April 8, 2011

A Tale of Pensions

Justin Katz

Ted Nesi has allowed far-left radical Tom Sgouros guest-posting privileges to his blog, which the latter used to offer an excellent example of his typical rhetorical style. Sgouros likes to explain complicated issues as if he's writing for children, so as (it appears) to leave the adult reader with a "well, gee" feeling and to breeze by the relevant points and objections.

First, a view from a high level: The essay is 1,055 words, and Sgouros spends the first 296 (28%) tallying an "unfunded liability" for education and roads. The next 125 words (12%) explain why he thinks the perspective that he's just described, and funding such expenses with investment income, would be "stupid."

With the next 125 words, Sgouros introduces his actual topic, pensions, and the principle that he's attempting to inject into thinking on the topic: "the goal is not full funding of the system; our goal should be simply making sure the checks don't bounce, at the lowest cost to the taxpayers, employees, students in the schools and drivers on our streets." He rephrases the question for another 138 words, and now two-thirds of the way into his essay, begins to let the reader in on what he's suggesting:

The people who say we can't re-amortize our pension obligations because it would make it more expensive would have you believe that we are going to pay off the liability by 2029, as called for under the current schedule. In truth, it's an absurd argument because neither option is going to happen. The cost of paying off the unfunded liability is what's breaking our backs, not the cost of servicing current obligations. Both options involve making escalating annual payments that are not within the bounds of either fiscal or political reality.

Translation: Treating current pension obligations as debt is completely unworkable. In fact, he goes on to compare the above choice to his own choice between two private jets that he couldn't afford to charter, anyway. Let's fund our pensions, he states, "at the lowest cost possible and not fret that because we can't afford the expensive way to do it, we can't do it at all."

Just in case the reader is wondering whether we can afford to pay retirements directly from current revenue, Sgouros preemptively offers the number of the upcoming year's pension expenses: $800 million. That's fully 10.4% of the total budget that Governor Chafee has proposed, but Sgouros has a ready explanation for its being so large. Governor Carcieri. Through "abrupt" changes to employee benefits, Sgouros argues, the state pushed a bunch of state workers into retirement. He doesn't bother to mention that we'd still be paying them as employees if they hadn't retired. He also doesn't elaborate that these folks would have retired in the relatively near future, anyway, and therefore merely joined the expense pool a little earlier, but that's not important, to him.

What is important is that he exit his argument rapidly, at this point, without offering a clear statement of his proposal and its costs. What's important, to Sgouros, is that we stop all this crazy talk about adjusting benefits to make the obligation more reasonable and just pay the obligation, year to year, without assessing just what it is our elected officials have promised. If we look at it as a debt that elected officials have incurred while failing to fund it year after year, we might begin to wonder why our children should be saddled with political hand-outs from old politicians. If we come up with a big scary total of what we owe in pensions, the public might demand that the benefits be reduced, but if we take it in annual billion-dollar bites, maybe apathy can continue to win out.

Sgouros closes as follows:

In other words, shortsighted and hasty changes enacted by people who did not really understand the situation have made the system’s problems much worse. Do we really want to do that again?

See, they didn't understand the problem. Not like Sgouros does. Can't you tell by the way he just explained it all in terms comprehensible to a twelve-year-old? Come now. It's nap time. Put your lunch money in the bag.

Look. I don't know the unabridged history of pensions in Western civilization, but it seems to me that we fund them the way we do so that the employing organization doesn't have every employee on its books for the rest of his or her life. The employer and employee put aside money as part of the employment arrangement while it is active so that the obligation (or liability) is covered by the time he or she departs the company.

The problems are, one, that a system that guesses what the investments will be able to fund and promises benefits at that level makes it too easy to offer big promises, and two, that a society with a shrinking population and whose progressive changes to the civic order are destroying those qualities that enabled its dynamism will just not create the investment returns that such a system requires. That's why defined benefit programs are almost unheard of, these days, except among government workers who can work to elect their bosses, who then make unworkable promises and force taxpayers to come up with a method of funding them at some point in the future.

We fund schools directly because students are a continuous stream. We fund roads directly (well, pretend that we do) because they are an annual expense. We fund pensions through savings and investments because they are an expense that begins when the employment relationship ends. Sgouros wants us to think as pensioners as wards of the state for the rest of their life.

Of course, anybody familiar with his work is apt to conclude that he'd be just as happy to make everybody a ward of the state. After all, then he and his really, really smart buddies — who really understand the problems that we face — can adjust the system so that it works right. And isn't that what we really all want? To put aside the disagreement and allow the smart folks to do what we all know, deep down, needs to be done?

That approach is working out so well with President Obama, isn't it?

