11 ms·

The pension gap

79 points by abakker 10y ago

notliketherest 10y ago
Ah, the rooster always comes home to roost. Well funded public sector unions and their pocket politicians robbed the state coffers blind. Will we see anyone hang to pay for this thievery? Not likely. I simply expect higher taxes in the future. This state will never learn until there's no more money left to take from its citizens.
- clarkmoody 10y ago
  > robbed the state coffers blind State coffers filled with their neighbors' money. Public union negotiations are always against the non-union taxpayers, which are not well represented since the politician "representative" is bought by the union. Public sector unions are the embodiment of moral hazard.
  - ng12 10y ago
    I don't understand why state/federal employees are allowed to unionize at all, let alone why they have such strong ones. Are government employees actually in danger of abuse or is it just because they can?
    - neaden 10y ago
      Why wouldn't they be allowed to unionize? In America you have a right to a union.
      - humanrebar 10y ago
        > Why wouldn't they be allowed to unionize? Because businesses go out of business when they can't meet their financial obligations. Or they declare bankruptcy and restructure the debt. In the meantime, their competitors pick up their slack in the various markets (labor, suppliers, sales). The same mechanisms don't exist when it comes to governments, who, by definition, have certain kinds of non-negotiable monopoly and monopsony powers.
      - ak217 10y ago
        Because their employer can't go bankrupt if they happen to bargain themselves an impossible deal.
        jhayward 10y ago
        Of course they can. Every city, county, state, individual and corporate entity in the US can go bankrupt. The federal government can't, technically, but it can default,
        ak217 10y ago
        States and the federal government cannot meaningfully go bankrupt. The problem is described in the article. While cities and counties can technically go bankrupt, they will externalize the costs and take on debt burdens at taxpayers' expense before they do so, to an extent that private companies are not allowed to. There have been just 9 city and county bankruptcies in the United States since 2008. Only 6 of them resulted in debt shedding, representing less than $30B in debt. That's 0.06 percent of total municipalities that could theoretically go bankrupt. In that time, tens of thousands of business entities and hundreds of publicly traded companies, representing trillions of USD of capitalization, have gone bankrupt. The overall ratio of public:private sector economy in the US is roughly 1:2.
      - kobeya 10y ago
        > In America you have a right to a union. No, you don't. At least not as a universal generalization. The law is more complex than that.
      - c517402 10y ago
        IIRC FDR considered public employee unions immoral.
      - eli_gottlieb 10y ago
        >In America you have a right to a union. There's an "in Capitalist America" joke in here somewhere, because you really don't have any effective right to union membership in the United States. Organizing any new union is a grinding struggle.
  - crdoconnor 10y ago
    >Public union negotiations are always against the non-union taxpayers Public sector unions drag up wages which has a ripple effect on non-unionized and non-public unions. (citation: http://www.epi.org/publication/briefingpapers_bp143/ http://www.epi.org/publication/briefingpapers_bp143/) Public sector unions also become more powerful in concert with private sector unions and vice versa - strikes work much more effectively when they are synchronous. It's not complicated economics.
- neaden 10y ago
  Ah yes, theft by negotiation, why didn't those unions simply make a worse deal for their members, just like we would all expect our lawyer to do for instance if they thought it was better for society. The problem here is short sightedness and over optimism, blaming the unions is just buying into it more.
  - smallnamespace 10y ago
    Well, part of the problem with our current society is that the social norm is to only look out for your own interest, and the public be damned. This attitude is applicable to lawyers, who only represent their clients, to company executives, who only represent investors, to investors, who only care about their own returns, and to lobbyists, who only care about their lobby's interests. This sort of system is fine when all parties to a dispute are equally organized and powerful, but it squeezes out the general public, who are not able to mobilize as effectively. It also forces people to focus on how to win, rather than how to cooperate more effectively for mutual benefit. Unless we are willing to relax this attitude of 'only care about my own or my client's bottom line' at least a little bit, there is going to be little room for changes that are necessary to happen.
    - JumpCrisscross 10y ago
      > the social norm is to only look out for your own interest We can wish upon a star that people were better, or we can put a public advocate in the room during these negotiations.
      - smallnamespace 10y ago
        I can't see that going well if it's the government that appoints and pays for the public advocate. And if the public advocate is an elected position, then we have the same problem as exists now -- unions are politically much more organized than the general public.
      - notliketherest 10y ago
        "put a public advocate in the room during these negotiations" The politicians that are negotiating with the unions ARE the public advocates! The problem is the unions have bought them off!!
jstepka 10y ago
"More than 200,000 civil servants became eligible to retire at 55 — and in many cases collect more than half their highest salary for life. California Highway Patrol officers could retire at 50 and receive as much as 90% of their peak pay for as long as they lived." It is simply not possible economically to support these type of benefits. Look no further than the Greece or Italian austerity crisis to see how these type of government payments will play out.
- Amezarak 10y ago
  That depends on how much is paid in and if it's mismanaged. It's also recommended to have your 401k set to pay your final monthly pay for your remaining months. We think that's sustainable, don't we? The real problem in America is gross mismanagement of pension funds. It's going to get worse. I live in a county where it was suddenly discovered administrators had been lying both about funding the pension and it's performance for years and now employees are screwed.
  - kobeya 10y ago
    Unless the global economy collapses, and your 401k along with it.
    - Eridrus 10y ago
      As opposed to having state funded pensions which are invested in the market and when the global economy collapses everyone else who just lost their savings has to pay even more to the people on fixed income plans? When the global economy tanks everyone is in for a hard time.
  - user5994461 10y ago
    Lived in a country without 401k and without private pension funds... turns out it's gonna collapse too.
