The pension squeeze

Pension reform is essential — and possible– argues a new Fordham report, The Big Squeeze: Retirement Costs and School District Budgets.

Philadelphia schools could spend as much as $2,361 per pupil by 2020 on retiree costs alone, more than 10 times the current level — and 13 percent of the school district budget —  if the governor’s pension reform plan doesn’t become law, the report warns.

Milwaukee will spend $1,924 per pupil on pensions and health care for retirees, but that’s $1,588 less per pupil because Wisconsin passed Act 10, a reform measure.

Ohio’s pension reform means Cleveland schools will spend less on retirement costs in 2020 than it did in 2011; the new laws are projected to save it about $1,200 per pupil that year.

But pension reform is always costly for someone. Both Wisconsin and Ohio in effect raised employee pension contributions and reduced retiree health benefits. While the changes in Milwaukee will be shared by all teachers, the impact in Cleveland will be felt disproportionately by new teachers, who will be essentially “taxed” to pay for the benefits of current and past employees.

That could discourage young people from entering teaching, the report warns. Young teachers will earn less — and less in the future — to maintain “relatively generous benefits for veteran teachers and current retirees —some of whom will spend more years in retirement than they did in the classroom.”

Pensions for public-sector employees will change dramatically in the future, Fordham predicts. Public employees may be offered 401(k)-style plans or “cash-balance plans. The current system isn’t sustainable.

Lawmakers have promised teachers retirement benefits that the system cannot afford, because the promises were based on short-term political considerations and willfully bad (or thoroughly incompetent) math. (For instance: assumptions about market returns that were wildly optimistic, and assumptions about longevity that were overly pessimistic.) The bill is coming due and someone’s going to get soaked.

Retirement benefits take 10 percent of the school budget in St. Louis, writes Stephen Sawchuk. Student enrollment is declining as pension costs are rising. ” The situation has hastened some of the district’s cost-cutting measures, and fights over whether and how to restructure pensions are looming.”

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Comments

  1. Richard Aubrey says:

    Said it before. It’s not only possible and desirable to pre-fund defined benefit plans so there is no debt when the retiree gets his due, it’s illegal not to.
    In the public sector, current union/public entity negotiators wink at each other while promising wild benefits whose price will come due long after they’re out of the biz, knowing it won’t cost the current actors a cent. Everybody gets the glory, the employees look forward to a version of being independently wealthy (what would you call a lifetime of good income and fat health care benefits without working an hour?)
    And everybody involved knows/knew it was a ponzi scheme which would inevitably crash.

    • Roger Sweeny says:

      Agree with everything you say except one thing. For the longest time, both the public entities and the unions actually believed the system would have no financial problems. One of Richard Feynman’s most famous quotes is, “The first principle is that you must not fool yourself, and you are the easiest person to fool.”

      Because, of course, you want to believe. Very few people want to believe they are complicit in a fraud.

      • Richard Aubrey says:

        Roger. You speak of large groups. I’m speaking of the individuals invovled in the fraud. The negotiators, the benefit administrators, such like. Private sector employees are owed annual statements on the funding of their retirement plan, whether defined benefit or profit-sharing.
        It would be interesting to know–I don’t think my wife ever got one–if any Ed union sent out annual reports reporting the pension fund for future retirements has zero in it.
        In my state, the teachers union got the pension built into the constitution.

        • Roger Sweeny says:

          The federal law that regulates pensions and establishes reporting requirments (ERISA, the Employee Retirement Income Security Act) does not apply to government pensions.

          • Richard Aubrey says:

            Precisely. Wonder how that happened? Bet whoever had that idea has a good chunk of money in the bank.

    • It might just be immaterial whether the folks made the ridiculous investment return assumptions that’ve gotten us into this mess were fooling themselves or cynically passing on an unsolvable problem to their successors. The results are the same.

      But let’s have a little faith in the system.

      What’s been the recent electoral fate of government unions? Not exactly a triumphant march of strength to even greater strength. In fact, the unions were forced to humiliating and, I believe, damaging excesses in Wisconsin. Some more even-headed unionistas certainly spoke against those excesses behind closed doors and were subsequently proven correct.

      Evidence the much less hysterical response to the union’s legislative losses in Michigan.

      The unions fought and fought hard, and there were some marches and protests but nothing even approaching the spectacles that were daily fodder for months in Wisconsin.

      I think the problem’s well on the way to being solved throughout most of the U.S. with my main concern being California.

      California’s fall-off-the-edge lefties may just decide to tip the state into bankruptcy as a lever to try to federalize their pension obligations.

      • Richard Aubrey says:

        Allen,
        Too late.

        • Um, so you feel all that’s left is to argue about the best chamberings for your after-the-fall arsenal?

          I don’t think it is too late although the privileged will never easily relinquish their privileges.

