The Pension Debacle Demands Resolution

November 22, 2014 at 11:47 AM Leave a comment

Don’t blame public employees…when their government employers fail to deliver on matching funds for pensions. But do worry about funding for education and every other government service that will be crowded out by these overdue pension contributions when the piper is finally paid. Modern day Robin Hoods would continue to steal from the middle class and give to the ultra-rich…let’s find a better solution.

Forbes has published an article with devastating news about underfunding of state public pension benefits…a whopping $4.7 trillion shortfall in funding as of 2014. And the number has grown from $4.1 trillion in 2013. The only mystery in the growth in unfunded pension benefits is why anyone is surprised. There is no growth in the value of $0 in funding regardless of how many decades have passed since the government gave itself each pension holiday…only the obligations linked to the increasingly shaky promises.

Let’s cut to the chase…

  1. Government entities must stop balancing their budgets by pilfering from employee pension plans, i.e., they must make their contributions to pension funds in the same period in which pension obligations are incurred.
  2. Government pensions must be made portable – #2 in 7 Keys to Education Reform since 2011 – that is, convert from defined-benefit plans to defined-contribution plans for at least new employees, and enroll employees in the Social Security safety net.
  3. Pension managers must reassess predicted returns on invested pension funds and create realistic schedules of future payouts under existing defined-benefit plans. These schedules must reflect real dollars contributed by employees and both real and imagined dollars (with interest) promised by governments.
  4. Wall Street must re-engage in capitalism and invest in stocks with long-term shareholder value propositions…no more unproductive financial instruments or built-to-flip bubble machines.

Deficit funding of pensions by government entities

Government pension systems are allowed to have deficit funding. This means that states can incur pension obligations that they do not match with actual funding. And that underfunding grows over time because the assumed return on investment for the promised funds grows over time. This should be a no-brainer. However, as government budgets become politicized and public officials try to dodge the issue, the images of alleged fat-cat union pensioners have become the face of the problem. They are the last people who would deserve blame.

Public employees who belong to pension plans typically make mandatory contributions beginning with their first paychecks even as very young adults. And they continue to pay their share into the pension plans throughout their careers. In fact, such pension plans, often taking 10% or more in payroll deductions from every check over a lifetime, are likely to eat a larger chunk of personal income than private sector retirement plans because employees start earlier at a higher rate and are less likely to be able to alter or tap into these funds. The promise of a good pension is an important part of continuing employment in government services and a secure middle class existence.

Unfortunately, government pension plans have been managed with kick-the-can financing to the point of questionable solvency unless pensions are reduced or other government services are cut. Again, politically, conservative solutions are about choosing how to hold the victims accountable. And to complicate matters, deficit funding is only part of the problem.

Complications with invested funds

Defined-benefit pensions schedule payments to retirees according to a combination of years of service and age at retirement. Implicit in these schedules are considerations for funds contributed and the performance of investments made by fund managers. The collapse of world financial markets in 2008, slowing of the economy, and volatility in technology and other stocks created a shock wave of uncertainty with pension funds. It also cast a light on some risky investment activity on the part of funds managers.

In denial, pension managers were slow to adjust expected payments to retirees in response to new market behavior. They continued or even intensified unwise gambling on high risk/high return investments, losing more money even as outdated pension benefits further depleted available funds.

Defined-benefits v. defined-contribution pension plans

Defined-benefit plans, which promise payouts to retirees, cannot expect to make their payments in the long run without a major change is policy. On the employer side, failure to make promised contributions means that states have balanced their budgets by pilfering from their employees’ pensions. Essentially, government entities just have to stop doing that. And they must take steps to bring promised funds up to date.

On the employee side, immediate solutions to the new market conditions are likely to mean higher contributions from workers and/or lower payout rates as well as raising the age of eligibility for retirement benefits. However, this is a good time to reconsider closed, defined-benefit retirement plans, and to limit the size of the tail on unfunded benefits.

Closed government pension plans presume lifelong government service and limited geographic mobility within a given pension plan. This is not relevant to a mobile society, and there is no equity for workers who fail to become vested in a plan. Going forward, an open, defined-contribution plans would better serve employees overall. In addition, they would transfer more control over the amount and the risk/return profile of invested retirement funds to the workers themselves. A sunset clause on defined benefits would create a finite limit for the long-term pension liabilities.

Finally, employees bearing the risk for their retirement plans must be enrolled in the Social Security safety net. No new employee should be allowed to join the 6 million Americans grandfathered into plans with Social Security opt-out clauses.

US economy at a cross-roads

At the heart of the problem, the US economy continues to lack vitality. Attention to Gross Domestic Product and a clear vision for market dynamism are essential for all of us to thrive. The promise of supply-side economics was made hollow by offshore investments, and cash in reserves continue to languish on corporate balance sheets because no one seems to know where to put their money.

We have wasted the savings of a generation on market bubbles and unproductive assets. And a derisive attitude toward domestic workers has undercut consumer markets – an underemployed sector that cannot buy. One side of the economy cannot be optimized with a nostalgic vision of cheap production at the worker’s expense. Demand-side economics must receive its due to balance the equation. And this does not mean better social networks and subversive advertising. Rather, it means real people with real lives and futures working in an economy that serves them, too.


Entry filed under: The Pension Trap.

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