Stanford students ‘rock’ public pension funds

CalSTRS is unveiling a new website, just in time to rebut a Stanford study last week that says California’s three big public pension funds have a shocking shortfall of more than $500 billion.

A group of graduate students used “risk-free” bonds, rather than stocks and other potentially higher-yielding investments, to calculate what a New York Times story called a “hidden shortfall” in CalPERS, CalSTRS and the UC Retirement System.

A Washington Post editorial, noting that the funds were reporting an unfunded liability of $55.4 billion, said the Stanford study is “more evidence that state governments are not leveling with their citizens about the costs of pensions for public employees.”

The website of the Stanford Institute for Economic Policy Research headlines links to some of the media stories about the study: “Stanford students rock the state with shortfall predictions of pension plans CalPERS, CalSTRS and UCRS.”

At a board meeting of the California State Teachers Retirement System last week several members said they thought the study was obviously inaccurate, but because of the credibility of the “Stanford brand” with the public needs to be countered.

“Unfortunately, I think most people would give this a letter grade of ‘F’ for quality,” said Jack Ehnes, the CalSTRS chief executive officer. “Since it bears the brand of Stanford, it clearly ripples out there quite a bit.”

He said the study does not use standard actuarial practices and draws “political” conclusions. One recommendation is a “hybrid” retirement plan that combines monthly pension checks with 401(k)-style individual investment plans.

Ehnes said a new website, www.calstrsbenefits.us, provides a forum for CalSTRS to analyze the Stanford study and “show why there are faulty assumptions in them or why they are based on shoddy research.”

The California Public Employees Retirement system posted a detailed response on its website, http://www.CalPERSresponds.com. CalPERS says earnings exceeded the 7.75 percent annual target during the last 20 years, despite an historic market crash.

The two websites are a reaction not only to growing criticism that public pensions are overly generous and diverting funding from other programs, but a defense of the system that some want to switch to the 401(k)-style plans common in the private sector.

The Stanford study requested by Gov. Arnold Schwarzenegger is part of a dispute over whether the pension funds can hit their earning targets. CalPERS gets 75 percent of its funds from investments, only about 25 percent from employer-employee contributions.

“This study reinforces the immediate need to address our staggering pension debt,” Schwarzenegger said in a news release. “According to the study, California taxpayers are on the hook for over a half trillion dollars.”

The governor proposed last year that pensions for new state employees (the pensions of current employees are protected by law) be returned to the lower formula used before a major benefit increase a decade ago.

Powerful public employee unions say pension benefits should only be lowered through labor negotiations, not by legislation. The benefit increase, SB 400 in 1999, was approved when the stock market was booming and CalPERS had a surplus.

Citing earnings, CalPERS told legislators state pension costs would be little changed for a decade if benefits were increased. But state costs soared from around $150 million a decade ago to about $3.5 billion next fiscal year.

Most of the increase is the result of a larger workforce and the fact that CalPERS, flush with a surplus, had sharply lowered the annual state payment that had been about $1 billion, a contribution “holiday” now criticized by many.

The Stanford study, using a Treasury bond-like 4.14 percent earnings rate instead of CalPERS’ 7.75 percent, shows how an increase in public pension benefits can dramatically increase taxpayer debt.

“The finding also raises vexing legal issues, because public debts in California are supposed to be approved by the voters,” said the New York Times story. “The voters have, in fact, duly authorized all of the state’s general obligation bonds, but the much larger pension debt is appearing out of nowhere.”

There have been questions in the past about revenue bonds issued without voter approval to build prisons. The last budget of former Gov. Gray Davis contained a complicated plan, never used, to issue a $10.7 billion deficit bond without voter approval.

But apparently, whether pension obligations are a debt that, under the state constitution, requires approval by voters has not been a widely discussed issue or the subject of a major legal challenge.

The Stanford study, discounting future pension obligations at 4.14 percent, follows the work last fall in the Journal of Economic Perspectives by Robert Novy-Marx of the University of Chicago and Joshua Rauh of Northwestern University.

