Former LA mayor: pension reform or ‘disaster’

A staff chart given to Los Angeles city council labor negotiators this month shows that city retirement costs nearly doubled in the last seven years, soaring to 18.6 percent of general fund revenue this fiscal year, $848 million.

In the next four years, the annual cost of the two city retirement systems for police and firefighters and for non-sworn employees is projected to increase by half to $1.285 billion, about 25.5 percent of general fund revenue.

Retirement costs continue to climb as the deficit-ridden city, already hit by four years of deep cuts in the workforce and services, faces another major budget shortfall next fiscal year that could balloon to more than a quarter billion dollars.

How unusual is the size of the growing bite taken by pensions and retiree health care costs from funds needed for other government services?

In San Jose and San Diego, where voters in June approved sweeping pension reforms now opposed in the courts by public employee unions, retirement costs were about 20 percent of the general fund.

Before a stock market crash and deep economic recession hit pension fund investments expected to pay two-thirds of future pension costs, a governor’s commission reported in 2008 that the average pension cost was 4 percent of the general fund.

Former Los Angeles Mayor Richard Riordan, who warned in a Wall Street Journal article two years ago that the city was likely to declare bankruptcy by 2014, renewed his alarm in a television interview last week.

Asked if by fiscal “disaster” he meant “bankruptcy,” Riordan told Fox Business that bankruptcy is a “bad word” but will perhaps be necessary. If nothing is done to curb retirement costs, he predicted the city could become insolvent in one to three years.

“Maybe the only thing you can do is go into bankruptcy in order to have the court cut back on all these terrible pensions, health care and other things,” Riordan said.

If the city council does not curb retirement costs, Riordan and several business leaders said they will put a pension reform initiative on the ballot. Their preliminary plan would give new hires lower pensions and require voter approval of pension increases.

To reduce the cost of pensions promised current workers, widely believed to be protected by court decisions, salaries would be frozen when city pension contributions exceed 25 percent of police and firefighter pay and 15 percent of non-sworn pay.

A union-backed change placed on the March ballot last year by the city council, Measure G, gives lower pensions to new hires from the Los Angeles Fire and Police Pensions system.

Members also must contribute an additional 2 percent of pay to maintain full retiree health care, bringing their total contribution to LAFPP to 11 percent of pay. The city contribution to LAFPP is about 42 percent of pay.

Many members of the other city pension plan, the Los Angeles City Employees Retirement System, have agreed to increase their contributions to 11 percent of pay, some going up from 6 percent. The city contribution to LACERS is about 24 percent of pay.

Mayor Antonio Villaraigosa’s plan to cut LACERS costs for new hires, stalled by union opposition, reportedly would cap pensions at 75 percent of pay, cut retiree health care and inflation adjustments, and extend retirement to age 67 from the current 60 or 55.

Last week, the city council labor negotiations committee asked for an actuarial study of the Villaraigosa retirement proposals and another study of proposed tax increases on property sales and parking that could be put on the March ballot.

A negotiator for SEIU Local 721, Art Sweatman, said in a news release members have sacrificed to maintain public services by agreeing to contribute 11 percent of their pay, saving the city $63 million in one year and $810 million over five years.

“Any more pension ‘reform’ is out of the question for us. We don’t want a two-tier system,” Sweatman said, referring to lower pensions for new hires. “Putting the burden of the city’s economic problems on the backs of working people is a non-starter.”

Some think city council action to curb pension costs would aid voter approval of the tax increases, much like Gov. Brown’s state tax increase on the November ballot, Proposition 30, presumably being aided by legislative action on pension reform.

Democratic legislators have been privately reworking a 12-point pension reform proposed by Brown. Today the Legislature begins its final week of the session, when deals on controversial issues sometimes surface, reducing time for opposition to build.

One of Brown’s points that may not be in the legislative plan is retiree health care. The governor would add five years to the retiree health care vesting period for state workers, now 10 years for partial coverage and 20 years for full coverage.

He also called for an end to the “anomaly” that can have an active state worker paying 15 percent of health care costs, but nothing for health coverage in retirement. Legislators are said to think unions are willing to negotiate retiree health care costs.

