December 7, 2008

Re: The Anchor Rising Pension Simulation: The Walshian Assumptions

Monique Chartier

Commenter George Elbow is back and once again requesting that Andrew revisit his post about Bob Walsh's public pension investment scenario.

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.

My commentary here is in no way intended to preempt a potential response by Andrew or even to imply that a response is needed.

In fact, going back, I see that Andrew's post is pretty narrow and self-explanatory, focusing as it does on the question of the viability of the Walshian Assumptions were they all to become reality. He makes no reference, positive or negative, to the qualities of sustainability or fairness.

Neither does Andrew purport to address the feasibility of the individual Walshian Assumptions. Let us take this opportunity to look at them now, shall we?

13.5% of salary contributed to the fund each year

The current contribution level, less than that proposed by Walsh - 8.75% for state workers, 9.5% for teachers - is already not hailed with enthusiasm by those doing the contributing. How realistic would it be to request a 42% or 54% increase in the next contract negotiations?

8.25% investment growth

This assumption, in turn, is composed of two separate assumptions: the performance of the stock market and adequate funding by the General Assembly.

George Elbow correctly disposes of the first when he points out that the stock market cannot be counted on to sustain any particular growth or direction, thereby casting doubt on even the 7% return table to which Andrew extended the Walshian Assumption. The General Assembly itself has disposed of the second assumption with its track record: funds needed for pension investing have been diverted over the course of decades to programs of dubious public merit deemed to be political advantageous to certain sectors of the General Assembly.

In short, it is difficult not to conclude that the Walshian Assumptions are overly optimistic and that, therefore, his scenario is unrealistic and unsustainable. As to fairness, George, I'm glad to state the obvious: promising a guaranteed income to one sector of the state's population on the basis of the non-guaranteed income of another sector is not just unfair but unrealistic to the point of delusion.

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I begin with a disclosure: I am a public school teacher working towards a pension. I must admit, I don't know as much as I should about the retirement system. What is the payroll tax for social security? I believe it's between 7 and 8 percent.

I understand the automatic 3 percent COLA frustrates many. Are you advocating the pension system use a COLA similar to social security, tied to the consumer price index?

Posted by: mikeinRI at December 7, 2008 12:06 PM

I may be incorrect, but I think we pretty universally are advocating the end of defined benefit pensions altogether.

Posted by: Justin Katz at December 7, 2008 1:31 PM

You realize, Justin, that for many of us, the pension is our only retirement source. I do not pay into the social security system, haven't for 17 years, and will not be ineligible to collect social security, with the exception of the small amounts I made in high school and college employment. So exactly what becomes of my retirement plan, and the 9.5 percent of my salary I've been paying into the pension system?

Posted by: mikeinRI at December 7, 2008 3:11 PM

There would have to be some sort of conversion process developed for folks in your situation. That doesn't mean that we're locked into the current system.

Posted by: Justin Katz at December 7, 2008 3:44 PM

Understood. But I think it's easy to advocate for a change in the system. Actually proposing that change is a different matter. I've been paying more per year than those who pay for social security, but to me this was an investment. How do I recoup the potential this money might have realized had it not been taken through payroll deductions? Plus, this would have to be more than just a state plan, requiring federal government agreement if the conversion would involve social security.

You will hear screaming and yelling from teachers should this change reach the consideration phase. And while it will be easy to brush off teachers as greedy, please remember that you are messing with our sole source of retirement just as if someone was attempting major changes to your social security benefit. I realize it might have to happen at some point, but for those of us who have been planning for this pension as our careers have proceeded, it will be a very difficult pill to swallow.

Posted by: mikeinRI at December 7, 2008 4:03 PM


Social Security does NOT allow people to begin collecting a Pension in their 40s and 50s the way the RI Public Employee system does.

Social Security does NOT pay Pensions equal to 75% of an employee's highest 5 years the way the RI Public Employee system does.

Very simply Mike, there is a reason why RI's Pension Fund has the largest deficit in the Nation.

The benefits paid (in terms of the amounts via 75% of one's highest 5 years of salary which then unbeliveably grows by an automatic 3% per year after year 3 AND in terms of the few years of service required with respect to employees beginning to collect Pensions in their 40s and 50s) far exceed what is contributed by the employee.

