7 ms·

Pension Funds Burn Cities as $1 Trillion Shortfall Set to Grow

77 points by randomname2 11y ago

gaius 11y ago
Kinda the problem in the UK is that if an organization was deemed to have "over-funded" its pensions scheme in the good years, it would be done over by the taxman. Even tho' everyone "knew" that markets could go down as well as up! So you're damned if you do and damned if you don't.
yardie 11y ago
Chickens coming home to roost. While the employees have been making their required contributions during each pay cycle their employer has been blowing off their part. I guess, since most city comptrollers are elected or appointed by those elected no one cared that the books weren't truly balanced. The problem wouldn't manifest itself for a few decades. If you look at Detroit as an example, the politicians will blame the pensioners for being "entitled" to their pensions, declare bankruptcy, and their retirees will be forced to eat cat food.
- themartorana 11y ago
  Or all of New Jersey. Governor Christie loves to vilify public employees while refusing to pay the legally required contributions to pension funds. I get it - pensions are expensive. Figure out a plan to start transitioning off of them for new hires. But this is just a refusal to meet contracted obligations, while laying the blame at the feet of the people that held up their end.
  - crusso 11y ago
    You have to consider the cyclical nature of these types of political pathologies. The unions get big benefit from the politicians they help to elect, the politicians looking to get elected make big promises to the unions... wash, rinse, repeat. The people who "held up their end" were the same people who provided the political force that elected the leadership that THEY wanted. The political and union leadership the unions elected created the messes that everyone is now having to deal with. I'm not a Christie fan, but blaming him for attempting to break the dysfunctional cycle seems misplaced.
  - jqm 11y ago
    I'm sure it's not true of all public employees, but many of those I am familiar with richly deserve vilifying. There is no shortage of people who did very little during their working career and expect to retire after 20-25 years with full health benefits and a livable pension paid for the rest of their lives. In my opinion, this is a form of freeloading and it certainly isn't sustainable. I don't know what the solution is. I'd like to see better pension schemes for private sector workers.. particularly those who don't stay at a company for 20 years. I suppose maybe a national scheme similar to Social Security. I don't know...
    - derefr 11y ago
      Whatever else it is, it was an option that was clearly on the table 20 years ago when these people were deciding on a career, and is probably in large part why they went into the public sector in the first place (as part of a larger package of "job security.") It's not freeloading, I think, to accept the "gift" of a nice career freely given; any more than it is freeloading to accept a scholarship, or an inheritance.
      - jqm 11y ago
        You are right. Freeloading probably isn't the right term. But it is an abusive scheme.. particularly given that performance expectations usually aren't reasonable, and once someone has "gotten on", they are usually very hard to get rid of. In the meantime, someone in the private sector is being increasingly squeezed for performance, can be gotten rid of almost on a whim and is very unlikely to have lifetime pension benefits.. particularly ridiculously unsustainable ones like public employees. True, they do have the potential of a larger salary and probably more job satisfaction. I just wish a balance could be found allowing people to actually enter productive jobs and make an effort towards improving the world while enjoying (a more reasonable version) of the pension benefits public "workers" (I use the term loosely) enjoy.
    - gaius 11y ago
      If you want to see how this plays out - look at Greece. There a civil servant retires at 50 or 95% of their final salary. Or did...
  - jbooth 11y ago
    Christie knows that he'll lose that case, having to pay a bunch of legal fees and damages on top of the pension money. He also knows it'll take years, happen on the next guy's watch, and he can run for President in the meantime claiming that he balanced the budget and reduced expenses. See also, the pennies on the dollar we got on that big EPA settlement with Exxon (pennies now are worth something, dollars during another gov's term worth nothing), and the fact that we didn't build another tunnel to NYC, even though it's about 50 years overdue and the feds were offering to pay for 95% of it. I'd be less offended if he had any chance at all of being a top 5 contender for the nomination. Screwing everyone for his own benefit is one thing, screwing everyone for self-delusion is a whole other level.
  - bobcostas55 11y ago
    Held up their end in a blatantly and transparently corrupt bargain. I don't see why we shouldn't lay the blame at their feet.
- deleted 11y ago
  [deleted]
rayiner 11y ago
This is going to be an existential crisis for most cities, and to survive they will have to figure out how to avoid paying these pensions. Whoever is to blame for the mess, the current generation of workers isn't going to want to pay higher taxes while having reduced services just so public employees can have their benefits. Especially when for most of that current cohort, those benefits will be far more generous than anything they will ever get, as everyone cuts benefits for newer hires first. For all but the most compelling cities, this situation ends with their tax base moving to non-Union cities in the south.
