Your Rostra Blogpen – Click on Name for Entries by Each Author … Scroll down for Recent Comments & What’s Hot on Rostra

Have a Hot Political News Tip?

Send us a news tip at info@sdrostra.com

Subscribe: Enter Your Email Address

Archives

Login



 

Recent Comments

Login



When Pension Reform Goes Bipartisan

Friday, November 29, 2013
posted by B-Daddy

Eventually the mathematical results of under-funding ever more generous pension benefits for state and local employees becomes a problem for Democrats too.  Illinois legislators are expected to vote this week on pension reform that would pare back pension benefits in three important ways.

  • Reducing cost of living increases.
  • Increases retirement age.
  • Capping the salary amount available for pension calculations.
There are few other means short of bankruptcy that can be used to reduce pension obligations.  However, Illinois has rejected attempts at pension reform before, so the path to success in the legislature is not certain.  Of course, the state employee unions are waiting to sue if a pension reform measure passes.  This is one of the most important long term issues for state and local government.  Without pension reform here in California and San Diego, the state and city governments will eventually have no money for basic services.  Rahm Emmanuel, not known for his tea party rhetoric, made the same point.

The [state] agreement also is expected to provide a template for Chicago Mayor Rahm Emanuel to follow for his city, which for years has paid far less into its retirement system than needed to keep it solvent. City payments to local pension funds are set to more than double to nearly $1.1 billion starting in 2015. Mr. Emanuel has warned that if changes aren’t made, the city will face a combination of property-tax increases and cuts in services, equating the scheduled increase to the cost of having 4,300 police officers on the street.

It is important to note how a deal was reached among Illinois legislative leaders.

Labor officials excluded from the talks found out about the eventual Wednesday breakthrough from reporters. 

“I think it’s going to be difficult,” said Sen. Linda Holmes, D-Aurora, a member of the pension conference committee and supporter of labor’s arguments in pension talks. “I’m uncomfortable they didn’t have a seat at the table when they’re the people who’ll be impacted by this.”

If Democratic politicians feel the need to exclude labor from pension reform talks, then the situation must certainly be dire.  Illinois is paying a 2% premium on its bonds while pension reform remains unresolved. (California and Michigan are paying about a half-percent premium, source: WSJ.)  

This is one of the key issues of our day, because the proper functioning of government is being put at risk by the expense of public employee pensions.  I support Kevin Faulconer for mayor of San Diego, primarily because I am convinced he can be trusted to continue the fight to reform pensions that was approved by voters under Proposition B.  Alvarez’ response on this issue does not “inspire confidence” as a U-T editorial put it.  I would prefer to deal with our pension problems before they become a crisis like Illinois’ and Chicago’s.

What You Should Be Reading

  • Victor Davis Hanson provides the most complete compendium of Obama-fail I have seen assembled in one column.  
  • In the same vain, Charles Krauthammer outlines the utter lawlessness of this administration and its Democratic allies in the Congress.  The destruction of the rule of law under Obama is frightening, it troubles me greatly that this doesn’t get more attention, we are on the path to dictatorship; our long history has made us believe we are immune, we are not.
  • Local blogger KTCat reminds us of the real spirit of Thanksgiving in light of the President’s request that we “talk about healthcare” at Thanksgiving dinner.  After the ACA fully crashes and burns, what will you do? Great question. 
Share


26 Responses to “When Pension Reform Goes Bipartisan”

  1. Hypocrisy questioned says:

    What Illinois is proposing is Pension (guaranteed benefits) Reform. What San Diego did was Pension Elimination. Most people understand that the former is necessary. Most people have no idea the damage the latter will end up doing in 30-40 years.

  2. Richard Rider says:

    HQ, keeping defined benefit pensions for new employees is like operating to remove a deadly malignant tumor but intentionally leaving the cancer in place to grow again in the future.

    Just about ALL defined benefit plans end up promising more than they can deliver — at least without “surprise” unfunded liabilities. Your unions work 24/7 to get such pensions reinstated, expanded, earlier retirement, less employee contributions, etc., etc. I think most of us are pretty confident that — given the union control of city hall — the unions would expand pensions if it were not prohibited by a proposition approved by the VOTERS (voters are harder to control than a handful of union-picked politicians). But then, you know all this, don’t you?

  3. Richard Rider says:

    HQ, is “Pension Elimination” the new labor union bleat? It IS clever, as it sounds like the existing employees lost their pensions. Well done! Such a careful crafting of the term (complete with proper noun capitalization) likely is no casual word selection by you, I suspect.

    PENSION ELIMINATION!!! Egad, the horror!!!

