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Welcome To The Third World, Part 24: Honest Pension Returns Equal Mass-Bankruptcy

Last year the California Public Employees’ Retirement System, otherwise known as Calpers, cut the expected return on the funds it invests for plan beneficiaries from 7.5% to 7%. Seems like a modest change that should have a correspondingly limited impact on all concerned, right? Alas, that’s not how things work in the realm of compound returns, where small initial changes produce hugely different outcomes. In fact, this is a bankruptcy-level event for some California cities.

California Cities’ Pension Tab Seen Almost Doubling in 5 Years

(Bloomberg) – California cities and counties will see their required contributions to the largest U.S. pension fund almost double in five years, according to an analysis by the California Policy Center.

In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023, according to the right-leaning group that examines public pensions.

The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.

Calpers hasn’t calculated the dollar impact of reducing the investment return over the years, said the group, which derived its estimate from guidance the system sent in January.

Including the costs paid by cities and counties that run their own systems, the fiscal 2018 tab will be at least $13 billion to meet retirement obligations for public workers, according to the analysis, which is based on actuarial reports and audited financial statements.

Barring any changes to pensions, “several California cities and counties will find themselves forced to slash other spending,” the group wrote in its report. “The less fortunate will simply be unable to pay the bills they receive from Calpers or their local retirement system.”

Some thoughts
Most cities and counties are already stretched to the limit with their current budgets. So, as the above article notes, a doubling of required pension contributions will leave only a handful of possible responses: Either they close libraries and parks, lay off teachers and firefighters and let potholes go unfilled, which lowers residents’ quality of life. Or they raise taxes dramatically, which also makes life harder for all concerned.

Or they declare bankruptcy and slash pension benefits, which decimates quality of life for retired teachers, cops, etc.

All because of a 0.5% drop in expected returns – to a level that is still unrealistically high. If 5% is the eventual number the financial markets impose on the system, then the situation described here will seem like the good old days.

And California pensions aren’t worst-in-class. That distinction belongs to Illinois:

Analysis: Pension fiasco spells future trouble for Illinois

(Madison Record) – The state’s mountain of retirement-related debt is $267 billion, up from $203 billion in 2010, according to new analysis from the Illinois Policy Institute.

Researchers for the institute found that if broken down per household, the debt owed would amount to $56,000 per family – what could essentially amount to a year’s net income for future taxes just to pay off old state and local retirement debts.

The pension debt breakdown is $129.9 billion in state pensions; $56.7 billion in state health benefits; $56.9 billion in local pensions; $12 billion in state pension bonds; $9.8 billion in local health benefits and $1.9 billion in local pension and benefit bonds.

Experts say the amount Illinois owes is a figurative fiscal time bomb that if left untreated could mean insolvency for the state.

“If this problem is not addressed municipalities in Illinois will likely go bankrupt and put the state itself at risk,” Michael Lucci, vice president of policy for the institute, told the Record.

Many workers today retire younger in their 50s after 30 years of service and receive free retirement health insurance and full benefits for life. According to the institute, the average pension is worth $1.6 million.

The state’s pension debt has been growing in recent years, having gotten profoundly worse during last decade’s recession.

“The state makes payments on the debt every year, but it’s less than the interest, which grows the debt,” Lucci said. “Even if there was no recession of 2007, we would not be as far behind, but we would still be in trouble.”

A federal bailout is looking inevitable at this point, which means trillions of new liabilities dumped onto a national debt that has already quadrupled in the past 16 years.

20 thoughts on "Welcome To The Third World, Part 24: Honest Pension Returns Equal Mass-Bankruptcy"

  1. This bullcrappe about greedy unions has gotten beyond old. What has happened – in _every_ instance – is that the union goes in asking (ok, “demanding”) “x” amount in raises. Then after months of bad faith “bargaining” on the part of the employers, they then offer the employees a 1% (or maybe 1.5%) raise, usually _divided_ over several years, in exchange for even more unrealistic pension benefits. Then, during and after the financial crisis (and even before then), they make higher and higher unrealistic pension return estimates (8% since 2008), and _then_ because of the estimated “whirlwind” of money expected by way of these ridiculous 8% return estimates, the government(s) allow the employers to only pay 50% of what they should be paying into the pensions. Then, when the whole bogus “plan” blows up, the completely misinformed trolls come out blaming “greedy unions.” Unions have been decimated in this country since the 1980’s. Between 1940 and 1970 unions made up close to 60% of the US workforce… today it’s at something like 11%; (as of the last time I checked which was about 5 years ago).

  2. …runnin’ on emptyyyyy, runnin’ on empty promises of more debt, kicking the can on down the road to that sign in Key West where the road stops and it says “90 miles to Havana.”

  3. Many pensions are overly generous – negotiated in bad faith between unions that shovel large campaign donations to the politicians on the other side of the table, and willing to screw the public for those donations.