- tajen 10y ago
  It's the same in every country: Some historical group's advantage can't be removed because they are enough people to get leverage against any opponent. There's a need for a new advance in democracy, because it has almost-bankrupted a few countries now (including Greece). Perhaps the separation of powers in our democracies (executive, judicial and law-makers) isn't enough. Maybe we should add a 4th weight, which translates hard limits from nature into limits that politics can't cross: "You can't allow a global warming", "You can't increase debt beyond 4%", "You can't let people work dramatically less for 5 decades (like in Greece), unless you justify it with an incredible progress in NGP/GDP/technology" or "You can't have discrepancies between public and private sectors". Somehow I'm happy Europe provides a bit of pushback against my country (France) because God knows how much debt our politics would otherwise subscribe.
FreedomToCreate 10y ago
Every time I read calPERS, I think scalper. Anyway, just goes to show that its not just big corporations that are greedy. Any reform will be difficult without adjustments to the promised pensions. With an economic slow down coming in 2017-2018, the gap isn't going to get smaller.
ng12 10y ago
Why would you _ever_ pass legislation which is entirely dependent on the stock market performing well?
davidf18 10y ago
There are problems in NY State and Illinois as well. Illinois has been in some sort of legislative standoff between the Republican Govenor who is trying to rein in pension costs and the Democratic legislature. NY State if I recall, has some sort of constitutional amendment that creates huge pension liabilities for taxpayers. These huge pension liabilities as well as increasing Medicaid costs means that students attending public universities in California, Illinois, and NY State have to pay higher and higher amounts of tuition, in effect subsidizing the pension funds and Medicaid.
- snarf21 10y ago
  All pension funds are pyramid schemes. We need to move to fixed contribution plans for giving people money for retirement. The existing schemes can only be propped up by more taxes or by slashing benefits.
  - ec109685 10y ago
    Did you read the article? The pension was solvent before the benefits were increased, so not a pyramid scheme.
    - snarf21 10y ago
      I'm not trying to be antagonistic. All pyramid schemes start out solvent. That's how they convince more people to join. There is a simple test to see if any of these things are pyramid schemes. If no new money comes in and no new people participate, can all the payouts that have been promised be made? I think it is clear that pension plans don't pass this test.
      - ec109685 10y ago
        Yes, a properly funded pension doesn't need new money to pay out existing benefits. The new money coming is a down payment for the people who will eventually retire, not to pay out benefits for those who have retired. Also, Ponzi scheme is a closer match to what you are implying. Pyramid involves escalating returns based on recruiting new members "under you".
seibelj 10y ago
US government pension funds (state, city, etc.) are basically doomed universally.[0] Tax payers cannot stomach having to pay more for less services so that a small fraction of society can retire much earlier and with cushier benefits than the vast majority. As happened in Detroit, benefits will be cut in order to prevent catastrophe. It's both the morally right solution and realistically the only solution. [0] http://www.nytimes.com/2016/03/18/business/dealbook/study-finds-public-pension-promises-exceed-ability-to-pay.html http://www.nytimes.com/2016/03/18/business/dealbook/study-fi...
- neaden 10y ago
  The alternative interpretation is that politicians and the people who elect them (meaning all of us) tend to be short sighted and underfund pensions for public workers. Many of those public workers are willing to work for less pay because of the pension, so in effect we are defrauding them. Detroit is an odd example to use as there we are dealing with a severe population crash, that's not the situation in California.
  - seibelj 10y ago
    Public workers don't settle for less pay than private sector workers, that is an often repeated talking point that simply isn't true.[0] A garbage man, janitor, administrator, etc. working for the government isn't going to magically make more salary by quitting and going to the private sector. Top level employees can make more in the private sector, but the average worker cannot. Public employees make more money, are very difficult to fire, and have far more benefits than most workers. [0] https://www.downsizinggovernment.org/federal-worker-pay https://www.downsizinggovernment.org/federal-worker-pay
    - neaden 10y ago
      "Other studies based on comparisons between similar federal and private workers find either no wage gap or a federal wage advantage. A 2012 Congressional Budget Office (CBO) study found that, for comparable workers, federal wages were similar to private wages overall, with just a small two percent advantage for federal workers" Looking at that report it looks like from a bachelors on up public sector workers get less compensation then private.
kefka 10y ago
Well, part of that deal is delayed pay, because the public sector pays a great deal less. Without this, you're going to get menial and do-littles in public service. ... Which the more I think about it, perhaps is the reason why they want to, so the Republicans can look at their bad performance and cut funds further. (Don't get me wrong, Democrats seems to like throwing money down holes for populous programs, which have their own set of regressive issues. I'm much for UBI, and scientific testing of laws and programs to determine if the benefit is actually helping. If not, eliminate and move it to help more, better.) If you cut funds by what you can, and then blame them for bad performance, you can "punish them" with less money, getting even worse. Wash, rinse, repeat, until that program is effectively dead. We're seeing it in the schools right now, with "No Child Left Behind" and the similar takes across the country with it. Inner city schools have bad performance, primarily because of bad home life, poverty, lack of food and resources... But because they do bad for tests, they get less funds. I always think, what would our system look like if we adequately funded our programs? Would the BMV be such a cesspool? Not hardly. Would dealing with government office be peachy? Well, no. But they would have quick serving times and adequate material and time response in larger issues. Instead, what I hear is "They're bad, so lets cut funding." which exasperates the problem by now cutting personnel, time, and physical resources.
- arielweisberg 10y ago
  I am not sure public sector work pays less than equivalent private sector work on the whole. I don't know for certain either way. My unsubstantiated belief was that it was higher and sometimes significantly so especially taking into account benefits, vacation time, and overtime policies. So citation needed.
