Battle Looms Over Huge Costs of Public Pensions

An excellent article from the New York Times on the emerging tug of war between taxpayers and recipients of public pensions.  Taxpayers are in the unenviable position of paying for public employees retirement and health care benefits; things that they themselves often don’t have due to the movement of private industry to self funded pension plans like the 401(k). I’ve suggested previously that some of these agreements will wind up being abrogated or changed as public pressure builds and it looks like Colorado is one of the first states to move in this direction.  There’s a huge funding gap in public pension plans of some $ 1.0 to $ 3.0 trillion nationwide and this is on top of the problems with social security.

The actuarial assumptions for many of these plans included a far more rosier picture of stock market returns than what recent experience has borne out.  In the boom years, much of this funding was provided for by stock market gains.  Frequently, those gains were so big as to make cash contributions into these plans unnecessary.  Those gains reversed into losses during the collapse of 2008 and the picture going forward is that future gains will be far less than what they have been.  The result is the funding gap and the only way to close it is to fund it in cash or to cut benefits.  Funding in cash may require tax increases which are politically unpalatable which leaves the only other option of cutting benefits.

Ultimately, this sets up a pitched battle between two “have nots”; the beleaguered and unemployed taxpayer and the retired state worker.  Those who’ve mismanaged and abused the nation’s financial systems thereby causing this mess have taken their money and run for the exits while leaving everyone else to muddle through. And muddle through we must as there are few other viable choices.

Today in the financial press, there was open speculation about whether the government is fresh out of policy responses.   The growing consensus is that they are.  That means a further deceleration in the overall economy on the way to a possible stall. I’ve felt for sometime that there is really no policy response for the structural problems we face.  At bottom, America no longer has its industrial base and re-establishing that is no small feat.  The first issue is gaining back the expertise to do so as that was outsourced along with the jobs.  The second issue is re-establishing it in an environment that is far more competitive than in earlier decades when America’s industrial base ruled unchallenged.  The lack of this industrial base is inextricably tied to our very deep problems.

It will be a very long and hard road out of the wilderness.   That will not be without huge and enduring social consequences.

Battle Looms Over Huge Costs of Public Pensions


There’s a class war coming to the world of government pensions.

The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.

The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.

At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.

The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.

So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?

Consider what’s going on in Colorado — and what is likely to unfold in other states and municipalities around the country.

Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.

This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.

Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”

But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.

The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. “If something didn’t change, we would have run out of money in the foreseeable future,” he said. “So no one would have been paid anything.”

Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?

After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.

And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.

The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before.

But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years.

Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.

No one disputes these figures. Instead, they apologize. “All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”

Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.

Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of A woman would need at least $928,000, because of her longer life expectancy.

Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?

If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.

If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it.

And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl.

“We have to do what unions call givebacks,” said Mr. Lamm, the former Colorado governor. “That’s the only way to sanity. Any other alternative, therein lies dragons.”

  • No denying it: The problem is huge. If retirees are facing problems of this magnitude, those on welfare, of any kind, section 8, food stamps, or what have you, may, too, find little sympathy from taxpayers for their growing predicament.

    And this withering economy is merely acerbating the problem.

    Cities are planned. But we allow our economy to grow without giving due consideration to how it grows, or the long-term impact of policy decisions that brought us trade deficits, corporate outsourcing, and free-trade zones.

    Here's one reality: When we began the transition from a manufacturing economy to service economy, our economic woes began then in earnest.

    I did respond to your "rant" on my blog. It was a good rant, and it goes to the heart of what's missing in black America, if we're to develop a sustainable economic future with a firm base.

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