California’s public pensions are breaking the bank
latimes.com
latimes.com
The one that focused on El Monte was particularly discouraging. http://www.latimes.com/projects/la-me-el-monte-pensions/ A former city manager with a $250K pension rationalizes with: “I have to admit that we made the mistake back then, and I have to admit that I make too much money now, but what can I do?”
In short, the problem is this: commitments were made when interest rates were higher than now. Interest rates have now stayed far lower for far longer than expected. Meeting those commitments in the recent few years would have required taking more risk than the funds can justify.
Hard equations are coming home to roost.
Years pass and then the cities lament, crying that these pension funds are now undue "public commitments on the back of the taxpayer", such as aswanson says above. IOW cities are trying to screw retirees out of their pensions.
For example, at this very moment Houston, in the name of "Pension Reform", is trying to coax the state to pass a law that would cut the pension of widows and widowers in half!
And that's just part of the cutbacks Houston is asking.
The people that voted in the fundamentally-flawed plans are also the ones that are standing to benefit from them as the legislative fixes are rolling in. I sympathize that they have built plans around the expectations of the money being there, but at the same time I think it's pretty unrealistic to expect current taxpayers to pay for unrealistic and underfunded plans.
So yes, I sympathise with people who allowed themselves to be lied to, i really do, because ultimately this is white collar crime we're talking about - but caveat emptor also applies.
Given that, an expected 8% rate of return isn't unreasonable.
Leaving that aside - even at the time it seemed ridiculous - so learning 20 years later that the "professionals" involved have essentially bet everybody's future, on projecting those kinds of returns for 40 years...
... because we all understand I hope. When this thing blows up - its not going to be pretty.
We educate individual investors to believe that they should achieve similar yields in their 401k accounts, why is only "white collar crime" when you need to fulfill the promise?
The retired employees completed their part of the contract and payment is due in full. They gave up higher levels of income to work at jobs where the pension is guaranteed (cities pay less than private firms, on average). To change the rules once employees have retired and without compensation will result in lawsuits and criminal prosecution, as it should.
WkndTriathlete says: "...it's pretty unrealistic to expect current taxpayers to pay for unrealistic and underfunded plans."
Sorry, that's what taxes are for. And what’s the problem with paying taxes anyway? To live in a city you pay city rates. Paying taxes on a well-managed city budget is one of the best ways to maintain and ensure that your property values increase. But for God’s sake, pay attention to politics and hold leaders accountable!
If you don’t want to pay taxes, then become a “Mountain Man” and move to Montana. Live on a mountaintop w/o roads, sewer, water, hospitals, stores, and cellphones. Or maybe you want your city to go the way of Detroit? You can
– kill your property values,
– call 911 and get nothing, not even a dial tone,
– Burn your own trash,
– Run your own septic system,
– Run your own electric generator,
– Buy a satellite cellphone (no other option – no other service available),
– Drive to another city once a month to stock up on flour, sugar, beans and batteries.
The problem is that government failed to govern itself. I'm a person with a public pension that is largely funded. By offering that pension, my employer saved significant sums of money compared to paying someone like me a market rate.
The real devil here is the dumb, inflationary fiscal policy where debt is virtually free and nobody can actually save anything.
As a layperson, the 2008 financial crisis felt like this to me: Someone shrank the effective value of my savings and earnings by something like half.
The worst aspect, though, is that the next step would be to ask for my and other taxpayer's money to fix the botched job the pension managers did. And next worst aspect would be that this request would never be refused, because you can't deny people their money, can you? That means, if they work for the government, if they not, you can take their money as much as you wish, that's why they are called "tax payers".
Part of the reason why even reasonable people do not take left's claims of "tax to protect environment" seriously because this is all the money that they can see going to the pockets of politicians and government employees.
That is certainly not a minuscule portion.
Pensions are part of employee salaries. Not budgeting for them is like buying a house, and not budgeting for anything past the first mortgage payment.
Why are we talking about defaulting, or haircutting pensions, instead of defaulting... On any of the other people or companies that the state owes money to?
