December 6, 2008

An Example of the Necessary Pushback

Justin Katz

Two principles necessary for Rhode Island to turn back from the brink (or, more accurately, to climb back onto it) have been coalescing in my commentary of late:

  1. The change must move from the municipalities, up, both in the ascension of a new ruling class and in the direction of reform.
  2. Policies can no longer be treated as irrevocable, allowing legislators and other state officers to skirt blame for the consequences of their decisions. In other words, there must be push-back and demands that the General Assembly et alia provide guidance as to how their demands ought to be balanced. That is: What do we erase, and whom do we tax in order to accomplish what you've dictated?

This development contains both of those elements, along with an acknowledgment that relief from union power is required:

Leaders from five municipalities met with Governor Carcieri’s policy director yesterday, saying they will back his efforts to bring state spending under control as long as he helps get them the tools to curtail spending in their own municipalities. ...

Lombardi said North Providence would stand to lose $2 million in state aid if some of the cuts being talked about come to pass. He said he could close that gap by $750,000 if he were allowed to reduce the number of firefighters who would have to be assigned to a shift at any one time from 21 to 17, saving on overtime.

The North Providence contract with the firefighters calls for a minimum of 21 firefighters, but that contract expired in July and the town and union are on the verge of going to binding arbitration.

It's a problem that could be solved, he said, if the General Assembly enacted a law barring arbitrators, or those who negotiate contracts, from putting minimum manning levels into future contracts.

Polisena said he has already told Johnston's local senators and representatives that any reduction in state aid to the town this late into the fiscal year would hurt the taxpayers and would be unacceptable.

The loss of an estimated $2.1 million in revenue would be more palatable, he said, if cities and towns were given the authority to ignore some state-imposed mandates, and were freed from a provision in state law that prohibits them from earmarking less for education than the previous year.

"I asked our [school] superintendent to come up with a list of mandates that we could do without, without affecting education. Her list totaled $1.6 million," he said.

Individually and collectively, every town council and school committee in the state ought to be knocking on doors at the statehouse with documents describing everything — other than money — that they need from the state government.

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Hello neighborly neighbors. I've been away for a while, so forgive me if you've already covered this ground.

But I was wondering if my good man Andrew has bothered to revisit his views and his models on the "Walshian Assumptions" with respect to the GUARANTEED Pensions our Public Employees enjoy, while the rest of us are expected to fund that which we can't afford for ourselves.

With the DOW down from 14,000+ at this time last year to somewhere in the neighborhood of 8,000+-, I was curious how Andrew feels about the famous "Walshian Assumptions" and the sustainability of the GUARANTEED defined benefits that Mr. Walsh feels his flock is so entitled to.

It would be most informative if Andrew would provide one of his models demonstrating the actual amount that a Public Employee contributes over their 25 year "working" life versus how much they receive in Pension Payments (you know, that little thing that grows by 3% a year regardless of the earnings in the Pension fund).

Then perhaps Andrew's analysis could provide the difference having to be made up by contributions from hardworking Taxpayers who have no such benefits themselves and by "earnings" (years' worth of which have been wiped out in the past 10 months with no end in sight).

Indeed, it would be nice to see one of Andrew's analysis with a focus on the minimal amount contributed and the massive amount received, ALL at NO risk.

Yes, we all understand the concept of compound interest. Rather, what we'd like discussed is the sustainability and FAIRNESS of the Walshian demands, particularly in this economic enviromnent.

Please help us understand why Public Employees should receive Guaranteed benefits that grow by 3% automatically every year regardless of the fact that there are NO guarantees with respect to economic conditions and irrespective of the minimal amount that the Employee contributed.


Posted by: George Elbow at December 6, 2008 6:56 PM

George, tell me whatever number you'd like for the investment growth factor. Then I can tell you about how long it will take someone in a 401(k) system to get to a decent retirement using that figure, assuming money isn't drawn out at the retirement end too quickly. Then I'll tell you how long it will take someone in a defined benefit system to do the same, assuming money isn't drawn out at the retirement end too quickly.

