Banking on a System Sure to Fail
Andrew makes a central observation in the comments to his latest post on the pension deficit:
If politicians making bad fiscal decisions are the entire story of the pension funding crisis, that is a strong case against defined benefit plans, because there is no reason to believe that current and future pols are going to be any smarter than the ones who got us in to this mess.
For his part, NEA honcho Bob Walsh offers a worthy summary thereof:
… since you asked, here is a brief recap. While pensions systems started in the public sector to match the private sector models, they generally had a few major differences – public sector plans usually required employee contributions as well as employer contributions, and, while private sector plans eventually fell under ERISA regulations, such rules were lacking for public plans. Eventually, though, most public plans tried to follow private guidelines, but since governments were (correctly) considered on-going entities, getting to full funding was never a high priority and the typical 30-year amortization schedules were constantly being redrawn (there are still folks who argue they should be reamortized every year to keep management contribution levels down). RI last reset the counter 8 years ago, so we will be fully funded in 22 years IF we stick to the plan.
RI, of course, added to the problem in its own unique way – they were later to the game in requiring real actuarial studies to set the management contributions, and imagine their surprise when the funding levels were discovered to be so low. During the DiPrete years, the two early retirements saved the state money from the personnel budget by essentially giving away time in the pension system, which not only essentially transfered those costs to the pension system, it was the equivalent of borrowing the money at 8.25% (more, really, since the real returns have always been higher). DiPrete also gave us the banking crisis, which caused the state to decide not to make required contributions during that time. In the late 1990’s, when funds all over the country were catching up due to stellar market returns, we decided to ignore the 5-year smoothing used to average out market returns and “mark to market” our portfolio, which lowered management contributions at the time and , all too predictably, caused them to increase years later.
Demographics have also played a part – while I disagreed with some of the Plan B changes, the concept of retirement at any age without any age-based actuarial reduction was not sustainable (as I testified at the time.) Of course, folks are living longer, etc., which also caused the need for those adjustments.
The missing piece is that — for professional and ideological reasons — he and his union-leader peers have backed the very politicians and policies that have brought Rhode Island to its current state. Giveaways, regulations, and micromanaged obfuscations of the free market — for the most part benefiting unions directly or indirectly — created the circumstances in which public-sector pensions are threatened as they are, and one suspects that those in the know, such as Mr. Walsh, have not raised the alarum because they’ve considered the pension benefits to be “guaranteed,” if not legally, then morally. As Michael commented to a previous post in the series:
… 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.
Well, I’ll agree that it was improper for politicians (and unions) to make unrealistic promises on which others would be expected to deliver, but Michael’s undue dismissal of taxpayers’ claims is telling. Sure, if everybody in Rhode Island threw me a dime (nevermind “a few bucks”), I could end my crushing debt, but I’d prefer policies that created an economy in which a hard-worker could thrive. I planned my educational investments based on indicators and advice, expecting those who’d constructed our social schema to have structured the market as promised. Life doesn’t always work out as expected.
The thread running between Bob and Michael is the belief that the responsibility for fixing the pension system rests with those whose ostensible representatives enunciated the promises. And that points to a structure (deliberate, no doubt) in which those who bear the risks receive none of the rewards, while those who receive the rewards have no risks (in the sense of losing their pensions). From where, then, would those whose futures are actually in question — as Michael claims his is — derive incentive to keep an eye on the stewards of their retirements? To ensure that “too good” doesn’t get swamped in “to be true”?
Tom W offers the important reminder that being entitled to vested benefits also means that benefits that aren’t yet vested aren’t an entitlement. It’s the public sector workers’ pension system that is at stake, and it seems to me that they ought to bear the brunt of the financial hit of having to return it to solvency. If the financial hit is too large, perhaps they’ll decide to mitigate in small degree by canceling their union dues.