    And I love the sentence “Most people have no idea the damage the latter will end up doing in 30-40 years.” Of course, only government workers and their unions can properly recognize the scope of this calamity.

    Imagine, public sector workers dependent on 401k investments and (gasp) having to invest on their own! No guarantees! After all, it’s so unfair. So, so, so . . . private sector. Investment uncertainty should be reserved for the the dolts in the free market — not for our “civil servants” ruling class.

  4. Hypocrisy questioned says:

    Richard,

    It wasn’t that long ago that most major private businesses had defined benefit pensions. We haven’t yet felt the full effect of their elimination.

  5. W.C. Varones says:

    Corporate bankruptcies due to pension liabilities are way down.

    Real pension reform would similarly reduce municipal bankruptcies. The horror!

  6. Hypocrisy questioned says:

    W.C.,

    What is your definition of pension reform?

  7. PAUL THERRIO says:

    I am a socialist/liberal. My definition of pension reform is to emulate the existing private sector (401k+5% match, no medical).
    That’s fair. “Libtards” can be fiscally realistic. I hope some of you are confused now.

  8. La Playa Heritage says:

    Mike Aguirre touted the Rhode Island Pension Reform as a template. Vested benefits are untouchable. There are many Non-Vested pension benefits including the low 50/55 Retirement Age, DROP, 13th Check, retroactive benefit increases, Retiree Healthcare, etc.

    Truth in Numbers. The Security and Sustainability of Rhode Island’s Retirement System – 2011.

    http://www.treasury.ri.gov/documents/SPRI/TIN-WEB-06-1-11.pdf

    So far, the City of San Diego has not asked for any actuary reports separating legally Vested Benefits separate from Non-Vested Benefits.

  9. Hypocrisy questioned says:

    La Playa,

    What you are describing is reform based on the fact that you can’t print money in the basement of City Hall regardless of what promises may have been made and it all makes sense. It also preserves a guaranteed income in retirement and that also makes sense.

    Paul,

    What happened to those who wanted to retire on their 401-K’s when the market crashed in 2008?

  10. B-Daddy B-Daddy says:

    With regards to 401(k) and market downturn, no one should be 100% invested in the stock market. As they near retirement age they will reduce their exposure to the market. Investing is for the long haul, you have to have a mix of investments that matches your risk tolerance. I would rather have individual retirees take this risk than the taxpayer.

  11. PAUL THERRIO says:

    Hypocrisy, The poss. of a market crash isn’t the point. The point is why should the private sector workers pay for public sector benefits that are a quantum leap from what is available to them?

  12. Hypocrisy questioned says:

    B-Daddy,

    Of course no one should be 100% invested in the stock market, but with the potential of living 30+ years after retirement, you definitely need some of your money invested in the market. Also, bonds can drop drastically as well.

    The key question is whether you believe retiring should be a financial gamble.

    Paul,

    These benefits were available for the majority of private sector workers not that long ago. I will ask you the same question I asked B-Daddy, Do you believe retiring should be a financial gamble?

  13. B-Daddy B-Daddy says:

    Retirement, like any life choice, IS a financial gamble. The question is who should assume the risk. Since the retiree is the beneficiary, then he/she should assume the risk, not the taxpayer. Socializing risk breeds moral hazard. Fund managers attempt to get out-sized returns that individual investors would have the sense to avoid. Retirees with DBPs push politicians to give them ever more generous benefits out of public view.

    In one of the pension articles I linked, the retirees were being guaranteed a 7.5% rate of return. However, my personal planning assumption for my own 401(k) style plan is for an average (not guaranteed) return of 6%. My more conservative assumption accrues to the mix of bonds and government securities in my portfolio to offset market risk. Since my own money is at stake, I am a very prudent manager. This model is effective in giving me a stake in my own planning.

  14. Hypocrisy questioned says:

    B-Daddy,

    I hope your investment strategy works out for you and I mean that sincerely.

    Unfortunately, not everyone’s investment strategy works out well. The latest statistics I saw said that less than 2% will be able to maintain their current lifestyle in retirement. Having senior citizens need to continue working or return to work in order to survive is a bad scenario for so many reasons.

  15. Michael A. Schwartz says:

    Hypocrisy, what if your pension was with Vallejo? Detroit? Stockton? or American Airlines?
    Illinois just had to come up with $100m dollars of the tax payer’s money to fill the holes in their pension. Pensions seem to have so many problems.

    You’ve pointed out in the past that people who wanted to retire in 2009 right after the market crashed were out of luck because the market dropped to around 6,900 from 12,000 in a year.