As if in fact no good deed goes unpunished, about a quarter of the Los Angeles retirement costs come from pre-funding retiree health care like pensions, rare among California government employers.

Pre-funding sets aside money to invest to help pay the future retiree health care promised current workers, a policy advocated by the governor’s pension commission and others. A report this month by California Common Sense is a recent example.

Most government employers, like the state, simply pay the annual cost of retiree health care, letting future generations pay for the retiree health care promised workers providing services now.

How costly is pre-funding? State Controller John Chiang estimated in March that the state has a $62 billion “unfunded liability” for retiree health care promised current state workers and retirees over the next 30 years.

The state general fund paid about $1.7 billion last fiscal year for retiree health care, up 60 percent in five years. The controller estimated that fully pre-funding retiree health care would more than double the cost to $4.7 billion.

“Even slight amounts set aside will help lessen the impact on future generations, and ensure that we fulfill our responsibilities to the state workforce and our taxpayers,” Chiang said in a news release.

Los Angeles, except for a few years, recently has been trying to make the full actuarially required contribution to pre-fund retiree health care.

Of the city LACERS contribution, the pension contribution is 18.09 percent of pay and the retiree health care contribution is 6.40 percent of pay, combining for the total of 24.49 percent.

Of the city LAFPP contribution, the pension contribution is 31.33 percent of pay and the retiree health care contribution is 10.93 percent of pay, combining for the total of 42.26 percent.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 27 Aug 12

38 Responses to “Former LA mayor: pension reform or ‘disaster’”

  1. Tough Love Says:

    Not one of the proposals on the table is even remotely sufficient:

    Step #1. All new workers go into 401k-style Defined Contribution Plans with a taxpayer “match” comparable to what Private Sector workers get … 3% of pay. If the workers are not in Social Security, they should get an additional contribution equal to the employers SS contribution rate of 6.4% of pay (temporarily lower per recent legislation)..

    Step #2. The Defined Benefit Plans of CURRENT workers should be frozen (zero future growth), and they should (for FUTURE service) be treated the same as workers in Step #1 above.

    Step #3. Past service accruals need to be addressed in the context of the town/cities fiscal health. Certainly, there will be places where payment of the full accruals are not financially reasonable and reductions will be necessary …. with reasonable defined as the unfunded liabilities being amortizable over the remaining working careers of these same workers without additional tax increases. While such reductions are unfortunate, we must keep in mind the collusive atmosphere (of the Unions trading campaign contributions and election support in exchange for favorable votes on pay, pensions, and benefits) leading to these these grossly excessive pension promises.

    ********************************************************
    Step #4 Outlaw Public Sector Collective Bargaining so Steps 1-3 won’t have to be repeated in the future.

  2. spension Says:

    Defined Contributions plans are roughly twice as costly for a given benefit as Defined Benefit plans… see the figure at

    The point is to cut benefits, not give a big bonus to Wall Street, which Defined Contribution plans do, with their high fees.

  3. califbeachbum Says:

    The point isn’t to punish public sector employees; it’s to stop punishing the taxpayers. Public sector (especially public safety) salaries and pension benefits are eating up so much of the overall tax-base that government’s chief purpose becomes to reward public employees. Meeting these unsustainable costs comes at the expense of the rest of the state. Parks are closing, classroom size is increasing and public services are in steep decline. The only public sector entity that isn’t suffering are the employees both current and retired.

    Public employee compensation should be no better, and no worse, than what is available to other (private sector) employees in the community.

  4. Tough Love Says:

    Spension, We’ve had this discussion before. Since DB plans benefit from mortality “risk sharing” , they can be costed-out using average life expectancy assumed for the group rather than the longer period that should be cover by individuals in 401K-type DC Plans. In addition, as you have pointed out, 401K plans have historically included higher-than-necessary fees (although that is currently being addressed).

    However, your argument per-supposes that the PRIMARY consider is limited to the cost of DC vs DB Plans. I challenge that notion, arguing that the appropriate goal must be equal Private and Public Sector “Total Compensation” (cash pay plus pensions plus benefits). Most studies (including the US Gov’t BLS) show that while “cash pay” is relatively equal in the 2 Sectors, Public Sector pensions & benefits are multiples greater. With equal cash pay, there is simply no justification for ANY greater pensions and benefits let alone ones that are multiples greater. So, while at least theoretically a DB Plan with cost-structure no greater than what Private Sector workers get from their employer towards their retirement would be OK, the current structure of multiples-greater Public Sector Plans benefits & costs is unacceptable.