The two professors found that the three state pension funds in California were underfunded by $475 billion. That was 415 percent of annual state tax revenue, ranking California 24th among states, well below top-ranked Ohio at 874 percent.

“We show that government accounting standards require states to use procedures that severely understate their liabilities,” the professors wrote.

Using a low and predictable bond-like rate to discount future pension debt reduces the risk of being wrong . But pension funds think their diversified investment strategy, despite market ups and downs, will average higher earnings in the long run.

As it does every third year, CalPERS plans to hold several public hearings this year on its assumed earnings rate of 7.75 percent, possibly resulting in an adjustment early next year.

The CalSTRS board, conducting a similar but shorter review of its 8 percent earnings assumption, may make a change as soon as next month. It’s actuarial consultant, Milliman, has been recommending a reduction of a quarter to a half percent.

Public pension funds were alarmed last year when the Governmental Accounting Standards Board, planning an update of public pension rules, asked for comment on switching to a lower bond-like discount rate that corporate pensions must use.

Groups of state treasurers and pension funds, including CalPERS and CalSTRS, responded with letters saying the change could increase state and local government pension costs and cause disruptive year-to-year changes in contributions.

Rick Reed, the CalSTRS actuary, told the board last week that at this point it’s believed that the accounting board is unlikely to “change their opinion on the discount rate,” but will require more disclosure of unfunded liabilities.

Reed said the “poor quality” of the Stanford report was surprising, given its source. He said the issue raised in the report is not new, but gets serious consideration.

“This report from Stanford has been noted,” Reed said of a meeting of public pension fund actuaries scheduled for the weekend. “We are going to be discussing this issue prominently.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 12 Apr 10

11 Responses to “Stanford students ‘rock’ public pension funds”

  1. Matt Says:

    One more follow-up to this story is that, if public pension plans with their shophisticated investments and the ability to hire the best money managers should not expect more than the “risk free” treasury rate, then how is the average Joe with his 401k supposed to beat the risk free rate.

    Novy et al has the ultimate non-answer as to why pension plans should be considered differently than 401ks:

    “A second misperception is the notion that if individuals should have stocks in their 401(k) or 403(b) retirement portfolios, so should state pension funds, on the misguided logic that the state pension fund must face the same objective function as the individual, simply on a collective
    and large scale. Defined benefit pension funds, however, must provide pre-specified annuities to their employees, whereas individuals are solving a problem of lifetime utility maximization.”

    http://www.kellogg.northwestern.edu/faculty/rauh/research/jep_20090813.pdf

    “Lifetime utility maximization” is what “individuals are “solving” for? Be serious, Professors. People who save for their 403 or 401k are “solving” for how to survive in retirement after they stop working. In other words, because they no longer have income—-or a defined benefit—-they are trying to put money aside and invest for that shortfall. And now matter how many fancy intellectual phrases Novy dreams up, the pension plans are doing the same thing—attempting to maximize the value of the dollar put aside today to provide future benefits tomorrow.

  2. Dr. Mark H. Shapiro Says:

    The Stanford study is deeply flawed, if not outright bogus. Assuming a discount rate of 4.14% for future pension obligations is tantamount to saying that no pension fund should ever invest in anything but Treasury bonds. This would make sense only if every state employee intended to retire tomorrow. In fact most state employees will continue to work for many more years, paying into the pension fund all the while. Thus, the pension funds have a long time horizon over which to invest.

    If one looks at past investment results for CalPERS, they are very respectable. Over the past 20 years, which includes the recent sharp downturn and subsequent recovery in the markets, CalPERS has achieved a very respectable 7.9% rate of return on investments. This exceeds their actuarial assumption of a 7.75% rate of return, and far exceeds the rate of return that the Stanford study assumes.

