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The latest cool thing for the Washington elite is to beat up on school teachers and firefighters for their overly generous pensions. It turns out that some of these public sector employees get enough money in their pensions that they can actually enjoy a decent retirement.
This is an outrage in modern America. After all, the Wall Street boys have made it so the vast majority of private sector workers can’t get by in their old age, and they plan to cut Social Security and Medicare to make it even harder. So given that factory workers and retail clerks can’t count on a decent standard of living in retirement, where does a school teacher get off earning a pension of $3,000 a month? The media want the public to be outraged over this incredible injustice. Of course, the men and women behind the curtain are saying: "pay no attention to the Wall Street people earning millions of dollars a year."
The attempt to provoke anger has momentum because most state and local pension funds are hugely underfunded. This is blamed on corrupt politicians who concealed pension fund expenses and used dubious accounting.
While this may be true in some cases, the real culprits of the underfunded pension funds are the country’s leading economists. Economists from across the political spectrum told the country that we could assume that stocks would provide an average return of 10 percent a year even when the stock bubble was at its peak in 2000. This consensus included the center-left economists in the Clinton administration as well conservative economists. It was treated as absolute gospel in all the plans to privatize Social Security. Both the Congressional Budget Office and the Social Security Administration assumed that the market would give an average of 10 percent nominal returns in their analysis of Social Security privatization proposals.
Given the consensus within the economics profession, who could blame the managers of state and local pension funds for using the same assumption? After all, were they supposed to question the assessments of economists teaching at Harvard and M.I.T.?
And, it does make a difference. If the economists’ projections had been right, $1 billion held in the stock market in 2000 would be worth about $2.5 billion today. Instead, it is worth about $1 billion. In short, if the economists had been right, most of the troubled pension funds would be just fine today.
So let’s give credit where credit is due. The media want us to beat school teachers and firefighters, but the real reason that more tax dollars might be needed to meet pension commitments is that the economists were clueless.
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The economists were wrong, but, at least in NJ, the politicians illegally used the pension fund for financing tax rebates and cuts so they (Christie Whitman, et. al) would look like heros.
What would the annual savings be to taxpayers if, after public ‘service’, elected officials went home to their regular jobs and collected their pensions and medical ‘insurance’ from the private sector? They really don’t need it from the public sector, do they?
http://www.huffingtonpost.com/2010/08/10/robert-gibbs-clarifies-pr_n_676934.html
And perhaps it might have been great longitudinal thinking to have had the economists realistic about the market.
After all, we are looking at the retirement of the Babyboomers. It would be nice for the boomers to have had solid retirement dollars which could stimulate the economy.
God forbid that retired teachers and firefighters stimulate the economy by being able to afford retirement.
Nice going Jane!! It’s going to be so easy NOT to vote for this guy ever again. It’s almost as if he’s purposely telling all of us not to.
I’m getting very sick of people who claim these scumbags earn anything.
They accumulate, steal, aggregate, take, inherit & otherwise acquire great sums of $$$ — but they earn nothing.
What they earn is the righteous disgust we in the real world have for them.
It’s true that the majority of financial writers want us to be outraged, as was true for the “welfare queen” myth before, at anyone that is middle class and collects a pension. They also want us to hate any middle-class person that simply gets a livable wage. This war have been going on since the days of St. Ronnie and the defenders of the elite have won nearly every battle.
The interesting thing about the wall streeters complaining about pension funds is that their unpredicted losses, have mainly fed the hedge funds and anyone else with a fast HFT colocation box. Pensions, like mutual funds, are the dumb money that the fast traders get in front of and rely upon to buy specific funds and a predictable manner. Of course in some situations the folks running the pensions have finagled rule changes that have put a lot of pension investments at much higher risk of losses and in those cases, as well, the wall streeters are taking advantage of those that are risking someone else’s money. The pension funds often represent the rubes that make sure that the financial elite do not have to worry about their own pensions.
Why are you letting Chicago and George Mason off the hook?
Not to mention the entire community of “professional investment advisors”.