Changing 'future' pension payment rules, where a pension kicks in after 20 years of employment, when you are on year 19, should not fly.
I fail to see how social security, which is a national program for all citizens, is any less holy than pensions. Pensions are usually backed by city and state govt which have much shallower pockets.
What I'm saying is if the federal government can cut back social security benefits there's no reason we shouldn't cut future pension benefits
SS is a welfare program. This is fundamentally different from a salary. Welfare programs can, and do change just before, or just after, you become eligible for them. This is fine. This is social programs are supposed to work. (Although, generally, their accounts should not be plundered to fund illegal wars.) There was no contract that you signed when you started paying into SS. It's a tax, which funds a welfare program.
Salaries, on the other hand, are sacred. Pensions aren't social programs. They are deferred salaries. Cutting pensions is a salary clawback.
If you're going to stop paying the pensions you're obligated to, you damn better have declared bankruptcy, and let your creditors - including the pensioners - pick over your carcass.
There are other programs administered by the Social Security Administration (e.g. SSDI) that are welfare programs, but that's not what the previous poster was talking about.
The fact that the payments are structured much like a pension is tangential. For example, nothing stops the feds from restructuring it into flat payments.
What do you base this statement on? The Federal Government enumerates the exact formula used to determine future social security benefit payments, even for people 40 years away from retirement. Given a known salary scale, a 22 year old can calculate their expected future social security benefit down to the penny. This future benefit is funded by a 12.4% tax/contribution from your salary. It's a % contribution for a defined benefit.
How is that any different than a state or municipal pension?
They are in fact so similar that, in some states, participation in the state's pension plan entirely replaces (rather than compliments) participation in social security.
That's more than double the $5.2 billion a year the Brown administration hopes to raise from a plan that would boost gas taxes by 12 cents a gallon, raise the vehicle-license fee by $25 to $175 a year (depending on the value of the vehicle), impose a $100 annual fee on electric cars because they don't currently pay gas taxes and include a large hike on diesel fuel. Money is fungible, so if the state overspends on pensions, it has to make it up somewhere else. [2]
[1] http://www.mercurynews.com/2017/01/04/jerry-browns-pension-r...
[2] http://reason.com/blog/2017/04/07/california-road-tax-hike-i...
> Part of the reason why even reasonable people do not take left's claims of "tax to protect environment" seriously because this is all the money that they can see going to the pockets of politicians and government employees.
"Hey, I want to be able to rob government employees of the compensation they were contractually promised when they did their jobs."
Color your argument however you want, in whatever political flavor you like, that is essentially what you suggest. I'm really not going to feel guilty if the government taxes you to pay average Americans the pay they agreed too.
Sorry, I'm genuinely not interested in your politics of envy.
Personally, as far as I can tell, for the same job the government would pay me less than I make now. So...I'm really not worried Government employees are being overcompensated.
Government departments promised each other outrageous compensation and somebody who is coming 30 years and wasn't even present back then is supposed to be skinned to the bone so that grand pa can swing his golf club in Scotland?
[Source:http://www.latimes.com/projects/la-me-el-monte-pensions/]
Who is the one doing the 'robbing' here?
There is limit up to how much you can abuse these things until the next generations call it quits and leave you with nothing.
Okay, so question, why aren't you working as a Government employee due to the outrageous compensation that dwarfs all alternatives?
Did I state the compensation for government employees is more than every other job out there?
My point is you can't award your self a unreasonable pay package and then expect somebody who didn't even sign up to pay for it, pay for it.
Which is an admission that your following sentence is a fiction:
> My point is you can't award your self a unreasonable pay package and then expect somebody who didn't even sign up to pay for it, pay for it.
Government employees aren't overpaid when the people who can get them can be paid more by the private sector in terms of total compensation.
The next problem with your argument is you intend to rob people who agreed to be paid $X for their labor after they kept up their end of the bargain.
The third problem is, if you do that, you'll see a steep decline in police & military who heavily rely on pensions as part of the total compensation package. I suggest robbing your police, military, and other emergency/security forces because you think their compensation is unreasonable is unlikely to be a wise choice if you enjoy a stable society.
