The Looming Pension Crisis

shutterstock_103487231
States, counties, cities, and other public entities face huge deficits in pensions and promised health care benefits that cumulatively add up to trillions of dollars. Detroit’s bankruptcy was fueled to a large degree by its pension and health care shortfalls, with billions owed to its workers and retirees that were not supported by adequate funding. All of the major cities in the country and many of the states also face future deficits of varying degrees that are not being properly addressed. While the focus may be on the national debt of the federal government, the failure of cities and states to fund the pensions and health care benefits of public workers may present an even greater problem. How did we get into this mess?

There are actually a number of factors behind this crisis, generated from irresponsible behavior by politicians, workers, and public employee unions. In order to get the support of municipal and state workers and their unions during elections, politicians made outsized promises to them regarding early retirement, pension and health care benefits.

Policemen, firemen, and some other municipal employees such as sanitation workers were allowed to leave early and receive major benefits at the time of their exit. This meant that some of these employees retired in their early to mid-forties, were given most or all of their wages, and then could work at other jobs that also paid them. Admittedly, the work they performed was dangerous, but unless they were on disability, their retirement benefits should have kicked in at sixty-five, particularly if they were working at a second job. Certainly, many of these men could have ontinued working for the cities or the states in their original jobs, perhaps retiring after thirty years of service with their benefits.

The cost of these benefits has only increased as life expectancy has grown and will continue to rise in the future if benefits are not curtailed. Contributing to the high costs is the fact that many public employees did not have significant deductibles with their health insurance and did not have to contribute to the health insurance premiums and pensions in many instances. This is in contradistinction to their brethren in the private sector. (Recently, there has been some movement towards having public employees pay deductibles and contribute to premiums and pension plans, but there is still a long way to go to match private industry.) Of course, the workers were only too happy to accept the benefits they were offered, often obtained by their unions after bargaining with elected officials.

Once the politicians made the financial promises to the state and municipal workers to get their backing in elections, they did whatever they could to delay adequate funding of these obligations. To avoid raising taxes to pay the necessary funds to the pension and health care plans, which would alienate the electorate, they found ways to fudge the payments, knowing that they were kicking the can down the road. Unreasonable assumptions were made in terms of investment returns so that contributions to health care plans and pensions could be lowered. Other politicians would have to find ways to meet the obligations, or the benefits would eventually have to be reduced.

The shortfalls in the municipal and state pensions and health care plans are a testament to the fact that the system in place is not working. Independent boards of actuaries, accountants, economists, and investment advisors are needed to determine what realistic returns are and how much is needed in contributions from the states and municipalities for the various pension and health care plans. It would then be up to the politicians to decide on how to meet these obligations, raising certain taxes, or fees if it were necessary. Or they could take the opposite tack and negotiate reduced benefits so that less funding would be required. But something has to be done rather quickly before more municipal bankruptcies occur.

Resurrecting Democracy

www.robertlevinebooks.com
Photo from Shutterstock.com

Author: ROBERT A. LEVINE, TMV Guest Voice Columnist

Political junkie, Vietnam vet, neurologist- two books on aging and dementia. Last book on health care reform- Shock Therapy for the American Health Care System. New book on the need for a centrist third party- Resurrecting Democracy- A Citizen's Call for a Centrist Third Party- will be available early October 2011

Share This Post On

9 Comments

  1. This is another example of Really Organized Crime. As always the Corporate Leaders and the Democrat and Republican Congressmen that they own have gotten their share first. The government, which in this case is the U.S. Taxpayer, will have to pay the bill on this additional scam. Once again, I have to ask if corporations have the same rights as I do, why don’t corporations have to pay their bills like I have to?

  2. why don’t corporations have to pay their bills like I have to?

    Because the one thing that congress does well, is not bite the hand that is feeding it.

  3. Pensions run into problems because people suck at math, and for some reason the logical part of the brain that makes us work out actual numbers on pretty much every other long term financial plan seems to magically shut off when we talk of pensions.