- kasey_junk 11y ago
  The part I don't understand is why the Union membership itself isn't voting for leadership looking to change things. If you are a teacher or cop in the middle of your career it seems crazy to continue voting for policies that are essentially "go down with the ship".
  - rayiner 11y ago
    It's going to happen. Rahm Emmenuel just fired 1,400 school employees in order to make Chicago's required pension payment. The teachers union can no longer ignore the inherent conflict of interest between current teachers and pensioners.
    - HarryHirsch 11y ago
      It's more like a conflict between inner cities and outer ring suburbs. Something tells me that in the suburbs the tax base and consequently the budget is healthy. The suburban pension fund may be intentionally mismanaged, though, and the fact wouldn't surprise anyone.
    - osi 11y ago
      Chicago is also doubly-messed up because the city pays into the pension fund for City of Chicago teachers AND the pension fund for not-City of Chicago teachers.
- 11y ago
inthewoods 11y ago
The sad part is that this isn't new - I've been reading about this since about 2006-2007 and I'm sure it was around prior to that. Combo of underfunding pensions and then underperforming your model (which was ridiculous to begin with) - just bad news all around. This is going to crush the elderly. Moody's downgrading the cities - oh the irony. Rate junk housing bonds as triple AAA and then do your actual job on the on the city pensions. Agreed with everyone else on the politicians - particularly those on the right - will be quick to seize on this as another supposed example of government freeloaders. I've thought for a long time that we're on the cusp of an inter-generational finance war - with pensioners and retirees demanding what they've been promised, while the funding required has to come from non-retired generations that don't have any strong financial position themselves.
- rayiner 11y ago
  Cutting benefits to make ends meet won't "crush the elderly." Just reducing pension benefits to the social security rate will save a ton of money: https://www.illinoispolicy.org/reports/fact-finder-pension-benefits-of-chicago-workers/ https://www.illinoispolicy.org/reports/fact-finder-pension-b...
  - Amezarak 11y ago
    That article is bizarre. It makes statements like this repeatedly: > Some career city workers even retire in their mid-50s while collecting pension benefits equal to most of their final salary. In contrast, private sector workers cannot begin drawing a full Social Security benefit until nearly a decade later – at the age of 67. Why on Earth would you compare Social Security with public pensions? Of course private sector workers cannot draw Social Security until 67. City workers can't draw Social Security until 67 either. But private sector workers can draw on their pensions (the few that are left) and on 401(k) accounts as early as age 55, too. Both city workers and private sector workers draw on Social Security and their retirement funds, whether those be investment accounts or pensions. Why the strange pretense that public sector pensions are equivalent to private sector retirees collecting Social Security? We're supposed to be outraged at 'excessive' pensions that, at the extreme end, match the salary of the retiree before they retired. But that's exactly where private sector pensions are, and that's exactly what you're supposed to target in your 401(k)/IRA etc. (Of course, the reality is that the vast majority of 401(k) accounts are drastically underfunded, but as this doesn't represent a liability to anyone, nobody cares.) Then you have paragraphs like this: > The amount of money a career city worker contributes to his or her pension has no bearing on what that worker will receive in retirement. ...And the article then goes on to note that a) pension contributions are a percentage of your salary and b) the % of your salary depends on your years of service and c) the pension ultimately pays out your salary every year, assuming (b). So it absolutely does depend on the amount of money a career city worker contributes. Finally, you have this comparison: > Rhea Fries Boldman’s experience as a Chicago Public Schools teacher reveals just how out of sync city worker contributions are compared to the benefits they receive. > Boldman retired in 2012 at the age of 59 with a final average salary of $87,057. > Boldman is receiving an annual pension of $71,674 – and she will receive $2.4 million in pension benefits during her retirement if she lives to her full life expectancy. > Yet she contributed just $147,032 to the pension system over her 30-plus year career. Her direct contributions to the Chicago Teachers’ Pension Fund will cover just 6.2 percent of her expected lifetime benefits. Including the interest earned on those contributions, the total would cover approximately 12 percent of her expected lifetime pension benefits. Hopefully Boldman is earning a lot more than interest in her pension account. If not, that's mismanagement. These numbers aren't drastically different from what you'd see in a 401(k). Were I to retire at 59, my company's 401(k) projection calculator says I'd have contributed 380k and would receive 3.5 million. I expect this is optimistic, but you can still see there is nothing totally ludicrous about those numbers. EDIT: My own back-of-the-hand calculations indicate 'optimistic' is perhaps an understatement. Hm.
