The Truthful Actuaries On Pensions

Is everyone reading Pension Tsunami?  Then you know enough about what is coming that you don’t have to hear it from me. But let me summarize a few articles from one of the places being hit first, so others who haven’t been reading can be prepared to face what is coming. Much of the recent discussion in California centered on an admission by the chief actuary of CalPERS, the California public employees pension fund, in a seminar sponsored by the Public Retirement Journal, that California’s defined benefit pensions are “not sustainable,” as reported on a blog by a pension expert.

“We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) …unsustainable pension costs,” he said. “We’ve got to find some other solutions.” The head of the League of California Cities told the seminar that “pension benefits are ‘just unsustainable’ in their current form and difficult to defend politically” to non-public employees. Another actuary pointed out “that two-tier plans do not save much money, even after several decades” because “costs from the untouchable high-benefit first tier, a vested right protected by contract law, continue to grow” and motivation to enact lower tiers for new hires are “political in nature,” attempts to pretend existing public employees have contributed shared sacrifice when they haven’t. The reaction is a Tsunami all its own.

“Ten years and two months ago, the board of the California Public Employees Retirement System committed what amounted to an act of civic arson,” according to the San Diego Union-Tribune. “It recommended that the Legislature and Gov. Gray Davis sharply increase the pension benefits for more than 800,000 state employees and retirees. CalPERS officials said the massive benefits spike would cost taxpayers little or no money because the heavy returns the pension giant enjoyed on its portfolio were likely to remain the norm. Incredibly, the Legislature and Davis believed this absurdly rosy scenario. Nearly all local agencies followed the state's lead in sharply increasing pensions. Now, with CalPERS' portfolio in tatters and with practically every last government pension provider struggling desperately to cover the cost of benefits, CalPERS' actuary is finally conceding what its board members and top executives can't bring themselves to say: The pension status quo has to die.”

It should be noted that New York City and New York State pushed through their own massive pension enhancement soon after. It too was described as “free” by then State Comptroller Carl McCall, seeking union backing for a run for Governor, and was passed without a single “no” vote state legislators who themselves benefitted from it.

If that pension blogger, Ed Mendel of Calpensions, had not attended the symposium, according to the Union-Tribune, “CalPERS might have continued with its formula of bland assurances that all is well and accounting gimmicks.” That formula includes deferring costs to the future, making them even greater, the same gimmick proposed by New York State Comptroller DiNapoli and nearly passed by the state legislatures. For all I know it has already passed, as these types of deals are seldom publicly vetted, as they are “difficult to defend politically.”

The Union-Tribune is a Republican newspaper, one might say. How about a liberal newspaper? “Let workers and others argue over whether defined-benefit plans for state employees are overly generous or unnecessarily stingy; the immediate problem is that, at their current levels, they are not fiscally responsible,” stated the editorial board of the Los Angeles Times. Like Governor Paterson and Mayor Bloomberg, it likes the idea of sticking the cost on future public employees alone, reducing their compensation to levels vastly lower than their own generation, the same plan honest actuaries say is “politically motivated.” “The governor's plan to roll back benefits for new employees to more rational pre-1999 levels is a reasonable starting point for reform. Without at least this modest change, obligations to retirees will eat up all the discretionary money for the human services and other programs that Californians want to keep.” I thought selling out the next generation was something Republicans did? Perhaps it’s a bi-partisan policy of Generation Greed.

Meanwhile, some California local governments that actually want to continue to provide some public services in exchange for the taxes they collect are pursuing a real solution – one that actually requires some sacrifice from those who have enriched themselves in the past. “La Mesa has become one of the first cities to launch part of a pension reform pushed by a group of city managers in San Diego County — have workers make annual payments to help fund their pensions,” according to the aforementioned blog. “As is common among local government pension systems in California, workers have not been making annual contributions toward their pensions in nearly all of the small cities in San Diego County. Firefighters in La Mesa agreed in July to contribute 9 percent of their pay to help fund their pensions, said Sandra Kerl, the La Mesa city manager. General employees agreed last week to contribute 8 percent.” Was that new employees making contributions? No, all employees, including current employees.

Those communities are seeking to avoid the fate of the City of San Diego, where a huge retroactive pension enhancement was passed based on fraudulent figures, and later drove the city to the brink of bankruptcy. A popular liberal Democratic candidate for Mayor actually proposed bankruptcy and a rollback of the pension gift to preserve services, but narrowly lost to a conservative Republican candidate and former police chief (and pension recipient), who gutted those services. “The city and county of San Diego have both recently adopted ‘two-tier’ pension systems, giving new hires lower benefits. But it’s a long-term plan not expected to produce significant savings for several decades.” Several decades of inadequate police and fire protection, close parks and libraries, and disinvestment in the infrastructure and public buildings. That’s their future, and ours.

Moreover, according to other reports, the City of San Diego is having trouble attracting new police officers given its lower wages and pensions for them, relative to those who came before, just as New York City did when it attempted to pay for 2000 pension enhancement with a 40% pay cut for new police and fire hires. You really can’t shift the cost to future public employees, because you cannot force qualified workers to work for the city, or even force them to work for the best of their ability once they have tenure or permanent civil service status. Even today while most do many don’t.

