June 29, 2011
Real Person Account of Pension Advisory Group
G.B. Short's letter to the ProJo is worth highlighting. He went to the Pension Advisory Group meeting about which I've already expressed some skepticism. Let's just say his first hand, real person account does little to alleviate my reservations. First, about the makeup of the members:
Early on in the meeting it was stated that this board was set up "to represent the interests of all Rhode Islanders," a sentiment the organizers expressed more than once. With that, my first instinct was to look at the makeup of the board as members introduced themselves. Of those appointed, four are union leaders from the public sector -- a disproportionate weighting at the outset, even acknowledging that labor will have to participate in the final solution and should have a voice.Short also provides some context surrounding the line I focused on in my prior post, “I don’t think the private sector is what we want to emulate.”There was not one clearly identified advocate for the taxpayer, while there should have been several. There were advocates for business and industry. And as the three academic members of the board are probably slated to receive pensions from their institutions I cannot count them to be unbiased....There was not one advocate for non-public union retirees...Certainly non-public union interests should have been present, as well, since many of these wage earners will also be substantially impacted through taxes on their income. One member of the board is retired, but his role as a president of the North Providence Federation of Teachers certainly disqualifies him as an independent advocate for retirees. When I questioned the board's makeup after the meeting, I was told he was proposed to fill that [ie; the "retiree's"] role.
[M]ost of the board's members, if not all, based on their current employment status, will likely draw a pension from their institution or union. This is an educated guess. As potential pensioners, board members quickly showed a bias in their expectations of what the benefits of a pension should be.Great.For instance, the discussion came up early on as to what income a retiree should expect a pension to provide for the rest of their lives. It was quickly settled by common agreement that about 80 percent of previous income was the expected norm...I can tell the board members that as one who had to provide for his own retirement, an 80 percent salary drawdown on your investments is an astoundingly good return, if not reckless, on your lifetime savings and investments going forward for the rest of your life, and one most of us who worked for a living privately can only dream about.
Amazingly, in the early phase of the meeting, I heard one expert participant from academia reject any alternative to a defined-benefits plan (a plan where the employer guarantees your future income for the rest of your retired life), declaring that employee contribution plans (i.e., a 401 [k]), which most of us in the private sector have, are "not anything we want to duplicate," as Ms. Gregg reported.
I waited for someone on the board to challenge that statement. Not one single board member commented!
I don't think -anybody- will challenge the statement that the -results- of switching to individual defined-contribution retirement plans is going to cause a national economic disaster. In that respect, I agree that it's not wise to emulate the private sector.
What needs to happen is that the framework of the private sector is kept (individual accounts, penalties for early draw-downs, ability to pile more money in), while the state/city demands that workers put at least 10% of their own income away and gives them a 1:1 match on it.
That might sound overly generous to you, but the stuff being offered in the private sector now is going to be ruinous in the long-term: The median 401k can only support a $200/month draw-down, it's 1/20th the size it needs to be... Or in other words, if Rhode Island's poorly-managed pension system is 40% funded, most Americans are only 5% funded.
What happens when people didn't save enough? They keep working, and then 20-somethings can't get jobs. I'll bet the 'graying' of Rhode Island's workforce contributes to the lack of opportunity offered to our young just as much as the dismal tax/regulatory climate.
Posted by: mangeek at June 29, 2011 12:09 PMMangeek, I hope you're not implying that it is the employer's responsibility to fund a comfortable retirement for all employees. Certainly a larger tax-deferred 401K contribution would help. But essentially, providing for retirement is the employee's responsibility, and for most folks it can be funded by reducing consumption during one's career.
Posted by: BobN at June 29, 2011 12:33 PM"I hope you're not implying that it is the employer's responsibility to fund a comfortable retirement for all employees. Certainly a larger tax-deferred 401K contribution would help. But essentially, providing for retirement is the employee's responsibility, and for most folks it can be funded by reducing consumption during one's career."
I agree, but when something isn't working and it's affecting the nation's economy to this extent, it's time for the government to carrot-and-stick things. It's not the employer's responsibility to 'take care' of workers, but I'd like to see them forced to offer a certain match (1:1 on the first 5%?) in order to obtain favorable tax situations, and I would also like to see workers automatically opted-in to 10% contributions.
Look where we are now, and project it out thirty years. People in my generation have no faith in the 401k, and only 5% of us are properly contributing. Out of the dozens of friends I count, I'll bet one or two of them besides myself are contributing more than a few dollars a month, if anything at all. The only way to prevent the disaster is to opt them in automatically and force the match.
Trust me, this will be good for folks: Less dependence on social welfare programs because you can draw-down instead of going-broke, fewer foreclosures, less dependence on Social Security, and old people retiring and investing instead of sticking around in the job market and displacing the youth.
Posted by: mangeek at June 29, 2011 1:01 PMWhat is the difference between the government forcing you to save a certain amount of your earnings in a 401K and the government telling you what you can and can't eat? How would it differ from Obamacare forcing you to buy a certain kind of health insurance (if you can find it)?
If saving is good, you should do it for that reason, and woe to those who refuse to. If the tax-deferral isn't enough incentive, I don't see why the government should tyrannically make people live their lives in a bureaucrat-approved manner.
Posted by: BobN at June 29, 2011 1:46 PM"What is the difference between the government forcing you to save a certain amount of your earnings in a 401K and the government telling you what you can and can't eat? How would it differ from Obamacare forcing you to buy a certain kind of health insurance (if you can find it)?"
Because it's just changing the default terms of employment, you can opt-out, and you get to choose how the money is invested.
Nobody is ever going to whine about how they filed paperwork to undo their default 10+5% savings while turning their pockets inside out.
I think it's the government's prerogative to offer different tax rates to businesses that offer qualifying benefits vs. those who don't.
Posted by: mangeek at June 29, 2011 2:32 PMAnd I don't think it's the government's prerogative to do any such thing. Like all laws, taxes should be imposed on the same basis for all, with no special deals.
Posted by: BobN at June 29, 2011 5:21 PMI think that's just where we'll disagree. I like the idea of a mildly punitive corporate profits tax rate (like our current one, which is really high) sans-all the deductions, and a second one that's really low for companies that offer 75% or better premium coverage on health care, my aforementioned retirement plan, and three weeks or more of vacation a year.
Why would I support such a strange policy? Because -some- American companies are really not treating workers well, and American consumers are still spending 95% of what they make, and they're going to be knocking on my door to maintain their standard of living in thirty years.
Posted by: mangeek at June 30, 2011 10:05 AM