    So the REAL issue is “primarily” that the current DB Plans are simply WAY too generous,unjust to Taxpayers, and unnecessary to attract and retain a qualified workforce.

    And i say “primarily”, because there are significant “secondary” benefits to switching to DC Plans, not the least of which is the END of all the spiking and gaming of the system by Unions, the workers, and the politicians ….. because DC plan accruals must be fully paid for in the year of accrual … there being no “deferrals” for future taxpayers, no improper assumptions (which historically have understated true Plan costs), and no easy way for future politicians to increase benefits w/o currently having the money to pay for them.

    All things considered, given the Union entitlement mentality and our politicians insatiable appetite for cash (and being more than will to trade favorable votes for that cash), the DC Plan structure wins HANDS DOWN.

  5. spension Says:

    Tough Love… spiking can be ended without going to DC… right now Social Security uses a 35-year average. Actually I don’t think Social Security has much gaming in it… a counterexample. And it is Defined Benefit.

    I agree DC ends the deferral issue, which is a good reason for DC plans. However, employers have power to skim from DC plans… see the article about Penn Specialty…

    http://www.nytimes.com/2012/08/26/business/401-k-woes-when-a-company-goes-bankrupt-fair-game.html?pagewanted=all

    So no, I don’t think DC plans win `hands down’. (I am in DC plans, BTW, and the longevity effect weighs heavily on me).

  6. Tough Love Says:

    Spension, Yes, Spiking can, and will likely will end (to some degree) as it’s the low-hanging fruit, but stopping this abuse is only a minor element in the savings needed. The Union/Politician collusion (money for favorable votes in pension & benefit issues) will never go away under a DB Plan and the best of changes can easily be reversed in a new legislature….. MUCH harder to do after a shift to a DC Plan.

    SS is a VERY poor example to justify the continuation of Traditional DB Plan afforded Public Sector workers: (a) as a social program, the formula benefit DECREASES as a % of pay as pay level increases, (b) the average benefit is VERY modest, being about 1/4 of that of typical Public Sector DB Plan, (c) the 35 year period included in the SS annuity calculation is based on wage-indexed career-average earnings, not final (or 3-5 year final average) earnings which are easily distorted by spiking, late-career promotions and/or higher than typical raises).

    And your example (in the link) is such an unusual outlier (a small-company 401k, with the company in bankruptcy and with an IRS hung-up on technical issues), hardly exemplifying risk of collection by 401K participants. The risk to participants is near zero as the Plan assets are in “Separate Accounts” IN THE PARTICIPANTS’ names, completely segregated from company assets and impossible for the company or creditors to seize (beyond outright criminal theft among many parties).

    Public Sector DB Plans have always been, currently are, and will continue to be a financial nightmare for Private Sector Taxpayers. Their limited cost benefits are FAR outweighed by the almost-certain-to-continue abuses that have near zero chance of being brought under control.

  7. tom paine Says:

    spension:

    You say, “spiking can be ended without going to DC”.
    Yes, it can. But it has not in fact been ended, or even significantly reduced.
    Why not? Because public sector unions have been dragging their feet and digging in their heels at even modest reform efforts, let alone the really big time reform efforts needed and justified by current abuses and fat. The unions deserve no sympathy whatsoever, and no more running room. And if public/voter/taxpayer anger in general over clear abuses and fat in the public worker pension system leads to tossing out the baby (DC) with the bath water (spiking, air time, etc. etc.), then the unions will have no one to blame but their own short-sighted, give-no-inch avarice.

    Total abolition, unconditionally, and permanently, without off-setting compensation or make-ups, of all spiking, here and now, and everywhere in the public sector, at all levels, is the sine qua non for anything that pretends to be any kind of “reform” — and also for any tax increases to make up for shortfalls in current pension funding.

    And, for me, ending spiking means averaging over the last ten years, not just the last three as proposed by Jerry Brown in his supposedly tough reform proposal.

