Good job, Andrew – excellent work, now we are getting somewhere. I used the same framework to present to the Pension Study Commission.
A few very important notes – our pension system uses 8.25% return (and has averaged over 10%) – most probably use 7.75% to 8.0%. Also, on the teacher and state employee side, a few very important modifications – under “Plan A” one must work (and contribute) 28 years to get a 60% benefit, 35 years to get 80%, and the COLA starts the January of the third year after retirement (assume a 2.5 year delay for teachers, most of who retire in June.). Under “Plan B”, a minimum age of 59 is instituted, and one must work 38 years to get a maximum benefit of 75%, with a three year delay until the COLA starts. As I have stated numerous times before, the Plan B scenario pays for itself with minimal contribution from management (and an an individual would not get those returns investing on their own.) Finally, to be fair, I would run the average lifespan up to age 82 or 83, as folks who make it to retirement are likely to live that long according to the actuarial charts (remember,the overall average lifespan is different than life expectancy after one reachers a certain age.)

Andrew – You, as well as Bob Walsh, seem to have missed Mr. Cournoyer’s very straightforward point, which is that our Public Empoyees, particularly under the scenario as laid out by Ms. P.E. Hanson, receive a ridiculously generous benefit at minimal cost to the employee and SIGNIFICANT cost to the taxpayers. Even your numbers demonstrate Mr. Cournoyer’s point, as after just 15 years, the Pension Fund (i.e. the Kitty) is running a deficit. Continue your table out to age 75 (or worse, age 83 as Bob Walsh suggests) and the deficit (i.e. the excess of benefits paid versus the employee’s minimal contributions plus the “assumed” earnings) grows to over $800,000! And make no mistake, there are many RI public employees collecting pensions for 30 years or more. The bottom line is that, as Mr. Cournoyer noted, the Benefits paid to our public employees is simply unsustainable under any scenario. Even you admit that it is a Ponzi scheme when you acknowledge that the shortfall has to be coverered by the next wave of workers. But eventually, the music stops and the taxpayers are left holding the bag. The unsustainability of these plans is not news. Big Steel and Big Auto figured this out long ago. The once mighty American Automotive industry has been brought to its knees because, like the RI General Assembly, they refused to say “no” to the Unions. The Bob Walsh’s of the world know this to be true, but refuse to open the eyes of their uniformed union members, much to their eventual detriment. Also, I find it interesting that you assume the fund will ALWAYS accrue earnings (the S&P 500 is actually lower today that it was at the end of 1999) and, more importantly, since the employee suffers no risk relative to the earnings… Read more »

Andrew- You wrote: “I don’t see much point, from a fiscal perspective, in separating the “employer” contribution from the “employee” contribution.” The reason for seperating the two, as I suspect Mr. Cournoyer did, was to clearly illustrate to the less than informed public employees what a sizeable benefit they are receiving in comparison to what they contribute. If you seperated the two amounts, your employee contribution amount would equal exactly what Mr. Cournoyer said they would be, which was $75k. Too many public employees, like Michael, are clueless and actually believe the spin put forth by the union leadership that their contributions (and earnings, if they materialize) cover most of the pension benefit they receive, when if fact, it doesn’t come even close, no matter how rosy your assumptions are. Our public employees need to be educated on how over the top these benefits are and how costly they are to the taxpayers, who quite frankly, can not bear to carry any more of them on their shoulders. You miss an opportunity to inform and educate our misinformed public employees when don’t break out the minimal cost to the employee as compared to the taxpayer; when you don’t carry forward the payments past the years in which the deficit begins; when you assume the fund will continually generate earnings, which by the way, both the employee and the taxpayer lose the ability to earn income on the funds they put into the pension system. But it is only the taxpayer that carries the risk associated with those earnings, as the employee gets their benefit regardless of how the fund performs. Also, for the Michaels of the world that say their participation and contributions into the pension plan is “mandatory” as if it is somehow a burden for the employee, well… Read more »

