Explaining Why the Pension System Should Not Be Reamortized

To rigorously show that reamortizing a pension system costs almost all taxpayers more money, you would begin with the risk-free rate of return on money and the expected return from the pension fund (which are two separate quantities) and then apply an appropriate discounting formula to the appropriate combination of the two. However, going strictly by the percentages overlooks an important point, related to a famous quote from economist John Maynard Keynes…

The long run is a misleading guide to current affairs. In the long run we are all dead.
In deciding whether to reamortize a pension system, we must take into consideration both the fact that our lives have finite end dates and as well as finite start dates, i.e. taxpayers do not exist from the beginning of time.
If a pension system is properly designed, funded and not raided, the state maintenance contribution — the part that goes to the fund from taxpayers without passing through an employee paycheck first — should only be at most 2-3% of payroll. In many years, it should be around 1%, and it never should reach the 20-25% that Rhode Island taxpayers will be paying through the year 2029 on the current funding schedule. The good news is that after 2029, if Rhode Island doesn’t reamortize (and benefit levels are rationally aligned with contributions and realistic estimates of interest growth), the taxpayer contribution should be in the range of 1%-2%-3% of payroll going forward from then on.
However, if the system is reamortized under a new 30-year plan (and benefit levels are not adjusted), the state contribution will remain a double-digit percentage of payroll through the decade of the 2030s. The result will be that RI citizens in the 2030s, some collecting the first paychecks of their lifetimes in that decade, will be burdened by higher tax rates than or service levels from what they would experience under a non-reamortized system. These citizens — amongst whom will be many individuals yet to be born — will be left with fewer resources for addressing their own needs, because we will have decided to make them help pay for what at that time will be decades-old mistakes made by our generation and the generations prior.
To progressives like gubernatorial candidate Patrick Lynch, passing the problems we’ve created to people 20 years down the road is the “fair” way to deal with the situation. The lesson, as always, is that progressives and public finance don’t mix.

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Mike
Mike
11 years ago

You’re wasting your time. The 3 card monte scammers on Smith Hill will be reamortizing if not this year then next.
Heck, they won’t even curb the damn COLA’s much less the benefit.
LOL
Progressives-the dumbest people on the planet.

OldTimeLefty
11 years ago

Mr. Morse says, “The lesson, as always, is that progressives and public finance don’t mix.” So he says.
The problem is that public finance and retrogressives like Mr. Morse need to be introduced to one another. It won’t happen because he is a one trick pony who prances to one tune only, “Unions are bad.”
So this thread is more of the same from Morse. Kill the unions and everything will be fine in these United States and leave the working class to the tender hands of our benevolent captains of industry.
What oil spill? Cut the funds and let the industrial foxes guard the public hen house.
OldTimeLefty

Dan
Dan
11 years ago

Ironic that you bring up the issue of pollution as if it is a private phenomenon, OldTimeLefty. Every reputable economist knows that the worst polluter in the entire world is the US government. Oops, that doesn’t jive with the progressive story. Quick, hire Pat “Two Gun” Crowley or Tom “The Illusionist” Sgouros to doctor some numbers and explain it away.

George
George
11 years ago
Ragin' Rhode Islander
Ragin' Rhode Islander
11 years ago

Does anyone really believe that the General Assembly clowns in the public sector union circus, the same hacks who blew through the tobacco money and increased their budget by 13% just last June, aren’t going to do the irresponsible, kick the can down the road thing and re-amortize?

mangeek
mangeek
11 years ago

I’m against reamortization because it’s a ‘last resort’ move with long-term consequences, and we’re not at ‘last resort’ in terms of trimming the budget. There are a -lot- of ways we could cut the budget without making this drastic move.
We have to accept the fact that Rhode Island will have either less services or higher taxes for a long time in order to make up this hole we’ve dug ourselves into. I’m not willing to refinance a debt that won’t be paid until I’m almost sixty.
Also, the big risk here is that we’ll re-amortize the payments this year, then do it again next year, and again, ad-infinitum. I don’t want my legislators thinking that they can magically wave their problems away for some future generation to deal with.

Monique
Editor
11 years ago

“it is somehow anti-union to discuss basic facts”
Actually, what is anti-union is the legion of General Assembly members who, for the past three decades, refused to fund the pensions that they themselves had promised.

Ragin' Rhode Islander
Ragin' Rhode Islander
11 years ago

>>We have to accept the fact that Rhode Island will have either less services or higher taxes for a long time in order to make up this hole we’ve dug ourselves into.
How about the better alternative: the public sector employees will have to accept that fact that they’ll have to live with lower compensation (pay, benefits and post-retirement benefits) … and the welfare queens will have to accept the fact that the party’s over and Rhode Island will no longer be the welfare plantation of choice?

mangeek
mangeek
11 years ago

Ragin, those are measures I count under ‘fewer services’. I think it’s actually rather unlikely to get a lot of concessions on a per-worker basis, so I’m imagining using some methods to have fewer state and local employees.

John
John
11 years ago

The principal here is clear. The issue at hand is the compensation of, say, police officers, fire fighters and teachers. Let’s look back to say, 1997. When these public sector professionals that year delivered their services, the government, and us indirectly as taxpayers, in the form of salaries paid and future benefits earned (pension and post retirement health care). On the principal that the people incurring the expense should fully provide for it, rather than shifting it to future generations to pay (think of it as a free lunch), in 1997 we should have taxed ourselves to pay both their salaries and to make out contribution to the cost of their future pensions. Granted, the cost of the latter can only be estimated with some uncertainty, involving as it does estimates of future salary increases, years to retirement, years lived after retirement, future CPI inflation, future health care cost inflation, and future returns on amounts already invested in the past to cover the cost of services provided in the past. But again, the general principle is clear. In 1997 the citizens who, through government, incurred those costs should have paid for them, via taxes that were used to pay salaries and fund future benefits. We here in 2010 should not be picking up their tab. But that is exactly what we are asking our own children and grandchildren to do via reamortization. Of course, if we all know that there will never be enough in the way of taxes or investment earnings to cover the future tab, then public sector pensions are nothing more or less than yet another Ponzi scheme. Time will tell, I guess. Final point: What too many public sector employees fail to fully comprehend is that if they had been giving the taxpayers superior value for… Read more »

michael
michael
11 years ago

“Final point: What too many public sector employees fail to fully comprehend is that if they had been giving the taxpayers superior value for money all along in the form of outcomes and delivery efficiency, then the current discussion would likely be a wholly different one.”
The only way this discussion would be different would be if the “taxpayers” no longer paid taxes.

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