    A couple of points on that:
    1. If this person is retiring then they’ve been investing for 30 years. (approx) And 30 years before the crash, the market was around 830. Going from 830 to 6900 is a huge return on his first dollar invested and steady growth on every dollar after.
    2. But, you are right, getting cut in half on the day you retire stinks. No question. However, if you are 60 and retiring, any responsible advice or strategy will have your portfolio balanced to about 60% bonds (income generating investments). Bonds did not thwacked by the market. So only 40% of your portfolio went from 12,000 to 6,900.
    3. the 60% of your portfolio that was in bonds would have returned a positive 6% to 8% in 2009, ’10, ’11, and ’12.
    4. The equity portion of your portfolio went from 6900 in 2009 up to over 16,000 today. If you re-allocated some of your fixed income holdings into equity while the market was low, you did gangbusters. Even if you did not, you are better off than where you started.

    What if a 401(k) type plan was offered with a forced contribution by the employer? Municipalities save a chunk of money by moving from a pension plan to a 401(k) type plan. What if some of that savings is given back to the employee into their 401(k)? It would be similar to the match that businesses give their employees and it could even be heavily protected regarding access and investment.

  16. Hypocrisy questioned says:

    Michael,

    There is just too much there to cover in a blog post, but I will try:

    1. Bonds also dropped precipitously in 2008-09. The average of municipal bond fund indexes was down almost 8% and high yield bonds almost 30%. There was simply no place to be during that time if if you had a crystal ball. Side note: Expect bonds to drop though not as much over the next few years.

    2. There are thousands of bonds, bond funds, stocks and stock based mutual funds. Even in the best years, some will lose money and some people will be invested in these losers.

    3. As I mentioned before, less than 2% of retirees will be able to sustain their current lifestyle in retirement and this will most likely get worse as more of us retire without the PRIVATE INDUSTRY pensions that many retirees currently have.

    4. I don’t know of many pension funds that have an average return of less than 8% over any period of time 30 years or longer. On the other hand, I don’t know of many 401-K participants, myself included, who can say the same.

    One more comment: You are correct that anyone that stayed the course and didn’t panic sell after the 2008 market crash has restored their 401-K to at least the level it was prior to the crash. The problem is two-fold:

    1. Even with an expected return of only 6%, the expectation would have been that the 401-K would have grown by almost 34%.

    2. If someone was retired and living off of their 401-K, they would have had to use a substantial part of their principal to live and therefore would not have received the benefit of the current run-up.

    The bottom line for me is that I don’t think a senior citizen retiree who has done everything right should have to fear that a market downturn may cost him his future economic freedom. I accept and understand that others do not share my view.

  17. Brian Brady Brian Brady says:

    “I don’t think a senior citizen retiree who has done everything right should have to fear that a market downturn may cost him his future economic freedom.”

    He/she doesn’t have to. Investment vehicles called annuity contracts can mitigate that risk for him/her. Why not make CalPERS and investment option, among many choices, but take taxpayer subsides away from its mistakes?

  18. Michael A. Schwartz says:

    My point was more along the lines of neither DBs or DCs are inherently “right” or evil. Either one can be messed up. Either one can be run well. I am sure we can both throw statistics back and forth to back either side.

    There does seem to be something about public pensions though. It’s almost like you can expect a percentage of them to be mismanaged and screwed up. Mostly by the elected who probably aren’t experts in this and were elected to fill potholes.

    Are there some steps that can be taken to avoid municipalities from screwing up the pensions of public employees and having to stick it to tax-payers for more money? Other than elect smarter people?
    Short of whatever safeguards, I think a lot of tax-payers want the ultimate safeguard which is some form of a DC plan which is putting the responsibility and consequences back on the employee.

    My proposal would be to offer a 401(k) style savings plan and guarantee the employees a percentage of their pay given to them annually and invested in a balanced mutual fund that they cannot touch or borrow against. It sits there and grows until they are 59 ½. Then they can touch it like the rest of their funds. Meanwhile the employee can decide to put more of their salary away in this plan and invest it how they like.
    The guaranteed amount would be similar to the private sector match or profit sharing contribution and would be less than what is normally set aside for pension reasons. (How much is that? Like, 15%?)
    The municipality saves money, the investments are in the hands of the employees, there is still a guaranteed money component, and employees have the ability to save more of their salary.

  19. Hypocrisy questioned says:

    Brian,

    I think investing money in guaranteed annuities provided by the private sector is a great idea and is probably where we should eventually end up. I do think that, much like the FDIC guarantees bank deposits, there will need to be a government guarantee in the event that the private entity can’t pay the annuity. However, even with this, the risk to the taxpayer is greatly reduced from the current status of public pensions.