    And ending spiking also means counting only base pay in the pension forumla: NOT overtime, shift differential pay, hardship pay, comp time, unused sick time and unused vacation time and allowances. Someone who is retired is not working overtime, and not working shift differentials, and not working hardship.

  8. Hondo Says:

    There isn’t enough time. LA is bankrupt in the next couple years. Solutions that rely on savings realized 20 or 30 years from now are of no use. LA is outa money NOW.
    The only fair solution is to cut CURRENT pensions, to make CURRENT employees pay enough into the system to cover the full and real costs of their pensions and health care. The same with any future workers.
    In Illinois, their pension funds must have an annual return of 18% to fund the pensions. Guess what, they’re not making it.
    You can raise taxes to 75% as they do in France but you aren’t going to get any more revenue. That much taxes destroys economic growth.
    Hondo…..

  9. spension Says:

    That SS has evaded the spiking, benefit escalation, etc that some claim is endemic in *all* public DB plans is my point. As for fraud… not sure, but when I was a college student nearly 50 years ago, I got a modest SS benefit after my parents died. But I made too much in a part time job and they made me pay it back. Seemed pretty bare bones and effective at suppressing fraud, to me at that time.

    So not all public pensions are fraud-prone. Another case: military pensions, which are entirely pay-as-you-go DB, with no prefunding at all, as far as I know.

    As for the 401(k) situation of Penn Specialty: the law must change to prevent companies from doing that. Some other examples of bankruptcy messing up 401(k)s: Enron, Countrywide, Bear-Stearns… Until the law is fixed, I couldn’t advocate for DC plans.

  10. Tough Love Says:

    Spension, None of what you just said as any bearing on the need to rid the taxpayers of the cost of and endless gaming associated with DB Pensions. And pointing out that military pensions are pay-as-you-go is a non-starter … because the military IS the US Gov’t which can print money. The States can’t do that and WILL go insolvent unless these DB pensions are replaced with modest-cost DC Plans or are radically lessened in cost for CURRENT workers … which means a permanent end to all gaming and SIGNIFICANT benefit reductions (of 50+%) for future service.

    And Penn Specialty isn’t the problem. It’s the IRS that won’t get off it duff and resolve the open issues. Typical Gov’t workers … no accountability, no consequences of poor service, and movement at a snail’s pace.

  11. spension Says:

    Tom Paine, sure, I’d be happy with an inflation-adjusted 10 year average (Social Security does inflation adjustment). Can’t pretend inflation does not exist.

    BTW, not all DB public pension systems in nation have California’s problems. California definitely got out of control, way out of control. Here are 6 DB systems that generally have lower benefits (not much different than the new Gov. Brown proposal has), but have done OK:

    http://www.nirsonline.org/storage/nirs/documents/Lessons%20Learned/final_june_29_report_lessonsfromwellfundedpublicpensions1.pdf

    It is a deep problem that all the high payout rates (3% @50), spiking, lack of limits on maximum pensions, etc are still obligations that California in theory must meet. They are binding contracts, after all… either you respect the contract clause or your don’t, and if you don’t, I think Sovereign Default for a State is the only avenue.

    Or, convince currently vested employees and pension holders to voluntarily accept a reduction. A longshot but preferable to Sovereign Default.

  12. tom paine Says:

    spension,

    Everything needs to be tried to cut public worker pension abuse and pension fat.

    The Unions will surely try to challenge many cuts in court.

    I say, don’t be afraid of possible legal challenges in court.

    The courts might agree with the unions on some cuts.

    But the courts might allow many other cuts.

    So, do not be scared about possible legal challenges from unions.

    Do not give up in advance.

  13. CalifBeachBum Says:

    Get the taxpayer out of the pension guarantee business!

    – Have the employee choose their pension plan and contribute at the level required to sustain it.
    – Eliminate the clause requiring the taxpayer to make-up any shortfall.

    The pension programs will then self adjust or collapse.

  14. Tough Love Says:

    To Tom Paine …

    Nor should towns in distress be subject to litigation threats from CalPERS when they consider pension reductions. The Bankruptcy Court is the proper venue for deciding the legitimacy of such reductions and CalPERS has clearly morphed beyond it’s mandate (accurately “administering” the Plan as written, and acting a investment fiduciary with respect to Plan assets) to one of “advocating” for greater benefits for Plan participants.