“I just don't think the benefit levels that are in the public sector can be defended in a public debate,” the head of the League of California Cities told The Sacramento Bee. “It's not just that public services are being cut to pay for the pensions. Younger public employees are being furloughed or losing their jobs as limited tax dollars go to support another entire class of retired employees. If union leaders don't work to negotiate a solution to the problem, they could soon face a revolt from the public — and their own members, who increasingly find themselves on the wrong end of this inter-generational tug-of-war.”   By the way, what does "not sustainable" mean?  It means that eventually the public employee pension systems will not be able to meet their obligations unless things change.  Older generations of former employees will then get paid, while younger generations will get nothing.  Which is apparently fine with the unions.

Meanwhile over at CalSTRS, the separate California pension plan for teachers, administrators are using an interesting argument to justify the big increases in costs school districts will have to bear for the retired, even as state school aid falls, tax revenue falls, and education in California collapses.

“Several board members, citing their hometown newspapers, said they were concerned that CalSTRS may be unfairly included in broad criticism of public employee retirement systems that have lowered retirement ages and boosted benefits. Some systems took ‘contribution holidays,’ putting little or no money into the pension fund when investment earnings soared, and others granted retroactive benefit increases for which contributions had not been made. In contrast, some of the story the board wants told about CalSTRS members: 71 percent are female, they do not receive Social Security, they do not receive retiree health care from employers, they work an average 29 years as educators, and the median pension replaces 62 percent of pay.”

I’d love to see Randi Weingarten, former head of the New York City teacher’s union and now head of the national union, show up to support that argument. After all, New York City teachers hired before 2008 contributed little to their own pensions, do get health benefits from their employer, do get Social Security as far as I know, and just got a massive retroactive pension benefit cutting their retirement age from 62 to 55 and their years of service for full benefits from 30 years to 25. That follows the 2000 pension enhancement, which apparently provides a cost of living increase of at least 1.0% even if we have deflation, which was perhaps not considered likely at the time but is entirely possible now. New York in general did exactly the sort of things that CALSTRs said it didn’t do. And public employees virtually everywhere else in the U.S. contribute far more to their pensions than those in New York.

As a result in the New York State pension system, which covers state employees and local government employees outside New York City, school districts pay the equivalent of 8.73 percent of their payroll costs to the teacher-retirement fund, compared with 8.5 percent of the payroll of most workers, and 15.7 percent for police and firefighters. The New York State Comptroller has found that, exactly as in California (no surprise), required pension contributions are going to soar to the levels described in that state as “unsustainable” and “politically unjustifiable”: 25 percent for most employees, and 50 percent for public safety (police and fire). I read in the Economist magazine, meanwhile, that it costs 20 percent of payroll to properly fund the typical defined benefit retirement plan, let alone a plan that permits retirement at age 44 after 20 years of work like New York City’s police and fire pensions, even if there is no existing underfunding hole to crawl out of.

For many classes of workers New York City’s public employee pension contributions are already at the “unsustainable” level: 23.6 percent of payroll for teachers, 13.5 percent for most workers, but 287% for sanitation workers, 22.8% for New York City Transit, 51.2% for police officers, and 62.9% for firefighters. That’s what the pensions cost before the city has even begun to hike taxes and gut public services to pay for the investment losses that have brought the issue to a head in California, and before the costs of the 2008 retroactive earlier retirement for teachers is paid for. How much higher will pensions spending go as a share of wages, given that wages will be falling as public services are shut down?

By the way, if the public agency employer doesn’t pay for the health insurance of retire public employees in California, who does? “CalPERS, the country's second-biggest buyer of health care services, urged Congress on Tuesday to act quickly to overhaul the nation's much-maligned health care system, saying there would be ‘a huge cost to inaction.’ In a letter sent to California's congressional delegation, whose ranks include some of the most influential voices in the national debate, the nation's largest pension fund called inaction an untenable policy choice. ‘Without reform this year, we will not be able to sustain our health care system,’" Yet another unsustainable benefit facing a tsunami, that is not politically justifiable in an open debate for all those paying taxes and getting nothing like it.

California is a lot like New York. Most people are no better off, or even worse off, than similar people were in the early 1970s, save the gift of some advances provided by technology, such as the internet. It’s a function of a rising share of national income and wealth being concentrated at the top. But California and New York also have a large number of people at the top, in the technology, entertainment and financial industry, and as total U.S. debt as a share of GDP rose from 150 percent in 1980 to 350% today, those people made a lot of money and paid a lot of state taxes. So the political class, public employee unions, other producer interests such as government contractors and government funded non-profiteers, and the politicians they control, scaled up their wages, benefits and lifestyles based on “the rich.” The “the rich” aren’t as rich and aren’t paying as much. Meaning that in order to continue living in the style to which they have become accustomed, which one way ratchet labor laws give them the right to, they will have to make the majority even worse off in higher taxes, diminished services or both. After they can’t go deeper and deeper into debt, on or off the books, to hide the problem anymore.

For a good projection of what life will be like for most of us, once we start having to pay back our public and private debts rather than running up more, read this essay on The Housing Bubble Blog, particularly if you came of age in the 1970s. (Not my essay by the way).

While California and New Jersey, as described by this actuary, may be facing this Pension Tsunami before New York, the tsunami actually hit New York City first, in the 1970s. The result was soaring taxes and a collapse of public services that remain, in some cases, much higher and worse then they had been before 35 years later. And now they will be worse still. Back then the city’s population fell by a million as those who could fled to somewhere the tax rate allowed a decent standard of living and public services afforded a decent quality of life. This time, New York’s political class must hope, people will just be resigned to their diminished circumstances. Because there will be nowhere else to go.