions don’t meet a (low) threshold, in which case SS will kick in a little to cover the lost ground — presumably if they were otherwise eligible for it.
but they use a different formula, so you don’t get as good a monthly payment. But the fact is, under the WEP (windfall elimination provision) you will get something. I have friends who are getting $200-300 per month, but they would be getting $800+ per month if there were no WEP. I have no special pity for them, despite their complaints, because they are getting very healthy state pensions. That was the whole point of the Tip O’Neill/Reagan legislation–to cut back on the gravy train.
Point 1: The obligor on many of those teacher/municipal employee pensions is NOT the Commonwealth of Massachusetts, but a municipality. I do not believe that the Commonwealth is automatically a guarantor of these obligations.
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p>Point 2: Municipal employees don’t pay into social security, and so don’t get any benefits (or they get minimal benefits from work before and after their work for the municipality and/or the bare minimum benefit payment).
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p>Point 3: Some municipalities have, for various reasons, obligated themselves to fund significant pension benefits, and have adopted funding models that leave their pensions systems seriously underfunded in the real world.
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p>Point 4: The pension benefits of municipal employees are not subject to the protections of the PBGC.
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p>Point 5: Municipalities can, and do, use the bankruptcy system to restructure debt obligations.
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p>Conclusion, if a municipality defaults on its debt obligations, and doesn’t have the cash to pay these pension benefits, they simply don’t get paid, and the retiree is largely without any kind of emergency Plan B.
All they have to do is run out of money…
What an awful situation.
and was before the reform bill. Patrick’s reforms swept away the other two issues you mentioned, too. No one can retire after 20 years, except maybe for cops.
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p>I find people who are the most rabidly against public pensions are the least informed about them, too. CMD is clearly no exception.
They already bear bankruptcy risk, as a municipality can file for bankruptcy relief under Chapter 9 of the Bankruptcy Code. This was used rather famously by Orange County, CA some years ago after its voters refused to raise taxes in sufficient amount to cover existing bond obligations, and the county defaulted. It has also been used by various county and municipal governments around the country over the last year or two.
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p>You are right that state-issued bonds would be hit, as state-issued bonds have been considered safer than muni bonds during this recession.