Oh btw, it gets better, since in order to do this you have to void a good chunk of legal precedent about employment and will likely create a ton of other unintended, non-obvious consequences.
If you don't like how the government operates, exercise your power to vote rather than attempting to rob people after they upheld their end of the social contract.
http://transparentcalifornia.com/salaries/san-francisco/?&s=...
- Approve HOME SF - a Katy Tang plan to provide bonuses for dense housing near transit
- Approve the Safai/Breed housing plan, which would require 18% of units to be affordable, vs 28%
- Show up to the Brisbane Baylands meetings and voice our support for a plan that includes 4400 units of housing, vs zero units
- Support SB 35, which would fast track projects that are near transit and include affordable housing
- Support SB 167, which would allow the state to be a lot more aggressive pursuing violators of the Housing Accountability Act.
a Katy Tang plan to provide bonuses for dense housing near transit
You can't purchase a lot of land and bulldoze it for a 3-story building near a subway station. It's just not profitable. The building will naturally be a high-rise. No "bonuses" needed to induce that.
The overtime amounts are often more than the base salary.
21K of $100K+ pensions. I wonder how much i should make to afford 401K contributions large enough to have result equivalent to one of those $300K/year pensions.
From what I hear in Canada, university professors get some percentage per year of service of their average salary, but it is capped at 75% or something. No professor has $200k annual pension payments.
Also, what is the purpose of such high pension promises? Does the government really have such a high talent retention problem?
It's based on peak earnings, including overtime: http://dailycaller.com/2014/06/20/california-public-employee... So naturally California public employees will rack up huge amounts of overtime in their final year of employment.
> Also, what is the purpose of such high pension promises?
Well funded public sector employee unions donate huge amounts to Democrat politicians and strongly encourage their members to vote for the same. More simply, it's outright corruption.
> Does the government really have such a high talent retention problem?
Based on my visits to the California DMV, no.
It's based on peak earnings, including overtime
plus saved vacation and sick days, including carryover from all the previous years. The number of such saved carried over days are usually not capped. As result the last year total may easily double the previous years yearly income. It is called "spiking".
http://resources.calstrs.com/CalSTRSComResourcesWebUI/Calcul...
I think it is about 2% of your highest salary per year of service (once you hit 60). In other words, if you work 40 years and made $100,000 in your highest paid year, you would get $80,000 (80% of 100k). Some of them take highest 3 year average, or something like that.
The pension promises are absolutely about solving a talent retention problem. They pay way under market, and try to make up for it by offering amazing retirement benefits. If they were funding the pension properly, this wouldn't actually gain anything (since you could just give the employees more money instead). However, the government never funds them properly, and is basically borrowing from the future to retain employees today.
It should be noted, however, that governments aren't the only ones who do this. Detroit motor companies did the same thing (offered amazing pension plans in lieu of more money to keep workers), and also failed to properly fund them. The difference is that auto companies can file bankruptcy and not be obligated for the pensions. Because of this threat, unions were more willing to negotiate a lower pension rate in return for no bankruptcy.
Personally, I think a deal is a deal. If a worker chooses to give up salary in return for a pension, you shouldn't be able to just revoke that when you realize you promised too much.
highest salary per year of service
you shouldn't be able to just revoke that when you realize you promised too much.
See also https://www.city-journal.org/html/pension-fund-ate-californi...
Inflation. If you work for, say, 30 years at 2% annual inflation, that comes out to about 81% total inflation by the end of it--that makes weighting early years the same as later years completely untenable.
According to bankrate, you would need to save about $24,000 a year for 40 working years to be able to support $300,000 a year for 15 years of retirement (using the default bankrate settings of 7% returns during pre-retirement years and 4% returns during your retirement years).
That is only 8% of your annual salary (assuming you were making $300,000). That is NOT an unreasonable saving rate for your retirement.
You also have to remember that retirement benefits is a HUGE selling point for government work; they are able to pay WAY below market rates to workers because they have promised this benefit.
