Public pensions at the state and local level are underfunded by
more than $1 trillion; in many cities, pension obligations will soon
consume a quarter or more of the annual budget — money that will be
unavailable for parks, libraries, street maintenance and public safety.
Part of the problem is that pension funds need significant
new financing to cover the growing number of retirees. But the real
issue is the lack of incentive to improve pension performance. What we
need, then, is a federal program that combines stimulus with serious
fund reform.
The pension-fund
crisis is rooted in the intersection of excessive optimism by fund
managers and the funds’ influence on the political process. Funds
regularly overestimate their future performance: Calpers, California’s
giant state pension fund, assumed, and still assumes, it will earn 7.75
percent annually on its investments; in fact, its returns over the
last decade were, on average, less than half of that.
But Calpers wasn’t left holding the
bag. Instead, it was able to force the state to increase its
contribution to the fund; indeed, the state’s 2010 share will be about
five times what it was forecast to be in 1999.
The Calpers
case is hardly unique; the same story has been repeated across the
country. Often, though, pension funds — including, until recently, New
Jersey’s — have been able to hide their liabilities behind clever,
nonstandard accounting methods.
This charade can’t last. Eventually debt-heavy governments will
begin to default, which will disrupt the municipal bond market by
blocking access to new capital for even the most credit-worthy public
institutions. Ultimately, Washington may have to add local governments
to the list of institutions it must bail out, next to banks and car
companies.
But
given how poorly pension funds have managed themselves, the federal
government can’t simply hand out checks. Instead, borrowing a page from
the Education Department’s Race for the Top initiative, which provides
money to states that propose significant reforms for their public
school systems, it should strike a grand bargain with city and state
pension funds: in exchange for capping their liabilities and adopting
better management practices, they could cover their costs through
tax-free, federally guaranteed securities.
Here’s how it
would work. A city, county or state facing insurmountable pension costs
would appeal to the Department of Treasury for relief. As a first
step, it would have to adopt standard accounting practices to
accurately portray its current and expected financial health, including
realistic projections of its investment returns and the discount rates
on its debt.
Second, the applicant would have to take action
to assure it can meet the debt service on its bonds, including placing a
permanent cap on its pension liabilities. This means raising the
retirement age, increasing employee contributions and preventing
employees from manipulating their salaries in the last years before
retirement to increase their pensions; it would also mean restructuring
the fund’s health-care spending, which has been a significant drain.
Finally, the fund would have to
move all new employees to 401(k) retirement plans, which have fixed
employer contributions and therefore reduce future taxpayer
liabilities.
In
exchange, the Treasury would authorize the fund to issue tax-free
“pension protection” bonds which, for a fee, would be guaranteed by the
federal government. Proceeds from the bond sales would cover its
liabilities, providing a quick resolution to the underfunding crisis.
Today’s bond market is the perfect
environment in which to introduce a new security like
pension-protection bonds. With their tax-free status, a federal
guarantee, accurate accounting and the promise of a permanent fix,
these securities might even be priced lower than Treasury bills, which
are yielding 3.8 percent for 30-year bonds.
A Race to the Top for public pensions
would offer something for everyone. The federal government would get a
voluntary, low-cost way to avoid paying trillions down the road.
Cities and states could cap their pension liabilities and close their
funding gaps with inexpensive long-term debt, allowing them to get back
to the business of providing needed services. And public-employee
unions would get a federal guarantee behind their increasingly
uncertain pension benefits.
The Obama administration’s Race to
the Top initiative has been a bold experiment in education reform. The
White House and Congress now have the opportunity to apply the same
idea to the public-pension crisis. Otherwise, chaos is just around the
corner for our cities, counties and states.
ummmm....no, not unless the 8% returns in perpetuity fairy comes back...
"pension-protection bonds?"
Nah...
My recommendation:
"Magic Beans"
Just as likely to work, but much more fun in the existential sense.