Then, as an added bonus, I'll tell you which is heavier, a pound of feathers, or a pound of lead.

So far, all you're doing is supporting the argument that market volatility means that 401(k)s don't work.

Posted by: Andrew at December 7, 2008 3:02 PM


For a smart guy, you sure do struggle grasping a few simple points.

So lets try again. The issues / points are:

1) Unlike a 401k style plan, the benefits via the Defined Benefit plans that are doled out to our Public Employees carry essentially ZERO Risk. The employee receives a GUARANTEED Benefit, regardless of what the market does. And the Taxpayers have to pick up the tab.

As noted in a previous post, there is a little concept called Risk/Reward. The lower the Risk, the lower the Reward. But our Public Pension system has it backwards. Little Risk, High Reward.

A rising and lowering tide should raise and lower all ships equally. But the deal we have now ignores this truism. When the market drops, the majority of Taxpayers see a drop in their Pension retirement benefit, as the value of their 401ks drop. This would be OK, since we'd all be on a relative basis.

But, a monkey wrench is thrown into the calculus because our Public Employees are insulated from Market forces ...they get their Guaranteed benefit regardless of what is happening in the real world. It is made worse because they also receive Guaranteed 3% increases.

Those of us living in the real world have to carry these fools receiving special treatment.

2) Unlike in a 401k, sweetheart deals in which someone's salary is artificially pumped up at the end of their careers (e.g. the Prov. Police Esserman gifts) ends up inflating Pension Benefits for rest of the beneficiary's life. In a 401k syle plan, the Esserman gifts would be a one-time 1-year gift, not a life-time annuity.

Very simply Andrew, I would like you to prepare one simple analysis:

- Employee Contributions vs Employee Benefits received, with NO earnings. This will demonstrate the massive Guaranteed benefit received in return for the very little Contributed by the Employee.

This is the key point to get accross to our uninformed Public Employees who believe they have somehow funded their lucrative (in many cases 75% of highest 5-year pay) GUARANTEED Pensions via their meager contributions.

Is such an analysis asking too much?

Then if you want to layer in unsustainable Walshian Utopian Assumptions of 8.25% or any other investment Growth or Loss, then fine. Have at it. But that is not what I was requesting.


Posted by: George Elbow at December 7, 2008 7:40 PM

George, do you understand that pension funds are invested in the same stock and bond markets as 401(k) funds? If not, it might explain your bizarre notion the expected rate of investment return on pension funds should be zero. Promises about benefits to be paid, whether ill-considered or well thought out, have no effect on the rate of return.

That's a good point about artificial salary increases and sweetheart deals though. However, be aware that there's someone using your "George Elbow" handle in another thread who's arguing that bad political decisions like that are an issue separate from the solvency of pension plans. Why don't you go hash this issue out with him, and when the two of you come to a common understanding about how retirement plans work, we can try moving on from there.

Posted by: Andrew at December 8, 2008 12:01 AM


Do you understand that the Beneficiaris of the Defined Benefit pension funds that are invested in the same stock and bond markets as 401(k) funds, unlike the Beneficiaries of 401(k) plans, receive a GUARANTEED benefit regardless of the Earnings or Losses incurred by those investments. That is, the Defined Benefit folks have ZERO Risk, yet receive a Guaranteed return that grows by 3% a year?

If not, it might explain your bizarre notion that the two plans are some how equal. It will also explain why you don't understand why companies throughout the US have moved away from UNSUSTAINABLE Defined Benefit plans and into 401(k) plans.

I never said a Defined Benefit Plan has a different rate of return from a 401k plan. Your ability to read the English language appears to be impaired by your desire to please your hero, Bob Walsh.

My assertion and concern is and has been that the Defined Benefit folks, after making minimal contributions, receive a Guaranteed payout, regardless of investment returns (i.e. ZERO Risk).