Bob,
What facts are you looking at?
Andrew’s analysis demonstrated the very issue highlighted by Mr. Cournoyer.
When a teacher can begin collecting a 60% pension after just 28 years (age 51 if they start working at age 23), the numbers are worse. Using your age figures (83 life expectancy), a teacher could easily earn a pension for 30 years under this scenario …more years than they worked.
Bob, there is no scenario you can create in which the math will work. That is why we have a $5 billion pension deficit. It is also why your union members must join the real world and move to defined contribution plans. Then, you can take all the benefit (or detriment) you want with respect to “earnings”.
Give it up Bob, the taxpayers have finally figured it out. The benefits you demand for your union are unsustainable. Even 17 year union-man “Michael” now gets it.
Your insistance on pretending that the laws of economics don’t apply to union members will only hurt your membership in the long run.
In terms of “resorting to insults”, you must be referring to your sidekick …that little clown Patrick Stalin Crowley.

I should add in fairness that the teacher’s pensions are not the main problem. Raise the age to 62 and cut the percent of salary just a little and you can probably balance them.
The real problem is the ruinous “retire at 41” municipal pensions and the “disability” scam. Please consult Rene Menard for details!

By all means, Andrew, please show us the Plan B numbers. (After all, what are we paying you for?) Let’s also see a rule of 90 calculation – you get the pension when years in and age sum to 90. And then how about a rule of 110 – which is approximately the combination of age and eligibility for social security. Yes Mr. Walsh, I know thats unfair as SS contributions are 12.4% vs. the 20% ostensibly contributed in the example, but I just had to point out what happens in the real world. The rule of 90 calc for Andrew’s example would certainly yield some different results – and its still way more generous than most of us get, in compensation for the extra contributions made (or not made, thanks to our Democrat solons). No matter how you look at it, collecting a pension before a more typical real world retirement age is, as the example above shows, unsustainable.

Bob, You must think I’m as uninformed as your members. I did do the math. Here it is, try to follow: One: A teacher who earned approximately $31,500 in 2004 will be earning approximately $78,000 in their 10th year. This is based on an existing contract. The yearly rates over the first 10 years are as follows: $31,500, $34,300, $37,550, $40,929, $45,150, $49,850, $55,950, $62,325, $70,000, $78,100. Two: It is assumed that the teacher will then receive 3.25% raises for the remaining 28 years, bringing their salary in year 38 to $191,213. The average of their last 5 years will equal $179,550. Three: A 75% pension in year 1 – 3 will equal $134,661 [75% of 179,550]. It will then grow at 3% per year for the next 20 years,at which point the teacher will have collected a pension for 23 years. The annual pension payment in year 23 will have grown to $243,000. The total amount that the teacher will have collected in pension payments over the 23 year period will be $4,130,934! Four: The teacher will have contributed at a rate of 9.5%, for a total contribution of $389,463 over the 38 years in which they contributed. Five: Assuming the employee contributions earn 7% (as Andrew assumed), the total earnings after 38 years would have been $929,454 for a total combined “kitty” of $1,318,917 [employee contributions of $389,463 plus 7% earnings of $929,454). Six: Then, that total kitty of $1.3 million would continue to earn 7% as the balance declined to fund the employee’s lucrative pension payments. The total additional earnings would be approximately $435,000. The earnings would cease around year 9, as the employee pension payments would, at that point, exceed the employee contributions plus earnings. So, Bob, we have a teacher that works 38 years, contributes… Read more »

Bob Walsh,
You just don’t get it.
You say: “you will find that it is less than what most private sector firms contribute to 401-k’s.”
Putting aside the fact that your numbers are wrong, as usual, the difference is that the private sector employee who has a 401k has no guarantees, whereas your entitlement minded union hacks that you make a living off of are GUARANTEED of receiving a pension payment that far out paces anything a 401k could cover, regardless of how the market performs.
Here is a little news flash for you Bob: when something has a gaurantee attached to it (i.e. no risk), the return should be less, not more!
Do you really think anyone’s 401k in the private sector could payout 75% of their highest 3 or 5 years for 20 years or more?
Who are you trying to kid? You’re a joke and it is people like you that are ruining this state.

Wow, Bill. Throw wild generalizations much?