A public School Teacher contributes less than 10% of their salary over 25 years and then collects a GUARANTEED payment equal to 75% of their highest 5 years, which then grows by 3% every year starting in year 3.

Not only is this wholly UNFAIR and inequitable to the rest of us that have to fund our own retirements, but it is completely UNSUSTAINABLE, hence the massive shortfalls.

Unfortunately, there are too many people like yourself that truly don't understand the mechanics and the math behind what is being foisted upon the Taxpayers (of which you are one).

That is why I believe it would be helpful and infomrative for Andrew to prepare one of his well crafted analysis to demonstrate the Amount that the employee Contributes versus the amount that the employee Receives.

The massive difference between the two numbers must be made up by either the Taxpayer contributions or via Earnings on the Employee Contributions.

Bob Walsh & Co. like people to believe that the Ponzi Scheme that is the Public Employee Pension System is sustainable via pie-in-the-sky Earnings. But as this year has proven, earnings are fleeting at best.

But alas, the lucky and often uninformed Public Employee could care less about earnings, as they get their Guaranteed payment that grows 3% every year regardless of what is going on in the real world.

With all due respect Mike, Pension Reform is desperately needed. We need to move you folks away from Defined Benefit plans over to 401k style plans so that you too can share in the risk of the economy. No more Guarantees for the special few.

Posted by: George Elbow at December 7, 2008 4:06 PM


Don't fall for the shell game! According to the accountants, payments into the state employee and teacher pension fund come in two parts, the contribution taken from each employees salary, and a block of money allocated directly by the state. But when you're asking the question of how much does the retirement system cost the taxpayer, the split isn't relevant. Whether your tax dollars go through a bunch of individual paychecks or through a few big state accounts to get to the retirement fund has no effect on how much tax-money winds up there.

This year, state employees are contributing 8.75% of their salaries AND the state is contributing 18.19% of total payroll. That's a contribution equal to 26.94% of the total state employee payroll. That's the only number that matters for a fiscal analysis.

I believe in the ideal case, the state would like to get somewhere to the vicinity of 1.5% to 2.0% of payroll, once the system is adequately funded (which under the plan we're using, is supposed to happen around the year 2026). That means that it has been calculated that a contribution of 10.25% to 10.75% of total payroll is needed to keep the system functioning, under current assumptions.

Under ideal conditions (i.e., a reasonable level of investment growth, the system not being drawn down too quickly), in fiscal terms, defined-benefit and defined-contribution can work out to be roughly the same. The problems with defined-benefit are that…

  1. It puts this huge single pool of money within the reach of government, which tends to grab at it to pay for mistakes made in other areas without understanding the consequences.
  2. Decisions of how much to pay-out are too far removed from the potential damage that bad decisions will do. For example, when some pol decides to modify the payout formula for judges, to give them a little extra kick, a) fiscal problems might not start to become obvious for a decade or more and b) the pol won't be the one who has to pay for it anyway.
  3. DB requires people to stay with the same employer for at least 20, more like 30 years to get to a good retirement. People who don't find the employer they want to spend the rest of their working careers with until later in life should have a shot at a decent retirement too.

Posted by: Andrew at December 7, 2008 4:06 PM

But George, as you pointed out in another comment, the Dow has gone from 14,000+ to about 8,000 in the past few months. If I use that level of investment growth for a 401(k) analysis, like you want me to do for a defined-benefit pension analysis, then 401(k)s clearly don't work. That's the one clear message people are going to take away from your comments.

Posted by: Andrew at December 7, 2008 4:15 PM

George, is social security a defined benefit plan?

Posted by: mikeinRI at December 7, 2008 4:21 PM

Mike - yes, Social Security is a Defined Benefit plan in which the Benefit paid is defined as being far less then what we contribute (the current old timers that contributed ~1% are getting a deal, but that has changed going fwd). Typically, we pay in over 45 years (assuming one works from age 20 to 65) and collect for about 18 years if we are lucky (assuming we live to 83).

Andrew - what I am keen to demonstrate to the Mike's of the world is that they contribute a relatively small amount for a RISK FREE and GUARANTEED benefit.