I was hoping you would provide a simple analysis that would clearly demonstrate the massive GUARANTEED amount paid out to the Beneficiaries in comparison to their meager contributions. Simple as that.

Perhaps when you hop off of Bob's lap, you can find time to put that simple analysis together.


Posted by: George Elbow at December 8, 2008 9:07 PM


You're so off base that the foolishness is tangible. I don't know how this whole obsession started, but I'd suggest that you go back and review the trail, because you're really missing Andrew's point and intention by a mile.

Posted by: Justin Katz at December 8, 2008 10:09 PM

George, my English is fine. So is my math. You on the other hand have very little clue about what you're talking about.

Both a DB plan and a group of 401(k) accounts start from the same concept. People invest their money over time, planning to draw from it later. In a DB plan, actuaries make some assumptions, do some math and come up with what is supposed to be a sustainable payout schedule. There is nothing inherently unstable about a DB plan, as long as the amount to be paid out is matched to the amount that's paid in, increased by the rate of investment growth.

A system becomes underfunded, requiring large contributions from outside of the employee base, if a) the actuaries screw up and allow bigger payouts than are sustainable or b) the pols ignore the actuaries, and promise bigger payouts than are sustainable (or raid the system for other purposes). But the bottom line is that, under ideal conditions (no stupid political decisions, a reasonable market rate of growth) if a DB plan cannot provide an adequate retirement stream, then a 401(k) plan can't either. (I'm a DC over DB proponent, among other reasons, because I'm skeptical about "no stupid political decisions" ever becoming a realistic assumption)

The concept of risk enters in this way: In a DC system, individual account holders receive the individual benefits from market booms, but in a DB system individual pensioners won't individually benefit. Instead, the system keeps the "extra" money, and uses it (hopefully) to smooth out the gaps from the rough years. If the actuaries have done their jobs properly, the up and the downs should roughly balance out.

And George, I realize by now that this is all beyond your ability to comprehend, but I'm posting it for the benefit of other people following this thread.

Posted by: Andrew at December 9, 2008 12:20 AM


Thanks for tutorial. But I assure you I well understand how the plans work.

Like the Walshian Assumptions, the lynch-pin to making the DB plan work is "ideal conditions", which in reality we all know is highly unlikely, particularly when it is a Public plan controlled by pandering politicians.

There is a reason why companies all accross the country have and are moving away from DB to DC plans. But I guess they are all morons like me with an inability to comprehend their folly.

The sad fact is that DB plans can not work in RI. That is not open for debate. When you have schmucks like Esserman giving our sweetheart last-day on the job raises that result in a lifetime increase in the ole Defined Benefit, the system becomes (and is) unsustainable.

We all know the real issue is the overly generous benefits paid, resulting from (1) the unsustainably high percentage of salary that is paid out e.g. 75% for Teachers (2)the automatic 3+% increase every year and (3)the tender age at which they begin collecting their 40s and 50s.

However, the fools on the receiving end foolishly think they are Entitled to such insane benefits because they make contributions.

Step 1 in educating people about the Pension mess is to clearly demonstrate to them the actual amount that they Contribute versus the actual amount that they Receive in benefits over the life of the plan (knowing the massive difference has to be made up by unpredictable investment earnings and/or Taxpayers).

Then we have to remind the beneficiaries that they suffer NO risk on potential earnings or losses, yet they receive these outlandish Guaranteed benefits, which should then be followed by the question of whether that is Fair or not.

And that is all I have been asking Andrew to do prepare a simple analysis to demonstrate the difference between what is Contributed versus what is Received.

But somehow he ends up talking about the weight of Feathers and Lead, while the Mikes of the world go thru life thinking they are receiving a Fair return on what they contributed, when we ALL know that the system is out of whack ...for lots of reasons, but primarily because we are paying out too much compared to what is contributed.

Stop worrying about pleasing or offending Bob Walsh and instead help educate his Flock to the Unsustainable deal they have been given.


Posted by: George Elbow at December 9, 2008 8:04 AM
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