    Because of its strong investment returns, CalPERS has been able to keep the taxpayer contribution to its pensions at a very modest level. Today 75 cents of every CalPERS pension dollar comes from INVESTMENT INCOME. Of the remaining 25 cents, more than 12.5 cents comes from EMPLOYEE CONTRIBUTIONS. Less than 12.5 cents comes from the taxpayer. Overall, only about 2% of the state budget goes to pension obligations. This is small compared to the 10% that goes to support the state prisons, and tiny compared to the nearly 50% that goes to support K-14 education.

  3. Randi Says:

    Crane repeatedly asserts the grossly misleading claim that public pension costs have risen 2,000% since 1999. To make this assertion he cherry picks 1999 as a starting point, when the state paid the lowest contribution to its pension fund, the California Public Employees Retirement System (CalPERS), that it had in many years. The $56 million contributed that year resulted from a four-year “pension holiday” that allowed the state to use CalPERS investment earnings to offset required contributions.

    In 1996, a more typical year, the state contribution was $1.2 billion. But Crane used neither that year nor any preceding year, allowing him to make the grossly misleading claim that the state would have to greatly increase its future contribution to CalPERS to meet its pension obligations.

    Similarly, Crane’s eager trumpeting of Stanford University study purporting to show that CalPERS’ unfunded liabilities are far greater than previously reported reeks of the same statistical manipulation. This particular study and others Crane cites assume a 50% decrease in the rate of return. Naturally, with a lower rate of return, projected unfunded liabilities skyrocket.

  4. Drew Says:

    I was a grad student once. The attention conveniently (and somewhat suspiciously) bestowed by the G.A.S. administration and the N.Y.T. must be making these kids absolutely giddy. The difference between a thesis and a true scientific undertaking is that a thesis conclusion actually is made prior to the work being done. In other words,with a thesis, you already know what you WANT to prove so you just go ahead and skew everything in your favor. A scientific study TESTS a theory or theorem, so the result can be unanticipated. These little tea partiers just wanted to bash the public retirement systems, so they ‘made it happen’. Good job, kids, but don’t expect anyone north of an M.S. to take you seriously unless they just might have something to gain for themselves …

  5. Phil Says:

    Dr. Shapiro, The point is the people don’t want to see a dime of their taxes going to your retirement benefits. Why should the public pay and why should it be guaranteed? That is bullshit….

  6. IT Pro Says:

    Then Phil, give me those dimes now instead of at retirement… by increasing my state salary to (or hell I’d take close to) market rates for an Information Technologist. In IT, we are severely underpaid for what we do when we do it for the state… except just maybe when you factor in the benefits.

  7. Dr. Mark H. Shapiro Says:

    Dear Phil,

    You can pay now or you can pay later. Without sound pension programs you will end with retirees who are too old or too sick to work. They will end up on the welfare rolls, and instead of paying 12 cents on the dollar of retirement benefits you will pay a dollar plus on every dollar of welfare benefits. In my book that’s short-sighted.

  8. Jeff Says:

    Here’s a little something Warren Buffet wrote about pension fund return expectations:

    “”The average holdings of bonds and cash for all pension funds is about 28%, and on these assets
    returns can be expected to be no more than 5%. Higher yields, of course, are obtainable but they carry with
    them a risk of commensurate (or greater) loss.

    This means that the remaining 72% of assets – which are mostly in equities, either held directly or
    through vehicles such as hedge funds or private-equity investments – must earn 9.2% in order for the fund
    overall to achieve the postulated 8%. And that return must be delivered after all fees, which are now far
    higher than they have ever been.

    How realistic is this expectation? Let’s revisit some data I mentioned two years ago: During the
    20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3%
    when compounded annually. An investor who owned the Dow throughout the century would also have
    received generous dividends for much of the period, but only about 2% or so in the final years. It was a
    wonderful century.

    Think now about this century. For investors to merely match that 5.3% market-value gain, the
    Dow – recently below 13,000 – would need to close at about 2,000,000 on December 31, 2099. We are
    now eight years into this century, and we have racked up less than 2,000 of the 1,988,000 Dow points the
    market needed to travel in this hundred years to equal the 5.3% of the last.