  - bittercynic 10y ago
    I don't have an answer as to who pays more for equivalent work, but I don't think that is the only important question. Suppose a bright young person has the skills to be a great elementary school teacher and to be a software engineer. If being a teacher is known to lead to a life of poverty, then few people who have options will choose teaching. If the only people who teach are those with no other options, then we have a problem. If you need effective people to make your organization function, you have to compete for them, and not just within your industry.
delinka 10y ago
Surely it was someone's job to project these future costs when putting such promises into employment contracts. And I would also presume that these future cost calculations should result in some amount of planning to understand what the minimal amount of tax revenue or investment would have to be to support the future obligation. However, even if that happens, how do employees prevent politicians from mucking about with those plans so that they can receive the retirement benefits that helped convince them to take jobs? These fears are why someone must have encouraged Congress to muck about in the USPS budgets wrt retirement accounts. The only solution I see is mandating that (gov't) employers pay, during an employee's employment, into a retirement account such that politicians and bosses can't touch the money, and only the employee can do anything with it during retirement.
- tantalor 10y ago
  > Surely it was someone's job Yes, the actuary Ronald Seeling did just that, and they ignored him outright.
- nevdka 10y ago
  Your proposal is essentially what we have in Australia with superannuation. Employers pay a minimum of 9.5% of pre-tax salary into the retirement accounts, and then can't touch it.
  - fowl2 10y ago
    And this is the same system that the public sector uses (grandfathered exceptions exists, of course). Of course once your super fund runs out, and it will very likely run out, you're back on the tax-funded age pension.
- wahern 10y ago
  Your solution is precisely what is required of all private companies by federal law--all future pension obligations must be 100% funded at any point in time, and the funds are basically untouchable once deposited. Thus, the moment somebody retires, 100% of his expected payout until death is literally sitting in the account. Basically, after N years of employment into an expected M-year career, at the end of year N then N/M of the expected pension payout must be sitting in the account. To account for unpredictable dips in market value while still following the law, in practice retirement funds tend to be overfunded. This is partly why private companies prefer 401(k)s--you don't need to overfund the accounts. (The other reason is that executives can be given disproportionately more benefits relative to regular workers under a defined-contribution plan (e.g. 401(k)) than a defined-benefits plan (e.g. pension).) State governments are currently excluded from the federal funding requirements governing the private sector. The easy solution, politically, would be to amend federal law to make state employers subject to the same or similar rules required of private employers. There are some thorny constitutional issues, though, around the federal government placing mandates directly on state governments. So while being the easiest solution (because Congress is less beholden to state employee lobbying interests than local legislatures), it's still not an easy bill to pass. That said, it's not fool-proof. A big reason for the merger frenzy during the 1990s and 2000s was that mergers provided opportunities for CFOs to extract money from pension funds. That is, mergers allowed them to fudge the numbers much more creatively. The increase in pension funds "bankrupting" companies is related to these shenanigans. The CFOs and other executives didn't care, though, because the shuffling of pension funds provided enough quarterly paper gains to trigger huge bonuses.
jorblumesea 10y ago
At the same time, many public California institutions are outsourcing their IT and other infrastructure costs while laying off workers because of budgetary pressure. Just another case of the baby boomers destroying future generations for their own personal gain. Pension funds are basically pyramid schemes and are economically doomed.
- DrScump 10y ago
  An example from just this week at UCSF: http://ww2.kqed.org/news/2016/12/14/ucsf-losing-some-it-staff-to-outsourcing/ http://ww2.kqed.org/news/2016/12/14/ucsf-losing-some-it-staf...
- noja 10y ago
  > Pension funds are basically pyramid schemes and are economically doomed. No, non-individual pensions schemes are the problem. Money paid into a pension for a person should only be accessible for that person, not reliant on future people paying money into a group pot.
n00b101 10y ago
"One of the few voices of restraint back in 1999 belonged to Ronald Seeling, then CalPERS’ chief actuary. Asked to study differing scenarios for the financial markets, Seeling told the CalPERS board that if the pension fund’s investments grew at about half the projected rate of 8.25% per year on average, the consequences would be “fairly catastrophic." Who decided on the projected rate of 8.25%, in the first place? Wouldn't that have been the work of the CalPERS’ chief actuary, Ronald Seeling? The root cause of the problem was the actuarial assumption of an 8.25% rate of return. This is what allowed the new Defined Benefits to appear to be "free," and that is what enabled the board and politicians to ram this through. Assuming an "average case scenario" of consistent 8.25% annual return on a pension investment portfolio is subjectively irresponsible, even in 1999. But more egregious is the fact that the actuarial profession failed miserably to recognise that the Defined Benefit was a financial guarantee similar to a put option, which means that the value of the put option should have been explicitly calculated - which would have been done by projecting scenarios using the "risk-neutral" rate of return (i.e. the yield on US government bonds) instead of the "real-world" rate (i.e. the super-optimistic assumption of 8.25% annual returns). The article goes on to explain that the Chief Actuary ran 3 different scenarios: a "pessimistic" scenario of 4.4% returns, "average" scenario of 8.25% and "optimistic scenario" of 12.1%. This is the crux of the problem, and it is not the first time that such actuarial calculations have blown up a pension plan like this. The right thing to do would be to calculate a single "scenario" using the risk-neutral rate, which would have been lower than 4.4% in 1999 and today it would be closer to 0% ... That would have correctly valued the economic cost of pension benefit as a multi-billion dollar expense that no politician would be able to so easily ram through the legislative process. "Lou Correa, then a freshman Democrat who carried the bill in the Assembly, said he fell victim to inexperience. He remembers seeing actuarial reports and assuming he’d “kicked the tires” and asked the right questions. Correa, now running for Congress in Orange County’s 46th district, said he should have sought independent financial advice." I think Correa was reasonable in assuming that actuarial reports, signed by the Chief Actuary of CalPERS, would have properly "kicked the tires." That is what the actuarial profession is supposed to do. Just like if an engineer signs off on the construction of major transportation bridge, we can reasonably expect that that the bridge won't be be designed with fundamentally incorrect physics calculations.