imglorp 11y ago
Let's not forget the largest fund of them all: Social Security will be tango uniform in 2033. http://www.nytimes.com/2013/01/06/opinion/sunday/social-security-its-worse-than-you-think.html http://www.nytimes.com/2013/01/06/opinion/sunday/social-secu...
- sigzero 11y ago
  Nah, Congress will never let that happen. They will tax us into oblivion to shore it up.
  - Retric 11y ago
    Moving back the retirement age is far more likely than you might think. From the cost perspective it's front loaded by age as there are a lot more 65 year olds than 95 year olds walking around. With a little warning someone can wait another year to retire, but a 95 year old has little recourse if you cut benefits.
sadris 11y ago
How to solve the pension crisis without being sued for breaking contracts: income tax on pension benefits at 95% rate for all amounts over $40,000.
- jqm 11y ago
  I like that idea.
- danielweber 11y ago
  Could be a bill of attainder. And if it works, even if you like the ends, those means should scare the shit out of you. The government can go after anyone unpopular at any time just by carefully crafting an income tax.
spoiledtechie 11y ago
Its the same for the USA as it has 126 Trillion in unfunded liabilities. In the next 30 years, the US will face the same problems as cities are today.
- rayiner 11y ago
  That number probably isn't real: http://www.washingtonpost.com/blogs/fact-checker/wp/2013/10/23/does-the-united-states-have-128-trillion-in-unfunded-liabilities http://www.washingtonpost.com/blogs/fact-checker/wp/2013/10/.... There are also a couple of key distinctions: 1) The Supreme Court decided in Fleming v. Nestor that people do not have a contractual right to their social security benefits. Therefore, the benefits can be changed at any time. In contrast, several states have a constitutional amendment protecting public pension benefits. 2) Most of the liabilities are Medicare, which doesn't have a defined benefit at all. 3) Unlike the states, the Federal government can print money to reduce the real value of benefits. 4) The tax base is far less mobile between countries than between cities and states.
  - SilasX 11y ago
    It's not real because the government can just not pay it? Because, even though people are counting them, they're not "really" liabilities that the government really takes seriously? I can't say that dissolves my worry about this...
    - rayiner 11y ago
      No, it's two separate points. One that the $127 trillion number is almost certainly overstated. Two that whatever the number is, it's of a fundamentally different nature than state pension liability. In Illinois, Gov. Rauner's modest attempt to reform the pension situation in the state was shot down by the Illinois Supreme Court because the state has a constitutional amendment guaranteeing pension benefits. Under Fleming the federal government can reduce Social Security and Medicare benefits if necessary. It'll be politically divisive, but it'll be possible. You won't have the situation you have in Illinois where the courts are telling the electorate they can't make certain reforms.
seibelj 11y ago
7% assumed return is the most ridiculous part of it all. I remember when NYC tried to reduce their assumed rate from 8.5 to 7.5 and people threw a fit (http://www.bloomberg.com/news/articles/2010-08-20/new-york-may-cut-assumed-8-rate-of-return-on-retiree-pension-investments http://www.bloomberg.com/news/articles/2010-08-20/new-york-m...) Everyone has their head in the sand
- tosseraccount 11y ago
  Really? Asset class returns: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/... Stocks: 11.53% Ten year T's 5.28% 7% return is easily obtainable. Not guaranteed, but very probable. 50% stocks and 50% bonds, should on average return 8.5% [ This analysis is not inflation adjusted ; average annual inflation is about 3.2% ; subtract this number for "real" returns ]
  - lotsofpulp 11y ago
    Unfortunately, the pension payments are guaranteed, not very probable. I also think this graph is better at showing S&P 500 returns based on buy/sell dates http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=0 http://www.nytimes.com/interactive/2011/01/02/business/20110... Since these are also average returns (which don't account for private equity/hedge fund/alternative investments), there are numerous funds that won't get to the average, and end up with a shortfall. Assuming that the return on stock market is the expected return of a pension fund is guaranteed a risk free benefit with a non risk free investment. On the other hand, the federal government requires non taxpayer funded pension plans to use government and highly rated corporated bonds to calculate their expected rate of return, which is far less than the 7% to 9% of government funded pensions.
    - tosseraccount 11y ago
      Insured via Pension Benefit Guaranty Corporation, yes. Not quite a "guarantee" of jinormous returns but a certainly a floor. That's a great link. Thanks! Worst case in history was break even after 22 years. Retirement investing should start with a 50 year horizon.
hchenji 11y ago