          • Richard Aubrey says:

            Allen. Never a bad idea to think about worst-case.
            Are you implying I’m privileged because I did a quick count of the money available to the State and discovered there isn’t enough? How does that make me privileged?
            But if you’re referring to the negotiators, the benefits administrators, you’re probably right. Wisconsin did well. I get a Milwaukee station and hear some good things. Problem is, they’re still actuarially screwed on the pensions. They need money from someplace. Taking it from people whose fault this was not is the only answer and they don’t have enough.
            Places not so wise–Illinois and California, for example–are in worse shape.

          • I’m referring to government employees, union and non-union.

            The problem results from the political power once, and in some states still, enjoyed by the unions. That power’s on the wane and what the legislature giveth the legislature can sure as heck taketh away.

            It won’t be pretty when it happens but the alternative is the sort of fiscal disaster we’re seeing unfold in Europe. What are the alternative though? Keep on going the way we are? I don’t think that’ll happen because, in my humble opinion, part of the cause of the demise of the municipal unions, not that long ago seemingly invulnerable and all-powerful, is due to the dawning realization that those unions will happily cause financial ruin to get what they want and keep what they’ve gotten.

            A couple of more Wisconsin and Michigan style losses on the part of the government unions and it’ll be Katy bar the door.

            Again, in my opinion but in politics strength builds on strength and weakness results in weakness. The unions have lately shown themselves to be weak and that’s not a good quality if you want to hang onto political influence.

      • Classics Mom says:

        One solution to the pension crisis would be to model teacher’s pensions after FERS retirement system for federal employees which was created under Ronald Reagan. The FERS system is composed of 3 parts: a 401 K type savings program, a very modest defined benefit plan (in comparison to most state and teacher benefits), and social security. This would go a long way towards saving states and cities from this debt tsunami.

  2. Stacy in NJ says:

    “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
    ? Alexis de Tocqueville

    • Richard Aubrey says:

      Stacy.
      I heard it related from Alexander Fraser Tytler, a Scottish judge in the late eighteenth century.
      Source, “Maxims for Men-at-Arms”.

      • Richard Aubrey says:

        Oops. Sorry.
        A bit differently: “A democracy will endure until the people discover they can vote themselves largesse from the public treasury.”
        Problem is, the chumps don’t know they’re selling their votes and being paid with chumps’ money. In the old days, crooked pols had to use their own money. Chumps are dumber these days.

    • Gotta have a little faith Stacy, Richard.

      After all, we is the public so if we can nod at Franklin’s or de Tocqueville’s or Tyler’s or whoever the heck it was, sage words so can enough other people to, perhaps grudgingly, vote that way.

      • Richard Aubrey says:

        Vote which way?
        See Cloward-Piven.
        Also, see, iirc, Bob Dylan, “They’l turn us into beggars ’cause we’re easier to please.”
        Meantime, they’ll keep pointing at the 1% to keep the chumps’ ire up, distracted.

        • Vote against continuing to extract largess for ourselves from the public treasury. Like I wrote, you’ve got to have a bit of faith in people like yourself and myself.

          With regard to Cloward and Piven, who cares? A couple lefties think they’re achingly clever. Alert the media.

          And since you brought up the entire, embarrassing incident with your mention of “the 1%”, what’s become of the late, great “Occupy” movement?

          It went from being the left’s savior to a good reason to change the subject in, on a historical timescale, the blink of an eye. Maybe you see success written all over that but I sure don’t.

          • Richard Aubrey says:

            Allen.
            Occupy is gone, leaving behind it diseases previously found in medieval slums.
            But not the presumption of a sufficient voting bloc that the one percent are the Enemy, and anything which can be linked to the Enemy is IMPORTANT.

          • Richard Aubrey says:

            Oh, yeah.
            Cloward-Piven. See the substantial increase of people dependent on the government. Food stamps.
            Soc Sec disabillity is up because people who can’t/won’t keep looking for a job go to disability.
            Theodore Dalrymple wrote about the same thing in the UK.

          • Yes, but Occupy is gone and what it’s left behind is a desire on the part of lefties to change the subject whenever Occupy is brought up. That’s hardly an indicator of success.

            I’m not even sure you’re right about Occupy stoking greed and jealousy. The greed and jealousy which is the left’s foundation existed before Occupy and I don’t see any significant increase in the politics of greed and jealousy. Rather the opposite.

            The more widely-held view of the Occupy movement is of a long drawn-out temper tantrum. Does that sound like the makings of a society-changing movement to you? It doesn’t to me.

            With one last reference to Cloward and Piven, they hold the exciting distinction of predicting the obvious.

            Of course people will get while the getting is good. See “the tragedy of the commons” – where there’s a commons there’s always a tragedy. The solution’s not to decry the human nature that underlies the “tragedy” but to accept that it’ll happen given the right conditions and work against those who’d create those conditions for their own benefit.

