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The Burden of Pensions on States?
Mary Williams Walsh of the NYT reports, The Burden of Pensions on States:
For public workers in Wisconsin, there’s more bad news.
Having lost the battle on collective bargaining, they may soon be asked to make more financial sacrifices.
The state’s workers offered to start picking up part of the cost of
their pensions and health insurance early in their showdown this year
with Gov. Scott Walker. That change will
provide immediate relief for struggling towns, school districts and
state agencies, and help them balance their budgets.
But new pension cost estimates,
ordered before Governor Walker was elected, are coming as soon as next
week. They are expected to show that the current contribution levels
to the state pension system are too meager. More money, from employers
and employees in some combination, will be needed, and perhaps much
more in coming years.
Other states will also probably
find that Wisconsin’s idea of simply dividing pension contributions
between labor and management is an illusory solution to their long-term
financial woes. That’s because several studies have shown that
promises to workers are far more costly than routinely calculated by
Wisconsin and most states.
And
the problem seems unlikely to be solved by putting curbs on the
collective bargaining power of state workers. Despite the arguments of
some Republican governors and popular perception, the places with the
most unionized work forces are not necessarily the ones with the most
generous pensions, according to a new study.
Coming up with bigger contributions to pension funds will require states
to make difficult choices about the size of their work forces, their
commitment to public services and the viability of their employee
benefits, which are often said to be irreversible and protected by state
constitutions.
“The amount they have to be
contributing could potentially be two to three times as much as they’re
contributing now,” said Joshua Rauh, an associate professor of finance
at Northwestern University, who has been challenging the way most cities and states measure
their pension promises. “If you don’t want to count on the stock
market to pay for all this, this is what you’re going to have to
contribute.”Mr. Rauh and a number of other analysts
say the states’ biggest problem has been a failure to understand how
much benefits will really cost. Instead of the states’ models, these
analysts have come up with alternatives that more closely approximate
those used by insurance companies.
Unlike
recalcitrant states like New Jersey and Illinois, Wisconsin has been
setting aside money every year for its fund. It has also been thinking
of lowering its reliance on stocks, to reduce its exposure to bear
markets.The issue is whether it has been setting aside anywhere near enough, given the magnitude of its promises to workers.
The idea that public pensions may cost more than expected angers many
union officials. They say economists like Mr. Rauh are trying to
frighten workers, or build resentment among taxpayers so that public
pension funds will be scrapped and replaced with something less
generous.
“We think there’s an agenda,” said Steve Kreisberg, research director for the American Federation of State, County and Municipal Employees.
“These numbers have become intensely politicized, and they’re being
distorted in a way that does real harm to real people.”
A
spokesman for Wisconsin’s governor said Mr. Walker had not factored
any possible increase in pension contributions into his budget proposal
or talks with the unions. “That was never discussed,” said the
spokesman, Cullen Werwie.
An
analysis being prepared for the state agency that operates Wisconsin’s
pension system — and which is to be presented to the agency’s board on
Wednesday — is expected to show that it has been relying on too high a
figure for investment gains. If the system’s trustees accept those
findings, overall cash contributions will have to rise.
The actuary preparing the analysis
is not tipping his hand, but any increase at this point is likely to
be small. The state estimates that 12 percent of all public workers’
pay will need to be set aside annually for the pension fund. Lowering
investment expectations sharply, to 7 percent a year from the current
7.8 percent, could push the contribution rate up to perhaps 16 percent,
meaning an additional $2,000 to $3,000 a year apiece for workers
nearing retirement.
Based on the 12 percent figure,
workers agreed earlier this year to contribute 5.8 percent of their pay
to the pension fund, leaving their employers to pay the remaining 6.2
percent. Workers also agreed to cover a portion of their health costs.
How to pay for health benefits for retirees is still being discussed.Workers in Wisconsin point out that their payments in
retirement are hardly a king’s ransom. Their average annual benefit is
about $26,500, and they believe they have been wrongly portrayed as
greedy chiselers who game the system and walk away with six-figure
pensions.
But it can be
a huge burden for states and municipalities to provide even a modest,
$26,000-a-year pension to hundreds of thousands of people, at least in
today’s economic environment, and especially if those people are able
to retire well before 65 and collect that money for many years.
“When interest rates are low, these plans are really expensive to run,”
said Gordon Latter, an actuary at Voyageur Asset Management whose
clients include both corporate and public pension funds.