- 10y ago
gavman 10y ago
>Asked to study differing scenarios for the financial markets, Seeling told the CalPERS board that if the pension fund’s investments grew at about half the projected rate of 8.25% per year on average, the consequences would be “fairly catastrophic.” 8.25% per year? No one averages 8% per year growth. That's not even an optimistic projection, just a stupid one.
- bittercynic 10y ago
  A stupid, but widely believed projection. In the years before the .com crash many people really believed that "This time is different."
  - iagreeentirely 10y ago
    Many people believed the housing crash wouldn't happen, many people often believe incredibly naive things. This should not excuse them. There were people among them trying to be voices of reason, they ignored them -- as they always do. It doesn't matter that it was a terrible idea. The people who voted in favor got the poll bump they wanted and everyone is gone by the time the bill comes due. Burn this pattern into your brain, it has happened hundreds of times and will happen hundreds more. Every single time people will exclaim "We couldn't have known!" That is simply misdirection, they didn't even TRY to know.
    - bittercynic 10y ago
      Yes, there are many stupid but widely believed projections. .com boom is not a regular boom. It will rise forever! Housing prices will always rise! Ad-tech will grow boundlessly! In my opinion one of the greatest tragedies of these cycles is that many people desperately want to believe they hype about "This time it's different", and they can find plenty of "experts" to tell them what they want to hear. Regular people who could have had a solid place in the middle class are thrown into chaos because they lack financial savvy. Is it stupid to expose yourself to a level of risk that can cause this? I think so. However, it seems like we provide more and more opportunities for unsavvy people to do severe and long-term damage to themselves and their families.
soVeryTired 10y ago
If you want to blame someone, blame the accountants. Pension funds' liabilities are long-term and inflation linked. If they had invested fully in inflation-indexed bonds (as the Bank of England pension scheme does), they would mostly be alright now. But pension fund accounting allowed them other options. During the 1990s and 2000s, pension funds underfunded their liabilities, assuming they'd be able to make up the difference from gains in equities, property and other high-yielding assets. In the process they created quite a few hedge fund billionaires and funded the venture-capital tech boom. Many of those investments subsequently turned sour. But their most significant error was to assume that bond yields would stay high. Today's low yields mean that they can't discount their future liabilities as heavily. The icing on the cake has been a moderate increase in longevity, which has been enough to tip the whole industry into crisis.
- gaius 10y ago
  During the 1990s and 2000s, pension funds underfunded their liabilities, assuming they'd be able to make up the difference from gains in equities, property and other high-yielding asset Not in the UK - if a company is deemed to be overpaying, according to the Revenue, they pay tax penalties. The Revenue don't care that the value of investments can go down as well as up, their pensions are paid from taxation...
  - soVeryTired 10y ago
    BHS and a number of others took contribution holidays in the 90's, on the back of a stock market boom. It's those that I was referring to.
    - gaius 10y ago
      They had no choice, because of the rules I mentioned. The Revenue deemed their pensions "over-funded".
      - soVeryTired 10y ago
        If you've got a link explaining the tax rules I'd be interested to see it. Seems to me like companies should prudently fund their pension obligations before minimising their tax bill.
deleted 10y ago
[deleted]
edabobojr 10y ago
I'll just throw for the opposing side and point out that "Gov. Pete Wilson, took $1.6 billion from CalPERS accounts in 1991 to help close a state budget gap". A random internet calculator tells me that investing in the S&P 500 with reinvested dividents since July, 1991 has had a 844% return. I wonder impact $1.3 trillion would have on the CalPERS shortfall (edit: this would only be $13 billion).
- Zanta 10y ago
  Your math is off by a couple orders of magnitude :)
  - edabobojr 10y ago
    Ouch! I feel the fool. Revised thoughts. It would only be 10 billion, which would equal two years of payouts for the entire pension.
    - wahern 10y ago
      obligatory XKCD: https://xkcd.com/947/ https://xkcd.com/947/
- edabobojr 10y ago
  Also, in 2008 and 2009 California did not fully pay pension contributions. http://www.wsj.com/articles/SB10001424052702304830104575172262909794220 http://www.wsj.com/articles/SB100014240527023048301045751722...
- soVeryTired 10y ago
  Gotta match assets with liabilities. That money would have mostly been invested in bonds. Still would have made a fortune though.
kombucha2 10y ago
The amount of mismanagement and lack of foresight on both sides of the aisle is disgusting.
m0llusk 10y ago
I tried to read this article on an Android mobile and it started playing a podcast even though I hate podcasts and have limited bandwidth.
- ec109685 10y ago
  For shame that the LA times doesn't know you don't like podcasts ;)
  - m0llusk 10y ago
    Traditional media outlets are desperate to save themselves but instead of trying to serve customers what they want they are indulging in tech dodads and hypermedia push assaults. LA Times won't be around much longer by their own projections. Attempting to force feed people content they don't want might be a factor in that.
mathiasben 10y ago
I finished reading this book earlier this month - http://www.retirementheist.com/ http://www.retirementheist.com/ pension funds work if they are managed responsibly!
csense 10y ago
In the private sector there's a balance: First, union and management are adversarial, since management's pay is often partly/wholly in stock/options or otherwise tied to the company's financial performance. Second, if the union pushes too far then the whole enterprise will sink. But in the public sector, neither of these things are true. Unions and management can collude to fleece the taxpayers, since management's tenure is tied to votes, not financial performance. Additionally there'll be increased taxes, a federal bailout, or some other steps taken to allow the government of California to continue to operate no matter how much their pension obligations rise. IMHO public sector unions should be illegal.