            That’s not welfare recipients who, as might be expected, don’t vote even at the tepid rates of the general public. It’s the rather better-off lefties who aspire to remake society into what they imagine themselves to be.

            But the attraction of their views is diminishing although spasmodically they can reinvigorate the attraction of those views. In the longer run though they’ve lost. Example, the politics surrounding the Second Amendment.

            Springboarding off of the tragedy at Sandy Hook, the left threw all their resources into an effort at some legislative success. They got nothing for their efforts and their last unarguable success is twenty years ago with the passage of the assault weapons ban. Does that sound like an ascendant movement to you? It doesn’t to me.

          • Richard Aubrey says:

            Allen,
            Concentration of power and money go on apace. DC and its surrounding metroplex prosper while the hinterlands do not. Money goes from the hinterlands to the center.
            Sheriffs in various states opt to refuse to enforce various ukases, which is a good idea, but the point is that it is necessary.
            I believe it’s the DoJ which has said in its training material for employees that silence is to be considered disapproval. Only active approval of gayness in all its forms is acceptable.
            When you control the language–about anything–you pretty much win.
            Legislative victories or losses are secondary to controlling what may be said.
            See Richwine. Or Sommers at Harvard.
            Had dinner with some folks, one of whom is a forthright greenie of the obsolete type. Global warming, too many cows, Rachel Carson, etc. If I had said anything–my wife kicked me a couple of times–the greenie would have gone into overdrive, gotten angry, supported her points with yet other fictions, gotten personal, and it would be my fault for ruining the dinner. OTOH, probably nobody believes her, which is a good thing.
            But the delta smelt thrive while the Central Valley is a dust bowl and the water can be turned on if the local elected officials do the Right Thing. Problem is, nobody but conservatives–who by definition don’t count–are saying anything about it. A small cabal of greenies hit the right button and caused a disaster and they’re giggling while nobody else except the victims notice.
            It’s the not-noticing thing.
            Like, to haul it back to the subject, the pension issue. Nobody noticed the funding shortfall until it was too late.

          • I guess then we’ll have to agree to disagree because it isn’t too late. There’s still time to undo the potential for the damage that’ll inevitably occur absent the proper measures but it won’t be easy and it will be as unpleasant as those who currently enjoy political power can make.

            I think they’ll lose because there’s more then a little evidence they’re already losing. The left’s already lost on important issues and their victories, few and far between, are Pyrrhic. Obamacare is the example that comes to mind.

            I can even see a split developing on the left over municipal pensions similar in nature to the split on the left over public education. Sooner or later the burgeoning slice of the pie necessary to fund government employee pensions will run into the slice of the pie necessary to fund welfare and then what?

          • Richard Aubrey says:

            Allen. Wrt your pie-slicing question:
            I believe the guy’s name was “Martinet”. Maybe, maybe not. But the equivalent of the French SecDef after the wars of religion hired the various wandering bands of mercs to fight each other. Keep them out of the hair of the honest burghers of the various cities, and dropped the numbers considerably and mercs preferred to fight untrained levies, not their professional equals so some went home.
            You see my point, I’m sure.

          • Sorry, no.

      • Stacy in NJ says:

        Even with our nasty union buster Christy in Jersey, the last budget failed to make the required state pension payment. Jersey, New York, Illinois, California are setting on the edge of disaster. If bond yields spike by even 1% – which they’ll do once QE ends – we’ll have go back to skipping those annual payments again. They just consume too much of our budget. Those programs assume an 8% return on investment. They actually earned 2.5% this year. We’re doomed. Other than a complete re-negotiation – which no politician in Jersey – not even the “conservative” is willing to even contemplate – there just no saving it.

      • Richard Aubrey says:

        allen.
        ref France: The public unions include cops. Them against the welfare folks when the latters’ checks start to bounce. If the Powers that Be have to pick one account to keep funded….

        • We’re still some years away from Greek-style public disorder which means we have some years to start to undo the re-expansion of the welfare state overseen by President Obama. We did it once, we can do it again, and being ever the optimist, from a more distinctly conservative starting point then the last time the welfare state was made to come to heel.

  3. You can build anything INTO the constitution, but unless there is actually money to pay for it, it’s going to be very hard to enforce as a general rule.

    Pension reform (not just educators), but state retirement systems which have promised far more in benefits than can actually be paid out are going to look to taxpayers to bail them out.

    What happens when the taxpayers tell the pension funds to take a walk off a short cliff?

    There MIGHT be a constitutional clause saying that pensions must be funded, but i’d be willing to bet there is NO clause that says the taxpayers have to be the ones to fund it 🙂

    • Richard Aubrey says:

      Bill. You’re right about the results of no money. But if it’s in the constitution, it’s going to be one of the last things cut, which is bad PR for the recipients who are living off the shavings of the rest of the population’s little unmulcted by other institutions.