Despite the furor in Wisconsin, collective bargaining does not appear
to be the main factor driving pension costs higher.
Sylvester J. Schieber, an economist and independent consultant, recently
compared public pensions in each of the 50 states, ranking them from
richest to poorest. Instead of looking at dollar values, like
Wisconsin’s $26,500 a year, Mr. Schieber looked at what part of the
average worker’s paycheck his pension was designed to replace in
retirement. The method eliminates regional disparities and certain other
problems with benefit-cost data.
Mr. Kreisberg of the public workers union said he considered the approach fair.
Mr.
Schieber said he expected to find that the most generous states were
the ones with collective bargaining for public workers, but he found no
correlation whatsoever. “I was surprised at the result,” he said. “I
had expected that the unions would be a significant force.”
Wisconsin turned out to have the eighth-richest pensions of any state,
replacing on average 57 percent of a worker’s pay in retirement. But
the most generous state by far is Colorado — even though it has granted
collective bargaining to only a fourth of its public work force. In
Wisconsin, roughly half are covered, according to Unionstats.com, a database that uses Census data to track union membership.Colorado offers pensions that replace 90 percent of salary, with
generous annual compounding that more than keeps up with the current
rate of inflation. (The state has tried to reduce this compounding;
retirees have sued.) Colorado’s pensions are unusually rich because its
public workers are not permitted to participate in Social Security — the state pension is the only one they get.
The
second-richest state is New York, which replaces 77 percent of a
worker’s income, even though New York’s public work force earns Social
Security benefits as well. A New Yorker’s public pension benefit,
combined with Social Security, replaces more than 100 percent of his
pay, Mr. Schieber found.
That might appear to be
the fruits of collective bargaining, since New York State grants that
right to more of its public work force than any other state. But the
third most generous state is Georgia, replacing 68 percent of a
retiree’s former paycheck on average. And Georgia is a right-to-work
state with one of the lowest rates of collective bargaining in America,
just 14 percent of its public work force.
Nonunion
Georgia’s public pensions are, in fact, three times as generous as
those of labor-friendly Vermont, where more than half the public work
force has collective bargaining. Vermont replaces just 20 percent of a
retiree’s previous pay, the lowest of any state.
Mr.
Schieber said he was at a loss to explain these findings. He had
expected rich pensions would go hand in hand with collective bargaining.
But his research, to be published in the Journal of Pension Economics and Finance,
does shed light on how a seemingly modest $26,000-a-year pension can
be considered unaffordably rich. One reason is low interest rates;
another is that public employees can often start claiming their
pensions in their 50s. Wisconsin’s pension plan allows people to retire
at 57 with a full pension, as long as they have 30 years of service.
Police officers and firefighters can retire at 53, with 25 years of
service.
In the private sector, pensions like that “have
just kind of dropped off the radar screen,” Mr. Schieber said. At the
dwindling number of companies that still grant full pensions below age
65, people seldom take them, for fear of giving up their health
insurance before they qualify for Medicare. Labor statistics show a marked increase in the number of 60- to 65-year-olds still working.
Public
employees have so far dodged that bullet. They can still generally
retire several years younger, which means their states or
municipalities must pay their benefits over a longer period. That adds
up. It also means the money for their benefits has fewer years to
compound, so more must be set aside years in advance.
“By the time the typical private-sector worker has retired, the
teachers, the highway patrolmen and these folks have already gotten
$200,000, $300,000, $400,000 in pensions,” Mr. Schieber said. “Plus,
they’re getting a pretty rich retiree health benefit. That’s why these
benefits are so expensive. ”
I have already
mentioned that early retirement is on its way out. It's simply
ridiculous to allow public sector workers to retire earlier and collect
pensions for 20 or 30 years. That's exactly what was going on in Greece
for years before the crisis forced them to curb these generous
benefits. People were retiring as early as 40 years old after working 20
years in the civil service and then collecting pensions for the rest of
their life.
But public sector workers will argue that they
don't make as much as their private sector counterparts who can
potentially make a lot more money during the good years. This is
absolutely true but the good years are over. And now that states face
severe budget crunches, they're all looking to cut costs, including
public pension costs. It's unfortunate that pensions have become so
politicized but the reality is that pension reforms need to take place
to reflect the reality that people are living longer, healthier lives.
Finally,
I too was surprised by Mr. Schieber's findings that the most generous
states weren't the ones with collective bargaining for public workers.