The economists weren’t clueless. They are/were shills for Wall Street who has for generations wanted to get access to pension funds to risk. Keeping interest rates down on safe and insured investments had all to do with the shunting of at least private retirement moneys into the riskier market in search of that promised rate of return.
Economics is one of the few academic disciplines that requires a firm commitment to using software and statistics to prove their preconceptions. Where other sciences attempt to disprove, economists settle for building models that match their expectations. Entire schools are dominated by purity enforcers who promote those that best fit the values expectations with tenure and other goodies. The wise ones, like Dean Baker, at least see through the smoke and mirrors and choose to represent something other than people that owe their livelihood to the glorification of corporate profits.
That’s why it is not science.
NJ is toast. The pols just spent and spent and spent and didn’t bother to pay the bills or fund the States obligations. The whole time they kept talking about how the ever expanding economy would pay for it all. You can bet though that they all will collect their pensions no matter what. I however, will no longer be a resident of NJ as soon as I can sell and vanish. So, good luck with paying off the pension thing folks!
I flipped over to CNN yesterday just in time to hear Rick (taze me now bro) Sanchez complaining that cops and teachers are getting “free” health care, while whining that he has to pay for his out of his diminutive salary. He started to rant about their pensions when I turned it off for fear of throwing something hard at the teevee.
No news that Sanchez is a right wing fool.
Part of the reason for the “generous” benefit packages is that public employees earn lower incomes throughout their working life than they could make in the private sector. That needs to be the first response to those in the right wing echo chamber.
This has long been the unspoken buried land mine for Democrats. Given the give and take backs private sector union labor and many white collar salaried workers have experienced in recent years, the idea that revenue from state and local tax increases may be levied so as to fund unfunded pension liability will not be a popular voting proposition. For generations it has been a core value for Democratic Elected Officials that public worker pensions plus benefit packages for Firefighters, Teachers, Prison Guards (who by law must retire at 55), and State Bureaucrats are untouchable — but how can you leave them untouchable when they have been systematicly underfunded, and any repare will have to come out of the hide of the rate payers?
I suspect what will happen is something like the guarentee program they put in place for the private sector, when pension funds disappear in bankruptcy, mergers, and the like.
It’s bad enough teachers, cops, and firefighters don’t make enough WHILE they’re working to have stress-free time off the job. A lot of people bitch and moan that they’d like to have the entire summer off like teachers do but how many people would like to use their own meager salaries to provide materials for their own jobs? How many secretaries would be willing to supply their own paper for the copy machine so that they could run off 27 copies of a chapter for their students because the school district doesn’t provide books for everyone?
While the politicians are complaining about the overly generous pensions they’re busy using cost of living multipliers that don’t include the most basic items in order to make sure that no retiree receives a cost of living allowance either in their pension or in Social Security payments. If as the Fed has intimated we’re looking at a deflationary economic policy retirees are fucked more so than we are now.
The honestly earning middle class workers who have the temerity to have jobs that provide pensions are the new cadillac welfare queens. It’s all part of the class warfare strategy to pit the small people against each other. The right has done a darn good job at demonizing teachers since forever (lazy, shiftless, get too long vacations, why do they make so much?, I send my kids to private schools, so why should I have to pay for public schools? and so on). Now much the same is being done to public saftey workers – the police and fire depts, whom we all rely on. But they’re now painted with the brush of unfairly jacking up their salaries to get alleged giant unfair pensions.
And the beat goes on. As long as a big segments of our society are willing to buy this b.s., we will be ground under by the real elites. The billionaires are really the ones enjoying the so-called neoliberal nanny state. Who else but the excessively wealthy get giant million dollar pay outs when they’re fired?
Although there are issues that need to be addressed in terms of gov’t pension systems – as this article indicates – that is not the crux of our problems. Our problem is with the out of control greed and venality of the elite, who have bought off our gov’t and own and run the media.
It’s a quiet day or are others having problems like I have had with browser freeze up after signing in?