I don't understand...how can there be a shortfall when annualized returns exceed the promised 7.x%? Take Ohio for example (https://www.strsoh.org/_pdfs/investments/investments.pdf https://www.strsoh.org/_pdfs/investments/investments.pdf). They seem to return an annualized 8% over the last 10 fiscal years (june-june). Why can't other state pension funds just ape this asset allocation?
- lotsofpulp 11y ago
  The mortality rates used could have been wrong, and people living longer than expected means more money having to be paid out than expected. I'd also take pension fund return #s with a grain of salt, as there are lots of ways to massage taxpayer funded pension numbers. And all pension funds can't just copy each other, otherwise a bubble happens and in the end everyone ends up with less. The only way out for all pension funds to win is to inflate the dollar, i.e. making the people receiving the pension lose. Or to increase taxes, making taxpayers lose. Actually, taxpayers lose in both cases.
marcusgarvey 11y ago
Oh, pension fund investment dysfunction...the gift that keeps on giving. Recently it was revealed that CalPERS (the largest U.S. pension fund that manages investments for Cali. public employees), has no idea of all the fees it's paying to private equity firms to manage their money. It took an intrepid indy blogger to do this digging. http://www.nakedcapitalism.com/2015/06/calpers-admits-it-has-no-idea-what-it-is-paying-in-private-equity-carry-fees.html http://www.nakedcapitalism.com/2015/06/calpers-admits-it-has... It has now led to NYT Dealbook,the Sac Bee and the California treasurer picking up the scent. And, by the way, this lack of fee transparency is just one of the the factors that contribute to private equity being a very overrated asset class. Yves Smith of Naked Capitalism has been sounding the alarm. If you're interested, she's one to follow.
- fredfoobar42 11y ago
  Hedge funds aren't much better, and have the added "benefit" of being completely opaque to the investor with higher fees. Part of why there's so much investment in Venture and Growth Capital by so many institutions, including pensions, is that it's one of the few places that's seeing real returns. And when that bubble bursts...
curiousjorge 11y ago
it never made sense as to why people are required to take a pay cut with hopes some opaque group will promise them greater return in the future. You can't expect fund managers to consistently return 7% without taking risks and having exposure to market downturns. You know who else offered a consistent market return on stocks year after year for decades? Madoff
lotsofpulp 11y ago
Defined benefit pensions are a ridiculous idea to begin with. The underlying assumption that humans can predict economic and biological conditions 30 to 60 years in the future is ridiculous. Add the fact that a huge pot of money can be easily corrupted, and the concept of taxpayer funded pensions becomes absolutely stupid, only working for the past 60 years due to a baby boom. The voters in local elections are mostly government employees (edit: my speculation based on a few elections, but also how unpopular it is to reduce pension benefits nationwide), so you vote someone in who promises you more pay, but the pay has to be deferred so it doesn't affect the current budget. You also hire the actuary who will use the most liberal risk free rate of return (hilarious that they assume 7%+ risk free rate of return over the next 30 to 60 years), so the costs look smaller than they are. On top of all of that, you ignore the insufficient funding requirements the actuary suggests to meet your budget somewhere else because there are no laws around funding a taxpayer funded pension...which obviously makes sense because you can just keep increasing taxes. The only way taxpayer funded pensions make sense is for politicians and union leaders, who gain from the influence that comes from sitting on billions and billions of dollars and directing that money to money managers who will somehow return the benefit (aka corruption). If they weren't corrupt, then governments would just give the employees the cash to go out and buy an equivalent life annuity from an insurance company. Of course, the annuities don't exist or are ludicrously expensive because it's crazy to try and predict the future so many years out.
- jbooth 11y ago
  "The voters in local elections are mostly government employees" Citation needed? My anecdotal experience disagrees.
  - lotsofpulp 11y ago
    I should have written that I'm speculating based on a few local elections I've participated in, but it seemed like the government employees and their friends/family had a voting bloc that basically made it impossible to even bring up reducing taxpayer funded pensions without ensuring your loss in the election. Also, I'd be very surprised if a significant amount of people even knew who their city council members were, and even their mayor unless they're in a very big city. Again, all speculation, but the professionals I know make too much and work too much to care about local elections, and the poorer people are working too much to prioritize the myriad other issues going on int heir life.
cheriot 11y ago
Pensions seem like the same kind of problem as long term insurance policies (life, liability, etc) and I've not heard of these kinds of issues happening there. I suspect the problem with pensions is that they're run by people (CEOs and politicians) that are strongly incentivized to under fund them.