Goes to show you that things aren't always as intuitive as they seem.
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Problem #1. Social Security & pensions were initiated at a time when retirement at 65 and life expencancy was 61.
Problem #2. Life Expectancy has risen to 78, but retirement age has not tracked this rise and has stayed at 65.
Problem #3 People are allowed to retire before retirement age ("early retirement").
Problem #4 Projected returns are unachivable. The past 20 years of returns were due to an unprecended expansion of credit. Not only can this not continue, it now has to be unwound.
Problem #5 No one want to look at the facts, hear the truth or do what is necessiary.
I blame it all on the demise of cigarettes.
Cancer and/or heart disease is really every pension plan's best friend.
actually Kim Jong you've swallowed yet another of the States BIG LIES
Smoking makes little difference. In fact smokers suffer from far less cancers than non-smokers. Parkinsons Disease is entirely rife amongst non-smokers for example.
The oldest person that ever lived, Madam Jean Claument of Ayrles in Farnce, lived to the ripe old age of 131. She is proof the bad life is a good life, the exact opposite of what the health fascists propaganda is trying to hed-fuk you into. Jean loved rich fatty salty French stews, drank red wine and port most every day, had a very sweet tooth and smoked too.
The oldest man in Britains' motto for a long life is "Whiskey, cigarettes and wild women". Amen to that and fuk everything any Govt Dept tells you to do as the only certainty in life is, the Govt is wrong
The reason these pensions are so rich is because the legislators themselves are members of the pension plan. Simple as that. (at least in NJ).
Hey Leo this is for you:
Solar Power Breakthrough Claimed By Stanford Researchershttp://www.huffingtonpost.com/2011/03/10/solar-power-breakthrough_n_8334...
sorry Leo. I thought the article was a bit weak. It touched on several important subjects, but left them hanging without significant follow through. That's where your knowledgable commentary could have filled in some facts.
How about putting together some comparisions on funding levels, return expectations, retirement ages, payout amounts, etc. It would be very interesting to compare the BIG union pension states to the small ones.
Leo-
Check out the huge pension payment increases granted in 1990's in the state of MN:
http://www.msrs.state.mn.us/retr/history.htmls
Compounded!
Charles Hugh Smith commented on this the other day :
http://www.oftwominds.com/blogmar11/what-public-employees-could-say2-11....
"Back in the stock market bubble of 1995 to 1999, our wages, pensions and benefits were "sweetened," sometimes administratively and sometimes with voter approval. In the years since, what looked at the time like it would be paid by stock market gains rather than additional taxes has been revealed as wishful thinking."
Finally, I too was surprised by Mr. Schieber's findings that the most generous states weren't the ones with collective bargaining for public workers.
But those states have more flexibility with their public sector workers if they get into trouble and that makes all the difference in the world.
That just means that businesses get an assurance that Georgia(or similar) workers cannot threaten the politicians that they buy. The politicians stay bought.
"Goes to show you that things aren't always as intuitive as they seem."
Correct.
But you have to go further, responsible people know that public sector collective bargaining is a completely different animal than private sector collective bargaining.
FDR knew it.
In part;
"Particularly, I want to emphasize my conviction that militant tactics have no place in the functions of any organization of Government employees. Upon employees in the Federal service rests the obligation to serve the whole people, whose interests and welfare require orderliness and continuity in the conduct of Government activities. >>>This obligation is paramount.<<< Since their own services have to do with the functioning of the Government, a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable." http://www.presidency.ucsb.edu/ws/index.php?pid=15445#axzz1GHt0vqa668% of 30,000 is ?
68% of 100,000 is ?
How disingenuous of you.
Assuming everything in this post is true, now what's next? More class warfare.
He gets more than I do.
How come he's more "essential" than I am?
Do you have any idea how expensive it is to live in _____?
How the ____ am I supposed to live on $______ a year?
Why should I get penalized for something that a greedy banker or
hedge fund manager did?
Now, the "experts" are going to argue back and forth about every aspect of this. Maybe Michael Moore will show up at another rally and get a You Tube clip out of it will 500,000 views. Who knows.
How come there's no talk about federal employees who double dip? How come no talk about people in Congress who make over $100,000 a year and who aren't there half the time? What's the typical response from them? You don't how how hard we work. You don't understand the pressure we're under.
If you really want to fix this, stop using certain groups as whipping boys to score political points. Get off of this personal we-must-destroy-Obama agenda at all costs.