79 points by abakker 10y ago

Ah, the rooster always comes home to roost. Well funded public sector unions and their pocket politicians robbed the state coffers blind. Will we see anyone hang to pay for this thievery? Not likely. I simply expect higher taxes in the future. This state will never learn until there's no more money left to take from its citizens.

clarkmoody 10y ago
> robbed the state coffers blind State coffers filled with their neighbors' money. Public union negotiations are always against the non-union taxpayers, which are not well represented since the politician "representative" is bought by the union. Public sector unions are the embodiment of moral hazard.
- ng12 10y ago
  I don't understand why state/federal employees are allowed to unionize at all, let alone why they have such strong ones. Are government employees actually in danger of abuse or is it just because they can?
  - neaden 10y ago
    Why wouldn't they be allowed to unionize? In America you have a right to a union.
    - humanrebar 10y ago
      > Why wouldn't they be allowed to unionize? Because businesses go out of business when they can't meet their financial obligations. Or they declare bankruptcy and restructure the debt. In the meantime, their competitors pick up their slack in the various markets (labor, suppliers, sales). The same mechanisms don't exist when it comes to governments, who, by definition, have certain kinds of non-negotiable monopoly and monopsony powers.
    - ak217 10y ago
      Because their employer can't go bankrupt if they happen to bargain themselves an impossible deal.
      - jhayward 10y ago
        Of course they can. Every city, county, state, individual and corporate entity in the US can go bankrupt. The federal government can't, technically, but it can default,
        ak217 10y ago
        States and the federal government cannot meaningfully go bankrupt. The problem is described in the article. While cities and counties can technically go bankrupt, they will externalize the costs and take on debt burdens at taxpayers' expense before they do so, to an extent that private companies are not allowed to. There have been just 9 city and county bankruptcies in the United States since 2008. Only 6 of them resulted in debt shedding, representing less than $30B in debt. That's 0.06 percent of total municipalities that could theoretically go bankrupt. In that time, tens of thousands of business entities and hundreds of publicly traded companies, representing trillions of USD of capitalization, have gone bankrupt. The overall ratio of public:private sector economy in the US is roughly 1:2.
    - kobeya 10y ago
      > In America you have a right to a union. No, you don't. At least not as a universal generalization. The law is more complex than that.
    - c517402 10y ago
      IIRC FDR considered public employee unions immoral.
    - eli_gottlieb 10y ago
      >In America you have a right to a union. There's an "in Capitalist America" joke in here somewhere, because you really don't have any effective right to union membership in the United States. Organizing any new union is a grinding struggle.
- crdoconnor 10y ago
  >Public union negotiations are always against the non-union taxpayers Public sector unions drag up wages which has a ripple effect on non-unionized and non-public unions. (citation: http://www.epi.org/publication/briefingpapers_bp143/ http://www.epi.org/publication/briefingpapers_bp143/) Public sector unions also become more powerful in concert with private sector unions and vice versa - strikes work much more effectively when they are synchronous. It's not complicated economics.
neaden 10y ago
Ah yes, theft by negotiation, why didn't those unions simply make a worse deal for their members, just like we would all expect our lawyer to do for instance if they thought it was better for society. The problem here is short sightedness and over optimism, blaming the unions is just buying into it more.
- smallnamespace 10y ago
  Well, part of the problem with our current society is that the social norm is to only look out for your own interest, and the public be damned. This attitude is applicable to lawyers, who only represent their clients, to company executives, who only represent investors, to investors, who only care about their own returns, and to lobbyists, who only care about their lobby's interests. This sort of system is fine when all parties to a dispute are equally organized and powerful, but it squeezes out the general public, who are not able to mobilize as effectively. It also forces people to focus on how to win, rather than how to cooperate more effectively for mutual benefit. Unless we are willing to relax this attitude of 'only care about my own or my client's bottom line' at least a little bit, there is going to be little room for changes that are necessary to happen.
  - JumpCrisscross 10y ago
    > the social norm is to only look out for your own interest We can wish upon a star that people were better, or we can put a public advocate in the room during these negotiations.
    - smallnamespace 10y ago
      I can't see that going well if it's the government that appoints and pays for the public advocate. And if the public advocate is an elected position, then we have the same problem as exists now -- unions are politically much more organized than the general public.
    - notliketherest 10y ago
      "put a public advocate in the room during these negotiations" The politicians that are negotiating with the unions ARE the public advocates! The problem is the unions have bought them off!!

jstepka 10y ago

"More than 200,000 civil servants became eligible to retire at 55 — and in many cases collect more than half their highest salary for life. California Highway Patrol officers could retire at 50 and receive as much as 90% of their peak pay for as long as they lived." It is simply not possible economically to support these type of benefits. Look no further than the Greece or Italian austerity crisis to see how these type of government payments will play out.

Amezarak 10y ago
That depends on how much is paid in and if it's mismanaged. It's also recommended to have your 401k set to pay your final monthly pay for your remaining months. We think that's sustainable, don't we? The real problem in America is gross mismanagement of pension funds. It's going to get worse. I live in a county where it was suddenly discovered administrators had been lying both about funding the pension and it's performance for years and now employees are screwed.
- kobeya 10y ago
  Unless the global economy collapses, and your 401k along with it.
  - Eridrus 10y ago
    As opposed to having state funded pensions which are invested in the market and when the global economy collapses everyone else who just lost their savings has to pay even more to the people on fixed income plans? When the global economy tanks everyone is in for a hard time.
- user5994461 10y ago
  Lived in a country without 401k and without private pension funds... turns out it's gonna collapse too.
tajen 10y ago
It's the same in every country: Some historical group's advantage can't be removed because they are enough people to get leverage against any opponent. There's a need for a new advance in democracy, because it has almost-bankrupted a few countries now (including Greece). Perhaps the separation of powers in our democracies (executive, judicial and law-makers) isn't enough. Maybe we should add a 4th weight, which translates hard limits from nature into limits that politics can't cross: "You can't allow a global warming", "You can't increase debt beyond 4%", "You can't let people work dramatically less for 5 decades (like in Greece), unless you justify it with an incredible progress in NGP/GDP/technology" or "You can't have discrepancies between public and private sectors". Somehow I'm happy Europe provides a bit of pushback against my country (France) because God knows how much debt our politics would otherwise subscribe.