    But deep-pocketed CalPERS has met it’s match, with the 2 big bond insurers about to be screwed by the lack of a proposal for pension reductions as part of Stockton CA’s Bankruptcy. If the Bond Insurers win their challenge, and the Court rules that the retirees must take a pension haircut (as well as reductions in future service accruals for CURRENT workers), the floodgate of bankruptcy filings will swing wide open as the towns and cities will see that REAL change is now possible.

  15. SeeSaw Says:

    The bankruptcy judge has ruled that Clause 904 of the Chapter 9 bankruptcy code, ties his hands regarding any decision on whether or not the retirees must take a pension haircut. The decision is left to the bankrupted debtor, in this case, Stockton. Don’t hold your breath waiting to see it choose the bondholders over the retirees.

  16. spension Says:

    Tom Paine… I don’t think more expensive solutions that greatly increase Wall Street’s profits need to be tried… that is what DC plans are.

    American Courts generally find in favor of whoever has the most expensive lawyers (and best bribes). Hard to say who would win in a court challenge. I would avoid the whole issue and just chart a course for Sovereign Default. The lawsuits will come in due time in response.

  17. Tough Love Says:

    Seesaw, not sure what decision you are addressing, but the 2 bond insurers’ challenge to Stockton filing (in it’s original form w/o pension haircuts) has certainly NOT yet been adjudicated.

  18. Tough Love Says:

    Spension, as already discussed, the inability of ANY spiking/gaming of DC Plans as well as the MUCH greater difficulty in reform-backtracking far far out-weights any DB vs DC cost differential.

  19. spension Says:

    Tough Love…I don’t understand. I’ve pointed at least 8 public DB systems that don’t suffer from the flaws you point out. (6 from the web link, + Social Security, +US Military).

    It is the California implementation of DB with outrageously high benefits that has been the problem. I don’t see how rewarding Wall Street with huge fees for running DC plans, which are also not economical plans in terms of benefits per $ contributed, solves anything. It creates new horrible problems.

    I’d rather solve the real problem….overly generous California benefits for retirees and current employee… instead of spending time on irrelevant prejudice, like, DC is *always* better than DB.

  20. SeeSaw Says:

    True about the bond insurers’ cases TL–but in the case of the Stockton retirees suing due to Stockton’s plan to lower or abolish their health care benefits, the bankruptcy judge ruled that Clause 904 of the federal bankruptcy code, regarding Chapter 9, allows the judge no leeway in ruling on the issue of who gets to determine the priorities that the debtor, in this case, Stockton, must follow when it decides who to stiff first. The judge said that Clause 904, puts such decisions in the hands of the debtor–he said that he is powerless to block any decision Stockton makes, regarding the health care benefits for its retirees.. Chapter 9, Clause 904 will be center-stage in the bond insurers, vs. pensions issue too–it will be up to Stockton to decide. I doubt Stockton will elect to stiff the pensioners instead of the bond insurers, who will recover, unlike individual workers who could lose their retirements, and will never recover.

  21. Tough Love Says:

    Spension, I couldn’t agree more that the financial problem is in fact the grossly excessive DB Plan formulas and loose provisions. However, while you believe the the collusion between the Public Sector Unions and out elected representatives can be controlled, I don’t.

    The doorway to PERMANENT reform is via DC Plans.

  22. CalifBeachBum Says:

    Get the taxpayer out of the pension guarantee business!

    – Retirement age for ALL employees is 67 (same as the private sector). Exceptions would have their retirement benefits offset (reduced) by any income earned after retiring until they are 67.
    – Have the employee choose their pension plan and contribute at the level required to sustain it (defined-contribution).
    – Eliminate the clause requiring the taxpayer to make-up any shortfall.
    – Scrap prevailing wage laws that have crucified cities.

  23. Tough Love Says:

    Seesaw, Interesting, but an extension of what you are saying suggests that the party filing for bankruptcy gets to pick which creditors are winners and which are losers … ignoring the “creditor hierarchy” as to one’s place in line.

