Politicians Acting Like Politicians- The Public Pension Mess
With states, municipalities and counties across the U.S. faced with yawning deficits and public pension obligations ballooning, these have been seen as areas ripe for reduction. Pensions and benefits of public employees are certainly out of whack with workers in the private sector, but the question is how did they get that way?
It was simply politicians being politicians. To get the support and votes of the public service unions, government officials agreed to pension and benefits packages that have been continually ramped up over the years, with little consideration of cost to taxpayers down the line. It’s usually the way politician’s think- if something helps them get elected or re-elected, they ignore the long-term ramifications.
In addition to the generous packages granted to public employees, insufficient funds were put aside to pay for them, with special accounting rules used to hide the deficiencies. These have been made even worse by the low rate of return on public pension fund money that has been invested. Instead of an annual expected return of about 8%, the funds are generating between 5% and 6%. This means that in order to pay for retirement obligations, either taxes have to be raised or benefits cut, neither one of which is a happy course for elected officials. And it has been estimated that underfunded public pension obligations run into the trillions of dollars.
The problem is not only with the pensions and benefits that have been granted to public employees, but the retirement ages at which these kick in. Policemen, firemen and some municipal sanitation workers are able to retire after twenty years, often with 50% of their salaries as part of their benefit packages. This means that workers can retire in their early to mid-forties, with payouts continuing until they die; possibly forty or more years. One can imagine the burden this places on the pension system. And if they work another five to ten years, they may be able to retire with full salaries. The amount of their yearly stipends after retirement is usually determined by their income in the last year of work, or perhaps an average of the last three years. To game the system, public employees work as much overtime as possible during those years, to boost their retirement income.
The pensions received by teachers, administrative employees and other public workers are not as bountiful as those mentioned, but may still be quite generous. They may be able to retire after thirty years of service, which can be in the early to mid-fifties, which still can mean thirty or more years of payment.
And governments also have to provide health care coverage to their retirees, which is another budget buster. It must be remembered that significant numbers of these people continue to work at other jobs after leaving municipal or state service, generating a second income for themselves.
In addition to Wisconsin and other states that have legislated reductions for public employees, citizens in San Diego and San Jose recently voted overwhelmingly to cut retirement benefits for city workers. We can expect more of the same in the future. Reductions in pensions are also being negotiated between public worker unions and governments, with the unions realizing they have little choice in the matter. And given the generous retirement packages of public workers and the difficult times that private sector workers have endured, with givebacks in salaries and benefits as well as layoffs, there’s been a serious split in the union movement between the two groups, with the latter providing tepid support to the former.
The fact remains that politicians agreed to generous benefits in the first place and public service unions were all too happy to accept them. If politicians had been more steadfast in their negotiations, and had made more realistic projections, the current confrontations would never have occurred.
Resurrecting Democracy
em>A VietNam vet and a Columbia history major who became a medical doctor, Bob Levine has watched the evolution of American politics over the past 40 years with increasing alarm. He knows he’s not alone. Partisan grid-lock, massive cash contributions and even more massive expenditures on lobbyists have undermined real democracy, and there is more than just a whiff of corruption emanating from Washington. If the nation is to overcome lockstep partisanship, restore growth to the economy and bring its debt under control, Levine argues that it will require a strong centrist third party to bring about the necessary reforms. Levine’s previous book, Shock Therapy For the American Health Care System took a realist approach to health care from a physician’s informed point of view; Resurrecting Democracy takes a similar pragmatic approach, putting aside ideology and taking a hard look at facts on the ground. In his latest book, Levine shines a light that cuts through the miasma of party propaganda and reactionary thinking, and reveals a new path for American politics. This post is cross posted from his blog.
Image via Shutterstock.com
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I took a 12% pay cut when I went from the private sector to public. Part of the reason I was willing to do so was because of the generous retirement plan, because I was willing to accept less money now on the promise of more money later.
Cuts here are a broken promise.
It’s mostly moot for the future though; my state–and I think most now?–enroll new employees (such as myself) in defined-contribution plans (similar to a 401(k), but for public workers) not the defined-benefit plans which, when combined with overestimated growth, contributed to these shortfalls.
Which brings up a question: What optimistic fool estimated 50% higher growth than was borne out? How is _their_ retirement going, while their mistake causes so much harm to so many others?
I will never understand the problems with pensions. I mean, I get it, people are stupid, and want everything they can get. But pensions are a relatively simple numbers game. One that gets mucked up by both sides. You put money in, it earns interest,and later, you take it out. How much did you put in, for how long, when do you retire, and what do the actuaries say about when you are likely to die?
Both sides mess this up. The pension providers mess it up by raiding the funds. The pension receivers mess it up by setting unrealistic expectations about how much they should get for the rest of their natural lives without putting more in. Now, if the funds have been raided, the pension receivers have a major grievance. If the pension providers are forced to pay out more than can be supported by the numbers, things go in the red. Both sides screw this up. But unlike so many issues we face, this one can be easily reduced to numbers. Blame can be easily assigned, and responsibility doled out with objective clarity when it comes time to figure out how to solve it. Why this issue seems to be a huge problem for cities, states, corporations and entire industries is beyond me. Its just freaking numbers.
RAL, terrific. All true and the foxes helped other foxes raid the chicken coop.
The party should be over, but the pain is going to be enormous.
What the author glosses over with his statement ” insufficient funds were put aside to pay for them, with special accounting rules used to hide the deficiencies” is the fact that government pensions do not have to follow private sector pensions.
Corporations with pensions insured by the Pension Benefit Gaurentee Corp (PBGC) as well as other federal law requires a minimum funding of pension funds to insure they are solvent when benefits become due. There are a number of calculations that go into the funding requirement, but basically the benefit salary, projected earning on funds and projected expenditures for current a future retirees all go into calculating the funds that will be required for current and future retirees when they retire using discount rates to take into account the change in the value of money. Government pension plans are not required to do that actuarial calculation.
So the current individuals and citizens receiving the benefit of the police, teachers, firemen and other government workers today are not paying for those benefits today. They are being transferred to the next generation of residents to pay for. That is the problem.
Get the government pension funding requirements to mirror private sector requirements and the funding for future retirees will take care of itself.
Many, many corporations have (because they are able to do so) have switched from DefBen plans to 401(k) plans. Also, there have been plenty of abuses in private sector pension plans, now less so under 401(k)s.
RP, I mostly agree with you, however the problems will not just disappear with government pensions following private pension rules. Those funds have been raided before (by corporations) and would likely be raided by politicians. What needs to be done is to jail the idiots who kept claiming that arithmetic is an unproven theory.
Well, California bought its pension problems back in 1999, when CalPERS (public employee retirement system) convinced the state legislature it could afford to essentially double pensions for state workers. The legislators gave CalPERS’s figures too much credence, but the economy was booming, and pundits were busily explaining how we had entered a new economic era which made 8% returns a reasonable expectation.
The promises were looking crazy just three years later, but the damage had been done. Legally we can’t take back public workers’ benefits without providing them equal value in some other way. And unions are fighting for similar benefits for future workers yet to be hired.
Like trying to take a lollypop back from a hungry gorilla.
I love how idiots make a deal like this, set in stone a pension plan based on some rate, instead of dishing out pension payments based on what the rate actually was during the time the money was accruing. Did it never occur to any of those morons what would happen if the rate dropped or increased over the span of decades, which it was certain to do.