77 points by randomname2 11y ago

gaius 11y ago

Kinda the problem in the UK is that if an organization was deemed to have "over-funded" its pensions scheme in the good years, it would be done over by the taxman. Even tho' everyone "knew" that markets could go down as well as up! So you're damned if you do and damned if you don't.

yardie 11y ago

Chickens coming home to roost. While the employees have been making their required contributions during each pay cycle their employer has been blowing off their part. I guess, since most city comptrollers are elected or appointed by those elected no one cared that the books weren't truly balanced. The problem wouldn't manifest itself for a few decades. If you look at Detroit as an example, the politicians will blame the pensioners for being "entitled" to their pensions, declare bankruptcy, and their retirees will be forced to eat cat food.

themartorana 11y ago
Or all of New Jersey. Governor Christie loves to vilify public employees while refusing to pay the legally required contributions to pension funds. I get it - pensions are expensive. Figure out a plan to start transitioning off of them for new hires. But this is just a refusal to meet contracted obligations, while laying the blame at the feet of the people that held up their end.
- crusso 11y ago
  You have to consider the cyclical nature of these types of political pathologies. The unions get big benefit from the politicians they help to elect, the politicians looking to get elected make big promises to the unions... wash, rinse, repeat. The people who "held up their end" were the same people who provided the political force that elected the leadership that THEY wanted. The political and union leadership the unions elected created the messes that everyone is now having to deal with. I'm not a Christie fan, but blaming him for attempting to break the dysfunctional cycle seems misplaced.
- jqm 11y ago
  I'm sure it's not true of all public employees, but many of those I am familiar with richly deserve vilifying. There is no shortage of people who did very little during their working career and expect to retire after 20-25 years with full health benefits and a livable pension paid for the rest of their lives. In my opinion, this is a form of freeloading and it certainly isn't sustainable. I don't know what the solution is. I'd like to see better pension schemes for private sector workers.. particularly those who don't stay at a company for 20 years. I suppose maybe a national scheme similar to Social Security. I don't know...
  - derefr 11y ago
    Whatever else it is, it was an option that was clearly on the table 20 years ago when these people were deciding on a career, and is probably in large part why they went into the public sector in the first place (as part of a larger package of "job security.") It's not freeloading, I think, to accept the "gift" of a nice career freely given; any more than it is freeloading to accept a scholarship, or an inheritance.
    - jqm 11y ago
      You are right. Freeloading probably isn't the right term. But it is an abusive scheme.. particularly given that performance expectations usually aren't reasonable, and once someone has "gotten on", they are usually very hard to get rid of. In the meantime, someone in the private sector is being increasingly squeezed for performance, can be gotten rid of almost on a whim and is very unlikely to have lifetime pension benefits.. particularly ridiculously unsustainable ones like public employees. True, they do have the potential of a larger salary and probably more job satisfaction. I just wish a balance could be found allowing people to actually enter productive jobs and make an effort towards improving the world while enjoying (a more reasonable version) of the pension benefits public "workers" (I use the term loosely) enjoy.
  - gaius 11y ago
    If you want to see how this plays out - look at Greece. There a civil servant retires at 50 or 95% of their final salary. Or did...
- jbooth 11y ago
  Christie knows that he'll lose that case, having to pay a bunch of legal fees and damages on top of the pension money. He also knows it'll take years, happen on the next guy's watch, and he can run for President in the meantime claiming that he balanced the budget and reduced expenses. See also, the pennies on the dollar we got on that big EPA settlement with Exxon (pennies now are worth something, dollars during another gov's term worth nothing), and the fact that we didn't build another tunnel to NYC, even though it's about 50 years overdue and the feds were offering to pay for 95% of it. I'd be less offended if he had any chance at all of being a top 5 contender for the nomination. Screwing everyone for his own benefit is one thing, screwing everyone for self-delusion is a whole other level.
- bobcostas55 11y ago
  Held up their end in a blatantly and transparently corrupt bargain. I don't see why we shouldn't lay the blame at their feet.
deleted 11y ago
[deleted]

rayiner 11y ago

This is going to be an existential crisis for most cities, and to survive they will have to figure out how to avoid paying these pensions. Whoever is to blame for the mess, the current generation of workers isn't going to want to pay higher taxes while having reduced services just so public employees can have their benefits. Especially when for most of that current cohort, those benefits will be far more generous than anything they will ever get, as everyone cuts benefits for newer hires first. For all but the most compelling cities, this situation ends with their tax base moving to non-Union cities in the south.

