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Social Security to Tackle State Pension Woes?
Mary
Williams Walsh of the NYT reports, Facing
Pension Woes, Maine Looks to Social Security:
Lawmakers
in Maine have found an unusual tool for tackling their state’s pension
woes: Social Security.
Just as workers in the private sector participate in Social Security in
addition to any pension plan at their companies, most states put their
workers in the federal program along with providing a state pension.
Maine and a handful of others, however, have long been holdouts,
relying solely on their state pension plans. In addition, most states
have excluded some workers — often teachers, firefighters and police —
from the national retirement system and its associated costs, 6.2
percent of payroll for the employer and an equal amount for the worker.
Now, Maine legislators have
prepared a detailed plan for shifting state employees into Social
Security and are considering whether to adopt it. They acknowledge it
will not solve their problem in the short term but see long-term
advantages.
Some variation on this idea could
ultimately appeal to other states grappling with their own exploding
pension costs and, in extreme cases, quietly looking for help from
Washington. In troubled states, some employees have wondered whether
they might be allowed to begin paying in and collecting from the
federal system even before they have contributed a career’s worth of
taxes.
The potential effect
on the Social Security program is hard to estimate. Maine’s proposal
would mean new members and a small additional source of payroll tax
revenue for the federal system.
Even if it fully
embraces the proposal, Maine will have to come up with a considerable
sum to sustain its existing pension plan, presumably through some
combination of taxes and service cuts. After a phase-in period, Social
Security would cover part of state retirees’ benefits, with the state
pension as the remainder. Many pension plans in corporate America
coordinate their benefits in this way.
The proposal has the
advantage of not reducing promised benefits, guaranteed by the
constitution in many states. The change would not be cheap, but it
would reduce the role of Maine’s pension fund and thus the risk of
having to suddenly cover giant losses down the road.
A Social Security spokesman said the agency
did not expect many of the holdout states to join, citing the cost of
participation. The only other state known to have talked recently about
adding Social Security is Louisiana.
More than six
million public employees work outside the Social Security system,
including roughly 1.7 million teachers in California, Illinois and
Texas, and nearly two million employees of all types in Alaska,
Colorado, Massachusetts, Nevada and Ohio, as well as Louisiana and
Maine. For years, these and other states have insisted they could
provide richer pensions at a lower cost, both to workers and taxpayers,
because of investments.
Some
of those states’ pension plans now have shortfalls so large that they
need outsize contributions. Virtually all state pension funds have had
big losses in the last two years, but the go-it-alone states appear
especially vulnerable.
Not only are these states trying
to provide richer benefits with smaller contributions than the payroll
tax for Social Security, but they have promised to do it for workers
who can retire 10 and sometimes 20 years younger.
With pension costs ballooning and taxpayers
lashing out, many workers in states with deeply underfunded plans fear
their benefits will be cut. Those being asked to put more into their
pension funds complain they feel caught up in Ponzi schemes. Some wish they had been part of Social
Security after all.
“Had I known back then, I would
not have stayed in Illinois,” said John Gebhardt, a university employee
in that state, which keeps teachers and university personnel out of
Social Security. He has even offered to pay both his own and his
employer’s payroll tax to join Social Security, but was told no.
Maine lawmakers who support shifting
state workers into Social Security say they believe it would be fairer.
Social Security may not be sexy, but it is portable.
A
recent study in Maine underscored the penalty paid by the mobile work
force. Only one in five state employees stays around long enough to get a
full pension. The majority leave, taking neither a pension nor any
Social Security credits with them. This practice, not investment gains,
has sustained the state’s pension system.
“The current system is immoral,” said Peter
Mills, who, as a state senator, started the push to join Social
Security. “It takes younger people and feeds off of them. You can
withdraw from teaching at age 40 and realize you’ve got nothing to look
ahead to for your old age.”