    Put more simply, people are idiots.

  4. One of the unwritten parts of the public pensions and benefits discussion above is that most of the public employees took jobs that paid substantially lower wages than they could have obtained for similar work in the private sector. The employees were, to some extent, “coaxed” into accepting the lower pay because they knew that they were being compensated (to a lesser extent) in other ways, due to their benefits packages.

    These employees and retirees EARNED their benefits.

  5. “These employees and retirees EARNED their benefits.”

    No one ever EARNS a lifetime paycheck from a fund that is so badly mismanaged that there won’t be funds to cover them in their lifetime. That kind of thinking is at the heart of why these pensions are falling apart. While I am sure they did take the jobs because of these benefits, it doesn’t change the fact that no one bothered to actually use math to see if it would be viable in 10, 20, however many years. There is no way around that, despite what people think they have earned or what they were promised. A classic case of reality crashing into wishful thinking.

  6. I worked under the State of Oregon Public Employees System (OPERS) for most of my working life. In years past, The board governing the system was made up almost entirely of Public Employees and the majority of those were union members. There were a few years in which the investments of OPERS made fantastic returns. The board credited most of the earnings to employee accounts and not enough to the accounts of employers. Then the economy suffered and the returns went negative. The legislature responded by enacting a minimum 8% return for all employee accounts. This resulted in a number of employees retiring with pensions well in excess of their final salaries. To paraphrase slamfu, in this case the legislature and the board “sucked at math” They did however, excel in self interest.

    By the early 2000′s it became obvious that these bad board decisions and subsequent legislative action had made the system unsustainable. A state senator bucked the unions and was successful in pushing legislation that provided some modest fixes (some of which were overturned in court). That senator later ran for Attorney General, a position for which he was well qualified. The unions pulled out all the stops and put a tremendous amount of money and effort to support a lesser qualified candidate who won. The unions only interest in that race was to show the legislature who was boss.

    As a result of the great recession, OPERS is once again in financial trouble. Many municipalities are paying well over 20% of payroll in retirement contributions and most of these school districts, cities and counties are already short of funds. The state is now cutting benefits.

    As a retiree, I agree with RC that good pensions were and are a trade off for the below private sector wages that we worked for in years past. However in no case does that excuse the reckless and irresponsible behavior that the OPERS Board and the legislature engaged in that turned a well funded and successful pension fund into a financial nightmare for the employers and retirees that depend on it.

  7. This is really a simple problem and has nothing to do with whether the pensions were earned or not. The problem is that politicians agreed generous pensions and then failed to adequately fund them from employee contributions and tax revenues. This was done for many years in a lot of jurisdictions, the politicians knowing they would be long gone before the problems became apparent. The problem is now arriving. Only two solutions for the current problem, one cut benefits, two raise taxes, or some combination. To prevent this in the future the pension funds need to be examined independently for financial soundness. Some standards need to be established. If they fail to meet standards then the local entity should be downgraded from a credit rating standpoint now while the problem can be addressed not forty years later when its too late for anything but drastic and draconian measures.

  8. The financial industry preys on pension funds. It’s objective is 100% parasitic – make damn sure it gets it’s management fee + 0.25% of every churn-driven transaction – win, lose or draw. Sometimes it’s even more greedy than that – creating derivatives that separate the reward from the risk and palming off the latter on outsider pension fund trustees whilst collecting fees for their toxic financial “advice”.

    The truth is that if pension fund returns actually reflected economic growth, they would be more than healthy. The reason that this is not the case is because most of them have been robbed, and the rest have been stolen.

  9. @epiphyte

    The same is true of 401K plans. The hidden fees are almost impossible to determine.
    http://www.kiplinger.com/artic.....payin.html
    Look at the changes in credit cards, bankruptcy and consumer debt…

    Dickens and usury come to mind…

Submit a Comment