kasey_junk 11y ago
The part I don't understand is why the Union membership itself isn't voting for leadership looking to change things. If you are a teacher or cop in the middle of your career it seems crazy to continue voting for policies that are essentially "go down with the ship".
- rayiner 11y ago
  It's going to happen. Rahm Emmenuel just fired 1,400 school employees in order to make Chicago's required pension payment. The teachers union can no longer ignore the inherent conflict of interest between current teachers and pensioners.
  - HarryHirsch 11y ago
    It's more like a conflict between inner cities and outer ring suburbs. Something tells me that in the suburbs the tax base and consequently the budget is healthy. The suburban pension fund may be intentionally mismanaged, though, and the fact wouldn't surprise anyone.
  - osi 11y ago
    Chicago is also doubly-messed up because the city pays into the pension fund for City of Chicago teachers AND the pension fund for not-City of Chicago teachers.
11y ago

inthewoods 11y ago

The sad part is that this isn't new - I've been reading about this since about 2006-2007 and I'm sure it was around prior to that. Combo of underfunding pensions and then underperforming your model (which was ridiculous to begin with) - just bad news all around. This is going to crush the elderly. Moody's downgrading the cities - oh the irony. Rate junk housing bonds as triple AAA and then do your actual job on the on the city pensions. Agreed with everyone else on the politicians - particularly those on the right - will be quick to seize on this as another supposed example of government freeloaders. I've thought for a long time that we're on the cusp of an inter-generational finance war - with pensioners and retirees demanding what they've been promised, while the funding required has to come from non-retired generations that don't have any strong financial position themselves.

rayiner 11y ago
Cutting benefits to make ends meet won't "crush the elderly." Just reducing pension benefits to the social security rate will save a ton of money: https://www.illinoispolicy.org/reports/fact-finder-pension-benefits-of-chicago-workers/ https://www.illinoispolicy.org/reports/fact-finder-pension-b...
- Amezarak 11y ago
  That article is bizarre. It makes statements like this repeatedly: > Some career city workers even retire in their mid-50s while collecting pension benefits equal to most of their final salary. In contrast, private sector workers cannot begin drawing a full Social Security benefit until nearly a decade later – at the age of 67. Why on Earth would you compare Social Security with public pensions? Of course private sector workers cannot draw Social Security until 67. City workers can't draw Social Security until 67 either. But private sector workers can draw on their pensions (the few that are left) and on 401(k) accounts as early as age 55, too. Both city workers and private sector workers draw on Social Security and their retirement funds, whether those be investment accounts or pensions. Why the strange pretense that public sector pensions are equivalent to private sector retirees collecting Social Security? We're supposed to be outraged at 'excessive' pensions that, at the extreme end, match the salary of the retiree before they retired. But that's exactly where private sector pensions are, and that's exactly what you're supposed to target in your 401(k)/IRA etc. (Of course, the reality is that the vast majority of 401(k) accounts are drastically underfunded, but as this doesn't represent a liability to anyone, nobody cares.) Then you have paragraphs like this: > The amount of money a career city worker contributes to his or her pension has no bearing on what that worker will receive in retirement. ...And the article then goes on to note that a) pension contributions are a percentage of your salary and b) the % of your salary depends on your years of service and c) the pension ultimately pays out your salary every year, assuming (b). So it absolutely does depend on the amount of money a career city worker contributes. Finally, you have this comparison: > Rhea Fries Boldman’s experience as a Chicago Public Schools teacher reveals just how out of sync city worker contributions are compared to the benefits they receive. > Boldman retired in 2012 at the age of 59 with a final average salary of $87,057. > Boldman is receiving an annual pension of $71,674 – and she will receive $2.4 million in pension benefits during her retirement if she lives to her full life expectancy. > Yet she contributed just $147,032 to the pension system over her 30-plus year career. Her direct contributions to the Chicago Teachers’ Pension Fund will cover just 6.2 percent of her expected lifetime benefits. Including the interest earned on those contributions, the total would cover approximately 12 percent of her expected lifetime pension benefits. Hopefully Boldman is earning a lot more than interest in her pension account. If not, that's mismanagement. These numbers aren't drastically different from what you'd see in a 401(k). Were I to retire at 59, my company's 401(k) projection calculator says I'd have contributed 380k and would receive 3.5 million. I expect this is optimistic, but you can still see there is nothing totally ludicrous about those numbers. EDIT: My own back-of-the-hand calculations indicate 'optimistic' is perhaps an understatement. Hm.

