Home › Forums › Open Discussion › Pensions bankrupting municipalities!!
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May 28, 2014 at 6:28 pm #611474
wakefloodParticipantOK, so we all should know by now that the pension funding driving municipalities into bankruptcy is an overblown issue ginned up by the right wing greed machine to suck even more $ out of the middle class – but here’s some data to help understand the scope and core issue.
To sum it up, Robin Hood in reverse is happily and voraciously attacking the next staple of middle class economic stability – retirement. They have no moral compass. They have no boundaries. They have no conscience. They want it all. And they want it now.
http://www.huffingtonpost.com/dean-baker/the-wall-street-pension-s_b_5400796.html
May 29, 2014 at 4:02 am #808767
JoBParticipantfunny.. nobody ever mentions the fees that wall street is making off those pension funds…
fees so hefty that they are willing to risk jail time by paying for the right to “manage” our money…
May 29, 2014 at 4:37 am #808768
snaParticipantEveryone wants some evil person to blame, so no one will read this comment, but here it goes anyway.
Pension funds are bankrupting municipalities and have been abandoned by business because of declining interest rates. To understand this, you need to understand the basic mechanics of pension funding.
A pension fund sets aside money today to pay future obligations. A key to this is that the money put aside will earn interest just like your savings or retirement account. As interest rates decline, you have to set aside more money to hit your relatively fixed future obligation.
Now look at an chart of interest rates since 1982 — interest rates have been dropping for 30 years. Just the impact of a drop in interest rates from 6% to 3% is huge. Interest rates were over 10% in the late 1980s.
What this means is the cost of a maintaining a solvent pension fund in our steadily declining interest rate environment has been going up and up and up and up.
The law requires that pension funds are appropriately funded, so as interest rates keep dropping, companies and municipalities have to put more money aside to fund the same benefits. Companies respond by freezing the plans (like Boeing). Municipalities just go bankrupt because they don’t have the guts to freeze the plan.
So, yes, some employees abuse the system and some money managers take excessive fees, but that’s peanuts compared to the larger issue of low interest rates.
May 29, 2014 at 1:01 pm #808769
JoBParticipantsna..
if only most pensions were invested in interest bearing accounts instead of on wall street…
May 29, 2014 at 7:00 pm #808770
wakefloodParticipantExactly. These funds aren’t sitting in money market accounts. They’re being churned through every equity configuration/risk level these fund managers can conjur up. Nobody’s been banking on 15% annual returns.
Let’s use one system that’s been highly scrutinized over the recent years and was being held up by the Right as an example of how public pensions are killing state budgets and need to be gutted: Wisconsin.
Here’s a quote from a researcher posted on DailyKos.
“In addition, pension benefits for active employees and retirees are linked directly to investment performance and change based upon that performance. Effectively, the report assumes that employers bear all the risk in the WRS and that the benefits of active and retired participants and beneficiaries are immune to those risks. It is well known that the WRS does NOT operate that way. Indeed, benefits payable to retirees have been CUT by more than $4 billion over the last 5 years in response to the financial crisis of 2008”.
May 29, 2014 at 11:16 pm #808771
skeeterParticipantWell here comes Skeeter to set the record straight. I do not think state/local government employees should receive defined benefit (“DB”) retirement plans. Why? Because taxpayers (or at least 89% of us) do not either. Anyone who defends DB retirement plans for state/local gov’t employees is basically saying “Hey taxpayer, write us a check so that the employees providing public services can have a retirement plan that you do not get yourself.”
A much more fair approach would be for state/local gov’t employees to participate in a defined contribution (“DC”) retirement plan with benchmarking from the private sector. Then the taxpayers are not on the hook for any unfunded liabilities and the tax increases required to provide such expensive benefits.
Full disclosure: I’ve never worked for an employer that offered a DB retirement plan. I’m part of the 89 percent. Actually that 89% is two years old. I suspect it is 93% or 94% now. I wonder if I’d feel differently if I was covered by a DB plan?
Another thing – I am not opposed at all to the basic structure of social security. Social security is basically a large DB plan in that the payout is guaranteed, lasts until the day you die, and is not based on market risk or fluctuations. I think social security is a very good thing and I’d be supportive of efforts to strengthen it by increasing taxes. I like social security because everyone gets to participate, not just a select few.