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"Tale", indeed. Great analyis, Justin.

This column by Mr. Sgouros reflects one positive development among the Rhode Island advocacy left: someone in their ranks has finally recognized that there is a big, BIG problem with public pensions.

Of course, he fails to take the next, logical step and suggest any sort of genuine resolution. In fact, he appears to be advocating, effectively, for complete inaction on the matter!

Nevertheless, the milestone here - an acknowledgement of the reality that there is a problem - is significant and should be noted.

Posted by: Monique at April 8, 2011 8:24 AM

I can't help but notice a huge distrust of any kind of long-term investing by anyone on the left. My friends on the left think I'm being 'silly' by putting away so much of my own paycheck for retirement; according to them, I'm just making a bunch of bankers on Wall Street rich and I should fully expect them to swindle my savings at the last minute.

I've been tinkering with the idea of 'endowment' type investing for government costs for a while, and I think Tom might be on to something: If things like education and road upkeep had trust funds backing up part of the cost, we'd be in much better shape.

So here's where I diverge from both the left and the right: I don't buy into the idea that 'if we had a little more to spend right now, the economy would be fixed', the right wants to accomplish that by cutting taxes, and the left by ignoring long-term liabilities and paying for them as we go.

I'd gladly pay more taxes into a stable, well-managed system that had the long-term goal of reducing costs by replacing debt financing with draw-downs of invested funds. Borrowing costs more than paying up-front, and investing costs less than pay-as-you-go. That's why I'm saving for things like home repairs instead of doubling-down on debt.

Posted by: mangeek at April 8, 2011 8:44 AM

"Sgouros wants us to think as pensioners as wards of the state for the rest of their life. "

Uh, that's exactly what they are.

Posted by: Tommy Cranston at April 8, 2011 8:57 AM

Every propaganda piece put out by Sgouros can be summed up as follows:
1. The state's fiscal problems are caused by a lack of understanding of the mechanics involved.
2. The mechanics are are very simple to those smart enough to understand them.
3. Sgouros understands the mechanics.
4. Sgouros has interpreted the irrefutable data for you. Pay no attention to how it was selected, collected, filtered, or analyzed.
5. The irrefutable data point to a need for increased taxes, enlightened central planning, investment in progressive technologies, and a simple reworking of state mechanics.
6. Put Sgouros in charge and he will fix all of the state's problems for you.

Make no mistake about it: these people want power, they want your money, and they are very dangerous.

Posted by: Dan at April 8, 2011 9:13 AM

"Put Sgouros in charge and he will fix all of the state's problems for you."

He had that chance but ran away. Now we have Raimondo.

Posted by: Patrick at April 8, 2011 10:07 AM

Thanks for the link, Justin. Gottta love Tom!

The argument about what is the “right” way to fund a pension system is somewhat besides the point. In the past, people in charge of our system made mistakes. Some of them were well-meaning and some were not, and reasonable people can even differ about which decisions were which. It’s true that some unreasonable promises were made, and some unpleasant and expensive details got swept under the rug. (And I think it’s worth asking how many of those details could have been swept under the rug if the pension benefits were intended to be paid out of the current budget rather than from investment proceeds.) The question before us is not what is the best way to fund a pension system; it is what is the best way to proceed given the condition of the system we’ve got.

As to your comments, the anti-intellectualism is pretty frightening and lends to my growing opinion that much of the right is growing proto-fascist sentiment.

But let me get this straight, you think that a writer who's credentials include "former circus clown" is too erudite for the wingnuts to take seriously (evidenced, of course, by his simple and direct writing style)? Clear as a bell, that one.

Posted by: Russ at April 8, 2011 11:15 AM

He hasn't had the chance yet, Patrick. The writing was on the wall in the general treasurer election and he threw support to Raimondo out of political necessity. You can bet your massive Rhode Island tax obligation that he is hoping for some kind of state or local appointment in the near future. I've never seen somebody so obsessed with controlling the public's money and so overconfident in the power of "expert" central economic planning.

Posted by: Dan at April 8, 2011 11:21 AM

Scrutiny of a self-proclaimed progressive "expert" opinion and skepticism of those who claim a monopoly on the data are considered anti-intellectual by Russ. Others would call it intellectual responsibility. Perhaps this perspective explains why he is so infatuated with Alfie Kohn and the rest of the progressive "elite" who browbeat their followers with cherry-picked research studies and cavalier data analyses always confirming the progressive line.

Posted by: Dan at April 8, 2011 11:34 AM

No surprise that the local brownshirts think being educated is a problem (well, that is if you disagree with them).

