Her ein the states, we definitely have a problem with pensions. Despite ecomic troubles, it’s not the private sector, but the public.
This link is a mere sampling: I’ve heard of similar crises in a number of states, particularly California and Illinois. This is the first I’ve heard about Rhode Island’s troubles, which are the very worst per-capita. And of course, pension funding problems helped spark Republican strength in New Jersey and Wisconsin.
It is an interesting article, but for those unwilling to linkjump, it basically looks at the gross uynderfunding. In all these cases, politicians overpromised public sector workers benefits based on ridiculous projections of the investment growth. The stock market troubles merely exposed a growing problem early.
Some sources that are inclined to be skeptical about government have been reporting on this issue for years, predicting the exact events that are now unfolding. The crisis is huge and there’s a lot of blame to go around. In some cases, besides basing their financial policies on absurd predictions, some funds didn’t even invest based on performance. From the above article:
As for what to do about it, I’m afraid it’s a little bit too late to do anything other than cut, cut, cut. The unions will fight back against any cuts; as the Washington Post article mentions, they’ve filed lawsuits in every state that has tried to cut benefits. So there will be long, drawn-out fighting. Everyone and everything else that relies on state governments for funding will see their budgets get as money is diverted to makeup for shortfalls in pension funding. There will a political crisis. Universities will suffer. Public education will suffer. State parks will suffer. Aid for the poor will suffer. There’s no need to speculate about this. It’s already happened in California over the last three years.
As well they should. In many cases, such as the Wisconsin teachers, most of the pension and health care benefits were gained as a result of deferred compensation in contract negotiations. That is, states negotiated higher pension and health care benefits tomorrow, in return for lower wages today. Well, tomorrow has come, and they are just turning out their pockets and saying, “Sorry, can’t give you what we promised.” Unions are rightly outraged to be played for such chumps, giving up wage increases for nothing.
It is a very bad precedent, because now, no employee will trust promises of deferred compensation, because state have proven themselves untrustworthy. Budgets are going to get worse as no one will accept deferred compensation, and services decline as states struggle to find competent workers who will trust them and the promises of compensation and benefits, which can be rescinded at any time.
Yes, I could pretty much agree with all of that. The problems that state governments are facing do not lie with any one individual or any one group. Neither does the cause of the financial crisis or the political paralysis in Washington. All of these problems arise from the fact that our political and financial system has become corrupt from top to bottom, from the fact that stealing and lying and fraud are considered to be part of standard business practice, and from the fact that no one with power will take responsibility for their own actions. Once you have a system like that in place, the inevitable results is a slow-rolling financial catastrophe as the trust and confidence which are necessary supports of a modern economy slowly erode.
Be that as it may, that seems to be irrelevant. Whether politicians in the past promised impossible benefits then or impossible benefits now, the benefits remain impossible. I don’t see how they can be paid for.
And that to me is the critical point the Unions don’t want to accept: they get angry at current politicians (usually Republicans) for saying, “No, we’re not bankrupting the state or destroying every other service to pay you,” but it seems to me they ought to be mad at the former politicians who made the impossible promises. Of course, I also suspect we’ll find a lot of people are quite willing to work for the supposedly inadequate pay, but that’s a separate issue.
Given the fact that state employees have legal contracts guaranteeing them benefits, which they negotiated in exchange for pay raises in many cases, why should they be the ones who sacrifice? Why shouldn’t the states simply default on the bonds? It is the responsibility of people buying bonds to judge risk and decide if the returns are commensurate. We hear all the time that the reason that rich people deserve so much money is that they take risks. Well in this case they fucked up and they can live with the consequences. Maybe they can sue the bond rating services to get back some of their money.
Do you like crashing the economic system to get yours? The governments need to borrow, and protecting their credit is a legitimate . It’s a lot more legitimate than gold-plated retirements. I dislike breaking contracts, too, but it’s far more desirably to break a contract paying out than one paying in.
Aside from which, you didn’t notice that if you stiff your bondholders, you still don’t fix the problem. You still come up heavily short, only now you can’t borrow anything and your economy is in crisis.
I also happen to think that the state is for everyone, not just those who lucked, or bargained, their way into it. The “adults,” in your analogy, who pay the bills aren’t those who made the promises. Those who made the promises were offering to pay with other people’s future money. And I rather suspect you’d change your mind if you didn’t support the union.
Aside from which, you can’t enforce a contract on the state.
The core of the problem is that the public at large is uneducated and irresponsible. These payments are far off into the future and people are not interested in hearing about sacrificing now for the sake of payments far off into the future, especially if some slick politician is claiming that this is unnecessary (“Yes we can!”)