Dallas L. Salisbury,
president of the Employee Benefit Research Institute, said he was
surprised by how few public workers ever got pensions in Maine, where
he provided advice on a pension overhaul. He said he checked and found
similar turnover in other states.
Whether Maine joins Social Security or not, painful choices must
be made. The state pension fund lost $2.25 billion in 2008, and
taxpayers will have to replace the lost money. But they have less time
to do so than most states, thanks to tough financing rules in the
constitution. Projections show that Maine will not have enough money to
do much else in the coming years if it adheres to those rules.
“It’s going to rip the guts out of our budget,” said Mr. Mills. “I
don’t think you can find a budgetary parallel in my lifetime, and I’m
67.”
Unlike laggard states, including Illinois and New Jersey,
Maine had in recent years been making its required pension
contributions annually, and it avoided the common mistake of sweetening
benefits when markets were strong.
Its looming fiscal crisis stems primarily from investment
losses, points out Sandy Matheson, executive director of the state
plan. “Maine is almost like a petri dish,” she said, showing how things
can go awry even if a state is responsible.
Mr.
Mills, a Republican, initially envisioned shifting workers into Social
Security and a 401(k) plan. But he
now views Social Security combined with a traditional pension as a
safer option. That puts him on common ground with Democrats in the
statehouse.The proposal may meet resistance, however, because
it does not fill the gaping hole in the state’s pension fund.
A shift into the federal program is
also hard to plan because Social Security has a financial imbalance —
one that will worsen as the population ages. At some point, Congress is
expected to either raise taxes or cut benefits.
Still, Social Security’s future is easier to
predict than that of a state pension fund, because its pressure stems
from broad demographic trends, not the vagaries of the stock market.
Social Security keeps its reserves in conservative Treasury securities.
“You’ve
got reviews taking place all over the country,” said Mr. Salisbury.
Most places are asking painful questions about their investment
strategies. But what Maine has discovered, he said, is just how
expensive it really is to provide a guaranteed retirement benefit.
It's
interesting to note how some states are now looking at Social Security
as an answer to their pension woes. What I don't get is why weren't
these state pension funds allocating more into "conservative Treasury
securities" before the crisis hit?
Instead, they were taking
stupid risks trying to achieve unrealistic returns based on rosy
investment projections. Moreover, they were all being advised by the
same pension consultants with absolutely no skin in the game, telling
them to invest more in public equities and alternative investments like
hedge funds, private equity, and real estate.
Pension funds are not just about making huge gains, it's also about
protecting the portfolio against downside risk. And in a zero-interest
rate (ZIRP) environment, good old government bonds are about the only
thing that will protect you, especially if a protracted period of debt
deflation is what lies ahead.
My
theory is plain and simple: the Fed will do everything it takes (including buying stocks) to make
sure this outcome never happens. Their policy is to keep interest
rates at zero as long as possible, reflate risks assets, and hope that mild inflation creeps
back into the economic system.
How does this work? You keep
interest rates at zero for as long as possible, let banks borrow at next
to nothing, and let them trade away in their prop desks, investing
those funds in all sorts of risk assets all around the world that can
deliver higher yields. What else? Banks can borrow at at historic low
rates and develop their credit card business, locking in a nice spread
as they fleece consumers. Unfortunately, with ZIRP, banking is all about
trading and spreads and very little goes to actually lending money to
businesses that need it.
Anyways, back to Social Security. Mary
Williams Walsh of the NYT also reports that Social Security is paying roughly
$50 million a year too much to people who collect state pensions
but fail to declare that income.
No wonder a majority of Americans
are losing confidence in Social Security. Susan Page of USA Today
reports, Faith
in Social Security system tanking:
Battered
by high unemployment and record home foreclosures, most Americans seem
to have lost faith in another fundamental part of their personal
finances: Social Security.
A USA TODAY/Gallup Poll finds that a majority of
retirees say they expect their current benefits to be cut, a dramatic
increase in the number who hold that view. And a record six of 10
non-retirees predict Social Security won't be able to pay them benefits
when they stop working.