May 29, 2014 at 11:33 pm #808772
socamrParticipantSo let’s get this straight:
1) Because Skeeter doesn’t get a particular benefit, no one should get it.
2) Employers who entered into contractual arrangements with employees should be able to tear up those contracts whenever they no longer make financial sense. Or is it whenever Skeeter thinks it makes sense? Or perhaps whenever 90% of the world has decided not to use that type of contract anymore?
Dude, a contract is a contract. It seems somewhat likely that if employees had known they wouldn’t be getting defined benefits down the line, they would have insisted on more cash up front. So if the employer wants to make them whole, by giving them all the back pay that they lost, then we can talk about getting rid of the DB’s. Anyone who attacks DB retirement plans is basically saying “Contracts aren’t worth anything for public sector employees if the taxpayers don’t like it. Too bad sucker.”
I totally agree that municipalities should be allowed to try to shift their employees to DC’s, the way most corporations have done. But that’s a matter for our elected public officials to work out with their employees; as taxpayers we have a role only in that if we don’t like the deal made by our public officials, we can vote them out of office next election. That’s kind of how our system of government works – you know, laws and democracy and all that. Dontcha hate it sometimes?
May 29, 2014 at 11:49 pm #808773
Mark32ParticipantThanks Skeeter, well said.
May 29, 2014 at 11:51 pm #808774
skeeterParticipantSocamr – thanks for your comments.
“Because Skeeter doesn’t get a particular benefit, no one should get it.”
Please re-read my post. I said that state/local government employees should not get a DB plan because 89% (more now) of taxpayers don’t get a DB plan. Whether Skeeter gets a benefit or not is irrelevant because Skeeter is only one person.
Regarding contracts – I should have been more clear. Of course the government has a legal and ethical obligation to honor a contract. The legal and ethical way to handle this would be exactly how Boeing handled the exact same thing a few months ago. You freeze the DB plan – any benefits already earned are retained. Then going forward employees no longer accrue *new* DB benefits but keep the benefits they have already earned. Thank you for raising this valuable point and giving me the chance to clarify. You are correct, of course, on this matter.
May 30, 2014 at 1:27 am #808775
JoBParticipantskeeter..
you ignore the fact that the employment contracts were negotiated with those defined benefit plans in mind…
those people worked for less and in many cases in high risk jobs because of the security of those defined benefits in retirement.
when it comes to municipalities.. a goodly portion of those retirement benefits are earned by firemen and policemen… both occupations that are high risk… both occupations in which an early retirement is desirable for the public.
who do you think will take those jobs after you change their retirement options?
you might want to think this through…
May 30, 2014 at 2:17 am #808776
metrognomeParticipantskeeter – can you provide a link that explains the difference between a ‘defined benefit’ and a ‘defined contribution’ approach? and, can you provide a citation for the 89%? That figure seems way off if the 11% represents all local, state and federal workers, incl. military, and private employers who provide pensions.
Employees covered by the WA Dept. of Retirement Systems (including non-State employees such as King County staff) pay into one of 8 funds, the largest being TRS (teachers), LEOFF (police/fire) and PERS (public employees.) There are typically variations within those plans, depending on hire date. The variations are a result of numerous legislative actions to try to prevent massive future liabilities. Note that the legislature governs contribution rules (a fact that was often left out of the Metro/roads Prop 1 debate.)
I was PERS2 but switched to PERS3 by transferring my (but not my employer’s) contributions plus minimal accrued interest to a new account that I could either manage myself (in select funds) or allow the state to manage for me as a ‘separate’ account; any gains or losses were applied to my balance. In return, I could contribute a higher pre-tax percentage and, on retirement, could take monthly payments or lump-sum distributions. And, my ‘guaranteed’ monthly pension payment was cut in half as it only reflects my employer’s contribution.
I believe new PERS employees are given the option of 2 or 3 and are given periodic opportunities to switch to 3 (but not back to 2.)
Many DRS-covered entities also offer deferred compensation programs. Plus, employees also contribute to Social Security.