FreedomToCreate 10y ago

Every time I read calPERS, I think scalper. Anyway, just goes to show that its not just big corporations that are greedy. Any reform will be difficult without adjustments to the promised pensions. With an economic slow down coming in 2017-2018, the gap isn't going to get smaller.

ng12 10y ago

Why would you _ever_ pass legislation which is entirely dependent on the stock market performing well?

davidf18 10y ago

There are problems in NY State and Illinois as well. Illinois has been in some sort of legislative standoff between the Republican Govenor who is trying to rein in pension costs and the Democratic legislature. NY State if I recall, has some sort of constitutional amendment that creates huge pension liabilities for taxpayers. These huge pension liabilities as well as increasing Medicaid costs means that students attending public universities in California, Illinois, and NY State have to pay higher and higher amounts of tuition, in effect subsidizing the pension funds and Medicaid.

snarf21 10y ago
All pension funds are pyramid schemes. We need to move to fixed contribution plans for giving people money for retirement. The existing schemes can only be propped up by more taxes or by slashing benefits.
- ec109685 10y ago
  Did you read the article? The pension was solvent before the benefits were increased, so not a pyramid scheme.
  - snarf21 10y ago
    I'm not trying to be antagonistic. All pyramid schemes start out solvent. That's how they convince more people to join. There is a simple test to see if any of these things are pyramid schemes. If no new money comes in and no new people participate, can all the payouts that have been promised be made? I think it is clear that pension plans don't pass this test.
    - ec109685 10y ago
      Yes, a properly funded pension doesn't need new money to pay out existing benefits. The new money coming is a down payment for the people who will eventually retire, not to pay out benefits for those who have retired. Also, Ponzi scheme is a closer match to what you are implying. Pyramid involves escalating returns based on recruiting new members "under you".

seibelj 10y ago

US government pension funds (state, city, etc.) are basically doomed universally.[0] Tax payers cannot stomach having to pay more for less services so that a small fraction of society can retire much earlier and with cushier benefits than the vast majority. As happened in Detroit, benefits will be cut in order to prevent catastrophe. It's both the morally right solution and realistically the only solution. [0] http://www.nytimes.com/2016/03/18/business/dealbook/study-finds-public-pension-promises-exceed-ability-to-pay.html http://www.nytimes.com/2016/03/18/business/dealbook/study-fi...

neaden 10y ago
The alternative interpretation is that politicians and the people who elect them (meaning all of us) tend to be short sighted and underfund pensions for public workers. Many of those public workers are willing to work for less pay because of the pension, so in effect we are defrauding them. Detroit is an odd example to use as there we are dealing with a severe population crash, that's not the situation in California.
- seibelj 10y ago
  Public workers don't settle for less pay than private sector workers, that is an often repeated talking point that simply isn't true.[0] A garbage man, janitor, administrator, etc. working for the government isn't going to magically make more salary by quitting and going to the private sector. Top level employees can make more in the private sector, but the average worker cannot. Public employees make more money, are very difficult to fire, and have far more benefits than most workers. [0] https://www.downsizinggovernment.org/federal-worker-pay https://www.downsizinggovernment.org/federal-worker-pay
  - neaden 10y ago
    "Other studies based on comparisons between similar federal and private workers find either no wage gap or a federal wage advantage. A 2012 Congressional Budget Office (CBO) study found that, for comparable workers, federal wages were similar to private wages overall, with just a small two percent advantage for federal workers" Looking at that report it looks like from a bachelors on up public sector workers get less compensation then private.

kefka 10y ago

Well, part of that deal is delayed pay, because the public sector pays a great deal less. Without this, you're going to get menial and do-littles in public service. ... Which the more I think about it, perhaps is the reason why they want to, so the Republicans can look at their bad performance and cut funds further. (Don't get me wrong, Democrats seems to like throwing money down holes for populous programs, which have their own set of regressive issues. I'm much for UBI, and scientific testing of laws and programs to determine if the benefit is actually helping. If not, eliminate and move it to help more, better.) If you cut funds by what you can, and then blame them for bad performance, you can "punish them" with less money, getting even worse. Wash, rinse, repeat, until that program is effectively dead. We're seeing it in the schools right now, with "No Child Left Behind" and the similar takes across the country with it. Inner city schools have bad performance, primarily because of bad home life, poverty, lack of food and resources... But because they do bad for tests, they get less funds. I always think, what would our system look like if we adequately funded our programs? Would the BMV be such a cesspool? Not hardly. Would dealing with government office be peachy? Well, no. But they would have quick serving times and adequate material and time response in larger issues. Instead, what I hear is "They're bad, so lets cut funding." which exasperates the problem by now cutting personnel, time, and physical resources.

arielweisberg 10y ago
I am not sure public sector work pays less than equivalent private sector work on the whole. I don't know for certain either way. My unsubstantiated belief was that it was higher and sometimes significantly so especially taking into account benefits, vacation time, and overtime policies. So citation needed.
- bittercynic 10y ago
  I don't have an answer as to who pays more for equivalent work, but I don't think that is the only important question. Suppose a bright young person has the skills to be a great elementary school teacher and to be a software engineer. If being a teacher is known to lead to a life of poverty, then few people who have options will choose teaching. If the only people who teach are those with no other options, then we have a problem. If you need effective people to make your organization function, you have to compete for them, and not just within your industry.

