August 19, 2011

Sharing the Pain Means You Hurt and They Have to Reduce Their Massages

Justin Katz

Somehow, I think we all expect Rhode Island to pursue the sort of inadequate solution to the pension crisis that consultant Joseph Newton described to the union-heavy pension advisory panel. Consider:

Cost-of-living adjustments, instead of being based on a commonly used measure of inflation, would be based on how well the pension fund's investments perform. As an example, if the fund met its target of a 7.5-percent return, retirees would get a 2-percent adjustment. If the fund didn't meet the 7.5 percent, the adjustment would be lower, Newton said. On the other side, if the fund did better than 7.5 percent, retirees would get an adjustment higher than 2 percent. This would align how much the government pays with how much it has in the pension fund.

It's like Bugs Bunny counting out "one for you, one for me; two for you, one, two for more." The pension system outperforms the necessary returns one year, beneficiaries get more money; it underperforms, beneficiaries get more money. But this is the best part of Newton's suggestion:

... it might take 15 years to reach a point where the contribution levels he outlined could be implemented. As an example, the taxpayers might have to kick in 23 percent of an employee's salary during that time to help pay off the unfunded liability. And retirees might be asked to do without cost-of-living adjustments for the same amount of time.

For fifteen years, we'd collectively be paying $16,100 toward the pension of a $70,000 per year teacher. That's a quarter of a million dollars per teacher, and teachers aren't the only pension recipients. On the other side, the "shared pain" is no automatic annual increase.

And when it turns out, in fifteen years, that investments didn't do as well as necessary, or some other mismanagement by the government affected the amount of money on hand? There'll only be more pain to share.

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The unfunded liability is mostly what is owed to the retirees--those already retired. The problem is, no amount of tinkering with the current worker's pensions will make the unfunded liability go away. Today's state workers and teachers are funding their pensions almost exclusively with a 2.3 % contribution by the state/municipality. Ok, the current system for current workers actually is extremely sustainable. but what are we to do with the unfunded liability? This is the problem.

It is absolutely ridiculous to switch current workers to a hybrid because the front loading expense will be 23% per worker--this is ridiculous. 2.3% versus 23%, no contest, the current system is much better. The unfunded liability, if it can be tackled, will allow the system to function well, without turning it into an expensive hybrid that is, btw, more expensive to administer than the pension is right now.

All of this smoke and mirrors going on at the Treasurer's office, and the window dressing called the pension group, is designed to downgrade the pension to a hybrid, the he'll with what's actually cheaper. Raimondo asks what should a reasonable retirement look like is the wrong question. How can we get rid of the unfunded liability is the right one. This is much like the debt ceiling debate. The debt is what is already owed, and so is the unfunded liability.

Again, the pension system for current workers is very sustainable going forward with a modest contribution by the state/ municipalities of just 2.3%. how should we get rid the unfunded liability generated by those who have already retired? That's the real question. And, as an aside, why should current workers pick up that tab any more than any other taxpayer. They won't benefit from it.

Posted by: Snow at August 19, 2011 10:33 AM

Snow, I believe you are incorrect. As with private pension funds, the unfunded liability is calculated based on all participants in the program, regardless of whether they are already retired.

So if we change the system for people who are currently working (to a 401K for example), the unfunded liability goes down.

Posted by: BobN at August 19, 2011 12:18 PM

Curiously, unless I missed it, where was the part about raising the employee's contribution. I understand they will have a lower base benefit at retirement but my wife and I contribute about 20 percent each a week toward retirement. I'm not talk raising it that high but 8 percent is a little weak.

Posted by: Max Diesel at August 19, 2011 3:23 PM

No I am not wrong. I attended both pension meetings, and the actuary told the group that the unfunded liability was mostly due to the retirees. Once the pension changes occured in 2005, 2009, and 2010, these changes not only made current workers pensions almost self-sustaining, but the unfunded liability for these people dramatically decreases as well, down to 2.3 percent of the entire liability for them plus the other 8.5 and 9.5 that they will co tribute over their lifetime. This is why the unfunded liability cannot be brought down by just changing the benefits for current workers.

As it stands, workers retirement age is 62/65 depending on if they were vested or not in 2005. They get colas on the first 35,000 of their pensions tied to the CPI, but can't start getting them until they are 65. This is drastically different from the pensions received by those who are already retired.

None of us want to be taxed more for the unfunded liability, but the truth is that the state and municipalities didn't fund it properly even in flush times. At one point the pension fund was 100% funded, and the municipalities paying into the fund for the teachers, were given a few years of a contribution holiday.

Also, don't forget where the DEPCO money came from to pay back depositors--the pension fund.

Check out Raimondo' " Truth in Numbers" document at the Treasurer' website. Most of this is on there. Btw, even though the DEPCO money was paid back to the pension fund, it didn't include interest, so those interest making years were lost.

Also, another point: because the pension fund accrues interest on the groups money, it accesses the power of the pool. A hybrid plan won't do that and that's why it's a rip-off.

Posted by: Snow at August 19, 2011 4:31 PM

Snow, thank you for the additional details. It looks, then, as though we really are screwed.

Particularly as the anti-business policies of our corrupt, "Progressive" state (that's two problems, not one) prevent economic growth from increasing the tax base.

Posted by: BobN at August 20, 2011 7:54 AM

The answer is shockingly simple.
Put them ALL on SS and a 3% 401 k.
They all work till 67 or reduced benefit at 62.
There-it's all solved with no commisions, no "plans", no nothing.

Posted by: Tommy Cranston at August 20, 2011 10:01 AM

Justin, what's the score now? About 45 anti-union posts to 5 posts against entitlements?

Posted by: Tom Kenney at August 20, 2011 8:19 PM
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