Of course, when you are planning your own retirement, you can't just assume you are going to die at exactly 79 years old, so you have to save more. That is one advantage of a pension fund - it averages out the cost for people who die early versus people who die late.
Anyway, bottom line, the pensions aren't ridiculous when you look at them in context. Of course, they were not being properly funded, but that isn't the fault of the people who took them.
Yet it is somehow the fault of the taxpayers, who are asked to sacrifice part of their income to make up for it.
how could have one saved $24K/year in 1977? I think it was pretty damn good whole salary back then. And it is kind of obvious that $24K yearly savings today wouldn't get you an equivalent of today's $300K/year in 2057.
You max your IRA every year ($5500 tax advantaged). You also have a Solo 401K, in which for Tax Year 2017 you can contribute up to $18,000 a year as an employee and a total (including employer -- your business -- contributions) of $54,000 tax-advantaged dollars. We'll ignore "catch up contributions" and the fact these limits increase over time, and make this a round $60,000/year.
Let's assume that, after expenses, averages a 4.75% return over 40 years. Conservative, but let's roll with it. Based on the calculator the SSA provides, your monthly SS benefit is ~$6500 at age 65.
After 40 years, you have ~$6.75M in your tax advantaged accounts. With a conservative withdrawal rate to keep your lifestyle the same, you can have ~$220K in retirement income a year (in today's money before taxes taken into account) w/ SS. However, the problem with that is you'd never draw it down. Even if you adjusted it for inflation, you'd die long before depleting your savings.
https://www.city-journal.org/html/pension-fund-ate-californi...
I'm not sure why Boomers would expect their children, who are saddled with unprecedented amounts of educational debt and who are priced out of the housing market, to be able to meet that obligation, let alone feel any duty to do so.
I don't understand why it's controversial that California (or any other state) should be legally obligated to pay the pensions they promised to workers. People make long-term decisions based on those promised benefits, and pulling the rug out from under them is unconscionable. And, luckily, in California at least, illegal.
Just look at San Jose. Just look at Social Security. It is hard to identify these liabilities as working the way they were intended. And what do the people gain from them? Overpaid cops?
(I assume you meant immoral, not amoral.)
0 - http://www.osfi-bsif.gc.ca/Eng/oca-bac/as-ea/Pages/ascpp.asp...
After considering investment returns/time value of money/"net present value" of contributions:
If you were a baby boomer, you'll get ~2x what you put in.
If you were born in the 80's, you'll get half what you put in.
So yes, they "fixed" CPP by changing it so that younger people are legally obligated to "invest" their money in a pension fund that returns half of what it should return based on the contributions younger people are making.
I think CPP is in danger. The danger is that someone will create a clear enough explanation of how CPP was "fixed" and young people will decide that there is no reason for them to allow being screwed the way CPP does.
https://en.wikipedia.org/wiki/Odious_debt
Private sector unions are essential and should get more protection from the government, but public sector unions don't make any sense to me.
Edit: To clarify first sentence, I mean that they do not have to take or hold these jobs.
To me, the current status isn't as simple as that. The current status that I see is that public pensions have outsized control over government spending, which means you can't just think of these unions in these simple happy terms.
It also seems perverse to many private sector workers that public workers, who are unionized, pay dues to the unions, which lobby the government for more benefits. Essentially the government is paying people to lobby against itself. Private unions don't have this conflict of interest, their funding is based entirely on profits based on the market.
[1]:http://www.mercurynews.com/2016/11/02/bart-janitors-whopping...
1. Privatization has a terrible track record, but it gains steam when the government is hamstrung by the labor-cost differential.
2. Governments are paying social democrat labor costs, while taking in neoliberal revenues. This makes nice things look inordinately expensive.
3. Jealousy in the private sector fosters conservatism / lazy govt worker stereotypes.
...
Basically long term the private sector unions undermine their own cause.
Once again, if you have a bunch of short-sited actors (c.f. financialization of business) you better be damn well they reach some equilibrium.