    While I’m not a lawyer, what you’re saying doesn’t pass the smell test. I surmise that there was more to the retiree healthcare decision … so the issue with pensions and the 2 bond insurer’s lawsuit may be different.

  24. spension Says:

    DC plans don’t reform anything… they give a huge undeserved bonus to Wall Street in 1-2% fees, while index funds and even California DB plans (CalSTRS and UCRP) have only 0.15% fees.
    Of course those same California DB plans messed up big time on their benefits, way too high. Additionally, DC plans require saving substantial additional money in case you live a long time.

    A real solution would be Vanguard-run annuities, which are DB plans. But in general annuities have been also sources of huge scams by private industry… they take huge fees. So far Vanguard seems better, but even they could be bought out by the Wall Street sharks, if huge public $ flowed to Vanguard.

    At least public officials are subject to the ballot box, unlike Wall Street.

  25. Tough Love Says:

    Spension, where do you think the Assets of Calpers (and all other) DB Plans are invested, on the moon …. no, WALL street. They’ll get heir fees whether DB or DC.

    You’re amendment advocacy for DB plans make me suspect you have a vested interest (as a participant) not wanting them ended … yourself, a family member as a paticipant?

    And comparing the fees of ANY investment firm who researches and picks investments to the low fees of an index fund is ridiculous ….. and you know it.

  26. spension Says:

    Tough Love, I of course am aware that DB and DC plans both invest in Wall Street. The difference: Calpers has total fees of 0.5%, which is outrageously high, but still $1 billion/year on assets of $200 billion or so. $1 billion/year is real money.

    CalSTRS and UCRP have total fees of 0.15% or so… if CalPERS could get down to that level, they’d save more than 1/2 billion $ per year.

    But if they were all converted to DC plans, more than $5 billion/year in new fees would go to Wall Street, because the fees will be close to 2%… that is the national average on DC plans. That is what you are arguing for, Tough Love, a new $5 billion/year payoff for Wall Street by conversion to DC plans. A payoff to the same people who crashed the economy in 2008.

    I argue for DB plans because they are simply much more efficient than DC plans. Many public entities throughout the US have run DB plans without the excess that California has, which contradicts your argument that all DB plans are always sources of greed and corruption. I have named 8 successful DB plans so far. I have also named a number of DC plans that have crashed (Penn Specialty, Enron, Countrywide, etc). Money is not safe in a DC plan either.

    My conjecture is: Wall Street is behind the drive for DC Plans, to get the billions on the sly. I wonder whether they are paying you off, Tough Love.

    As for me: I’m in DC plans. I figured out they are a rip-off, except for Vanguard and some Fidelity funds. Maybe Dimensional too.

    And I have consistently argued for a serious reduction in payouts from DB plans, even if that requires a Sovereign Default of the State of California.

    But DC plans are an awful solution. BTW, DC plans were *never* intended to be the sole source of retirement benefits outside of Social Security. The idea in the 1970’s, in the private sector, was to supplement small but reliable DB plans, for people who were frugal and liked to save.

  27. Tough Love Says:

    No Spension. Since “cash Pay” in the Public & Private Sector is very close, to have no greater Public than Private sector “Total Compensation” (the PROPER GOAL), I’m advocating for Taxpayer contributions to Public Sector Pensions & Benefits NO GREATER than what Private Sector workers get from their employers, and right now, the Current Public Sector Plan structure costs Taxpayers AT LEAST 4 time that amount (with a good portion still hidden/deferred due to the outrageous Gov’t Plan accounting rules)

    Personally I don’t give a crap how we get there … as long as we get there. It’s WAY past time for Taxpayers to STOP being financially raped by Public Sector Unions/members and their beholden politicians.

  28. spension Says:

    Some day it would be nice not to be abused by Wall Street and bankers too.

    As I’ve said, many, many times, the benefits formulas for pension payouts in *CALIFORNIA* are way too generous. That is *NOT* because of the DB structure, but because elected politicians in California allowed unreasonable benefits on the advice of error-prone actuaries. But other states and districts in the US have not been as error-prone as California.

    DC plans are roughly twice the cost for the same benefit when compared to DB plans. Just because the US private sector chooses an expensive and inefficient funding mechanism for retirement benefits should not dictate the same inefficiency to everyone.