When confronted with actual facts, the uninformed resort to name-calling and hatred.
At least it helps to remind folks why they need a union. No wonder the polls still show that a majority of the workforce would join a union if they could.

>>At least it helps to remind folks why they need a union. No wonder the polls still show that a majority of the workforce would join a union if they could.
I’ll bet that thousands of auto workers and steel workers and garment workers who are now unemployed (thanks to union greed) would just love to “join” the union, i.e., get their jobs back!

George’s analysis was good as far as it went. However, it does leave out the fact that the state/employer’s contributions have been lower than what they (in the actuarial sense) should have been in the past, which has contributed to the current underfunding of the future liability for pension payments (leaving post retirement healthcare benefits out of the discussion for now). Undoubtedly, Bob Walsh will bring this up, and suggest that fairness or equity or something along those lines demands that we (the state/taxpayers) issue pension bonds or sell the Pell Bridge and other assets in order to make up this deficit. However, this ignores the fact that said underfunding was a political decision made by the people’s representatives in the General Assembly (who used the money to fund growing welfare programs which forged an alliance between the union and progressive wings of the Democratic Party as private sector union membership declined, and in so doing maintained the Democrats unbroken control of Smith Hill). Like it or not, Bob’s fellow Democrats made the decision to underfund. And now Bob’s fellow Democrats face another choice: do they cut pension benefits to reduce the future liability to a level commensurate with current pension assets and expected future contributions and earnings (note: that constant 7% assumption creates too rosy a picture; the right way to do the analysis is with stochastic annual returns and plan participant longevity)? Do they sell assets and issue pension bonds? Or do they pass a huge increase in RI’s already very high taxes (income, sales, corporate or some combination thereof)? Just as the U.S. Congress reduced the size of the future Social Security liability by raising the retirement age, so too can the RI General Assembly legislate its way out of this mess. Bob may not like it,… Read more »

John – with respect, it is irrellevent whether or not the state/taxpayers withheld employer contributions from the pension system.
Certainly, that will be Bob Walsh’s weak argument.
But the issue at hand, which I tried to demonstrate to Bob Walsh using his own figures, is that the benefits paid to his union flock are simply unsustainable. The math just does not work, regardless of whether or not the taxpayers funded every year.
And, as you correctly noted, imagine if the taxpayers had funded every year. They are already taxed to the hilt. Funding these nutty benefits just would have added to their burden.
The only discussion that should on the table at this point is “do we move to a 401k style defined contribution plan as of December 2008 or do we wait until July 2009”.
The debate of whether or not the existing plan is fair, sustainable or acceptable is over. Bob Walsh and his flock lost that argument before it even started.
Bob just needs to accept reality and be thankful that the gravy train lasted as long as it did.

Michael,
I know – definitely a battle of wits with unarmed opponents – fortunately, I entered the true figures into testimony before the pension study commission months ago – Andrew template is fine, he just needs to use the real numbers as I noted above. As much as some of these folks, who clearly have a different agenda, whine, complain and just outright ignore the facts, the truth will prevail. But, as the man said, they just can’t handle the truth.
Sometimes I do wonder how some of these people make a living, or if there is any real world experience behind some of these anonymous posts at all.

Mr. Walsh, I’ve read all the posts on this subject (including the one’s under Justin’s original post), as well as Ms. Hanson’s and Mr. Cournoyer’s letters that started all this. So far, you have posted on several occasions things like “the facts and math are wrong”, yet you never articulate or explain what is wrong. I suspect that your vagueness is due to the fact that you privately agree with Mr. Cournoyer’s original assertion that the benefits paid are far in excess of any contributions made by the employees and are mathematically unsustainable. I’ve reviewed the calculations presented. Unfortunately, Mr. Elbow’s, as well as Mr. Cournoyer’s, are right and you are wrong, Mr. Walsh. The question at hand is what is the employee receiving in pension payments in relation to what they pay in, the difference being the cost to the taxpayer. This question is important, because many public employees are under the false belief that their contributions fund the majority of their pension. In both cases (Mr. Cournoyer’s and Mr. Elbow’s), the answer is clear. The cost and burden of providing these benefits overwhelmingly fall on the backs of the taxpayers. In Mr. Cournoyer’s analysis, he appropriately does not include “earnings” as the employee has no risk relative to those earnings. They get paid the $1,230,000 in payments in his example regardless of whether or not the employee’s $75,000 in contributions accrue earnings or losses. In Mr. Elbow’s analysis using your parameters, the employee gets the benefit of $1.3 million of earnings that may or may not materialize. The only thing that is gauranteed in Mr. Elbow’s analysis is the $4.1 million of pension payments to be made to the employee. In both cases, it is clearly demonstrated that the employee is receiving a significant benefit as compared to… Read more »