My 401k has been decimated in this market. That would be OK if we were all in the same boat. But the reality is that not only do I have find a way to make up what I have lost in my 401K, but I also have to cover the Mikes of the world who happily and obliviously go through life without a care of what is happening in the real world.

The fact that politicians raid Pension funds and make bad decisions is a seperate issue.

My issue is why should we be providing Guaranteed benefits when there is NO Guarantee on the economy.

If someone wants a Guaranteed benefit, then they should be willing to accept far LESS than what is currently being demanded by Bob Walsh & Co.

The concept is called Risk / Reward. No Risk should result in Little Reward. But the morons, buying into Walshian Assumptions, have got is backwards ...No Risk and HIGH Reward.

I think it would be helpful and revealing to demonstrate to Mike how much he Contributes versus how much he will Receive ...all at NO Risk to current market conditions.

We'll then move on to Health-care scam! :)

Posted by: George Elbow at December 7, 2008 4:41 PM

For the record, as a thirty-three year old hovering between blue and white collars, I'm not counting on receiving a penny of social security. I'm also not counting on ever being able to move from increasing my debt to beginning some form of savings, which means that I fully expect to rely on my children or else to starve or die of an easily curable disease.

Posted by: Justin Katz at December 7, 2008 4:53 PM

"For the record, as a thirty-three year old hovering between blue and white collars, I'm not counting on receiving a penny of social security. I'm also not counting on ever being able to move from increasing my debt to beginning some form of savings, which means that I fully expect to rely on my children or else to starve or die of an easily curable disease."

Justin Katz

So you would do that to your children. Because you want to remain as pure as fresh driven snow. Conceit.

Posted by: David at December 7, 2008 5:32 PM

Who said anything about purity? I'm talking expectations. The more others compromise their purity to maintain systems that help themselves and their own children, the more people who'll be joining me in the fatal athlete's foot ward.

Be it said, though, that dying of an easily curable disease would relieve just a little bit of the strain on the socialist healthcare system that we're apt to have by the time I reach an age at which some people get to retire.

Be it also said that, if my children aren't willing to take care of parents who've sacrificed so much — only to age into a society with a collapsed social security regime and rationed healthcare — then the least they can suffer is a little guilt!

Posted by: Justin Katz at December 7, 2008 5:50 PM

I really don't want to respond to you George, because your attitude is typical of those who think they know it all. But here it goes. You don't know me. I absolutely understand that we need pension reform. And I very much understand that the benefits I receive are far better than those received by many in the private sector. The only point I was making to Justin was that my pension is the ONLY retirement benefit I will receive. I do not participate in the social security system. So your suggestion that my pension should be more like a 401k with all economic risks attached does not take into account that I would be left with no guaranteed benefit like you would through social security (despite how small you claim it to be).

Want to reform the pension system? Me, too. So let's talk about how, instead of just labeling me the "mikes of the world" and suggesting we are stupid. Have you invested in the Pat Crowley playbook?

Justin, if it helps any, I have little expectation, particularly with the state of RI's economy, that I will be collecting any pension. My problem is worse, because I have little extra money to save and I don't have any children.

Posted by: mikeinRI at December 7, 2008 6:52 PM

Well said. You should read some Cormac McCarthy- Outer Dark. J Bernstein knows all of them. The guilt thing. Thats between you and your god.

Posted by: David at December 7, 2008 7:07 PM

Mike -

Don't confuse my saying that you are "uninformed" with me saying you are stupid. There is a difference.

And sadly, too many of your comrades are, like you, uninformed with regard to the benefits they receive, as they leave it to the likes of Pat "I struggle mightly with basic math" Crowley and Bob Walsh to "inform" them.

Trust me, what the Public Employee receives as a Benefit in return for what they Contribute far exceeds what Non-Public emoloyees will ever receive for their Contributions to Social Security.

Also, teachers are able to participate in 401k style retirement plans. But since you are not stupid, so you already know that.

Posted by: George Elbow at December 7, 2008 7:11 PM

I simply ask George that you consider what I have to say, regardless of what you believe my "comrades" would say.

I do know that teachers may elect to participate in a 401k plan. I also know that with the high cost of living in RI, it's difficult to save any money on a modest income.