delinka 10y ago

Surely it was someone's job to project these future costs when putting such promises into employment contracts. And I would also presume that these future cost calculations should result in some amount of planning to understand what the minimal amount of tax revenue or investment would have to be to support the future obligation. However, even if that happens, how do employees prevent politicians from mucking about with those plans so that they can receive the retirement benefits that helped convince them to take jobs? These fears are why someone must have encouraged Congress to muck about in the USPS budgets wrt retirement accounts. The only solution I see is mandating that (gov't) employers pay, during an employee's employment, into a retirement account such that politicians and bosses can't touch the money, and only the employee can do anything with it during retirement.

tantalor 10y ago
> Surely it was someone's job Yes, the actuary Ronald Seeling did just that, and they ignored him outright.
nevdka 10y ago
Your proposal is essentially what we have in Australia with superannuation. Employers pay a minimum of 9.5% of pre-tax salary into the retirement accounts, and then can't touch it.
- fowl2 10y ago
  And this is the same system that the public sector uses (grandfathered exceptions exists, of course). Of course once your super fund runs out, and it will very likely run out, you're back on the tax-funded age pension.
wahern 10y ago
Your solution is precisely what is required of all private companies by federal law--all future pension obligations must be 100% funded at any point in time, and the funds are basically untouchable once deposited. Thus, the moment somebody retires, 100% of his expected payout until death is literally sitting in the account. Basically, after N years of employment into an expected M-year career, at the end of year N then N/M of the expected pension payout must be sitting in the account. To account for unpredictable dips in market value while still following the law, in practice retirement funds tend to be overfunded. This is partly why private companies prefer 401(k)s--you don't need to overfund the accounts. (The other reason is that executives can be given disproportionately more benefits relative to regular workers under a defined-contribution plan (e.g. 401(k)) than a defined-benefits plan (e.g. pension).) State governments are currently excluded from the federal funding requirements governing the private sector. The easy solution, politically, would be to amend federal law to make state employers subject to the same or similar rules required of private employers. There are some thorny constitutional issues, though, around the federal government placing mandates directly on state governments. So while being the easiest solution (because Congress is less beholden to state employee lobbying interests than local legislatures), it's still not an easy bill to pass. That said, it's not fool-proof. A big reason for the merger frenzy during the 1990s and 2000s was that mergers provided opportunities for CFOs to extract money from pension funds. That is, mergers allowed them to fudge the numbers much more creatively. The increase in pension funds "bankrupting" companies is related to these shenanigans. The CFOs and other executives didn't care, though, because the shuffling of pension funds provided enough quarterly paper gains to trigger huge bonuses.

jorblumesea 10y ago

At the same time, many public California institutions are outsourcing their IT and other infrastructure costs while laying off workers because of budgetary pressure. Just another case of the baby boomers destroying future generations for their own personal gain. Pension funds are basically pyramid schemes and are economically doomed.

DrScump 10y ago
An example from just this week at UCSF: http://ww2.kqed.org/news/2016/12/14/ucsf-losing-some-it-staff-to-outsourcing/ http://ww2.kqed.org/news/2016/12/14/ucsf-losing-some-it-staf...
noja 10y ago
> Pension funds are basically pyramid schemes and are economically doomed. No, non-individual pensions schemes are the problem. Money paid into a pension for a person should only be accessible for that person, not reliant on future people paying money into a group pot.

n00b101 10y ago

"One of the few voices of restraint back in 1999 belonged to Ronald Seeling, then CalPERS’ chief actuary. Asked to study differing scenarios for the financial markets, Seeling told the CalPERS board that if the pension fund’s investments grew at about half the projected rate of 8.25% per year on average, the consequences would be “fairly catastrophic." Who decided on the projected rate of 8.25%, in the first place? Wouldn't that have been the work of the CalPERS’ chief actuary, Ronald Seeling? The root cause of the problem was the actuarial assumption of an 8.25% rate of return. This is what allowed the new Defined Benefits to appear to be "free," and that is what enabled the board and politicians to ram this through. Assuming an "average case scenario" of consistent 8.25% annual return on a pension investment portfolio is subjectively irresponsible, even in 1999. But more egregious is the fact that the actuarial profession failed miserably to recognise that the Defined Benefit was a financial guarantee similar to a put option, which means that the value of the put option should have been explicitly calculated - which would have been done by projecting scenarios using the "risk-neutral" rate of return (i.e. the yield on US government bonds) instead of the "real-world" rate (i.e. the super-optimistic assumption of 8.25% annual returns). The article goes on to explain that the Chief Actuary ran 3 different scenarios: a "pessimistic" scenario of 4.4% returns, "average" scenario of 8.25% and "optimistic scenario" of 12.1%. This is the crux of the problem, and it is not the first time that such actuarial calculations have blown up a pension plan like this. The right thing to do would be to calculate a single "scenario" using the risk-neutral rate, which would have been lower than 4.4% in 1999 and today it would be closer to 0% ... That would have correctly valued the economic cost of pension benefit as a multi-billion dollar expense that no politician would be able to so easily ram through the legislative process. "Lou Correa, then a freshman Democrat who carried the bill in the Assembly, said he fell victim to inexperience. He remembers seeing actuarial reports and assuming he’d “kicked the tires” and asked the right questions. Correa, now running for Congress in Orange County’s 46th district, said he should have sought independent financial advice." I think Correa was reasonable in assuming that actuarial reports, signed by the Chief Actuary of CalPERS, would have properly "kicked the tires." That is what the actuarial profession is supposed to do. Just like if an engineer signs off on the construction of major transportation bridge, we can reasonably expect that that the bridge won't be be designed with fundamentally incorrect physics calculations.

