Unsustainable: At This Rate, You'll Be Working Nine Months A Year Just To Pay Unfunded Public Employee Pensions
There's a crisis looming, and I have a sense of it because I follow @reasonpolicy -- Adrian Moore -- on Twitter.
Moore, a VP at the Reason Foundation (Reason's think tank), has covered pensions paid to public workers -- specifically, the gap between what gets paid into the funds and what's getting paid out. That gap is substantial in many places -- and growing at scary rates.
If things continue as unsustainably as they have been, we'll all be working nine months out of the year to pay retired public workers' pensions and the rest will be months we work to scrape together a little money we can live on.
Moore recently tweeted this story by Steven Greenhut at Reason, "California Road-Tax Hike Is Really A Pension Tax":
Gov. Jerry Brown and Democratic legislators have caused a stir with their plan, which passed the legislature on Thursday, to increase taxes to pay for the state's unquestionably decrepit infrastructure of roads and bridges. Instead of thinking of this as a new transportation tax, however, Californians should see it as a pension tax, given the extra money plugs a hole caused by growing retirement payments to public employees.Consider this sobering news from the CalMatters' Judy Lin in January: "New projections show the state's annual bill for retirement obligations is expected to reach $11 billion by the time Brown leaves office in January 2019--nearly double what it was eight years earlier." That's the state's "annual bill," i.e., the direct costs taken from the general-fund budget. That number doesn't even include those "unfunded" pension liabilities that according to some estimates top $1 trillion.
That's more than double the $5.2 billion a year the Brown administration hopes to raise from a plan that would boost gas taxes by 12 cents a gallon, raise the vehicle-license fee by $25 to $175 a year (depending on the value of the vehicle), impose a $100 annual fee on electric cars because they don't currently pay gas taxes and include a large hike on diesel fuel. Money is fungible, so if the state overspends on pensions, it has to make it up somewhere else.
Video of Moore here. And some quotes from it:
"Optimistic scenario: it's $1 trillion in unfunded liabilities," says Adrian Moore, vice president of policy at Reason Foundation about public-sector pensions at the state, county, and local levels. "More realistic scenario: You're looking at $2 trillion to $4 trillion in unfunded liabilities. That's a huge debt."Over the past dozen or so years, Moore tells Reason TV's Nick Gillespie, state and local governments have allowed their payrolls be taken over by pension obligations. Rising pension costs have been a key factor in municipal bankruptcies across the country.
How crazy are things? Here's yet another Reason piece Moore tweeted. This one's by Eric Boehm on Chicago's pension craziness:
During 2015, the two pension plans for Chicago city employees paid out $999 million in retirement benefits to 29,286 retirees. During that same year, the two funds generated just $90 million in investment income.To call that a massive shortfall would be a, well, massive understatement.
Here's why it matters. Investment returns are one of three ways that money gets into public pension plans--the other two being contributions from public employees themselves and contributions from taxpayers. Contributions from employees are set at fixed levels based on contracts, so a shortfall in investment returns means that either taxpayers are picking up the tab or the pension fund is running in the red. In Chicago, both of those things are happening.
Chicago City Wire, which reported this week on those terrifying numbers for the city's two municipal worker pension systems, also notes that the four other pension plans in Chicago--covering teachers, firefighters, police, and park workers--are not doing much better. "All six operate as government-sanctioned Ponzi schemes, paying retirees with contributions made into the fund by active city employees, as well as taxpayers contributing on those employees behalf," the Chicago City Wire concludes.
Chicago officials have tossed around a wide range of ideas for how to squeeze more money out of the population in order to feed the ever-growing appetite of the city's pension systems. Taxing soda and other sugary drinks is one idea. Taxing sewage is another. None of those ideas will solve the pension crisis, and are likely to drive more people out of the city, which has already seen a drop in population for two years running.
This is the kind of third-rail issue no politician wants to touch. They're all waiting for it to be some other politician's problem. Pretty soon, we'll all have to pay a fee every month just to keep these plans paying out. At least we will unless there are steps taken to get us off the path we're currently on.
Moore says there are five steps to pension reform:
•Commit to making full pension payments and paying down pension debt as soon as possible.•Stop deferring payments or using unrealistic investment return assumptions to artificially lower payments into the pension system.
•Adopt a sustainable system with smooth accrual of pension benefits in line with the private labor market, allowing workers to accrue benefits throughout their career that are portable and devoid of perverse incentives, which protects taxpayers from unnecessary cost risks.