  20. Hypocrisy questioned says:

    Michael,

    You do put a lot into one post. Let me address what I think is your most important question because I think it is the reason that the public has turned on pensions:

    “Are there some steps that can be taken to avoid municipalities from screwing up the pensions of public employees and having to stick it to tax-payers for more money?”

    There are a number of things we can do:

    1. Make the giving of any retroactive benefit increase illegal.

    2. Make it illegal for the municipality to skip or reduce required payments to the pension plan.

    3. Stop basing the benefit on salary and years of service and base it instead on actual dollars contributed to the plan. This is not 100% of the solution, but it would stop many of the games that are played now.

    4. If you are going to continue to base the pension benefit on salary, then make it illegal for any municipality to give their employees a pay raise when their pension funding level is less than 80%. This not only makes the funding level self-correcting, it also takes away the political incentive to increase pension benefits or to provide exorbitant wage increases.

  21. Michael A. Schwartz says:

    On the surface and at first glance, those seem like good steps, Hypocrisy. As is Brian’s idea of choices.

    What do you think is the hindrance of getting those things done, Hypocrisy?

  22. Hypocrisy questioned says:

    Politics and lack of trust.

    The left doesn’t want to be portrayed as “reducing benefits” and they don’t believe there is anything wrong with the current system. They point to the current run-up in the stock market and the great returns over the last 2-3 years and they say everything is fine.

    The right doesn’t want to accept that DB’s are viable at all. Much like the way they treat Obamacare, they would much rather eliminate it than fix it. Also, they don’t trust that the Unions and their “elected puppets” won’t find some way around any laws if they want more benefits. And they always want more.

    Both sides have just enough truth in their arguments to at least convince themselves that they are correct. Unfortunately, they are both mostly wrong.

  23. Brian Brady Brian Brady says:

    ” I do think that, much like the FDIC guarantees bank deposits, there will need to be a government guarantee in the event that the private entity can’t pay the annuity.”

    Ugh. That, combined with GLB and the CRA is how we got into the housing mess, BUT…

    “However, even with this, the risk to the taxpayer is greatly reduced from the current status of public pensions.”

    Agreed. Make it an option for employees and limit the taxpayers’ contributions and we have a deal.

    “The right doesn’t want to accept that DB’s are viable at all. Much like the way they treat Obamacare, they would much rather eliminate it than fix it.”

    False. “The right” understands that government shouldn’t be messing around in the insurance business. Again, making these things optional and removing the threat of force is an answer upon which I can agree.

  24. Hypocrisy questioned says:

    Brian,

    I think the fact that you only took exception to my explanation as to why the right doesn’t want to compromise on this issue ignoring my contention as to why the left won’t compromise actually proved my point so I thank you for that, but I do actually have two questions for you?

    1. What “threat of force” are you referring to?

    2. Do you believe in bankruptcy laws?

    By the way, the government was “messing around” in the insurance business long before Obamacare.

  25. Brian Brady Brian Brady says:

    “The left doesn’t want to be portrayed as “reducing benefits”

    They don’t have to reduce benefits but rather define by contribution

    “and they don’t believe there is anything wrong with the current system”

    and since we’ll be offering annuities as a choice, their problem is solved.

    “1. What “threat of force” are you referring to?”

    extracting money from free citizens at the tip of a gun

    “2. Do you believe in bankruptcy laws?”

    Of course.

  26. Richard Rider says:

    The core problem in all this discussion is that HQ and some others are discussing the ideal model. The unstated assumption is that “we” can establish the ideal defined benefit plan, and that will be that.

    But in the REAL world (the world of HQ and other union bosses), no sooner will such a plan be put in place than the push starts to CHANGE the plan to closer match all the other failed, overpromising, underfunding defined benefit pension plans around the nation (indeed, the WORLD).

    Would such a union effort succeed? Well, they almost always have in the past. It didn’t much matter if it was a Republican or Democrat-controlled government, sooner or later the unions pretty much have their way with us.

    So don’t buy into HQ’s pie-in-the-sky Utopian pension plan — rest assured that HE doesn’t. HQ well knows that the goal here is to sound “reasonable” and suggest a “sensible” plan with proper safeguards. THEN the unions can start the subversion process, as they have done countless times. Elect beholden politicians, and bring back “the good old days (and pensions).” Even if, perchance, HQ opposes such a process, few can deny that this subversion process is real, relentless and (usually) successful.

    That’s why the INITIATIVE change banning such pensions was necessary in San Diego. With this city council, who would doubt for a moment that, given the chance, they’d do the unions’ bidding (albeit through a series of incremental steps, as usual).

Social Widgets powered by AB-WebLog.com.