    It’s amusing that commentators regularly hyperventilate at the prospect of the Dow crossing an
    even number of thousands, such as 14,000 or 15,000. If they keep reacting that way, a 5.3% annual gain
    for the century will mean they experience at least 1,986 seizures during the next 92 years. While anything
    is possible, does anyone really believe this is the most likely outcome?

    Dividends continue to run about 2%. Even if stocks were to average the 5.3% annual appreciation
    of the 1900s, the equity portion of plan assets – allowing for expenses of .5% – would produce no more
    than 7% or so. And .5% may well understate costs, given the presence of layers of consultants and highpriced managers (“helpers”).

    Naturally, everyone expects to be above average. And those helpers – bless their hearts – will
    certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below
    average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs
    they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs
    that are very low; 3) With that group earning average returns, so must the remaining group – the active
    investors. But this group will incur high transaction, management, and advisory costs. Therefore, the
    active investors will have their returns diminished by a far greater percentage than will their inactive
    brethren. That means that the passive group – the “know-nothings” – must win.”

    http://www.berkshirehathaway.com/letters/2007ltr.pdf

  9. Phil Says:

    IT Pro….the IT guy we having running our servers makes $6k a month and gets health care fully paid for his family ($1400 a month). He can put money into a 401k to retire but that’s it. You want that much? Hope so…

    Dr. Shapiro….Pay now. Because “assumptions” are frequently wrong for paying later. Why don’t we just change these to 401k plans like companies have? Why the guarantees? Can you tell me what sort of plans Intel or Apple or Google have in place and what sort of guarantees they give their retirees as a comparison?

  10. Phil Says:

    Touch Love March 22nd, 2010 at 12:59 | #1 Reply | Quote Go Meg go !!!
    http://www.californiapensionreform.com/?p=815&cpage=1#comment-1776

    Here’s an analysis you need to read:

    ” If you “do the math” ….

    The total “value” of benefits at retirement is the present value of all future payments, be they pensions benefits, healthcare premium subsidies, or anything else. Some of these future cash flows are definitively known at the time of retirement (e.g., fixed monthly pensions), and others need to be estimated (e.g., healthcare premiums, the incremental value of future COLA pension increases, etc.). However, all of these future payments can be reasonably estimated (sometimes with several options such as the low, medium, and high liability estimates routinely provided by the Social Security Administration). Once all known and estimated future payments have been determined, they can be discounted to the point of retirement at an assumed interest rate and an assumed mortality rate (for those payments that cease upon death). The interest rate used in this calculation is very important, but actuaries routinely do calculations of this sort and the range of reasonable interest assumptions for this purpose is fairly narrow.

    The present value of all retirement pension and benefit payments can be looked at as the answer to the question ….. How much would an insurance company charge in a single payment at the time of retirement to take on the guaranteed responsibility to make all future payments in lieu of the former employer.

    If we examine two 30-year service, age 55 workers (one Private Sector & one a Policeman or Fireman) making $100,000 in base pay + $20,000 in overtime at retirement, what would these present values be?

    Being somewhat versed in the subject of employee benefits I’ll describe the “likely” pensions & retirement benefits afforded each and then estimate their present values.

    Let’s assume the Private Sector worker is one of the few lucky enough to still have the older traditional-style defined benefit pension plan, and does NOT contribute towards its cost (common practice in Private Sector plans). With 30 years of service and with a typical formula that takes into account wages above and below Social Security “covered compensation”, this worker would likely receive about 40% of final 3-year average pay at normal retirement age, and overtime would NOT be included in benefits-bearing compensation.

    Here’s how the Present value would be calculated …

    Assume $95,000 is the AVERAGE of the last 3 year’s base salary, so 40% x 95,000 = $38,000. But this would be payable only if the employee waited until his plan’s “normal retirement age”. Let’s assume that his plan’s normal retirement age is 60. Since he will start collecting his pension 5 years early, there would be an “actuarial reduction” of 4 to 6% per year (just like Social Security applies when someone starts collecting early at age 62). Let’s assume the yearly reduction is 5%. So … we now have an annual pension of $38,000 x .75 = 28,500.