Posted by: mikeinRI at December 7, 2008 7:40 PM

Mike -

Teachers are NOT the only ones dealing with the high cost of living in RI. We all are.

And one of the key drivers of the high cost of living is the high taxes that are required to support the unsustainable pay & benefits of our Public Employees.

Public Empoyees retiring in their 40s and 50s, collecting Pensions equal to 75% of their high-five years after contributing just 10% of their pay for 25 years is Unsustainable, Unfair and one of the reasons why the cost of living in RI is so high.

And, yes, I do consider (and appreciate) what you have to say. If I didn't, I wouldn't respond. I wrote "the Mikes of the world" not in a derrogatory way, but merely to point out that there are many Public Employees who don't fully understand the burden that the RI Public Employee Pension system is putting on the rest of us.

You yourself wrote "I must admit, I don't know as much as I should about the retirement system". Based on that, I though I had liscense to use you as an example. Sorry if I offended you. It was not my intent.

I merely want the Andrews of the world to use their skills to inform and demonstrate to those less informed what an unbelievable (and unsustainable) deal they are getting for the relatively small contribution in dollars that they make into the system compared to what they take out of it.

Posted by: George Elbow at December 7, 2008 7:52 PM

George, glad we better understand each other. I do realize that all RIers are dealing with the high cost of living, and didn't imply otherwise. And again, I do believe we need to reform the pension system. But I will also advocate for protections to those who have long paid into the system expecting a benefit in return. We can't simply say "it's a 401k now, good luck."

Perhaps we should differentiate between those who will receive pensions in addition to social security, and those who will receive pensions as their sole retirement benefits. Is that reasonable? Any idea how many figure into either category?

Posted by: mikeinRI at December 7, 2008 8:25 PM

>> I do not participate in the social security system. So your suggestion that my pension should be more like a 401k with all economic risks attached does not take into account that I would be left with no guaranteed benefit like you would through social security (despite how small you claim it to be).

Social Security IS NOT a defined benefit plan.

There is no guarantee of benefits under Social Security, this per the U.S. Supreme Court in the case Fleming v. Nestor, way back around 1960.

It was held then - and is still the case - that one has NO VESTING in Social Security, and thus no defined benefit or guaranteed benefit. Congress can reduce, or even eliminate, benefits at any time, at its whim.

The fact that one pays into (or paid into) Social Security for a lifetime has no bearing on that - Congress can still reduce or eliminate one's "benefit."

Demographic realities are that it will. They already have.

The retirement age has been raised to 67 and beyond based on date of birth. That is a reduction in one's benefit (and an age FAR beyond the RI pension benefit age).

Obama has advocated eliminating the earnings cap for having to pay Social Security taxes - one will have to pay the tax on all of one's income (they already did this with Medicare taxes). Given that the "benefit" is capped at only about 24k, this divorcing from amount paid in the amount paid out is a "benefit" reduction.

For high income people AND younger people, what they pay in will actually be significantly less than what they ever get out. So unlike a 401k which has a positive return over the long haul - despite periodic downturns in the market - millions of people are "guaranteed" a negative return under Social Security.

Social Security was always structured as a welfare plan - one that is age based rather than income based - but one dressed up to look like a retirement plan because back in FDR's day most people were still ashamed to be "on the dole."

The fact that ones forced Social Security "contributions" immediately go into the federal version of Rhode Island's general fund, from which it is spent (err, I mean "invested") by Congress in critical needs like bridges to nowhere tells us all just how "secure" Social Security is - anyone who depends on the U.S. Congress to fund their retirement is an absolute fool.

Despite the current stock market debacle (thanks to Subprime Barney Frank), a 401k is by far the most secure investment, for one owns the money. Contrast that with depending upon the good graces of Patrick Kennedy and his ilk for Social Security, and Teresa Paiva-Weed and her ilk for RI pensions, to keep the "promises" they've made.

Given that the RI pension system is several billion dollars underfunded - thanks entirely to the Democrat General Assembly's mismanagement - why would anyone want to trust their future to the likes of John Harwood, John Celona, William Irons, Steven Alves, etc. etc. etc.?????

Posted by: Tom W at December 7, 2008 11:28 PM

Tom W,

You’ve given us a retirement look at social security.

How about telling us about the rest of social security and the life insurance.