Skepticism is
highest among the youngest workers: Three-fourths of those 18 to 34
don't expect to get a Social Security check when they retire.
The public's views are
more dire than the calculations of Social Security's trustees. Last
year, they projected the system would begin running in the red in 2016,
as the Baby Boom generation retired, and the trust fund would be
exhausted in 2037.
Even then, Social
Security — which celebrates its 75th anniversary next month — could
finance about three-fourths of current benefits through the payroll
tax.
The downbeat outlook reflects "all the
attacks on Social Security that we have this total crisis in the
program," says Alicia Munnell, director of the Center for Retirement
Research at Boston College. What's more, she says, "the fear and
distrust as a result of the financial collapse and the Great Recession
has spilled over into people's expectations generally, that you can't
count on anything."
Well-informed or not, public attitudes could affect
the debate over what to do about Social Security, a subject that is
likely to be raised when President Obama's deficit commission delivers
its report in December.
"It makes it easier
to make some of the changes that we are inevitably going to have to
make," says Maya MacGuineas, president of the Committee for a
Responsible Federal Budget. "We could make changes and still have
people collecting more in benefits than they're expecting to see."
So far, however,
resistance hasn't eased against steps such as raising the retirement
age or increasing Social Security taxes. The only policy options that
command majority support are imposing the payroll tax on all the wages
of higher-income workers — the amount is now capped — and limiting
benefits for wealthy retirees.
Confidence in
Social Security has significantly eroded since 2005. The percentage of
retirees who predict cuts has jumped by 24 points, even though benefit
levels have never been cut for current retirees. In that time, the
number of non-retirees who doubt they'll get benefits has risen by 10
points.
The poll of 1,020 adults, taken July
8-11, has a margin of error of +/–4 percentage points.
Most people are reeling following the 2008 financial crisis. They got
screwed in the stock market, and they fear Social Security will not be
there to support them during their retirement years. However misplaced
those fears are, they're real, and states are now looking to tap into
Social Security to deal with their pension woes?
They
should first look at bolstering the governance of their public pension
plans (read Forbes article, Self-Dealing
Threatens Florida Pensions). Social Security is already stretched,
and tackling state pension woes is the last thing it should be called
upon to do.
»
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It sounds like a GREAT deal to me. Maine gives its money to SS. SS will put it in its lockbox, and the great rate of return will shore up pensioner's savings.
What possible downside could there be?
I could never foresee a situation where that money would be used for anything other than the retirement of Maine Employees.
BWAaah HaHaHaHa! HA! Ha....ha...
We're all so screwed. The only thing left is trying to find humor in all the ways people try to convince us we aren't.
University of California Left CalPERS for the same SS Plus System Decades Ago
UCRS pays retirees in a similar fashion to CalPERS, 2% to 2.7% X years of service X your highest salary...
The difference is UC employees pay FICA tax and receive Social Security and then UCRS adds to the difference. UCRS has always been a healthier pension fund compared to CalPERS....
Sign of things to come..
Federal bailouts to deficit strapped states on condition that states pension obligations are rolled into the Social Security system-similar in form to how PBGC handles private pension failures along with the reduced benefits.
In Rhode Island, the leading Democrat Clown for Governor, ex-State Treasurer Caprio announced at his nomination win that he will be sure that every State Pensioner (payee) will get his pension and every taxpayer (payer) will be dealt with fairly. I think we have a 2Billion dollar hole, which translates to a $2000 tax for every breathing human being in the state. When the mushroom cloud of failure goes off here, it surely will not be pretty for the pols.
I am waiting for Uncle Sugar's version of SSI 2.0 where IRAs, 401Ks and these enimic local pensions get sucked up by the Federal Government. More slaves. More votes. Welcome to the Retirement "Perfect Storm"..... This will NOT end well....