Anyway, I shed no tears for the overpaid f*ckups running pension funds. Economics departments at all universities are made up of charlatans. Economics itself has become little more than bilgewater propaganda to justify and/or ignore our corporate kleptocracy. Yes, I know there are a few individual economists, like Dean Baker and Jamie Galbraith, who somehow managed to survive the system, but economics outside of these is nothing more than an elaborate con. But I digress.
The problem is that pension funds are supposed to be safe. Low risk, however, means low yield. High yield means high risk. There is no need to have ever heard of MIT or Harvard to understand this. As soon as fund managers go after high yields, they violate the core principle of pension fund safety. There is just no way around this. They participate in the con because if they told the truth they would be fired and because they pull down big compensation for doing very little. The downside for those paying into these funds are that they are notorious slow movers. So consider what happens when they are in the same market as a Goldman. These klucks get burned. When there is a bubble in stocks as we have now, there will be a bubble burst. The smart money will have headed to the exits and be out them before the pension funds even know what hit them. They are the classic patsies.
Now that more than a few pensions have been openly emulating hedge funds the one thing that is certain is that there will be bigger losses coming down the pike. Pennsylvania, among other states, has some interesting rules that make it so that local pensions can take all sorts of risk as long as they get a little guidance from one of the big Wall Street firms like JPMorgan. Asking a shark whether it is safe to take a swim.
Wow. That was great. And and easy to understand. So simple that MSM might be able to pick it up and run with it.
Good job!
What makes this even worse is that the growth of the late 1990s — growth achieved largely by tax hikes that injected money into the Treasury to pay down the debt — was ignored when the economists chose to poor-mouth Social Security’s finances, even though the same economy that gave us the zowie-wowie stock market also ensures that Social Security does well.
Here’s a little tidbit the privatizers would rather you didn’t know: So long as the growth of the economy averages 2.7% or more a year, Social Security never, ever runs out of money. Guess what? Growth rates for the US economy for the 75-year-period from 1929 through 2004 (years that include the whole of the Great Depression) were 3.6%.
Government employees should never have been allowed to set up unions. This is the big problem.
Let’s not blame this all on economists. There are multiple causes of blame. For one thing, all of these pension funds have their own in-house economists and actuaries. But they continued to accept unrealistic future projections when real life experience showed that they weren’t earning anything close to those wildly optimistic rates of return. The alternative was politicially unpalatable. (Translation: telling the voters the truth about what was to come.)
Here are some points that I made on a previous post about the same general subject (i.e. attacking public employee pensions).
The problems with things as they now stand:
1. Public employee unions should not be able to contribute money or support to political candidates. Otherwise you get into the situation we have now: with enough gerry-mandered Democratically safe districts elected officials are too beholden to the big unions. When they sit down at the negotiating table, nobody represents the taxpayer. (Same with smaller entities like cities and school districts; union contributions, endosrsements, and field support are often the single most important determining factor in who gets elected.)
2. Private sector unions and pension plans should be stronger. Workers have been getting increasingly screwed over the past thirty years. 401(k) plans are a scam; many people dependent on them will have a rude awakening when they retire. Businesses should be required to offer, and adequately fund, defined benefit plans.
3. Public employee pension plans, at least in CA, have habitually, for decades, over-estimated their Return on Investments. For decades they used a projected annual rate of 8% despite the fact that year-after-year they came nowhere close to earning this rate of return. As the prospect of the baby boomer retirement loomed closer, they turned from investing in bonds to riskier vehicles that offered a higher rate of return. (Translation: mortgage-backed securities.) You know how that went. CALPERS lost $500 million as an investor on the catastrophically ill-fated Tishman Cooper Stuyvesant purchase. Sale price: $8 billion; value when Tishman committed “strategic default” and walked away: $1.5 bil.
4) Historically, up until Jan 1. 2006, under the accounting rules for government entities, those entities did not have to account in their annual budgets for future pension liabilies beyond the current year assessment. Owe CALPERS $1.5 mil, budget $1.5 mil. But no need to put away any reserves for the projected assessment three years down the road of $6 mil. This was great for the elected officials who blessed these deals, because by the time future benefits needed to be paid, the officials would either be retired themselves or in a higher office and no longer held to account. (Nice note: the city managers who help negotiate with the employees also belong to CALPERS and get the benefits of the same pension plans. Neat, huh?)