imglorp 11y ago

Let's not forget the largest fund of them all: Social Security will be tango uniform in 2033. http://www.nytimes.com/2013/01/06/opinion/sunday/social-security-its-worse-than-you-think.html http://www.nytimes.com/2013/01/06/opinion/sunday/social-secu...

sigzero 11y ago
Nah, Congress will never let that happen. They will tax us into oblivion to shore it up.
- Retric 11y ago
  Moving back the retirement age is far more likely than you might think. From the cost perspective it's front loaded by age as there are a lot more 65 year olds than 95 year olds walking around. With a little warning someone can wait another year to retire, but a 95 year old has little recourse if you cut benefits.

sadris 11y ago

How to solve the pension crisis without being sued for breaking contracts: income tax on pension benefits at 95% rate for all amounts over $40,000.

jqm 11y ago
I like that idea.
danielweber 11y ago
Could be a bill of attainder. And if it works, even if you like the ends, those means should scare the shit out of you. The government can go after anyone unpopular at any time just by carefully crafting an income tax.

spoiledtechie 11y ago

Its the same for the USA as it has 126 Trillion in unfunded liabilities. In the next 30 years, the US will face the same problems as cities are today.

rayiner 11y ago
That number probably isn't real: http://www.washingtonpost.com/blogs/fact-checker/wp/2013/10/23/does-the-united-states-have-128-trillion-in-unfunded-liabilities http://www.washingtonpost.com/blogs/fact-checker/wp/2013/10/.... There are also a couple of key distinctions: 1) The Supreme Court decided in Fleming v. Nestor that people do not have a contractual right to their social security benefits. Therefore, the benefits can be changed at any time. In contrast, several states have a constitutional amendment protecting public pension benefits. 2) Most of the liabilities are Medicare, which doesn't have a defined benefit at all. 3) Unlike the states, the Federal government can print money to reduce the real value of benefits. 4) The tax base is far less mobile between countries than between cities and states.
- SilasX 11y ago
  It's not real because the government can just not pay it? Because, even though people are counting them, they're not "really" liabilities that the government really takes seriously? I can't say that dissolves my worry about this...
  - rayiner 11y ago
    No, it's two separate points. One that the $127 trillion number is almost certainly overstated. Two that whatever the number is, it's of a fundamentally different nature than state pension liability. In Illinois, Gov. Rauner's modest attempt to reform the pension situation in the state was shot down by the Illinois Supreme Court because the state has a constitutional amendment guaranteeing pension benefits. Under Fleming the federal government can reduce Social Security and Medicare benefits if necessary. It'll be politically divisive, but it'll be possible. You won't have the situation you have in Illinois where the courts are telling the electorate they can't make certain reforms.

seibelj 11y ago

7% assumed return is the most ridiculous part of it all. I remember when NYC tried to reduce their assumed rate from 8.5 to 7.5 and people threw a fit (http://www.bloomberg.com/news/articles/2010-08-20/new-york-may-cut-assumed-8-rate-of-return-on-retiree-pension-investments http://www.bloomberg.com/news/articles/2010-08-20/new-york-m...) Everyone has their head in the sand

tosseraccount 11y ago
Really? Asset class returns: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/... Stocks: 11.53% Ten year T's 5.28% 7% return is easily obtainable. Not guaranteed, but very probable. 50% stocks and 50% bonds, should on average return 8.5% [ This analysis is not inflation adjusted ; average annual inflation is about 3.2% ; subtract this number for "real" returns ]
- lotsofpulp 11y ago
  Unfortunately, the pension payments are guaranteed, not very probable. I also think this graph is better at showing S&P 500 returns based on buy/sell dates http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=0 http://www.nytimes.com/interactive/2011/01/02/business/20110... Since these are also average returns (which don't account for private equity/hedge fund/alternative investments), there are numerous funds that won't get to the average, and end up with a shortfall. Assuming that the return on stock market is the expected return of a pension fund is guaranteed a risk free benefit with a non risk free investment. On the other hand, the federal government requires non taxpayer funded pension plans to use government and highly rated corporated bonds to calculate their expected rate of return, which is far less than the 7% to 9% of government funded pensions.
  - tosseraccount 11y ago
    Insured via Pension Benefit Guaranty Corporation, yes. Not quite a "guarantee" of jinormous returns but a certainly a floor. That's a great link. Thanks! Worst case in history was break even after 22 years. Retirement investing should start with a 50 year horizon.