    It is the best use of the taxpayer’s money to use the DB structure, but with *much, much* lower benefits.

  29. Tough Love Says:

    Quoting spension …”That is *NOT* because of the DB structure, but because elected politicians in California allowed unreasonable benefits on the advice of error-prone actuaries.”

    Hogwash. While the politicians may have been looking for some financial cover, they knew EXACTLY what they were doing (when approving these grossly excessive pensions) but didn’t give a crap as long as their campaign contributions and election support continued.

    And quoting ..”DC plans are roughly twice the cost for the same benefit when compared to DB plans.”

    Nonsense (and repeating this over & over won’t make it true) … it’s NOT the “SAME” benefit, because nobody who dies soon after retiring in a DC Plan gives up the entire value of their pension. While the DC fees are lower, you are comparing apples & oranges.

    DB MUST go because politicians simply cannot be trusted … it’s like offering free drugs to an addict.

  30. spension Says:

    Tough Love said “Nonsense (and repeating this over & over won’t make it true) … it’s NOT the “SAME” benefit, because nobody who dies soon after retiring in a DC Plan gives up the entire value of their pension

    How does a dead person retain the value of their pension? Do they take the funds into the hereafter? If it is there spouse you are saying retains the value of their DC… DB plans also have provisions for spousal support (usually at a lower payout). If it is heirs you are talking about, well, the heirs are not the ones who saved into the pension… a different problem entirely, and their are interesting laws about taking minimum distributions for DC inheritances.

    Many places in the US (I named 6) as well as Social Security and Military Pensions have *not* suffered from the DB abuse that California has. I don’t see how you can logically claim *all* DB plans are like drugs to an addict, when a fair number of non-Californian DB plans have done just fine.

    As for the politicians `knowing what they were doing’, perhaps you can cite proof of that. Just saying it doesn’t prove it.

  31. Tough Love Says:

    spension , you simply think you know more than you really do.

    Options, e.g., Joint & survivor annuities and refund annuities that leave money after death of the employee-annuitant in a DB Plan need not be discussed, because the option’s value (via a reduced annuity payment) is supposed to be equivalent to that of a Straight life annulty. All that need be compared is a DC Plan to a DB Plan with a straight life annuity.

    In a DB Plan the mortality averaging (that your incorrectly believe leads to have the cost of a DC Plan) is accomplished by forfeiture of value from those that die soon after retirement. It is that forfeited value that funds the payments for those that live beyond their life expectancy.

    In a DC there is never any forfeiture of value, Whatever remains in one’s account upon death goes to that person’s beneficiary.

    Beside the somewhat higher fees in a DC (vs a DB) Plan, you are correct that a (responsible) SINGLE INDIVIDUAL cannot only finance retirement until his life expectancy … because there is a substantial probability he will live longer. But that extra “cost” … is only true on a INDIVIDUAL BASIS and 10,000 such individuals will, on average, die which funds left over … bequeathed to their heirs … bringing the average cost for the group down to the level of the DB Plan.

    You are completely ignoring that remainder when saying DC Plan are 2x costly than DB Plans. The ONLY real added cost is the somewhat higher fees …. now being addressed and substantively coming down.

  32. spension Says:

    And why should any pension fund subsidize beneficiaries? That is certainly outside the scope of the concept… what work did beneficiaries ever do for the employer? Sorry, I think the DB system, where benefits stop at the spouse, are more economical.

  33. Tough Love Says:

    Quoting spension …”And why should any pension fund subsidize beneficiaries?”

    Who said we (the Taxpayers) have to subsidize that beneficiary inheritance ? Taxpayer’s shouldn’t, by contributing the SAME amount that they would to a DB Plan. The fact that it will buy less monthly annuity is NOT their problem. Their goal should simply (and ONLY) be to provide “Total Compensation” (cash pay + pensions + benefits) equal to but no greater than what comparable Private Sector workers get.

    If they don’t like the fact that the same contribution buy’s less monthly income in a DC Plan (again, because of the lack of the forfeiture element inherent to DB Plans), who do they have to blame but them selves (for their greed) and the Politicians they have paid off.