More fights are on the way.
Unfortunately PATCO wasn't enough for some envious people.
Interestingly, envy doesn't seem to apply unless it's pointed to a disfavored group or a long-term enemy. Nor does it seem to apply if you use the magical construct of the taxpayer, who is magically considered a non-member of a disfavored group(even if members of the disfavored group are indeed, taxpayers).
Double dip? Heck... I used to work at an engineering company where about half of the salaried employees were triple dippers! They joined the military when young and stayed long enough to qualify for a military pension and lifetime healthcare, then went into the federal government as a civilian worker (often as a technician at the same army facility where they spent their military career), and then in their 50's they joined the company where I was working -- a small defense contractor -- as an "engineer" or "consultant". Incidentally, that company is out-of-business now due to corruption charges (no surprise to me) with its former owner in jail (heh).
I have an old friend (I mean OLD like he's in his 80s now) who got pensions from a Navy career, a Postal Service career, and lastly a civil position in the community/city. Add all that to Social Security and you've got some serious money coming in every month. He's still restoring cars at his advanced age!
The number of people who have managed to set their own compensation with no regard to the VALUE of the job, profession, or career, is a crushing burden on ALL of those who actually DO something of value.
Lawyers who get 35% of Class action suits, 5% of Estates.
Doctors who kill, incapacitate patients
Tax accountants and lawyers who are agents for the US and State governments
Union workers who get exorbitant pay for mopping floors, putting a fender on a car, or "manage" a borough, township, or village's pension fund.
Investment banksters who get trillions for not only not producing a return but bankrupting entire countries.
Social Security paid out to people who didn't put a penny in it.
Professors with tenure who don't teach, and earn over a quarter million in annual salary
Teachers who don't teach
The list of unproductive, destructive people who make a whole lot of money for doing nothing or contriving to do harm would fill all our prisons twice over if their ill-gotten gains were illegally obtained or prosecutable offenses.
Let there be a fight.
Ayn Rand set it out a long time ago, as vilified as she was, and is, she is completely correct.
It's time the nurses made more than many doctors, it's time the genuinely hardworking producers make at least as much as their exploiters. It's long past time to at least stop any entity that is getting a free ride, collectively bargained for or not.
I'm chuckling at your comment. You are correct, of course. But I was just thinking that you've not called an electrician or plumber lately! Those guys get some big bucks for the work and they are not unionized in my state. It's just getting what the market will bear. You see them all sitting at the counter stools at the supply houses in the mornings drinking the free coffee and setting prices. Hey, I was sitting on one of those stools for many years, so I know whereof I speak.
When you can define productivity with perfect specificity and in an objective manner, please let us know. I would also like to know how many productive jobs are necessary, given force multipliers in productive technology, to fulfill society's needs...
PS, I hope you understand that it is universally accepted that governmental employees are not productive in the traditional sense (given their entire livelihoods are derived through taxation of the private sector)... or, at the very most, production neutral... so, factor that in when creating your definition.
>Mr. Schieber said he expected to find that the most generous states were the ones with collective bargaining for public workers, but he found no correlation whatsoever. “I was surprised at the result,” he said. “I had expected that the unions would be a significant force.” <
If I were a dues paying union worker, I would have to question just what the heck I was getting for my money!
Leo, you've already shown the main factor in driving pension costs higher: Incompetent Fund Managers with Pollyanna dreams of 8% YOY returns!
Leo, they got these absurd low-contribution early retirement pensions through collective bargaining, so your statement makes zero sense. The collective bargaining between unions and politicians who had received millions in union campaign contributions was and is completely corrupt. As usual, the taxpayer was and is the "forgotten man."
And you didn't read the article. Try again.
If you want the Cliff Notes version, read clodbuster's comment below.
"the reality that people are living longer, healthier lives."
Leo. Have you seen the general population in Wisconsin? Healthy lives? No wonder those fat sweethearts are storming the castle. Parking lard in the State building is easier than negotiating a treadmill.
You closed this article perfectly. The most generous states don't have a gun to their heads. STOP PAYING THE TRUMKA'S AND STERN'S. Why do these people live like kings? I'm not going to pull out the RICO Card.
Well. YES. I am.
All of the above bad news assumes a reasonable return on pension fund investments.
The actual situation is much worse because average real returns on investments will be negative once peak oil starts to bite.
Of course no one could possibly see this coming.