    Now, to convert this to a “present value” we need to apply a life annuity factor (which incorporates the interest and mortality discounts discussed earlier). For someone retiring at age 55 this “factor” would be a multiplier of about 15. So … the present value of this worker’s pension is $28,500 x 15 = $427,500.

    We will also assume there are no post-retirement healthcare benefits, as such benefits are VERY rare in the Private Sector.

    Now let’s calculate the present value of the Policeman’s pension & benefits.

    The pension formula for the policeman is often 3% of the last year’s salary (including overtime) per year of service and with no “actuarial reduction” for collecting benefits at age 55 (unlike for the private Sector worker). So … we have ($100,000+$20,000)x.03×30 =$108,000. But, we’re not done …

    The policeman’s pension includes a provision for post-retirement COLA increases (while essentially NO Private Sector plans do so). Although this may surprise the reader, the “value” of this added benefit is VERY significant. Even with a modest long-term inflation assumption of 3%/yr, the addition of a COLA benefit for life increases the value of the pension by at least 50%. Hence, the levelized annual pension (with the COLA) is now $108,000×1.5=$162,000.

    Using the same annuity factor of 15 (as used in the Private Sector workup above), we have a present value of 15x$162,000=$2,430,000.

    But wait, we’re still not done (2 more items to adjust for) …

    First, in fairness, the policeman contributes a percentage of his pay toward his pension (unlike the Private Sector worker), and the accumulated value (at interest) of these payments at retirement should be subtracted from the above $2,430,000 for a fair comparison. For this policeman whose final total pay was $120,000, I have calculated the accumulated value at retirement date of his contributions to be roughly $400,000. Hence the present value of this officer’s pension (offset by the accumulated vale of his contributions) is $2,430,000-$400,000=$2,030,000

    Second, this officer gets free or heavily subsidized retiree healthcare for himself AND his family. Since he is not eligible for Medicare until age 65, his healthcare premiums are very expensive and are expected to increase annually at 8-12%, triple the rate of regular (non-medical care) inflation. The present value of this benefit and the post Medicare age healthcare subsidy is roughly $500,000.

    Hence, the present value of this officer’s pension AND retiree healthcare benefit is $2,030,000+$500,000=$2,530,000.

    Now, let compare the present value for these 2 workers making the SAME pay, working for the SAME number of years, and retiring at the SAME age.

    The Private Sector worker’s EMPLOYER-PROVIDED retirement benefits are worth (as a present value on the date of retirement) $427,500.

    The Policeman’s TAXPAYER-PROVIDED retirement benefits are worth (as a present value on the date of retirement) $2,530,000.

    The crisis associated with funding Civil Servant Pensions and benefits is NOT a revenue shortfall issue. It is CLEARLY one of EXCESSIVELY GENEROUS pensions and benefits as the above calculations demonstrate.

    For 2 similarly situated workers (in pay, years of service, and retirement age) the Policeman’s package of retirement benefits costs the TAXPAYERS almost SIX TIMES what the typical Private Sector employer is willing to pay.

    Clearly, if the Private Sector employer provided the same benefits to his workers that the policeman receives, his company would likely go bankrupt in short order.

    These unreasonable benefits have been provided due to a political structure that rewards politicians for “giving-away-the-store” of not their own, but TAXPAYERS’ money, for personal gain. This “gain” may simply be to feed their ego, garner the union support needed to get re-elected, or perhaps worse … for current or future personal financial gain.

    In any event, the current situation is without doubt unsustainable and without MAJOR REDUCTIONS to the benefits provided CURRENT (not just NEW) public employees, towns, cities, and states will be filing bankruptcy with increasing frequency.

    Unfortunately, since difficult change is delayed and delayed and delayed to avoid the confrontation (with very aggressive unions), important public services will suffer tremendously until action is FINALLY taken.

