SUPER-SIZED PENSIONS, AND A DOOMSDAY SCENARIO
Posted: Friday, November 12 2010 at 06:00 am CT by Bob Sullivan
http://redtape.msnbc.com/2010/...mmissioner-q.html#tp
In New York, a 44-year-old firefighter retires with a $101,000 a year pension, for life. Near Chicago, a parks commissioner quits and begins collecting a $166,000 pension a sum sweetened by $50,000 thanks to a one-time retirement year windfall of $270,000. And in California, a former city manager pulls down $500,000 in retirement checks every year.
As outrageous as those sunset stipends may seem, they are merely the most visible piece of what critics of generous government pensions say is a ticking time bomb of debt that is threatening to bankrupt a number of states by the end of the decade.
While the federal debt of $13.7 trillion raises issues of devalued currency, higher borrowing costs for Washington, D.C., and loss of international bargaining power, state debt much of it driven by exploding pension costs poses a more immediate risk to the U.S. economy, according to many experts.
Wall Street analyst Meredith Whitney correctly predicted the need for a government bailout of banks three years ago, so people listened in September when she forecast who will be next to beg for a federal bailout: States like California, New Jersey and Ohio. State and local governments have effectively run up huge credit card bills, and soon wont even be able to make the minimum payments on that debt. What happens then? Middle America, Whitney predicted in a report called Tragedy of the Commons, might revolt at the idea at bailing out coastal states for years of mismanagement and overspending.
Crushing debts racked up by these and other states are obvious almost every budget year, when state government shutdowns are threatened and tax increases loom. But annual budget woes are a drop in the bucket compared to long-term obligations facing these states particularly their promises to supply pensions and health care to millions of retired workers. Pension talk might not sound sexy, but it should: U.S. states already are short $1 trillion they should have set aside to pay retired workers, according to the Pew Center on the States. That hole could very well drive states to bankruptcy or federal bailout.
As documented in our continuing series on supersized government worker pay, granting supersized pensions seems irresponsible in light of this looming fiscal catastrophe. Yet, in California alone, nearly 10,000 retirees will get pension checks totaling at least $100,000 this year.
The economic struggles of the past decade lit the fuse for the pension fund time bomb. In 2000, half of the 50 states had enough money socked away to cover future pension costs, according to Pew. By 2008, only four states -- Florida, New York, Washington and Wisconsin -- could make that claim. The other 46 are potentially on the road to insolvency.
Joshua Rauh, associate professor of finance at at Northwestern University, estimates that 20 states will run out of pension money by 2025.
The pension doomsday clocks in Illinois and New Jersey will strike even sooner, in 2018, he said.
What happens then? In New Jersey, for example, the state is obligated to pay pensions out of the general fund when the pension fund runs dry. In 2018, the state will owe $14 billion in pension payouts, or one-third of the state's annual tax receipts. To put that in perspective, to plug a budget hole like that this year, the state would have to cut all education spending. That bears repeating: It would have to eliminate spending on every elementary school, high school and college from its budget.
That's why stories of $195,000 pensions, rampant double-dipping, workers collecting pensions on seven, eight or even nine government jobs, and other excesses seem so absurd.
And pension gamesmanship is routine around the country. For example, pension payments are often based on the employees salary in the final year on the job, or final three years. That formula is easily abused, a process sometimes called back-ending. A pension commission in New Jersey found one worker spent 24 years in public service earning less than $10,000, then one year as a prosecutor earning $141,000. That boosted his pension from $3,600 to $70,000 annually. The employee wasn't named.
There's probably as many variations as you can imagine, said Jack Dean, who runs the PensionTsunami.com website. Just when I think that I've heard something amazing, I'll hear something more amazing. It goes on everywhere across the country. Its human nature; if you can figure out a way to inflate your pension, you are going to do it. People who make a career of it are making out like bandits.
Another common pension abuse is double-dipping a practice in which employees retire and start collecting their pension, then are rehired to perform their old job at their old salary. Its a common practice for government workers around the country, despite many rules forbidding it. Workers often argue that they have earned their pension and their right to retire, and if they decide to work during retirement, they're entitled. But the logic there is deeply flawed, said Dean.
"Pensions were designed to make sure government workers were allowed to grow old with dignity, not to make them rich," he said.
The outrage, and the actuarial problem
In this series on super-sized government pay, weve already met Phoenix police chief/public safety manager Jack Harris, whos become the nations poster child for double-dipping. He retired as chief in 2007 and began collecting a $90,000 pension. Two weeks later, he was hired for essentially the same job, retitled public safety manager, and granted a salary of $193,000. Harris attracted nationwide attention after a lawsuit was filed by conservative interest group Judicial Watch. The lawsuit claims the public safety managers job was manufactured expressly to circumvent both pension rules and a state law aimed at curbing the practice.