It may be here sooner than you think, what with Andy Stern on Obama's new commission.
http://www.seiu.org/2009/03/seiu-coalition-partners-launch-retirement-us...
Interesting to read the comments. Acutally I'm surprised the SEIU let most of the commenters post considering they basically give them the middle finger.
Here's a funny one. Not sure if this guy is serious but if he is, that's scary.
Carlos | March 27, 2010 3:29 PM | Reply
I don't know who all these idiots are posting on here. I am a worker and I deserve to have a good retirement. There is no reason I should have to work my butt off even more to save for my own retirement. A comfortable retirement is a RIGHT... get that through your head!... you can't take that away.
We are an army and we are winning one battle at a time... Give us what we want or we will take it from you... either through elections or by whatever means necessary. We did it with other civil rights... more recently with health care rights... and now it's going to be worker and retirement rights.
Idiot owners and businessmen and corporations need to sit down, shut up, and get out of the way. You have ruined the world and we are going to fix it in a more fair way.
Workers of the world have united under Our Obama... it is our turn now.
Donnie,
Carlos is a UNION member..........and a Communist.
" Give us what we want or we will take it ".
Yeah, or you might get a hell of a lot more than you bargained for..................Not Good.
Workers of the world have united under Our Obama... it is our turn now.( Evidently CARLOS, isn't American,and Obamamama, is not going to be around much longer).
It's been your turn,my entire life Union members have,get better pay, and retirement bennies than anyone else working in the Blue collar world..........this only has changed(evened out) in the last few years.
The only thing missing here are the funds skimmed off the top to fund the Democrat Party.... did I miss that somewhere? :)
A total non-event. Why would anyone want to throw away money on SS at this point? Late entrants in a Ponzi scheme always get killed.
Leo,
This is a comment on your latest blog post at Pension Pulse. I composed it before discovering that only "team members" can comment. Don't worry, I never read stuff online that won't accept comments, so I'll avoid your blog in the future. This is the only time we'll have to do this awkward dance.
RE: "Big Money Suffering Performance Anxiety?"
I'm not following. If hedge funds are largely sitting on the sidelines, and pension funds are going to be pumping more assets into hedge funds, how does that translate to support for equities? Shouldn't that translate to more "smart money" waiting to short this limp-wristed rally?
You've also pointed previously to the tidal wave of demographics: if the boomers are retreating from risk as they enter retirement, why would they re-enter the equities market now? To win back what they've lost?
Post your comments here. I don't have time to police comments. As far as your comment, greed & fear drive markets. That never changes. I don't buy this storyline that boomers are leaving the market permanently. Heard it too many times. Besides, pension plans are naturally long stocks, and so are most hedge funds (on a levered basis).
This is an informative find, Leo. Thank you for posting it.
No man is an island, but Leo is Gilligan!
Thanks again, Little Buddy.
I would say that their fears are in no way misplaced. The SS Ponzi is collapsing. I would venture a guess that the 36% who think it will still be there for them are already dependent on government largesse.
Michelle,
That is pure speculation. Fear always takes hold of the masses, especially after a financial crisis of epic proportions, but to say SS will collapse is just irresponsible. If they have to, they will raise payroll taxes, cut benefits, do something to bolster SS, but they won't allow this pillar of retirement to collapse. Too many seniors rely on it to live.
Leo,
How will they keep seperate the SS that will go to the guest workers? How exactly will they keep it fair when those working under a H1-B visa don't even have to pay into SS the required 10 years because we will share the responsibility with another country if they paid for a total of 10 yrs to both?
No, promising future retirees that SS will be there for them is irresponsible. Sure, they'll keep it floating for current seniors, but anyone under 40 would be a fool to think they'll see one penny.
SS should never have been considered a pillar of retirement. Truly, no government promise should ever factor significantly in one's retirement plans. My husband is active duty military and will be putting in his twenty, most likely more. We know what his "promised" retirement benefits are, but they don't factor in to our planning at all. If he gets them, well, bonus. But we don't put our faith in the government to fulfill its promises.