    I’m sure there will be Civil Servants (with vested interest in the status quo) that will say my figures are wrong. Estimates are necessary, and small variations in assumptions will change the figures to a minor degree, but the final relationship is quite accurate …. TAXPAYERS are forced (via their taxes) to pay almost SIX times as much as the Private Sector employer is willing to pay.

    By-the-way … any qualified actuary can verify the reasonableness of my figures and conclusions, …. and I would welcome the actuary who offers to do so ……

    Bye-the-way ……… I didn’t mention it above, but it’s worth a comment …… Civil Servants often take advantage of what’s commonly called “spiking” to unfairly boost one’s pension just before retirement. This takes many forms: large last minute promotions and/or raises, excessive/unusual overtime, cashout of sick and/or vacation days with the payout included in “compensation” for pension calculation purposes, or inclusion in “compensation” of miscellaneous “allowances” (housing, vehicle, parking, uniform, etc.).

    None of this is EVER allowed in Private Sector employer-sponsored plans (employers are spending THEIR OWN money, not TAXPAYER’S, and would never be so foolish). For every $10,000 of “spiking” that works its way into the above Policeman’s “compensation”, it costs the TAXPAYERS an additional $10,000x.03×30×1.5×15=$202,500 ! “

  11. Phil Says:

    Touch Love March 22nd, 2010 at 13:00 | #2 Reply | Quote And here is another one:

    State & City Budgets are stressed all over the nation with supposed one-time “fixes”. Let me tell you something … this isn’t going to be a one-shot fix. Most States, cities, & towns have a FUNDAMENTAL structural problem which MUST be addressed.

    Long ago, Civil Servant “cash” pay was quite a bit less than Private Sector pay in comparable jobs. This justified a better pension & benefit package.

    Per the US Gov’t BLS, cash pay alone is now higher in the Public Sector than in the private sector. This justifies AT MOST comparable (but certainly NOT better) pensions & benefits.

    More valuable Public Sector pensions comes from multiple sources: (1) higher formula per year of service, (2) basing pensionable compensation on the final 1 year instead of 3 or 5 years of service, (3) including post retirement COLAs, (4) arbitrary end-of-career promotions or excessive raises to “spike” the pensionable compensation, (5) allowing the soon-to-be retired to load up on overtime includable in pensionable compensation, (6) including payouts of unused vacation, unused sick days, uniform, parking, and other miscellaneous “allowances” in pensionable compensation, etc.

    In MOST Corporate Pension Plans NONE of the above are included. Why? Because the cost would have to be paid for by the employer, and none of these being really justified, employers are not foolish enough to waste THEIR money this way.

    In the Public Sector ALL, of the above are generally included/allowed. Why? Our Politicians aren’t spending THEIR money, their spending YOUR money (via your taxes) while they curry favor for campaign contributions and election support.

    Sometimes, Corporate Sector Pension Plan sponsors realize that the plan is no longer affordable, so they reduce cost via formula reductions, increases in the retirement age, etc., for NEW employees and for FUTURE years of service for CURRENT (yes CURRENT) employees. This is ROUTINE in the Private Sector and is allowed by ERISA (the Federal Law that governs Private Sector Plans).

    Just as in the Private Sector, CURRENTLY EMPLOYED workers in the Public Sector have already “accrued” pension benefits for PAST service. To this will be added benefits for FUTURE years of service. However, in the Public Sector (and there are variations from State to State) the ability to reduce the pension formula for FUTURE years of service for CURRENT employees is “questionable”.

    Of course, the employees and their Unions say it cannot be reduced for anyone already employed (even for those very recently hired). There are many variations, e.g., NJ’s Office of Legislative Service said that cannot be changed only for current employees who already have 5 years of service. In some States, the rules that govern such potential Plan changes are in the State Constitution. In others, in Laws/Regs., and in others via Court Case law.