Posted by: Ken at December 7, 2008 11:46 PM

Tom W,

You’ve given us a retirement look at social security.

How about telling us about the rest of social security and the life insurance.

Posted by: Ken at December 7, 2008 11:47 PM

Tom W,

You’ve given us a retirement look at social security.

How about telling us about the rest of social security and the life insurance.

Posted by: Ken at December 7, 2008 11:47 PM

The battle we must focus on in the near term is reforming the retirement system in this state so you can't start collecting until you reach the Social Security age which right now is at 65. That will save the state PILES of money.

Posted by: Greg at December 8, 2008 7:44 AM

>How about telling us about the rest of social security and the life insurance.

One can purchase life insurance worth much more than SS pays out in the private marketplace, for a much lower "premium."

Yes there are SS survivor benefits. But this is washed out by the millions who pay into SS who, without eligible survivors, forfeit the money they paid in for decades rather than being able to leave an asset in their estate.

Oh, and did I mention that since one pays income taxes on their SS "contribution" when it is taken from their check, and many will again pay income taxes on their "benefit" decades down the road, SS is subject to double taxation and so the net benefit is largely wiped out (and the negative return on SS for higher income / younger people made even worse).

Posted by: Tom W at December 8, 2008 2:25 PM

Tom W,

“One can purchase life insurance worth much more than SS pays out in the private marketplace, for a much lower "premium."”

Actually Tom W, SS is made up of two parts; the retirement system and life insurance system. The life insurance policy is of higher value than most of us individual would purchase for ourselves on the open market.

The life insurance covers unlimited monthly payments to a disabled person, spouse, children, and in death, burial stipend and unlimited monthly death benefit payments to spouse and children.

Parents, surviving divorced spouse, stepchildren, grandchildren and adopted children can be some of the life insurance beneficiaries.

Tom W I am detecting that you are advocating people should not sign up for SS and if so, just what do you suggest take SS place?

Posted by: Ken at December 8, 2008 6:10 PM

>Tom W I am detecting that you are advocating people should not sign up for SS and if so, just what do you suggest take SS place?


There is no "signing up." We are forced into Social Security.

To take its place: 10% of every workers pay placed into a private / individual 401k account. Those accounts investments will be limited to a selection of index funds, with no more than 30% in any one index.

At retirement the worker will be given a choice - they can use the then value to purchase a lifetime annuity (those annuities being subject to federal guidelines re: expense ratios, disclosure requirements and the like, and the issuers subject to an FDIC like insurance regime so no individual will be left hanging should their annuity company go belly up).

The other choice, should their investments not be that large, would be to go into a "social security" program the benefits of which would be equal to the current system. To do this, all of their investment account would have to be "donated" into the pool, with the remainder made up for by taxpayers.

If they die before reaching retirement, the account will go to their heirs (allowing, e.g., minority families to start accumulating wealth).

By far most workers will choose the first option, for the investment returns and compounding of a lifetime invested in index funds will buy an annuity whose benefits will be multiples of the average SS benefit (some lucky folks in Texas have experienced this).

For the others, they'll be no worse off than the current system, so they have nothing to lose.

As for the economy, all of those 10% accounts will be invested in the economy, helping it grow, instead of the current system in which payroll taxes go to Congress, which then pees it away on bridges to nowhere while putting IOU's into the Social Security "trust fund."

As for disability, an AFLAC type regime would be sufficient, taking care of the truly disabled (not the RI public sector definition of disability).

Posted by: Tom W at December 8, 2008 8:42 PM


If you are still following this thread ...

No offense, but "Promises" are broken every day.

For example, the ole "Til death do us part" promise gets broken about 50% of the time.

Want another example? The General Assembly promised that we "have a balanced budget" ...woops.

Here is what happens in Pension reform (we aren't recreating the wheel, this has been done thousands of times in the real world):

Actuaries calculate the amount that you have vested through the transition date and provide you with a payout, which you can then transfer into a 401(k) plan. At transition date, you no longer vest any additional benefits in the Unfair, Unsustainable, Unacceptable gravy train that is the RI Pension system.

It can be that simple.

Once completed, we move to fixing the nut-bag Healthcare scam in which Public Employees pay nearly nothing for the cost of premium healthcare.