Public pensions should pay out from age 65 and be around 50% of prior income. Combined with Social Security, the total should be 70%+ of income. No more payouts from age 52 at 90% of income. Poof! Problem solved.
This has me laughing so hard I can barely type. My two siblings, aged 58 and 50, are both teachers covered by the NYS pension (ponzi) plan (scheme). They actually believe that their contributions are going to result in actual monthly checks when they "retire."
Sometimes, I subtly hint that they'd better come up with a plan B, other times I just keep my mouth shut. Now, me, being cynical and thereby practical, and age 56, am already partially retired. Haven't taken a paycheck since 1998. Work for myself. Cheat vigorously on my taxes, pay none. Live frugally and save, and actually have money saved (real cash and silver coins, plus other tangible assets).
I assume no SS checks when I turn 62, 65, 67 or 70. I have no retirement "plan" except for my business that turns a profit month after month with little to no work on my part (don't ask, because I'm not telling) I have no health insurance. If I get cancer, I figure I will die. I'd rather have it that way than have some greedy nursing home or hospital take all my money.
I will live as long as I do, not a moment longer. That's everybody's eventuality and the sooner we realize that life is finite and there are no guarantees, maybe some of us will take responsibility for our own lives.
The article above is a string of P's
Permanent
Public
Pension
Ponzi
Plan
A PPPPP. Now, please excuse me because I have to go take one of those Ps (and at my age, with my growing prostate, it takes longer). I'll be back for Recess... I mean the FOMC policy decision.
always good you have time for the tube. i mean "the tele." i mean the "show." i mean....yeah, yeah. u know what i mean.
It's easy to fix a busted pension fund. Just renege' on the commitments while you still have enough principal on the books to hire an evil lawyer.
lawyers tellin' cops "you're not gettin' paid." Yeahhhhhh, right.
the retirement dreams are doomed. there is a lot of misinformation going around about "safety". buried gold is the best way. is fort knox well stocked?
http://covert2.wordpress.com
look this is a vaguely serious forum now please stop linking to that gibberish blog or I'll have it shutdown for hate writings you utter lunatic.
no but apparently your yacht is.
This article suggests a mechanism to enable funds to avoid imploding at the cost of taking steps that, in my opinion, should be a given for every public plan - elimating pension benefits that vastly exceed those available to the public funding the plans.
The bonds are just a way to lock in abusive benefits and transfer more obligations to -you guessed it - the middle class and their children and grandchildren.
I would rather see the bankruptcy option play out, as this possibility is the only option to get the unions to play ball.
It's amazing that no matter how bad it gets (for example Illinois public pension plans) the shit still will not finally hit the fan. No reform. No genuine solutions yet.
r u sure "this is in the interest of the Illinois pensioners"?
Yep. We, the taxpayers, are already paying too much. Making us pay more by adding new layers and revenue streams is not an answer, it's a punt. It's more "kicking the can down the road".
Methinks if the taxpayers are forced to eat this, there WILL BE marches on DC with pitchforks and nooses. Btw: some Dems have already proposed this.
The Pensions Plans will be the next Fannie & Freddie disaster. Defined benefits are killing the plans. Where did we get the idea that a person in his early 50's can retired at close to final pay and full medical for 30 years? That is what is happening in California for Police, Fire, and Correctional Officers.
I believe that each person should contribute a portion of their pay and the State match it . It is fully funded each year. The success or failure should determine the amount of money they receive. Of course governements should have balanced budgets, but the pension scam is "off the budget" when it comes to real costs as they overestiment the ROI and the actual long term liabilites.
We were snookered. It was a scam by the State employee unions, the politicians, and those brokers who took huge commissions churning the accounts. It is doomed to fail because we just can't afford it. It is a Ponzi scheme, just like Freddie & Fannie!
We are on the road to pension fund collaspe as a new generation rightfully protests why should they be taxed to pay for what their elders did.
"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world."