10y ago

gavman 10y ago

>Asked to study differing scenarios for the financial markets, Seeling told the CalPERS board that if the pension fund’s investments grew at about half the projected rate of 8.25% per year on average, the consequences would be “fairly catastrophic.” 8.25% per year? No one averages 8% per year growth. That's not even an optimistic projection, just a stupid one.

bittercynic 10y ago
A stupid, but widely believed projection. In the years before the .com crash many people really believed that "This time is different."
- iagreeentirely 10y ago
  Many people believed the housing crash wouldn't happen, many people often believe incredibly naive things. This should not excuse them. There were people among them trying to be voices of reason, they ignored them -- as they always do. It doesn't matter that it was a terrible idea. The people who voted in favor got the poll bump they wanted and everyone is gone by the time the bill comes due. Burn this pattern into your brain, it has happened hundreds of times and will happen hundreds more. Every single time people will exclaim "We couldn't have known!" That is simply misdirection, they didn't even TRY to know.
  - bittercynic 10y ago
    Yes, there are many stupid but widely believed projections. .com boom is not a regular boom. It will rise forever! Housing prices will always rise! Ad-tech will grow boundlessly! In my opinion one of the greatest tragedies of these cycles is that many people desperately want to believe they hype about "This time it's different", and they can find plenty of "experts" to tell them what they want to hear. Regular people who could have had a solid place in the middle class are thrown into chaos because they lack financial savvy. Is it stupid to expose yourself to a level of risk that can cause this? I think so. However, it seems like we provide more and more opportunities for unsavvy people to do severe and long-term damage to themselves and their families.

soVeryTired 10y ago

If you want to blame someone, blame the accountants. Pension funds' liabilities are long-term and inflation linked. If they had invested fully in inflation-indexed bonds (as the Bank of England pension scheme does), they would mostly be alright now. But pension fund accounting allowed them other options. During the 1990s and 2000s, pension funds underfunded their liabilities, assuming they'd be able to make up the difference from gains in equities, property and other high-yielding assets. In the process they created quite a few hedge fund billionaires and funded the venture-capital tech boom. Many of those investments subsequently turned sour. But their most significant error was to assume that bond yields would stay high. Today's low yields mean that they can't discount their future liabilities as heavily. The icing on the cake has been a moderate increase in longevity, which has been enough to tip the whole industry into crisis.

gaius 10y ago
During the 1990s and 2000s, pension funds underfunded their liabilities, assuming they'd be able to make up the difference from gains in equities, property and other high-yielding asset Not in the UK - if a company is deemed to be overpaying, according to the Revenue, they pay tax penalties. The Revenue don't care that the value of investments can go down as well as up, their pensions are paid from taxation...
- soVeryTired 10y ago
  BHS and a number of others took contribution holidays in the 90's, on the back of a stock market boom. It's those that I was referring to.
  - gaius 10y ago
    They had no choice, because of the rules I mentioned. The Revenue deemed their pensions "over-funded".
    - soVeryTired 10y ago
      If you've got a link explaining the tax rules I'd be interested to see it. Seems to me like companies should prudently fund their pension obligations before minimising their tax bill.

deleted 10y ago

[deleted]

edabobojr 10y ago

I'll just throw for the opposing side and point out that "Gov. Pete Wilson, took $1.6 billion from CalPERS accounts in 1991 to help close a state budget gap". A random internet calculator tells me that investing in the S&P 500 with reinvested dividents since July, 1991 has had a 844% return. I wonder impact $1.3 trillion would have on the CalPERS shortfall (edit: this would only be $13 billion).

Zanta 10y ago
Your math is off by a couple orders of magnitude :)
- edabobojr 10y ago
  Ouch! I feel the fool. Revised thoughts. It would only be 10 billion, which would equal two years of payouts for the entire pension.
  - wahern 10y ago
    obligatory XKCD: https://xkcd.com/947/ https://xkcd.com/947/
edabobojr 10y ago
Also, in 2008 and 2009 California did not fully pay pension contributions. http://www.wsj.com/articles/SB10001424052702304830104575172262909794220 http://www.wsj.com/articles/SB100014240527023048301045751722...
soVeryTired 10y ago
Gotta match assets with liabilities. That money would have mostly been invested in bonds. Still would have made a fortune though.

kombucha2 10y ago

The amount of mismanagement and lack of foresight on both sides of the aisle is disgusting.

m0llusk 10y ago

I tried to read this article on an Android mobile and it started playing a podcast even though I hate podcasts and have limited bandwidth.

ec109685 10y ago
For shame that the LA times doesn't know you don't like podcasts ;)
- m0llusk 10y ago
  Traditional media outlets are desperate to save themselves but instead of trying to serve customers what they want they are indulging in tech dodads and hypermedia push assaults. LA Times won't be around much longer by their own projections. Attempting to force feed people content they don't want might be a factor in that.

mathiasben 10y ago

I finished reading this book earlier this month - http://www.retirementheist.com/ http://www.retirementheist.com/ pension funds work if they are managed responsibly!

csense 10y ago

In the private sector there's a balance: First, union and management are adversarial, since management's pay is often partly/wholly in stock/options or otherwise tied to the company's financial performance. Second, if the union pushes too far then the whole enterprise will sink. But in the public sector, neither of these things are true. Unions and management can collude to fleece the taxpayers, since management's tenure is tied to votes, not financial performance. Additionally there'll be increased taxes, a federal bailout, or some other steps taken to allow the government of California to continue to operate no matter how much their pension obligations rise. IMHO public sector unions should be illegal.