  34. spension Says:

    You are evading the point: dead people don’t spend money. When you enter the hereafter, you got no use for what is left in your DC plan.

    You are the one saying the taxpayer must subsidize the inheritors of the dead employee’s estate… I disagree.

    DB plans also give a terrific incentive to stay healthy… the longer you live, the better your benefit.

    I have no idea why the most economical use of taxpayer funds, by putting them in a suitably managed DB plan (as many DB Plans in the Country are managed) offends you. You seem to support wanton waste of taxpayer funds on DC funds… because of your principle that because the private sector has decided to be wasteful, you insist everyone must be similarly wasteful.

  35. Tough Love Says:

    Quoting … “I have no idea why the most economical use of taxpayer funds, by putting them in a suitably managed DB plan (as many DB Plans in the Country are managed) offends you.”

    Because the Unions and Politicians they OWN simply cannot be trusted and never will.

    Under DC Plans, full payment for all “promises” made today must be paid-for TODAY ending all the screw-the-taxpayer game-playing …… easily summarized as granting benefits greater than what is necessary, appropriate, and reasonably affordable and then hiding the true cost and deferring the bill to future taxpayers.

    DB Plan fail miserably in that regard. In a perfect world where Unions/workers were not pigs and our Elected officials looked out for Taxpayers as their #1 priority, perhaps DB Plans would be the better choice, but unfortunately, that’s not the world we live in.

  36. spension Says:

    I think politicians are elected by voters… it is up to the voters to vote out the politicians that granted too much benefits. If the voters don’t do that, blaming the unions or Wall Street or the trilateral commission is just woulda-coulda-shoulda whining.

    And remember: it is non-union California employees who get the highest pensions, not union employees. For example, look at the pensions of UC medical professors or prison dentists. That fact violates your contention that unions are the sole culprits, although I agree they bear a certain responsibility.

    In any case, there are plenty of DB plans that have not suffered the benefits explosion that California’s plans have suffered. If you are saying that every government structure in the US is incapable of running a DB plan, you are contradicted by the facts. It is California, maybe Illinois, Rhode Island, etc where things have gone of the rails, not everywhere.

    Under DC plans, as the Penn Specialty, Enron, Washington Mutual, Bear-Stearns bankruptcies have shown, employee contributions can be lost in a number of ways.

    It is simply false that money is `safe’ in a DC plan, at least according to current law. Of course, I advocate reduction of DB benefits (for existing pensioners and vested employees) in an orderly fashion, so, I’m advocating for a loss of certainly in DB benefits. The root cause is: benefits were raised, in California, to an unsustainable level, which is different than the situations in the DC plans I mentioned.

  37. Tough Love Says:

    Quoting spension …”Under DC plans, as the Penn Specialty, Enron, Washington Mutual, Bear-Stearns bankruptcies have shown, employee contributions can be lost in a number of ways.”

    Nonsense, DC plans (by definition are set up in Separate Accounts where the employee-account-holder, not the employer, allocates his account balance to the available investment options). Although one option is usually buying the company’s stock, you would have to be living under a rock to have not heard many times that investing more than 10% of your Plan Balance in your company’s stock is very foolish. And if you are referring to the big losses from Stock Option of these companies that went under, that has nothing to do with DC Plans.

    Additionally, under a well diversified portfolio, always easy to do under DC plan investment options, getting hurt by the few big companies that go bankrupt each year should not materially impact your overall investment return.

    You are struggling mightily to play-up DB plan by playing down DC Plans. BOTH are fine investment approaches, but NOT for Public Sector Pension Plans, where it is impossible to stop the Union/Politician thievery that has, is and will continue to take place in DB Plans.

  38. spension Says:

    DC plans suffer from high fees.. .national average in the 1-2% range. And, as Penn Specialty has proven, a company can ratchet up fees higher and drain DC accounts if they want… even Vanguard had to do what Penn Specialty requested.

    Take it from Shanker Iyer, a 70 year-old in Penn Specialty’s DC Plan:

    “I tell everyone I know, ‘Do not trust this 401(k) at all,’ ” he said.

    http://www.nytimes.com/2012/08/26/business/401-k-woes-when-a-company-goes-bankrupt-fair-game.html?pagewanted=all

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