In the US, the federal and state governments are functionally and legally unable to undergo bankruptcy. Although municipal governments can technically go bankrupt, only five cities have done it since the Great Recession, and none of those bankruptcies actually resulted in significant debt shedding. In that same timeframe, hundreds of thousands of businesses went through bankruptcy.
We wouldn't be in the issue if Calpers wasn't terrible at investing. They did really stupid things like invest in the most risky tranche of CDOs during the subprime crisis. Thats not the fault of tax payers.
A city certainly can, and they have, e.g. San Bernardino, Stockton, Detroit.
Politicians bribed unions with promises of payments which could not actually be sustained. That sucks, there need to be checks against that happening, but that doesn't need to be held sacrosanct at the cost of actual services.
There's a reason that the US has a robust bankrupcy court for individuals -- it doesn't matter if you signed a contract for 15% credit card debt; at the point you are out of money and can't pay the bills, there's nothing ethical about keeping someone enslaved to uphold it.
This is the exact same thing, except mostly it's their parents who elected corrupt politicians, so there's even less reason to hold people accountable for the decisions of irresponsible politicians two decades ago.
The fact that their obligations are unfunded is a major problem and borderline accounting fraud - they should start treating it as actual debt, even if suddenly noticing the elephant in the room would actually invoke talks of bankruptcy. Coincidentally, this would also mean that the voters can implement the required changes for future, no matter how scary the wording on the bill sounds.
You want to fund things? Get Trump to send a bill to Gates, Buffet, Koch's, etc.
Why blame the public system for the mess private capitalism is truly responsible for creating?
These funds stuck trillions of dollars in the stock market, which is exactly how Gates, Buffet, and Koch made their money. The pension funds are still getting massive returns. But that does not stop politicians from promising _even more_ than was possible.
Capitalists want their investments to grow. Largely at the expense of others.
We'll put the pedal to the metal so the richest can earn more than is necessary. And poo-poo the notion that public workers should get even a smidgen of the same consideration.
Because it won't drive unreasonable growth if we're padding out health plans for the people that do the work.
I understand your argument, and the real problem is that state never should have made those promises.
This is much more acceptable, IMO. It's the difference between "we're paying you less than you thought we would for work you did" and "we're going to pay you less for work you'll do in the future". There's an unethical opening for convincing people to take a lower compensation now in exchange for the right to earn a higher compensation later and then reneging on it (see also: firing people immediately before a vesting cliff).
One reasonable objection is that public pensions are never fully funded at the time they were negotiated with the public sector unions. This is done on purpose to make the cost look lower to get a better total compensation package. They know they will almost certainly be bailed out later. This is fraud.
Public workers should be forced into defined contributions plans like 401-Ks.
Because the people of California can no longer afford it. It's unfortunate that baby boomers allowed politicians to kick the can down the road by negotiating pensions rather than salaries, but now fiscal reality is settling in. And you want to talk about unconscionable, what they have in effect done is a money transfer from their children to them, since now younger generations have to pay the pensions, while receiving none of the benefits. That's why you're seeing movements like Generation Screwed here in Canada (http://www.generationscrewed.ca/).
The baby boom generation makes me think of the "Half a Life" Star Trek episode.
According to CalPERS https://www.calpers.ca.gov/docs/forms-publications/facts-at-... it's $32k/yr, which is hardly extravagant.
But that of course includes a lot of people who have spent little time accruing benefits.
When I worked for a state university, in IT as a senior DBA, I earned half what private sector friends and professional acquaintances earned.
The story was something like "well, we can't afford to pay you enough to save for yourself, but we'll make sure there's a decent retirement to draw from for you."
The problem is, after the housing bubble, and with low-interest rates, the investment methods they had relied on haven't kept up.
Not saying this covers the more extravagant pay outs. But public workers on the whole have largely been shorted up front in exchange for a decent retirement.
Most public jobs pay far less then private sector jobs. Pensions are one of the reasons behind it. They are part of your compensation package, not some communist largesse.
Middle managers in valley firms make more.