After the law changed, government entities have to allocate for future “post-employment benefits” (PEBs) under the accrual accounting system. At midnight the day this new rule went into effect, one of CA’s various retiree health care funds went from $5 bil in the black to $10 bil in the red. (A more accurate reflection of its true status.)
So now, at the same time government revenues are declining with the economic meltdown, they are, for the first time, having to put aside greater and greater reserves for the looming liabilities.
e) In CA during the financial boom times of the 1990′s our union-captured Democratic Party controlled state government made a retroactive change in the pension calculation system. It gave plans the option to move from 2% of final year salary times the number of years worked to 3%. That gave every pension an immediate 50% increase. A $30K pension became $45K, a $40K pension became $60K, a $60K pension became $90K.
Even Brown has admitted that the current CA pension system is “unsustainable”. Projections of the deficit range from $330 bil to $500 bil, but one analysis says the real number is $1 trillion.
The solution is a combination of reforms in the way pensions are calculated and tax increases — but not on ordinary Californians. We need to get rid of state tax breaks for luxury purchases such as yachts and private aircraft, giveaways to oil companies (hey, bet that one’s a surprise!), etc. But what we really need to do is reform the state income tax. You wanns hear something that will blow your mind?
CA’s state income tax top bracket starts at $41K. That’s right; at $41K in taxable income regular everyday Californians pay at the same rate as Steven Spielberg, Kobe Bryant, Steve Jobs, etc. On top of that we have the highest regressive sales tax rate in the nation at 10%. Ain’t government wonderful?
I have a great deal of sympathy for your points – but some of the details in your post do not fit my memory
Sty Town was sold by Met for $5 billion with the Met taking back a 3.5 b mortgage which was later sold – I do not know how the number became $8 b as you posted. But your point is well taken – the walk away made the 2nd mortgages worthless.
The CA fix is easy – under current ERISA law for non-gov plans current accruals to date are fixed in stone – and future accruals are back at 2% or perhaps a cash balance plan replaces the current plan. But State and local governments are exempt from ERISA, so we have only CA law to worry about.
I lived through the takeover by the economists under Reagan
Before Reagan the actuary set the investment return/discount rate “with the advise of investment advisers”. The rates were 6 to 7% based on 95% confidence historical rates of return 1929 to the year in question.
Under Reagan the corporations were encouraged to used economists – and suddenly we had to fights “growth” scenarios and projected stock returns that were based on very short histories – we put out papers about the inherent rate of return being the same as bonds for the same reason that any sane person would not touch a bond if they were funding a long term liability and there was an asset class able to give a safe return 3% higher than bonds.
But the Reagan economists gave corporations – and cities – the answers they wanted – a high return that made the suggested contribution required much smaller. Actuarial consulting firms closed/merged and were bought out while economic consultants and management consultants prospered. Thank goodness other countries still support a strong actuarial profession in the pension world.
Congress has the ultimate federal employee. Here’s their plan (catch the SS payment even if you arenot 62):
http://www.senate.gov/reference/resources/pdf/RL30631.pdf
Interesting position that fails in the same way the Economists failed. Growth in our Stock Market and thus in the pension system requires a REAL engine of economic growth. So let’s look at economic growth:
Public Sector growth? nope that won’t work.
Housing via Cheap Credit? Nope that won’t work.
Finance Industry Growth: Maybe, but were too leveraged and there are serious questions as to whether Banks add REAL value leading to growth, or are they merely parasites.
Manufacturing Growth: No evidence that will happen soon.
Tech Growth: One of our few solid hopes for growth.
Problem is that economists put a little too much faith in Housing and Finance to grow our economy….probably not a good model in an uber competitive global environment. We’ll probably all have to work harder and longer than our predecessors and we’ll eventually have to trim Govt Fat and Pension Fat or there will be NO GROWTH and the pensions will fail to grow as well.