There is also some borderline corruption involved, in that the participants, including both union reps and government officials, pressured actuaries to use dubious and optimistic assumptions about things like interest rates and rates of return on assets. (I believe in NY State, the actuary on whose advice the legislature relied was actually employed by the public sector unions, and he pretty much acknowledged that his numbers were made up to satisfy the unions.)
What brings this to a head now is two things.
In a recession, pension liabilities are hit with a double whammy. At the same time, interest rates decrease (which increases liabilities) and pension assets lose value. (This also applies to the private sector.)
The adoption of GASB standards forced states to recognize the liabilities in a more formal manner.
I don’t see why that same logic doesn’t apply to the people who took state jobs. They took the same risk as the bond purchasers. Maybe they too should live with the consequences.
The legislature was authorized by the voters to enter into contracts on their behalf. Just because you disagree with the will of the majority does not mean you are not bound by contracts made in your name.
No, it was not other people’s money. It was state revenue, legally obtained through tax collection. It ceases to be your money when it leaves your wallet. You have one recourse to affect how state revenues are spent, and that is through the ballot box. It is very irresponsible to refuse to honor a legal contract by claiming it wasn’t binding on you. You are a citizen of the state, and whether you like it or not, we have a system for collecting taxes and spending them, and it does not include minority interests getting to pick and choose which contracts they like, and which they find inconvenient.
An intersting point of view, that you would bring in the apparently very silent “majority.” I’m not at all clear myself how this, but the plain fact is that majorities can repudiate contracts as well as fill them. Moreover, these “contracts” are not perpetual. They can be legally abrogated at any time by the state, which is under no requirement to continue them forever. As a matter of law, they have no force beyond what the legislatures or other responsible parties accept.
So I would say you would have to put up a better argument beyond, “Contract!” from a legal perspective. And from a moral perspective, a self-serving contract created by the corrupt or the dishonest isn’t terribly binding.
That’s the problem: it isn’t state revenue yet. The gold-plated pensions were sold by proclaiming damn lies (not statistics as assumptions. The cost to future generations will be vastly higher than claimed, high enough that it may deeply mar their finances in turn.
Yes, that would be my point. The legislatures thus far don’t appear interested in raising taxes to fulfill dishonest past promises.
Nice job turning this into an attack on me, for civil disobediance, for something I didn’t say, and which would be an argument in favor of the greater justice even if it were so.
More specifically, you may want to check your law. The soverign power is a beast, and gets excercised all the time. And among one of its hilarious little effects is that contracts are not always binding on states or the feds. And as I mentioned, even if they were there’s no reason the state must actually continue said contract.
I think people need to understand some terms here. When they talk about pensions being “fully funded” that means that there is money in their accounts to support every single person in their system at this point in time if everyone retired right now. This includes people currently working and just recently vested. When Rhode Island is 62% funded, it means that they have 62% of what is necessary to fund the system if every single one of their workers retired en-mass, in addition to funding the current retirees.
Now as to the question of what to do - here’s a radical idea - fund the pensions. This “problem” is caused by several factors. Short term economic struggles, rosy projections and reductions in the workforce because of state and local governments slashing jobs. WAG - If you ask workers to contribute a little bit more (~2% max) to their own retirement, wait out the economic downturn and introduce a 2-5 year temporary 1% tax increase on the “job creators”, you’d probably fix the worst of the worst. The ones in the middle and upper tier will fix themselves in time. This isn’t a universal problem. Some pension systems aren’t run by states or municipalities directly. They have a board that oversees them - and in some of these cases the states are trying to unload their own public employee systems into these systems because of how well they are run. This isn’t even close to a nation-wide problem.
This is all incorrect. Fully funded means that the assets equal the present value of accrued benefits. Present value of accrued benefits is based on actuarial assumptions, which includes likelihood of retirement.
What is true is that there is frequently not much difference in the present value of benefit based on when a given employee decides to retire. This is because the pension formulas generally adjust for years worked after retirement eligibility. Meaning that a given employee can get X per year if he retires now and X * (1 + Y) if he retires next year, and so on. And “Y” is frequently (but not always) determined by making the year of retirement cost neutral (at least based on the actuarial assumptions, which are - as noted above - frequently highly dubious).
But to suggest that the funded formulas underestimate the true funded status, as you’ve done here, is simply an error.
My mistake - I must have misread or misunderstood something a while back. I read your statement and did a little more digging and you are correct. Thank you.