    Unlike the federal government, they have never seen the problem as needing fixing. The US government changed their federal retirement system from “CSRS” – about 2% per year times number of years worked times their final high 3 year ‘base’ salary (no OT, no ‘plus ups’) …to the less generous FERS (1% per year times number of years worked times the final high 3 year base salary – no OT or plus ups.) CSRS people didn’t pay into Soc.Security and won’t draw it based on their work for the fed. government. OTOH – FERS workers contribute to both the FERS and to Soc.Security.

    California is an extreme example – where someone can get 3% per year worked x their final year salary (including OT and plus ups..) – so someone could retire at age 50 with perhaps MORE salary than their final year.

    A solution is to compute what a FAIR salary would have been if the negotiations had been honest and fair, and tax the excess at 95% – with the taxed amount going back into the pension system. These workers are screwing over the taxpayers…time for them to get theirs also.

    1. To make matters worse, a large portion of these pension payouts will be sent to low-tax states like Nevada and Florida. Things don’t look good for “Mexifornia”.

      1. GREAT POINT. After years of sucking at the TaxPayer teat…the worker (who, with the powerful union, conspired to bribe politicians to get their salaries and benefits escalated very high) – then decides to move to a low tax state so he can live ‘high on the hog’…. Too bad that anyone who ‘escapes’ this socialist nirvana can’t have a 50% tax surcharge for moving out of the area.

    2. MV… Yes, the pension benefits are negotiated in bad faith, but that bad faith is on the part of the employers, not the unions. What happens is that the union goes in demanding “x” amount in raises. Then the employers drag negotiations out for months in _genuine_ bad faith, and in the end offer the employees 1% to 1.5% raises (usually _divided_ over several years), in exchange for yet even more unrealistic pension benefits. Then the pensions plan administrators “estimate” ridiculous return rates of 8% (going out the next 10 years), and because of the whirlwind of estimated returns, the government(s) allow the employers to only pay 50% of what they should be paying into the plan. Then, when the whole scam blows up, people like yourself come out a blame “greedy unions.” The fact is, Unions (just like Pension Plans) have been decimated in this country since the 1980’s. Between 1940 and 1970 unions made up 60% of the workforce. Today it is at 11%. Just about _no_ jobs offer Pensions any longer. All “pension” plans have been converted (for new employees) to 401k or IRA plans. The 401k is the biggest scam to come along in decades. The only people who will benefit from them are BabyBoomers who are retiring just about now (plus-minus 5 years). Gen Xers and Millennials will never see a dime.

      1. Pension benefits are negotiated in bad faith because the employer (government agencies….with pressure from corrupt politicians wanting the union members to pass back campaign donations)….and they agree to give far more pension than what the taxpayers can afford.

        Bad faith when the agency (with politician’s silent consent) claim that the Pension Fund will be invested and generate 8% rate of return (when 2% to 4% is more realistic).

        I don’t give a damn about any private company that promises big pension benefits, then it can’t deliver…and goes bankrupt…and the pension plan fails. The company and the employees screwed each other over…agreeing that for ‘peace today’ – there is the promise of a rosy future with wonderful pensions funded by unicorn gold farts.

        BUT – when government workers push for big pensions…and when the funding is insolvent and the taxpayer must be raped financially to fund these bloated pensions….well – time for the pensions to be ‘reset’.

        1. MV… Overall, I agree with your reply. However, you are missing my point. Your original post blamed “union greed.” Even your reply asserts “government workers push for big pensions,” and that is not at all what they “push” for. They seek higher wages and IN LIEU of higher wages they are promised bigger pensions. That is a fact, and it happens in both private and government contract negotiations. With exception of the point above. I pretty much agree with both your overall point of view and your attitude regarding the situation; (especially the “big reset” which I am a big proponent of, with regard to much more than just pensions). // Of interest, I remember during the financial crisis when the “poor traders” on wall street were facing losing their “bonuses” due to their companies having to accept government bailouts… My father in law (“ex wall street exec”) was going on and on about how these bonuses were _promised_ to them as part of their “total compensation,” and how they should “get their bonuses no matter what because they planned their lives around receiving them.” I remind him of that every time he starts in with this “promised pensions too high” and “greedy unions” argument.

          1. The original article had to do with GOVERNMENT pensions. My discussion was on Government pensions…not private sector (although my last comment indicated that private sector – businesses and unions will both get what they deserve…good or bad…and hopefully each side won’t be stupid enough to ‘kill the goose that lays the golden egg.)

            As to Wall Street and such – hell – any ‘bailout or other action should include HUGE ‘clawbacks’ from financial experts who sold ‘highly rated bonds’ that were dog crap. IMHO – any company that has federal backing (like FDIC insurance or such) – salaries and compensation should be very limited AND subject to ‘clawbacks’ if there are problems. A financier who wants 7 figure income and 7 or 8 figure bonuses – he and his company need to be totally ‘private sector’ – with NO chance of government bailouts…and every investor who invests more than 1 dime would be required to sign a statement that the investment has ZERO guarantees and ZERO chance of any federal bailout or assistance…and they should not invest money in something that could go belly up. In short – investors should be ‘buyer beware’ …and financial ‘gurus’ and financial investors should be held accountable….and clients should be able to sue, the government should be able to ‘clawback’ profits gained either illegally or due to misrepresentations.

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