Class Warfare Blog

July 25, 2013

The Nation’s “Public Pension Problems”

Conservatives are wringing their hands over this nation’s “pension problems.” A number of state governments (including my new home state of Illinois) show massive shortfalls in their pension “pots.” Part of the solution, they say, is to move away from defined benefit to defined contribution pension plans.

For those of you not fully versed in pension terminology, a “defined benefit plan” is one that from the get go says that if you meet your obligations and your employer does too, then you will get a clearly defined amount of money each month. A “defined contribution” plan says that you will contribute what you contribute and if your employer does or does not, you will only get what your contributions are worth when you retire.

The pension I have from the California State Teacher’s Retirement System is a defined benefit plan. I fulfilled my commitments as did my employers and my plan is good for the next 25-35 years according to the plan’s overseers. So, there is nothing wrong with these kinds of programs. They work quite nicely, thank you.

Here’s the difference. If the employer reneges on their contributions, which the State of Illinois has done, then either plan falls into deficit. If that happens and you have a defined benefit plan, then the problem sits in the lap of the benefactor, which is the State of Illinois. If you have a defined contribution plan, the problem is, well, yours. Too bad. You can sue if you like, but lots of luck with that.

Can you see why conservatives want the switch? It is all about who pays.

Can you see why conservatives want the switch? In Illinois, there will be increasing pressures on businesses to pay their fair share of taxes (currently they do not, along with virtually all of the other businesses in the country).

Can you see why conservatives want the switch? While corporations are raking in corporate welfare or, like Wal-Mart, passing off their employee’s healthcare costs (Medicaid) and housing costs (Section 8) and food costs (SNAP or “food stamps”) to you and me, they want the rest of the 99% to pay for the malfeasance of the politicians they have bought to do their bidding and not the business of the people.

Can you see why conservatives want the switch? Public service jobs don’t pay all that well. Part of the dance has always been, that the employer will sweeten the pot with better benefits, so security was offered for later instead of cash now. But that was then and this is now. Too bad, you lose. Wall Street takes down the economy with reckless wagers with money not their own and then they expect the “little people,” the “99 percent” to make up the shortfall.

Now, an argument can be made that as the population of the country gets older, fewer people of working age are supporting more retired people, but that is not what this discussion is about. What we are talking about here is malfeasance. If the pension plan provider were a private company, they would just go bankrupt (voiding their pension agreements and throwing their obligations onto the federal government), but governments can’t do that. (Or can they? If Detroit pulls it off, will Illinois be next?) How about we take a couple of hundred billion dollars from the Pentagon’s budget and fix this problem? They don’t need it. Congress keeps shoveling money at the military they haven’t even asked for because our representatives have taken bribes, er, campaign contributions, from military contractors.

And why the fuck do we let our representatives take money from people doing business with the federal government? If that were a private transaction, people would be going to jail.

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10 Comments »

  1. The problem with those pension plans was that many of them assumed a annual rate of return of 7% or more on the plan investments – and the higher assumed return, the less money have to be transferred to the plan’s fund to keep the plan funded. So that assumed value can make the plan look in good shape on paper, and could even be accurate in the boom times, but during stagnation or recession when actual rates of return are minimal, such funds don’t have the money they expected to have, and quickly become underfunded or insolvent. This is one of the things that should be regulated more strictly. It won’t fix the current problems, but will make them less likely in the future.

    Comment by List of X — July 26, 2013 @ 12:54 am | Reply

    • Yes, that is true … and when the return is greater than 7%? The people running these funds are not fools. Their stock market investments often run well above 7% and they assume an historical average that is defendable with data. When the bottom dropped out of the world’s economy I was expecting a letter from my pension board saying times were tough and adjustments need be made but instead they sent a letter saying they had been prudent and had allowed for such events (maybe not one quite so large) and all was well. And, of course, the stock market was the first to recover. As I said, my defined benefit program is doing just fine thank you.

      The problem is politicians who decide that “maybe this year we will only pay in 40% of what we owe and we’ll make it up later.” Any actuary will tell you this is madness . . . and malfeasance.

      Comment by stephenpruis — July 26, 2013 @ 7:18 am | Reply

      • Yes, that last practice should also be made illegal: you tell teachers or firefighters union that they won’t get the salary increases but would get better pensions when they retire? Fine, but then you have to fund the money today to pay for for these pension improvements. Suddenly, those salary increases won’t seem so impossible.

        Comment by List of X — July 26, 2013 @ 8:34 am | Reply

        • Now you are being silly. Both fringe benefits and salary are negotiable. Nobody can afford to prepay a retirement program. And many people seem to be equating ordinary public pensions with the corrupt ones. I think the corrupt ones need to be corrected, but the ordinary ones aren’t some golden parachute. Due to federal law, since I have a state supported pension, I cannot collect a Social Security benefit even though I earned one (I do get Medicare but I will be chipping in out of pocket soon nonetheless). Yet, my contributions to my pension plan were comparable to those of SS, yet my benefit is far greater than SS, since no extra benefits are paid out (as they are in SS). So, these are workable systems … if they are entered into with good faith and aren’t undermined by politicians. The very first time the State of Illinois couldn’t meet its pension obligations, the problem should have been fixed right then and there. If grandiose promises had been made, they should have been rectified then. But they swept the problem under the rug and now it is a humongous problem.

          Comment by stephenpruis — July 26, 2013 @ 8:44 am | Reply

          • I am not talking about pre-payment – that’s what dragging the USPS into bankruptcy. What I mean is when the state says to the union “we won’t increase your salary, but we’ll tweak your pension plan so that you’ll get a 10% higher pension when you retire” – that creates immediate shortfall in the plan, since the value of the plan’s future obligations, and the amount of money that has to be in the fund to meet them, goes up the moment the plan tweak is signed into law.

            Comment by List of X — July 26, 2013 @ 8:58 am | Reply

          • If you were working for the state, you and your employer probably haven’t paid taxes into Social Security – that’s why you’re not eligible for the SS benefits. Frankly, I don’t see the point for excluding state employees from SS – everyone should be a part of it, and no one is stopping the state from providing additional defined benefit and 401(k) above the SS minimum.

            Comment by List of X — July 26, 2013 @ 9:07 am | Reply

            • I was not working for the state, I worked for a county and I also worked other jobs which I did pay into SS for (to get my forty quarters).

              In California there are two major pension plans: STRS and PERS, both are more than solvent and the thing is you are either “in” or “out.” School districts or whatever either participate or they do not, so there is no local negotiating (well, not none, there are some local options but they are quite limited).

              Comment by stephenpruis — July 26, 2013 @ 9:19 am | Reply

              • If you paid SS taxes at private jobs for 40 quarters, you are probably eligible for SS on that time. You should look into that, because I doubt that a state plan can take that away from you. SSA says on the website that if you worked for the state, your pension may be lower.

                Comment by List of X — July 26, 2013 @ 9:28 am | Reply

                • There is a federal law that says if you have a state sponsored pension, you can only receive about 10% of a SS payment (it is not a “may” be but a “will” be), which just barely covers my Medicare payment (but since Medicare payments escalate with age, will not shortly).

                  Thanks for the tip, I appreciate it.

                  And your “no comment” royal baby trope was perfect!

                  Comment by stephenpruis — July 26, 2013 @ 9:35 am | Reply

  2. In my new book Kentuckyfriedpensions.com I think they will need Federal help along with states like Illinois and Kentucky. I propose putting the pensions under the PBGC umbrella.

    Comment by Chris Tobe — July 26, 2013 @ 10:35 am | Reply


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