•If necessary, change contracts over time with existing employees to bring benefits in line with the labor market, increase employee contributions, set more realistic retirement ages, and adopt formulas that avoid abuses such as pension spiking (gaming the system to increase the final salary used to calculate pension benefits), pickups (where the government pays the employee's share of contributions to the pension system), etc.
•Depoliticize management of pension funds and increase their transparency and accountability.
Pension reform sounds all nice and fuzzy but these proposals are pie in the sky.
Public sector unions have won in the courts more often than not to block most of these reforms.
The only real solution is to let states and municipalities go bankrupt which will allow the pension systems to be forcibly restructured.
The other way out is through run away inflation which comes with a lot of heartburn for most of the middle class living on those pensions.
Personally I would rather see a claw back of excessive pensions in the form of a tiered state income tax to recoup excessive pension pay outs. Leave the secretary and the retired clerk alone with their 30k anual pension. Claw back two thirds of the 300k pension paid to the former university president.
Many of these problems started when the unions kept insisting that state employees with guaranteed jobs for life, and 100 percent pensions after 30 years needed to be paid *the same* as a private sector employee, who was at most, only going to collect a third of his annual salary in the form of a pension after 40 years of private sector employment.
The teacher's unions were the worst, but there is a lot of blame to go around.
Isab at April 8, 2017 11:04 PM
What Isab said...
There should be no government pension of any kind greater than $90,000. No, $100,000. No, $75,000... Under penalty of death.The thing about Moore's five bullets is that they describe precisely the reasons that people want to work for government: Of course they want to avoid market forces. That's the whole point of working for government! Who wants to have their performance JUDGED all the time, y'know?
This is going to be a huge problem with civilization for the rest of Earthly time. Fixing it would make the cultural changes wrought by Judaism, the Magna Carta, and germ theory look like a parting your haircut on the other side... Absolutely incidental.
Crid at April 9, 2017 5:04 AM
Listen, this blog post is freaking important. For years I ended every comment with this link. The onrushing crisis is going to be horrible.
The most self-centered people on the planet are going to be cranking their sob stories with all the Meryl Streep theatricality their twisted little souls can summon. DON'T LISTEN TO THEM. It's your money... YOURS.
George Will made a comment about public finance years ago... The only sacrosanct component, the only obligation we can't modify or disregard, is the interest on our existing debt. If America misses a payment, the planet could burn in some tragically literal ways.
EVERYTHING else is on the table.
(Mentally compose your own sob stories for me in this moment: School lunches for minorities, medicine for wounded soldiers, kindness for the mentally retarded, the defense of Bambi's mother. And hear the reply in my voice:)
EVERYTHING else is on the table.
Crid at April 9, 2017 5:16 AM
You're absolutely right, Crid.
And I don't see that these proposals are a solution, but there are huge problems here. Say you're one of these people who gets the ginormous pension. There's some document there that says you do. A document from the government. The government's declaring that worthless and void -- even to some degree -- (and remember, this government is built on the lobbying dollars of unions), well, will the people with these pensions just go along with that?
Amy Alkon at April 9, 2017 5:37 AM
Right. This is going to require backbone from the public and integrity on the part of elected officials. Hence the pessimism of that first comment.
Crid at April 9, 2017 6:04 AM
Both governments and companies give out pensions that make it unprofitable to work past 57 or 62. Instead of giving a retirement age, they just say after 30 yrs work you can take your pension. Many friends have found that if they keep working, they make maybe $5000 or $10000 more per year than if they retire--that is, they are working for $5000/yr. But they are only in their late 50s. A plan should say after 30 yrs you get your full pension --at 66.
Then there are the tricks paid by public employees to top up their pension, and the growing number of "disability" cases where the disability is age.
My company was in trouble and stopped making their pension contributions (adding to 401k above matching). Public employees act like such a thing is impossible.
cc at April 9, 2017 7:30 AM
Moore's first bullet is ludicrous. The full pension payments are going to bankrupt the state. The courts keep insisting that governments have to pay the promised pension, but that ignores basic financial truths.
The chaos generated by the outrageous promises made by the government are going to produce a quick-fix mentality, print money. And that will produce hyperinflation.
Want to know what that causes, check out the history of the Weimar Republic. In 1930s Germany, it took a wheelbarrow of money to purchase a loaf of bread. People bough anything, even pianos, as soon as they got paid - just to have something that wasn't worthless by the next day, so they could trade it for food. Weimar's economic travails and eventual failure led to the rise of National Socialism.