What are the facts?
http://brucekrasting.blogspot.com/2010/06/social-security-at-mid-year.html
Social Security is now paying out more than it is taking in. Raise payroll taxes? Sure. Now it's just obviously a Ponzi scheme. If you need a continuous supply of new "investors" in order to simply pay promised benefits to old ones, you're in a Ponzi.
Cut benefits? How? The common complaint is that you can't live off SS as it is. Would you limit who can receive SS according to income? If so, then now SS is welfare.
What I'm thinking with these states talking about pushing their pension plans on SS's shoulders is that they're trying to make a scapegoat. When everything falls apart, they'll be able to point to the Feds and blame the lost retirement on them.
@Leo
"If they have to, they will raise payroll taxes, cut benefits, do something to bolster SS"
Raise payroll taxes, yes that's always popular, and everyone knows that wells are infinite. Workers in their twenties will gladly fork over an extra 10% to the grey hairs, sure they will.
Cut benefits -- hmm, how exactly is that different from failure?
Do something to bolster SS -- now there's a plan!
The present Social Security plan is actuarially unsound, backed largely by a cabinet full of IOUs of dubious value. The only difference between their plan and Mr. Ponzi's is the size of the lie.
Roger,
"Raise payroll taxes, yes that's always popular, and everyone knows that wells are infinite. Workers in their twenties will gladly fork over an extra 10% to the grey hairs, sure they will."
They won't have a choice, anymore than WE did/do.
If their working for any company, it will be removed before they get left overs, JUST like we have since we all started working.
Problem is, the boomers are a larger voting bloc. I can't imagine an intelligent optimist believing that any of the major entitlements - Medicaid, Medicare, SS - will change by dint of a vote.
Forgot to mention that they can also raise the retirement age. To call SS a Ponzi scheme is to misunderstand its very nature. Treasury securities back up SS, not stocks, hedge funds and pe funds. I am sure the US SS trustees have the smartest actuaries trying to figure out ways to make this a sustainable program for generations to come. They simply cannot afford to allow it to collapse.
disclosure: i junked you.
reason: that was just stupid, the US is on the verge of financial collapse from a ridiculous debt burden and you spout off with SS is backed by US Treasury securities.....worse comment ever Leo. But I do appreciate your viewpoint.
I'm just guessing but don't think there is a real Treasury Security backing up SS - it's more like an IOU to the the Social Security Trust Fund (I think issued by Congress) - I don't think it shows as a payable at the US Treasury. Even if it did, it wouldn't be backed by any asset other than full FIAT faith. We are living in two nations - the one inhabited by the public sector is much richer.
They cannot afford the political costs of collapse, and cannot afford the actual costs of contunation.
from investopedia:
"What Does Ponzi Scheme Mean?
A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop."
I'll agree that SS is not exactly a Ponzi scheme by letter-of-the-law definition, but the general concept is apparent. One thing it requires is perpetual population increases in order to support the structure.
Anyway, the government wants you dead by time you reach age 60. That is their method of making it sustainable.
Leo, while I agree that SS is fixable (it has a revenue stream after all), it IS a Ponzi scheme. It's promised relatively high returns to early investors, in the hopes that future investors will fund those withdrawals with their capital contributions. Any modification of benefits IS a default against future recipients to the favor of current ones and prior beneficiaries. Sure, that's all possible, but these 'fixes' will increasingly be a part of a great unwind of all of the unsustainable social promises. Leading to the Great Disappointment - where the American Dream morphs incredibly into something much different.
Ponzi Scheme Defined (note the "hopefully increasing number of" - the opposite is happening):
Scam in which gullible public is enticed with the promise of very high returns in a very short time, but is based onpaying off the early 'investors' from the cash from (hopefully ever increasing number of) new 'investors.' The whole structure collapses when the cash outflow exceeds the cash inflow. The originators of the scheme, however, usually disappear with large sums a few days before thecrash. Named after Charles Ponzi (1882-1949), an Italian immigrant to the US who, during 1919-20 collected more than fifteen million dollars from some 40,000 eager people by promising to double their investment in 90 days. See also pyramid scheme.