Action being beautiful in itself, it must be taken before, or without, reflection. Thinking is a form of emasculation. Therefore culture is suspect insofar as it is identified with critical attitudes. Distrust of the intellectual world has always been a symptom of Ur-Fascism, from Hermann Goering's fondness for a phrase from a Hanns Johst play ("When I hear the word 'culture' I reach for my gun") to the frequent use of such expressions as "degenerate intellectuals," "eggheads," "effete snobs," and "universities are nests of reds." The official Fascist intellectuals were mainly engaged in attacking modern culture and the liberal intelligentsia for having betrayed traditional values.

Sorry to interrupt the marching in lockstep. Carry on.

Posted by: Russ at April 8, 2011 11:52 AM

Good to see that Godwin's Law is still in full force. Thanks for nuking the thread, folks!

Posted by: mangeek at April 8, 2011 11:56 AM

"I can't help but notice a huge distrust of any kind of long-term investing by anyone on the left."

Huh? How old are you, mangeek? That's totally ridiculous and folks my age (left and right) worry all the time that we aren't saving enough.

Now if you said the left questions the long-term stability of the stock market, I might agree with you (although even I still have a 401k).

Posted by: Russ at April 8, 2011 11:57 AM

Russ, the overall sentiment amongst my friends and in many online conversation threads is that the stock market (and the 401k/403b/IRA entry points to it) are 'scams' perpetrated by 'the man' and that it would be better to push for a dramatic expansion of a national pension plan like Social Security.

That scares me, because I'm much more worried about:

1. People not saving/investing out of fear now, despite the long-term proven track record of success.
2. What happens in 35 years when I'm scheduled to retire and the unwashed masses of people who didn't save start looking at MY money like it's their birthright (I will likely have $1M+ invested by then, after all, which puts me square in the crosshairs of progressive tax policy).

'Worrying' about not saving enough isn't enough. This generation needs to put their priorities in-order and downsize their day-to-day expectations so they don't end up shivering in the cold in 2045.

Posted by: mangeek at April 8, 2011 12:07 PM

Your point, mangeek, that Justin isn't playing on anti-(left)intellectualism or that we should pretend that this type of technique isn't something characteristic of proto-fascist movements?

Posted by: Russ at April 8, 2011 12:08 PM

Russ must be awfully flustered to invoke the Nazi reference so early in the thread.

I think that is an implicit admission of intellectual defeat on this topic.

Was there a single sentence in his post that was not an ad hominem slur?

Where's jparis to criticize his incivility?

Posted by: BobN at April 8, 2011 12:14 PM
What happens in 35 years when I'm scheduled to retire and the unwashed masses of people who didn't save start looking at MY money...

That seems to me to be more of an argument for a guaranteed minimum pension for retirees than an argument against it. That's part of why the proto-fascist language freaks me out. Disenfranchise enough people (even if through their own foolishness) and it can happen here.

Posted by: Russ at April 8, 2011 12:15 PM

"Russ must be awfully flustered to invoke the Nazi reference so early in the thread."

Who we talking about, Justin or the brownshirts?
(the later have thoroughly earned the designation imho, but I'd readily acknowlege that I don't think Justin is a fascist)

Posted by: Russ at April 8, 2011 12:22 PM

The libertarianism = authoritarianism argument coming from Russ yet again. Ironic that in the same breath he accuses us of being anti-intellectual and uneducated. It's impossible to even decipher from his confused comment who he thinks is being "disenfranchised" now. Russ would be more at home commenting on The Alex Jones Show than political blogs.

Posted by: Dan at April 8, 2011 1:42 PM

P.S. Russ - Although I do not agree with intellectual property laws, your practice of block quoting entire passages without attribution is immoral and almost certainly copyright infringement.

Posted by: Dan at April 8, 2011 1:48 PM

This is what happens when you push the Left's fundamental contradictions until they reach critical mass. You'd want a Geiger counter before approaching Russ today.

Posted by: BobN at April 8, 2011 3:16 PM

"What happens in 35 years when I'm scheduled to retire and the unwashed masses of people who didn't save start looking at MY money like it's their birthright"

That's already happening in some eastern European countries, Mangeek. (Scary.)


Posted by: Monique at April 8, 2011 3:27 PM

I've noticed that when the left starts sounding like they're about to projectile vomit pea soup,it means they're worried.
Russ is a good barometer-Nazis?Brownshirts?How about the lockstep storm troopers of the ISO and the SEIU?
Oh,I guess now I'm being uncivil.
We can do this infantile sh*t all day long.
The left allows no deviance of thought from the "party line".
Russ is a smart guy and he's bought into that stuff it seems.
What the left really loves are the bellas of the world who lap up their propaganda like a pup with a box of Milk Bone.

Posted by: joe bernstein at April 11, 2011 6:32 AM
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