Not saying we'll get the Nazis, but we will get some form of authoritarianism promising to fix the system once we've sunk into hyperinflation and chaos, perhaps an American Hugo Chavez.
Conan the Grammarian at April 9, 2017 7:43 AM
> we will get some form of
> authoritarianism promising
> to fix the system once we've
> sunk into hyperinflation
> and chaos
Your cynicism is naked and unrelieved; keep up the good work.
> Both governments and companies give...
STOP.
Governments and companies are NOT THE SAME. Any number of companies have failed in my lifetime, and fail (literally) all around me today, impacting me only incidentally... But that's how things are supposed to work in a capitalist system of disproportionate risks and rewards. Sometimes their compensation errors are the problem and sometimes not, but I don't have to care.
Government employees never face risks. The money they spend isn't theirs, so they don't care about spending it well. They'll never be fired, and the incompetent people who they hire (and pension) will have only beneficial impacts on their careers and budgets. There are no corrections at hand... Radio Shack is closed, and despite how much I liked them in the 1970's, good riddance...
But you and I are on the hook for government wretchedness at all times.
I think you're making a terrible and despicable mistake by so glibly conflating these forms of enterprise. You should seriously watch what you say, because it can corrupt what you think.
Crid at April 9, 2017 8:42 AM
http://cafehayek.com/2012/05/some-links-174.html
The nature of the state
=== ===
[edited] There is a notion that the state is a legitimate agency deserving respect; that despite its flaws, it generally promotes or tries to promote the welfare of its citizens. This is increasingly difficult to understand, much less to accept.
The late Mancur Olson had a far more realistic view: The state is a Stationary Bandit. Ordinary people might have to tolerate this, but they should understand that dealing with the state is dealing with organized thuggery. Obey the state because it can unleash its guns and prisons on you. But, please don’t pretend that the state’s commands are issued with your best interests in mind.
=== ===
The fundamental problem with politics is that it is driven by incentives, like all other activities. Political parties are organized to collect the spoils of government. They benefit from implementing good policy only to the extent that they can confiscate more of the wealth of the citizens.
Their fight for dominance is not primarily driven by greater prosperity for the average citizen, and so increased prosperity will usually suffer from the fight.
Possibly, the populace will reject nanny government (protection racket) after the general economic collapse which is coming. But, the example of US President Franklin Roosevelt in the 1930's, and of Hugo Chavez in Venezuela doesn't cheer me. Each became more popular as his country declined.
The most efficient bandit government would just take the resources (taxes) it could. In a democracy, the bandit wastes resources on poorly implemented but well advertized benefits to convince the majority that they are good guys dealing with a difficult world.
Motto: Things are bad now, but without us in government they would be so much worse.
Pensions are a Ponzi scheme, like so much else in government. Pensions lie to the vast majority of the eventual recipients, because there will not be resources available in the future to fully pay them. Pensions lie to the public, because the costs are hidden and delayed. Governments are about lying; no biggie.
Andrew Garland at April 9, 2017 9:56 AM
Spot on, Crid.
This is why I'm getting the H out of California as soon as I can afford to move. Let Hollywood and the granola people pay the bills that result from their refusal to learn economics before voting. It's not my problem, and we'll all be better off when all those needless bureaucrats are dead.
jdgalt at April 9, 2017 11:27 AM
The government didn't invest the pension funds. It bought its own IOUs with them. "The pension fund was just sitting there." That's how government thinks. Then, it spend the money, promising to pay it back with future tax money, the next generation's tax money.
You're the next generation. Surprise!
The worst people to whom to entrust your money are people who have a greater incentive to spend it than to invest it.
Conan the Grammarian at April 9, 2017 12:59 PM
It's amazing that you too remember that line from the cartoon strip.
Crid at April 9, 2017 1:58 PM
Lt's weird & great to think we all have the same pop culture references rolling around in our heads.
Crid at April 9, 2017 2:03 PM
Crid FTW
Jeff Guinn at April 9, 2017 2:36 PM
"Crid FTW"
Yes- It's a great pleasure to see how far he's come!
It's been about five and half years since he actually argued against examining what those agencies offering pensions were doing...
Radwaste at April 9, 2017 4:33 PM
I was a big fan of Doonesbury back in the day. However, by the mid-eighties, it had lost much of its charm and appeal for me.