    One important consideration in examining the DIFFICULTY in reducing pension for (FUTURE years of service ONLY) for CURRENT employees is that the legislators, judges, and staff (such as in the NJ example above) that “opine” that such reductions are not allowed are THEMSELVES participants in these same pension Plans and would be negatively impacted by such formula reductions.

    Hence, they are hardly disinterested parties, but come with a built-in conflict of interest. These persons should not be making decisions that favor THEM (as beneficiaries of their own decisions) but add to the taxpayers’ burden.

    The financial situation across the country is getting more dire, and the ROOT CAUSE must be addressed. Stated another way, we must once and for all, address the STRUCTURAL imbalance between income and expenses.

    Way too much focus has been placed on the government entity’s neglect to “fully fund” the Plans. This is certainly true (to varying degrees across the nation). What is often given short-shrift is the “expense” side of the income statement. No one ever says …gee … funding a VERY generous pension plan is VERY expensive, and then moves to the logical next questions, that being, is it too expensive BECAUSE it is too generous and perhaps we such make it less generous.

    But what exactly is “too generous”? Well, given that “cash” pay in the Public Sector now exceeds that of the Private Sector in comparable jobs, maybe a Public Pension Plan that is more than MARGINALLY higher is too expensive.

    Above, I enumerated 6 items which make Public Sector Plans more expensive. Few people not educated in pending funding understand just how VERY valuable (and hence EXPENSIVE) these differences are. One thing is certain, the Public employee Unions know. That’s why they fight tooth-and-nail to stop changes.

    Here is an accurate comparison of the costs of Public vs Private Sector retirement packages (pension plus retiree healthcare, if any) …. The value (i.e., cost to purchase the pension/benefit package) at the time of retirement of the employer-paid (i.e., Taxpayer) share of the typical (non-safety) worker’s retirement package is 2-4 times that of employer-paid share of the comparable (in pay, years of service, and age at retirement) Private Sector worker, and that multiple increases to 4-6 times for safety workers (policemen, firemen, corrections officers, etc.).

    I’ll bet you had no idea that this HUGE disparity exists. Given that it does, and given that Public Sector “cash” pay by itself is higher, is it surprising that States, cities, towns are being so squeezed to fund this? Not at all.

    So what is the solution? Of course Civil Servants deserve “fair” pay as well as “fair” pensions & benefits, but “fair” should mean COMPARABLE to what their Private Sector Taxpaying counterparts get. Right now, this is anything but true.

    The EXPENSE side of the income statement has been neglected far too long. To reach a “structural balance” we need to reduce current pensions (as well as retiree healthcare subsidies) in the Public Sector to a level comparable to that of the Private Sector. A few more progressive States & Cities (or perhaps, those in the greatest financial pain) know they must look at this and are beginning the baby steps.

    But the BIG problem is the conflict-of-interest conundrum that reducing pensions for CURRENT employees will (in many cases) reduce there own pensions. So, they ONLY propose plan reductions for NEW employees. To be fair, this may be happening not because they just “cave” on addressing such reduction, but because they really believe it is not possible.

    A disinterested party might look a bit harder. Perhaps we need to get opinions from outside this circle, e.g., from university scholars. Or perhaps challenges should be brought in the Federal Court system where the conflicted parties are no longer the decision-makers.

    Not addressing the huge cost of future accruals for current employees is wishing-away current financial reality. The dire financial problem is here NOW. Reducing pensions ONLY for NEW employees will have little impact for 20-30 years until they begin to retire. We will never make it. But also, given that most (objective) observers agree that current pensions & benefits are overly generous (compared to Private Sector plans … while appropriately taking into account compensation levels), why should we CONTINUE to layer on MORE excessive pension accruals?

    It’s been said that the first step in getting out of a big hole is to STOP DIGGING. Well, every day we allow the current plan to continue, the hole gets deeper.

    Somehow we need to find the way to reduce pensions (not for PAST) but for FUTURE years of service for CURRENT employees. That, along with a significant reduction in the retiree healthcare subsidy just MAY save us.

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