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Pensions unsustainable; Every one that looks at this agrees! August 18, 2009

Posted by shaferfinancial in Finance.
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As regular readers know I have commented on this fact many times before.  Here are some comments from California that are dead on.  If you don’t live in California don’t think you are immune.  This is a problem every place.  I have contacted my local politicians and begged them to open up the discussion to no avail.  The benefits for police and fire are bankrupting cities all over the US.  Something will be done, but not until a crisis happens.  There is simply no way most politicians are going to be able to increase taxes to cover these pension commitments, so the only other way to deal with it is to break promises.  If you are relying solely on a pension from a city or county or even a state in some cases you need to be prepared for this possibility.  The numbers don’t lie!



1. Another Investor - August 18, 2009

At the height of the stock market several years ago, many of these pension systems were actually overfunded. Benefits were increased on the assumption the returns would continue to grow at the same rate.

Because of the market crash, the systems are suddenly underfunded. The bozos that run Calpers and some of the other large funds strayed from their conservative investment principles when the returns began to decline, compounding the problem.

As someone that worked in government and looked at the pension assumptions, I can tell you this is not the first time this has happened. Contribution rates have gone up and down as a result of market swings as long as I can remember.

If the unions and the agencies can agree on a reasonable cost split and a more achievable rate of return is assumed, the pensions at the pre-stock bubble levels can easily be funded, at least in California. The recent increases in benefits are less sustainable, and the funding of the incremental benefits will have to be considered carefully.

This issue is being used to take benefits away from the employees so that the money can be used for whatever pet projects the city councils, county boards, or state legislators want to fund. The employees, particularly at the professional level, are generally paid substantially less than their counterparts in the private sector. If you take away job security and the pensions, you will no longer be able to attract decent quality employees. I know from experience, because I was the hiring authority for professional staff in my agency.

2. shaferfinancial - August 18, 2009

Thanks for you insight. Recent events have left government with little or no wiggle room. Current taxation is not enough to cover everything they have promised. Cuts are being made. Yet, when even the slowing down of increases in benefits is talked about the unions go on the offensive. I believe we have reached a breaking point. When police and fire personnel can retire in their 40s with all health care and a pension that approaches 80% of their highest pay [including overtime] + COLAs, we have a problem. How much longer is the general public going to fund these extravagant retirements?

3. Another Investor - August 18, 2009

The most generous pensions for non-safety positions at the County level in California that I recall offer 2.7 percent per year of service at age 55 or 60. So a person with 30 years of service at age 60 could retire with 81 percent of their average salary over the last three years of employment. Looks pretty darned good, right? However, if that person was a degreed accontant or similar level of professional employee, they were probably making 75 to 80 percent of what someone in the private sector with a similar career path was making over their career and at retirement. Now it does not look so good.

I could never recruit straight out of college because of the pay differential. My best recruits were folks who had been out in the workforce for a few years and had gotten laid off or downsized more than once. Those folks were willing to trade higher wages for job security and a good pension. Take away the pension and the job security and your government will be operated by the lowest quartile of the workforce.

Since you work with insurance, you must understand the actuarial assumptions underlying pension funding. Small changes in the assumptions can create wild swings in the conclusion (sensitivity analysis). Unfortunately, the actuarial assumptions have become politicized, and I don’t trust any of the wild claims I read in the media.

4. shaferfinancial - August 18, 2009

Thanks again for your insight. The issue here [as well as other places] is really not professional staff, but safety positions whom the unions have been able to extract much higher pension rates than the rank and file worker. I know several ex-police officers in their late 40s bringing home over 80K in retirement pay.

As for the overall health of the pension funds, they have manipulated them using overly liberal assumed rates of returns as well as out dated assumptions of mortality. They looked great in 2000, pretty healthy in 2007, but are in trouble now.

I really don’t have an issue with the promises made to the rank and file municipal worker vis a vis retirement benefits, but the so called safety workers are going to bankrupt the whole system with their benefits.

I think they did look locally; comparing pay and benefits between our municipal workers and similar private workers. Pay was very close, but the benefits were hugely favorable to the municipal worker. Again I wonder how long the vast majority of workers who labor in the private world are willing to pay for those generous packages?

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