Thomas Jefferson
one of Jefferson's best. It is said of him that "no greater intellects have ever inhabited the White House than when Thomas Jefferson dined alone." Of course he had this short balding guy as a bud...That we all could be so fortunate, no?
It's interesting that the media, in general, was too busy bashing Repubs all these years to notice what was going on.
There is no way a large public pension fund with a defined benefit plan can behave responsibly with all the political voodoo going on between politicians and unions. Let us begin there. Then the least worst fix to the problem becomes defined contribution plans for all pre retirees presently in the system and all future employees. Only then can a bonding fix be applied to the underfunding problem for the currents.
Public employees must take ownership of responsibility for their future benefits. Private taxpayers are sick of this "Losses-R-Protected" attitude in all government dealings.
The lazy fix is DC plan, and it will end up ensuring pension poverty and costing society a hell of a lot more. Start thinking long-term. Some public goods (health, education, pensions), are worth fighting for. US plans need to adopt Canadian governance models and they need to reform pensions asap. Period.
The plan would be fine if it was the *state* treasuries issuing pension guarantees for their municipalities backed by a class of muni debt, free of *state* taxes. If you don't like it, you can always move out of that state.
What I absolutely object to is Federal government involvement. There is no reasonable argument one can use in a capitalist system to convince a resident of one state to pay for the obligations willingly entered into by another state. I think there would be a powerful constitutional case against it.
are you sure Leo you want this clever plan to succeed? i know i do but...as i recall...you live in....Canada. However, you are....Greek and therefore....so, yeah. I hear ya.' We shall see. We shall see.
There is no "long term thinking" in turning public servants into a protected and privileged class, over and above the private sector.
Actual long term thinking would involve restoring the government/citizen social contract of pre-1960 US... government workers traded salary for security. Pay was a bit lower than the private sector, benefits about the same, and job security was greater. That is sustainable long term.
The way the FASB rules are written, if a security is moved from 'Trading' or 'Held for Sale' status to 'Held to Maturity,' it's *supposed* to be valued to the last measurable price input at the time of the change in status. In a world where laws and rules are actually meaningful constructs, the mark-to-market would already have happened. Plan managers liked these rules on the way up; they should have to live with them on the way down, too. An auditor worth his salt should absolutely ream an organization for this kind of chicanery.
This is such book-talking bullshit. Under what construal of law is the federal government on the hook for 'trillions down the road?' The last I heard, the only thing federal taxpayers are responsible for is private pensions covered by PBGC.
Why should citizens of another state, say, Wyoming, that has managed its pension fund prudently, be required to bear the burden of Los Angeles' innumeracy and poor investment acumen? Not only is it moral hazard, it's a states' rights issue, pure and simple. The federal government has no business being involved in an employment contract entered into by a state, city or municipality. Set up a procedure for state bankruptcies and let the pensioners take their chances in court alongside the other creditors.
thank God for computers. the paperwork use to be a real bear on this one.
RED IS THE NEW GREEN!! DON'T GET LEFT OUT!!!
So, to get out of the red I just have to borrow? Any volunteers to buy my current account protection bonds?
I think pensions may get into the black in the future but I'm afraid even my great grandchildren won't see it.
You're comment sounds pretty racist... into the black...
I'll forgive you for this one Poké Hitler! But next time I'll send you to the camps!
What camp? Camp David? ;-)
I hope future generations never see ponzions again.
i see death spirals....
...death spirals everywhere.
The idea of making a bond to pay a bond to cover a bond makes as much sense and writing IOU's for IOU's for IOU's. Looks like the Ottawa municipal government is going to have trouble making it's retirement payments this year so increased taxes and service shortfalls are expected.
http://ottawa.ctv.ca/servlet/an/local/CTVNews/20100921/OTT_Pension_10092...
Mish would be proud of his prognostication
Death spirals, I need to make mine spin.
Fuck the pensions, let them go broke. Fire all the public sector & put all that shit out to the lowest bidder. since when does the servant make more than the master. Fuck'em...
"roger that."