hchenji 11y ago

I don't understand...how can there be a shortfall when annualized returns exceed the promised 7.x%? Take Ohio for example (https://www.strsoh.org/_pdfs/investments/investments.pdf https://www.strsoh.org/_pdfs/investments/investments.pdf). They seem to return an annualized 8% over the last 10 fiscal years (june-june). Why can't other state pension funds just ape this asset allocation?

lotsofpulp 11y ago
The mortality rates used could have been wrong, and people living longer than expected means more money having to be paid out than expected. I'd also take pension fund return #s with a grain of salt, as there are lots of ways to massage taxpayer funded pension numbers. And all pension funds can't just copy each other, otherwise a bubble happens and in the end everyone ends up with less. The only way out for all pension funds to win is to inflate the dollar, i.e. making the people receiving the pension lose. Or to increase taxes, making taxpayers lose. Actually, taxpayers lose in both cases.

marcusgarvey 11y ago

Oh, pension fund investment dysfunction...the gift that keeps on giving. Recently it was revealed that CalPERS (the largest U.S. pension fund that manages investments for Cali. public employees), has no idea of all the fees it's paying to private equity firms to manage their money. It took an intrepid indy blogger to do this digging. http://www.nakedcapitalism.com/2015/06/calpers-admits-it-has-no-idea-what-it-is-paying-in-private-equity-carry-fees.html http://www.nakedcapitalism.com/2015/06/calpers-admits-it-has... It has now led to NYT Dealbook,the Sac Bee and the California treasurer picking up the scent. And, by the way, this lack of fee transparency is just one of the the factors that contribute to private equity being a very overrated asset class. Yves Smith of Naked Capitalism has been sounding the alarm. If you're interested, she's one to follow.

fredfoobar42 11y ago
Hedge funds aren't much better, and have the added "benefit" of being completely opaque to the investor with higher fees. Part of why there's so much investment in Venture and Growth Capital by so many institutions, including pensions, is that it's one of the few places that's seeing real returns. And when that bubble bursts...

curiousjorge 11y ago

it never made sense as to why people are required to take a pay cut with hopes some opaque group will promise them greater return in the future. You can't expect fund managers to consistently return 7% without taking risks and having exposure to market downturns. You know who else offered a consistent market return on stocks year after year for decades? Madoff

lotsofpulp 11y ago

Defined benefit pensions are a ridiculous idea to begin with. The underlying assumption that humans can predict economic and biological conditions 30 to 60 years in the future is ridiculous. Add the fact that a huge pot of money can be easily corrupted, and the concept of taxpayer funded pensions becomes absolutely stupid, only working for the past 60 years due to a baby boom. The voters in local elections are mostly government employees (edit: my speculation based on a few elections, but also how unpopular it is to reduce pension benefits nationwide), so you vote someone in who promises you more pay, but the pay has to be deferred so it doesn't affect the current budget. You also hire the actuary who will use the most liberal risk free rate of return (hilarious that they assume 7%+ risk free rate of return over the next 30 to 60 years), so the costs look smaller than they are. On top of all of that, you ignore the insufficient funding requirements the actuary suggests to meet your budget somewhere else because there are no laws around funding a taxpayer funded pension...which obviously makes sense because you can just keep increasing taxes. The only way taxpayer funded pensions make sense is for politicians and union leaders, who gain from the influence that comes from sitting on billions and billions of dollars and directing that money to money managers who will somehow return the benefit (aka corruption). If they weren't corrupt, then governments would just give the employees the cash to go out and buy an equivalent life annuity from an insurance company. Of course, the annuities don't exist or are ludicrously expensive because it's crazy to try and predict the future so many years out.

jbooth 11y ago
"The voters in local elections are mostly government employees" Citation needed? My anecdotal experience disagrees.
- lotsofpulp 11y ago
  I should have written that I'm speculating based on a few local elections I've participated in, but it seemed like the government employees and their friends/family had a voting bloc that basically made it impossible to even bring up reducing taxpayer funded pensions without ensuring your loss in the election. Also, I'd be very surprised if a significant amount of people even knew who their city council members were, and even their mayor unless they're in a very big city. Again, all speculation, but the professionals I know make too much and work too much to care about local elections, and the poorer people are working too much to prioritize the myriad other issues going on int heir life.

cheriot 11y ago

Pensions seem like the same kind of problem as long term insurance policies (life, liability, etc) and I've not heard of these kinds of issues happening there. I suspect the problem with pensions is that they're run by people (CEOs and politicians) that are strongly incentivized to under fund them.