Peter Tom is a municipal compensation specialist whos worked in New Jerseys complicated government worker environment for three decades. New Jersey even has rules designed to enable double-dippers, he said. Yet, hes seen all manner of pension-stuffing through the years.
This would not be allowed in the private sector because pension committees are third party administrators who have fiduciary responsibilities, Tom said.
While the outrage factor on six-figure pensions and lucrative loopholes is high, Tom also points to a more practical, actuarial problem: Pension recipients arent paying their fair share, creating unfunded liabilities. For example, he said, a worker who pays 5 percent of a $10,000 salary into the system for 24 years, then 5 percent of a $140,000 salary for one year, doesnt cover the costs of a $70,000 pension.
"These loopholes create unfunded liabilities that have helped damage the pension pool.," he said. "Pensioners are never asked to make up the difference.
A Ponzi scheme?
In truth, pension systems rely on what might be considered an accounting trick, not unlike the trick which keeps the Social Security system afloat for now. While state workers contribute payments to the system typically about 5 percent of their salary -- and those payments are matched by government employers -- about 10 percent -- those payments scarcely cover the eventual payouts.
You can never pay enough to pay for your retirement, Tom said.
In fact, "defined benefit" pension plans make no direct connection between the worker's contributions and the benefits enjoyed later. Pension systems hope for large investment gains during a worker's career in many states the calculations project an annual return of around 8 percent, a fantasy -- but really rely on the payments of current workers to fund payouts to retired workers.
Just as pensions are a bit of an accounting trick (or a Ponzi scheme, some might argue), pension obligations do not appear on state balance sheets as debts. If they did if states actually had to write down what they owe retirees going forward, and assume a modest return on investments -- the unfunded portion of the payments could be as high as $4.3 trillion, said Rauh, the Northwestern professor. Thats nearly a third of the federal debt, which currently stands at $13.7 trillion. The federal governments massive debt steals headlines, vaults politicians to office and has its own Times Square clock, but at least Washington, D.C., can print money. Meanwhile, states are staring at a black mammoth black hole with seemingly no way to dig out.
While the contribution formulas have systematic flaws, their shortcomings are severely exacerbated by another simple math problem life expectancy has jumped almost 10 years since 1960.
Unions managed to lower or reduce the retirement age while increasing benefits in a period of history where people are living longer, said Dean, the PensionTsunami.com webmaster. So you begin seeing what the problem is.
Deans website maintains a $100,000 club roster, listing pensioners who enjoy six-figure annual payouts. But life expectancy is forcing him to consider new list: the $1 million club, for retirees who will collect seven-figure pensions during their lifetime.
We have a police chief who will pull in $5 million in California (before he dies), he said.
Defined contribution to the rescue?
Most pension reformers are calling for state governments to switch to a defined contribution system, similar to 401(k) plans many workers have. That would mean workers would only get what they put into the system -- combined with any employer cash contributions and supplemented by investment gains -- when they retire.
But while that is fiscally responsible from the government's point of view, a defined contribution plan is a meager replacement for a defined benefit plan. Thats why unions are putting up quite a fight against pension reform.
Here's a simple rule-of-thumb comparison.
A 30-year government worker with a final salary of $80,000 could expect an annual pension of roughly $55,000, or about $4,600 per month for life, under the current scheme.
To earn that kind of guaranteed monthly income, a 401(k) saver would need $1 million in their retirement account, assuming $100,000 in savings can generate $400 in monthly income.
While it's not impossible to grow a 401(k) to those lofty levels, it is rare. In fact, 50 percent of Americans who have 401(k) accounts have less than $35,000 in them. Contrast that with our 30-year government workers who can all expect predictable pension checks.
So expect a furious battle as state governments attempt to reign in pension costs.
Its about power
But in the end, pensions are about power. Elected officials from local and state governments maintain power by doling out favors and perks, and there is no perk like a pension.
Next week, Tom will be our guide as we delve more deeply into particularly egregious forms of pension loopholes, such as a county sheriff who retired in 1999 but still holds his six-figure-salaried office, the judge with 11 state jobs and the convicted mayor with the $125,000 pension and multiple other sources of state income.
Well also find out just how emotional the tale of government pensions can be, as we meet a New Jersey sheriff who stormed a college classroom and forced a professor to apologize for calling him a double dipper in class.
This problem is really the result of years of the public just not paying close attention, especially over the last decade, said Dean, of PensionTsunami.com. So now, this is a story that is going to keep on going and going.
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