You can all use an many words as you need to try to obscure the truth, or try to slant the discussion away from the facts that prove you wrong, but the truth remains the truth.
Let’s review the facts once again.
Plan B – Teachers
Contribute 9.5% of salary (among the highest in the country)
Management – contributes enough to cover active cost (about 3 – 4% of salary) plus a lot more (about 20% of salary) to pay unfunded liability. When the unfunded liability is paid off, only the 3 -4% management contribution need be made to sustain the system forever. It the system went away, still have to pay off unfunded liability, and the costs go through the roof)
Pensions system invests all funds with targeted 8.25% average annual return, have always exceeded that average. So 8.25% is the actual RI number (continued excess returns mean the unfunded liability gets paid down faster).
If a teacher starts working at age 22, works until age 60 (38 years) to get maximum 75% benefit, COLA at CPI with 3% cap kicks in at age 63 (Social Security COLA is CPI without a cap).
DO YOUR OWN MATH (or maybe Andrew will do it for you, if you ask him nicely). Teacher 9.5% contribution plus minimal management contribution (use 4% if you want to run your own numbers) is more than enough to pay for pension, plus COLA, for expected life.
Here ends the pension tutorial – unfortunately, I suspect many of you will have to attend pension summer school as your political agendas have distracted you from learning.

Bob W writes: “Management – contributes enough to cover active cost (about 3 – 4% of salary) plus a lot more (about 20% of salary) to pay unfunded liability. When the unfunded liability is paid off, only the 3 -4% management contribution need be made to sustain the system forever. It the system went away, still have to pay off unfunded liability, and the costs go through the roof) Pensions system invests all funds with targeted 8.25% average annual return, have always exceeded that average. So 8.25% is the actual RI number (continued excess returns mean the unfunded liability gets paid down faster).” Not exactly. As TomW notes, management/taxpayers have made contributions over the years to the defined benefit plan, to the extent voted on by the General Assembly, which was controlled by the Democratic Party. That we are today facing a whopping unfunded liability (one of the worst in the nation on a percentage basis) reflects four factors: (a) the size of the benefit package; (b) increases in average longevity; (c) the structure of investment returns (hint: it’s not the average that counts), and (d) the level of plan funding (which in this case refers to the amount contributed by management/employer/taxpayers). As an aside, few if any private sector DB plans use the 8.25% average return assumption today; it is just too aggressive and serves no purpose other than to hide the true size of the unfunded liability (states have the luxury of not being subject to ERISA, which regulates private plans). So, given that we can’t do anything about increasing longevity or about investment returns, we’re left with a choice of reducing benefits or taking a major piece of change out of taxpayers’ pockets, in one way or another (e.g., a tax hike, asset sales, pension bonds, etc.).… Read more »

“George Elbow/Bill/Larry/Tired of Bob/Milton,”
Apparently I was in an ass kicking contest with a one legged man with multipe personalities. Who would have guessed!
I am no mathemetitian, that much is certain but I know enough to know that any retirement/pension that is part of an employee package will cost that employer something, whether it is publicly or privately funded. I get a headace reading all of the different ways Andrew’s numbers get twisted.
Tom W, one of the commenters here whose opinions I value is closest to getting the mess figured out but still is missing an important point, the pension is part of a benefit package. The benefit package was offered to me when I accepted employment with the City of Providence. I didn’t demand it or crunch the numbers or do an audit, I trusted the integrity of the people who hired me to have figured this thing out before offering the package. I’ve planned my future based on the numbers supplied to me and doing some investing and career building on my own. The only demanding I’m hearing is people who’s future’s are not tied to the pension systems demanding I sacrifice my future so they can save a few bucks on their tax bills.