I watched reruns of a Canadian sit-com a while back and was fascinated that the characters in it had most of the same pop-culture references that Americans do. The ones we didn't share were Canada-only (e.g., Blue Rodeo songs, CFL trivia, etc.).
Conan the Grammarian at April 9, 2017 4:47 PM
What Isab said, bankruptcy. It is not possible to pay what has been promised.
For California and Illinois it doesn't look politically possible to even discus moving in the direction of solvency. Bankruptcy is the only realistic solution. When the organization who made those promises has no more money the promises will not be kept and the pensioners will be left holding the bag. Well, plenty of people told those pensioners that things couldn't go on. I can't feel much sympathy for them considering that they keep hoping it will fall apart for someone else and they can slip past the pain.
The only question is exactly when will the system completely fall apart and how wide spread will the collateral damage be. Will the federal government try hyper inflation thereby throwing most of the states under the bus for a few select people? Will California and Illinois revert to territorial status, and all of those people lose their rights to vote for federal offices? Think about that one for a minute. That is 75 guaranteed democrat electoral votes that could vanish. 27% of what the democrats need for the presidency. Not to mention the seats in the house and senate.
I can't even guess when thing will fail. When will people stop lending money to those states? As for Moore's bullet points, it's already too late for that.
Ben at April 9, 2017 6:10 PM
The best part of these public pension funds is when they actually run out of money. And then the union leaders rile up the members, demanding the government to give a solution to the problem.
Of course, they expect something along the lines of gub'mint give moar money plz, and not something like a third-party auditing; and when the latter happens? Ooooh, you're going to see union leaders raise a stink bigger than the Salton Sea during the peak Summer.
Sixclaws at April 9, 2017 6:38 PM
> It's a great pleasure
Muffin, you don't even have to say it.
Then as now, your position is 'Don't complain about *me,* complain about the state legislature whom I've so egregiously intimidated!'
Then as now, this sheer smock will not protect you from the blood and goo of a fundamentally corrupt posture on the public spreadsheet.
It's good, if not actually comforting, to know that this got under your skin so many years ago.
Grrrr.
EVERYTHING else is on the table.
Crid at April 9, 2017 7:28 PM
Seriously, go blow a giraffe.
Crid at April 9, 2017 7:30 PM
People sometimes ask, 'Does it bug you being right about everything, ALL the time? …Across every known measure of time and space? Does it ever get old?'
No. No, it doesn't. YOU SHOULD TRY IT.
Crid at April 9, 2017 8:20 PM
> I watched reruns of a Canadian
> sit-com a while back and was
> fascinated that the characters
> in it had most of the same pop-
> culture references that
> Americans do.
This was the quintessence of the McKenzie Brothers skit on SCTV. Their literal fulfillment of a regulatory requirement for entirely Canadian sourcing of some percentage of broadcast content laughably demonstrated the vacuity and futility of the requirement itself. ('Irony is the consolation of slaves,' etc.) I'd bet one in ten readers of this comment knows what a "Juno" is. I bet one in fifty could name a recipient of one.
Consider a favorite columnist, Cosh. He's Scots-derivative, perhaps something of drinker, and bitterly impatient. This speaks to my heritage, and he's been know to say neat, book-learned things.
But he's Canadian, and sometimes that means he thinks and says things that're just fucking delusional... Things like "we're." A few days ago he at least copped to the depth of his illness:
But I doubt the truth is that they're "raised" with that 'instinct'... I'd bet each of them selects that behavior as a comforting, decorative weakness for their own interior lives. And by each of them, I mean ALL of them.Because Canada, right? Wouldn't you?
When I was seven, I thought I was going to swing on ropes from tall buildings to solve crimes, like Batman. My adult life soothed & redeemed the collapse of that fantasy.
Imagine what it's like to grow up to be Canadian.
Crid at April 9, 2017 8:49 PM
Moore says there are five steps to pension reform:
John says there is one step to reform.
Tell pensioners they are shit out of luck and their contracts are void as they were scams from the word go given they were negotiated not by the people responsible for paying their salaries (taxpayers) but with politicians so the union would kick back campaign contributions to the politicians who negotiated such generous terms.
lujlp at April 10, 2017 12:39 AM
"go blow a giraffe"
That's a bit of a stretch.
Gog_Magog_Carpet_Reclaimers at April 10, 2017 2:52 PM
All the sudden I don't regret the intemperance.
Crid at April 10, 2017 7:44 PM
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