Seems like this approach is the best of both worlds. Maybe instead of taking away from the 11%, we should work towards better pensions for the 89% … of course, that may involve reducing multi-million CEO compensation packages.
Here’s the list of DRS plan handbooks in case anyone has trouble falling asleep:
http://www.drs.wa.gov/publications/ (click on ‘Member Handbooks’)
and the history of WA pensions
May 30, 2014 at 4:07 am #808777
skeeterParticipant“skeeter..
you ignore the fact that the employment contracts were negotiated with those defined benefit plans in mind…
those people worked for less and in many cases in high risk jobs because of the security of those defined benefits in retirement.”
Agree 100%. Anyone covered by a DB plan would keep everything he/she has earned. The change I propose would be forward only.
May 30, 2014 at 4:12 am #808778
socamrParticipantAppreciate the clarification. But I’m not sure it solves the problem going forward, especially since so many municipalities underfunded their pensions, so they have past obligations they need to meet, not just future ones.
May 30, 2014 at 4:38 am #808779
skeeterParticipantmetrognome – great questions. I think you’ll find this article to be non-biased and will answer the first several questions you ask about DB and DC plans.
http://www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html
The 11% number I quoted is for new hires. If you were to include all workers, the number is higher – 18%. See the first graph of this study.
http://www.bls.gov/opub/mlr/2012/12/art1full.pdf
Whether the number is 11% or 18% my point is the same – very few in the private sector have a DB retirement plan.
Not all of the trend away from DBs is corporate greed. Younger workers do not see DBs as a strong incentive. So companies are adjusting to give younger workers what they want – gym memberships and catered breakfast lunch and dinner. But in the case of, say, Boeing, it was a purely financial decision to freeze the DB plan. Boeing wanted to stop that liability from growing and eventually reduce it to zero for new hires. By switching to a DC plan, Boeing still spends hundreds of millions of dollars on retirement, but there is no risk of an unfunded liability because the risk is shifted to the employee.
May 30, 2014 at 4:52 am #808780
skeeterParticipant“when it comes to municipalities.. a goodly portion of those retirement benefits are earned by firemen and policemen… both occupations that are high risk… both occupations in which an early retirement is desirable for the public.
who do you think will take those jobs after you change their retirement options?”
Agreed. Workers are smart and understand that a risky job requires greater remuneration. Gov’t employers will likely have to increase wages in order to attract qualified candidates for risky jobs.
May 30, 2014 at 5:07 am #808781
kgdlgParticipantI think part of the problem is also pension mismanagement like what happened in Detroit. This was a fascinating read
http://dealbook.nytimes.com/2013/09/25/undisclosed-payments-cost-detroit-pension-plan-billions/
May 30, 2014 at 1:37 pm #808782
JoBParticipantskeeter..
workers may understand that a risky job requires better remuneration.. but the public doesn’t seem to…
May 30, 2014 at 7:36 pm #808783
metrognomeParticipantskeeter – I was going to say ‘thanks’ for the links, but I got a migraine trying to understand the intro to the SSA report … worse by far than any IRS publication! It amazes me that anyone can make sense of that gibberish, but I feel the same way about Sudoku, Welsh, Polish, Greek, Hebrew, etc.
sna – your point is well taken, but how many funds are invested in savings account-type investments with fixed rate returns? Seems like part of the problem is that some/many pension fund managers anticipated that issue and invested money in higher risk/higher return gambles (REIT’s, etc.) and sometimes lost their shirts … and tons of money.
I like WA’s approach with PERS3 — state fund managers select a range of investment options for those who self-direct their funds and each individual chooses their fund mix. Or, if you’re an economic idiot like me, you just let SEIB manage your funds and accept their lower risk/lower return results.
May 30, 2014 at 8:06 pm #808784
wakefloodParticipantUm…not so fast on the “lower returns” piece, metrognome. As skeets and I have discussed before, most investors are actually better off in the long run buying low overhead index funds and just leaving them alone. Like significantly better off.
You don’t have to buy into the sales pitch of “high yield” with the fine print high fees lurking – whether or not the high yields actually manifest.
Don’t believe everything that you breathe, as Beck once said. ;-)
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