Andrew, Ok, let’s try one more time. I’ve given up on Mr. Walsh providing answers, as all he does is repeat “facts” without applying them to the Pension formula to produce an honest answer. The exercise we have been debating has the following simple objectives: 1- Demonstrate to the Public Employees who are under the false belief that the majority of their Pension benefit is somehow covered by their contributions and related earnings. Remember, this all started when P.E. Hanson implied that only 25% of her Pension was funded by the taxpayers. This is a common myth amongst the uninformed, including Michael, who has acknowledged he did not understand how the math worked …no crime there, but be willing to be educated. 2- Demonstrate that given the overly generous nature of the benefits provided, the cost to the taxpayer is unrealisticaly and unsustainably high. The overly generous nature of the benefits manifest themselves as follows: (a) the early age at which the employee can go on pension …e.g. 59 in some cases, but we all know we have MANY people going on Pension in their 40s and 50s. In fact, Ms. Hanson said she could begin collecting a 40% to 50% Pension after just 20 years (b) the extremely high rate at which they collect [e.g. 60%, 75%, 80%] (c) the automatic “cost of living adjustment”. With that in mind, it would be helpful if Andrew would adjust his calculation spreadsheet to reflect the following discreet items: 1) Employee contribution at 9.5%, with a total 2) Earnings on the employee contributions at 7%, with a total 3) Taxpayer contributions at 5% as Mr. Walsh suggested, with a total. 4) Earnings on Taxpayer contributions, at 7% with a total. 5) Pension Payments to employee thru age 83. From this, it will… Read more »

As a postscript Michael, if you have a beef, it is with your union leadership / the leadership of the state AFL-CIO.
They live up at the Statehouse, and exert great influence over the leadership of the General Assembly, if not control it.
So why did that union leadership sign off, year after year after year, on budgets that underfunded the state pension system?
Why did they act against the best interests of the rank and file?
Why did they not demand that the tobacco money windfall be injected into the pension fund to eliminate the unfunded liability?
They have access to all the annual reports and financial statements – why did they stand by and let the unfunded liability balloon until it hit FIVE BILLION DOLLARS?
What incentives / reward did they get for looking the other way while the rank and file was being sold down the river????
A lot of union officials serve in the General Assembly, and have for years (if not decades). Why were they not sounding the alarm on behalf of the rank and file whom they are supposed to represent and protect???

George Elbow,
Your basic grasp of these concepts continues to be severely lacking. Please provide your credentials as an expert on this subject, your backup reseach, or any other materials you have used to come to your conclusions.

>> Tom W – Excellent commentary. Thank you. I do have to get better about checking for typos and grammatical errors before I hit “send” – I tend to bang these postings out and miss those when just reading online than with printing out a hard copy to edit first. >>I fear you will not get throught to Michael and his union brethren, as you are trying to apply logic and common sense to a problem [for example; you make an excellent point that Michael does not complain that his salary today is NOT the same as what is was on his first day of work.] Unfortunately, an entitlement mentality is not bourne of logic and common sense. So I am not confident that you will get thru to Michael & Co. Michael strikes me as quite intelligent and articulate, and fairly reasonable. I do think that he’s swallowed a bit too much of the union Kool-Aid, but reasonable people can disagree about that. As for his “union brothers and sisters” nobody wants to go backwards. That doesn’t make them bad people, just normal and economically rational. The problem is (and has been) the system – the political process has been perverted to suit the ends of public sector unions. >>With respect to the General Assembly “not funding the pension plan”, the reason is that even they knew the taxpayers couldn’t afford to fund the lavish and unsustainable benefits bestowed to the Michaels of the world. The caliber of people that inhabit the Democrat General Assembly, and their record, speak for themselves. Short term political reward (public sector union support and money) while putting off the bills for future years … that and an emphasis on expanding the welfare system by the “progressive” wing of the Democrat Party explains the… Read more »