Once those two items are fixed / reformed, we move to reforming the "Collective Bargaining" laws, making RI a Right to Work state.

Then, we can take a breather and start to enjoy the fruits of our labor.

Posted by: George Elbow at December 8, 2008 9:24 PM

Tom W,

I pulled all my funds out of annuities because after moving to Hawaii the banks here are paying better percentage rates on savings accounts than managed annuities out of RI plus without management fees tacked on.

Yes I paid a penalty, income tax on interest income but I’m still making more than what the RI annuities accounts were paying without taxes but with management fees. I’m exempted from state income tax on my retirement income in Hawaii and my total property tax due to age exemptions (starting at age 55) is $225 this year. Try to match that in RI or FL!

You have not convinced me because you pointed me towards annuities where the manager of funds rakes the customer over the barrel. A very bad investment choice!

My retirement income is more than $15k a year over what was my regular gross working salary was. I stayed with known standards that I was brought up with and not current make a fast buck exotic retirement plans. I essentially have no risk (because I diversified following my father’s lead) to my retirement income till I die.

My dad is over 85 retired 28 years and still drawing his retirement income so I’ve got a long way to go lying on 80 degree sunny beaches and golfing 18-holes every day. I still need to get to 65 or 66 so I can collect my SS to add to my retirement income!

Good luck Tom W on your insurance, investment, retirement ideas and schemes! Do you have ties to Wall Street?

Posted by: Ken at December 9, 2008 12:45 AM


Lying on the beach in 80 degree weather collecting a Retirement well before age 65.

Do you have ties to RI Public Employement?

Posted by: George Elbow at December 9, 2008 7:16 AM


You seem to forget that I mentioned limits on fees for annuities.

The average SS benefit is only about 12k a year. A relative pittance - here in RI it MIGHT cover property taxes and heating oil.

Some lucky municipal employees (in a Texas county as I recall) were able to opt out of SS in the early seventies and invest their money instead. Today their average benefit is about three times the SS benefit.

I seem to recall that you mentioned having been a former state or municipal employee from RI. If that is correct, with all due respect, taunting us about the benefits of SS while you're sitting in Hawaii collecting a pension that we're paying for is beyond disingenuous.

Every twenty something knows that they're getting screwed by SS. I'm a fifty-something and I know that I've been screwed by SS.

Posted by: Tom W at December 9, 2008 9:55 AM

Tom W,

I did very brief stints working municipal and state under the federal CETA program during the recession of the 1970s due to layoffs.

I am not receiving a State of RI pension.

I paid my dues in RI and learned nobody was going to look out for me or protect my job. I learned to look out for myself and I made sure that each successive working title was compensated with higher salary and more benefits and perks.

Although I did work a period for the federal government, my retirement comes from working private industry both RI and MA and properly investing over the long term for retirement.

Also, I selected HI for retirement so I could receive the best all around bang for the buck. You would not believe how fast free airline ticket miles accumulate living in HI and normal telephone service includes unlimited free long distance calling to anywhere on the mainland.

If you’re going to retire, five states not to retire in are CA, CT, NE, RI, and VT which allows no exemptions or tax credits for pension and other retirement income that is counted in federal adjusted gross income. Most in-state government pensions are taxed the same as out-of-state government pensions and MN, NE, ND, RI, and VT tax SS income to the extent it is taxed by the federal government.

Posted by: Ken at December 9, 2008 3:23 PM

Fair enough Ken.

But my comments re: SS remain the same - as with all Ponzi-type schemes, it is very lucrative for the early participants, and increasingly a loser for the later participants, who are left holding the bag.

The trust fund cupboard is bare, and when SS goes cash flow negative in about ten years a lot of folks who listened to people like Patrick Kennedy who claimed to be "protecting" Social Security are going to be in for a rude surprise.

The federal government can't cover its cash expenditures now, so the debt is spiraling upward. And this is with them spending the excess monies currently coming into SS. When SS goes from producing revenues on a net basis, to producing expenditures on a net basis, all hell is going to break loose.

And we haven't even started the spending on Obama's "universal health care."

Can you say Weimar-like inflation?

Posted by: Tom W at December 9, 2008 8:28 PM
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