From http://politicalcalculations.blogspot.com/2007/01/approximating-social-s... - and you can find lots of other similar sites...
Going by birth year, you'll find that those born in recent decades don't come out anywhere near as well as those born back when the program was first launched in the 1930s. This is primarily a result of tax increases over the years, which have significantly reduced the effective rate of return of Social Security as an investment.
For example, when Social Security was first launched, the tax supporting it ran just 1% of a person's paycheck, with their employer required to match the contribution. Today, 6.4% of a person's paycheck goes to Social Security, again with their employer paying an additional 6.4% into the fund as well. Since benefits are more-or-less calculated using the same formula regardless of when an individual retires, the older worker, who has paid proportionally less into Social Security, comes out ahead of younger workers!
Can also shorten lifespans. Ever see Logan's Run and Soylent Green?
Zack,
I get a kick out of some here.
They refer to the grey hairs, and Boomers, as old, decrepit,poor,helpless victims..............broke dick dogs.
Newsflash............I have seen and know, a LOT of 55-65 yr old Boomers, that are still bad ass.
They took care of themselves, and continue to do so.
To think a lot of these folks will just ROLL over and take this, is a MAJOR leauge error.
I am not talking just marching............"When you lose it all, You lose it."
( G Celente)
I'm just being silly, of course. Every time we have this discussion, I think of those dystopian overpopulation novels and movies from the 70s.
My position is, neither SS nor Medicare will change via the political system because the Boomers are large enough to outvote anyone else.
And I know what you mean... I am 47 and in tremendous shape. I climb mountains for fun and I could rip the 25 year old me in half and wear the torso like a sock-puppet.
Potatoe, Powtato. Treasuries, stocks. They are both promises to pay. As we all know, real promises are hard to come by these days.
I have been saying this for years.
They will pay out pensions in NOMINAL terms.
There is no guarantee the payouts will be paid in REAL terms.
"from each according to his ability" (sorry savers , hard workers), "to each according to his needs" (where need = you got more than me)
This is where we are headed in the "Spread the wealth around," land of the free.
Social Security recipients will likely wind up being means-tested for eligibility. Most likely, if state retirees receive anything more than a modest pension, they wouldn't be eligible for SS.
These municipalities should just do what private employers have done for decades... force older workers out before they're vested.
Something near 70% of all entitlements are inflation-indexed in some way. Unless the inflation statistics are also manipulated or the Fed somehow sits on the commodity market, I don't see how inflating risk assets helps the general public in a meaningful way.
People in Maine, particularly our politicians, are not the brightest bulbs in the tanning bed. If there is a way to make sure that no one gets a pension and everyone pays crippling taxes to the point that government services virtually vanish, our state politicians will surely find it.
Like leaping from the Lusitania into the Titanic.
+ google
This could be a bum rap for the folks in Maine. Over the next ten years the payouts and terms for SS will change substantially. The age limit for benefits will be raised. The amounts paid out will be reduced. Benefits will be subject to tax. Some high income oldsters will recieve nothing at all. COLA adjustments on benefits will be eliminated or sharply reduced.
Anyone in Maine who thinks that SS is a viable option will be very disapointed. For that matter anyone who thinks this is a nest egg in waiting is in for a surprise.
At some point we will go from the economic crisis to a political crisis.
I can't help but think we have the mother of all bubbles forming in the public sector. With an increasing number of people working for or supported by the government and their entitlements/benefits becoming increasingly unaffordable for the rest of us in the private sector who support them.
The gov't is going to get heat from both sides, the public employees not getting what they were promised and the private employees sick of funding benefits that they will never receive themselves.