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August 1, 2012

Pew Center Dishes out the Truth about Pensions

At the Huffington Post, Kil Huh, Director of Research at the Pew Center on the States, feeds Via Meadia with more ammunition in our ongoing struggle to publicize the coming pension disaster. Huh warns that 34 state pensions are less than 80 percent funded and falling, and underfunding of these pensions is just as much of a long-term problem as is overestimating their probable investment returns.

Huh fingers the right culprit for this mess:

It is easy to blame unions or Wall Street for states’ pension problems. But policy makers are the ones who made promises they couldn’t afford, didn’t pay for, and now can’t keep. Recent investment losses have hurt pension plans, but the decline in pension funding started before then—largely because some policy makers shortchanged their retirement systems for years and relied heavily on investment gains that never materialized. Now, these same states can’t count on investing their way out of this funding crisis.

Of course, knowing who’s to blame isn’t the same as fixing the problem, but on that score, some recent voting patterns have been encouraging. Let’s keep spreading the dismal news.

And as for current pension holders, our usual advice applies: Save aggressively. Invest prudently. If your current pension seems too good to be true, it probably is. Your politicians and union leaders can and will lie to you about the solvency of your retirement, and there won’t be all that much you can do about it—except maybe to vote the bums out.

Posted in Blue Social Model, Economics & Business, Quick Takes
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  • thibaud

    “Spreading the dismal news” isn’t the same as contributing to our understanding.

    What would be much more helpful would be a focused, fact-based analysis of why the US lags so far behind Canada, the Netherlands and Sweden when it comes to well-managed and well-funded public pensions.

    Such an analysis could focus on four core issues:

    1. Which nation relies on Defined Contribution rather than Defined Benefit?

    2. Which nation’s fund managers manage their pensions in-house instead of paying absurdly bloated 2-and-20 fees to external fund managers like Mitt Romney?

    3. Which nation requires, by statute, appropriate levels of broad-based taxation in order to maintain pension solvency ratios close to or exceeding 100%? (That would be Holland.)

    4. What is the correlation between the above well-managed pensions and libertarian, shrink-the-government policies? Highly negative.

    Cheat sheet for the lazy:

    1. Sweden

    2. Canada

    3. The Netherlands

    4. Negative correlation.

    So if you want solvent pensions, you need good governance, professional management, an end to the extraordinary “leakage” by which Romney and his ilk skim off nearly all the returns – AND you need appropriate, broad-based taxation.

    in other words, one party needs to rein in its public employee union hacks and the other party needs to get rid of its starve-the-state loons.

  • Kenny

    Public sector unions are easy to blame because they are the prime cause for the pension problem.

    It was the unions which moved heaven and earth to elect people who would give them what they demanded. Fact.

  • Jim.

    @thibaud-

    Wasn’t a recent proposal to save Social Security based on a defined-contribution plan that maintained our broad FICA taxation? If I recall correctly (and on this point I may not) it was supposed to depend on low-fee index funds.

    It was, as I recall, the beginning of a long, severe decline in the proposer’s political fortunes.

    Another courageous idea would be to defend the solvency of Social Security by making sure FICA taxes are not reduced for short-term political gain.

    Courage will continue to be in short supply so long as people will vote for people who tell them comforting Leftist lies instead of people willing to tell them hard truths about what is realistic to expect from the US government.

  • Mick The Reactionary

    @thibaud:

    “Which nation requires, by statute, appropriate levels of broad-based taxation in order to maintain pension solvency”

    Wow, what a brilliant idea. Why no stupid American thought about it?

    Well, in fact many did. Unfortunately most of them were/are crooks.

    For example, Rizzo, a good mayor of Bell, population 35K of working-class residents (93% Hispanics) in LA county, CA had $800K annual salary and was to receive $880K/year pension.

    Rizzo was one hardworking dude and had benefits package to fit his modest wages:

    “Rizzo also received an unusually large package of benefits, including paid vacation, sick and personal time of 28 weeks off per year.”

    en.wikipedia.org/wiki/City_of_Bell_scandal

    Mayor Rizzo and the gang were democratically elected by the residents and their wages and pensions were defined and funded in open democratic process.

    Too bad democracy requires voters able to understand what they are voting for.

    I understand that air traffic controllers in Spain are making $300K/year and have corresponding fully funded pension.
    Average wage in Spain is $20K/year (see http://www.huffingtonpost.com/2010/12/04/spains-air-traffic-contro_n_792010.html)

    Should Spain air traffic controllers be model for wages/pensions?
    If not, why not?

  • OneHundredYearsOfBlogPosts

    “Which nation’s fund managers manage their pensions in-house instead of paying absurdly bloated 2-and-20 fees to external fund managers like Mitt Romney?”

    –And why, prey tell, are these fund managers selling their souls to the high-fee-charging hedge fund managers? Having failed to hit their exorbitant projected returns, they have to chase the big returns offered by hedge funds, albeit with high fees and high risk. It’s called “doubling down.”

    “What would be much more helpful would be a focused, fact-based analysis of why the US lags so far behind Canada, the Netherlands and Sweden when it comes to well-managed and well-funded public pensions.”

    –How’s this for a start: corruption, cronyism, incompetence. Do you seriously think you’re going to make make Chicago into a Sweden on the Lake? The differences in political cultures and civil societies are, shall we say, not insignificant. Let’s not underestimate the difficulty of hitting an 8% return annually when you have to invest a large percentage of your assets in ventures affiliated with the friends and family of your political masters.

    “So if you want solvent pensions, you need good governance, professional management, an end to the extraordinary “leakage” by which Romney and his ilk skim off nearly all the returns – AND you need appropriate, broad-based taxation.”

    –Or 8% returns every year for the next 50 years. Both are about as realistic as “good governance” and “professionalism” in Illinois state government.

    I know in my heart of hearts that the Cubs would have made the World Series several times if they had been managed and played like the Yankees. But I can’t for he life of me figure out how that fairly self-evident observation will bring them any closer to October baseball.

  • thibaud

    #5 – you don’t address the fact that ALL fund managers, here, in Canada, Sweden, Holland and around the world, are facing the same pressures of changing actuarial tables and lower returns to equity markets.

    And yet our pension funds continue to be out-managed and out-funded by those doggoned furreigners. Why?

    Again, the Canadians refuse to be suckered. The alternative to giving your money to scammers like Romney and Paulson is to take the “alternative” investing in-house, staff up with real professionals, pay them appropriately. Some recent examples:

    Canada Pension Plan (CPP) bought 12% of Skype for ~$300m and flipped it a few years later for about $900m.

    CPP and PSP Investments partnered with Apax to acquire Kinetic Concepts for $6.1 billion in 2011.

    A number of big Canadian pension funds created a consortium to bid on a purchase of the Toronto Stock Exchange.

    Are you implying that our fund managers can’t do the same because … why, exactly?

    Because we Americans aren’t as smart as Canadians?

  • thibaud

    Preachin’ to the choir, Mick. Hacks and crooks are bad. Yea verily.

  • http://inthisdimension.com alex scipio

    @thibaud

    Actually, no. You are only arguing the symptoms, not the problem. It is a waste of time. For as long as this link remains: taxes->govt-employee-salary->govt dues forcibly collected->dues sent to (D) campaign coffers, the symptoms only will increase, and the condition of the patient (the taxpayer) deteriorate.

    The PROBLEM is that the government has no business in the pension business OR the enforcement of unions business. THIS is what WI was all about. The govt-sector unions already had caved on pension contributions, health care contributions. They got their panties in a twist because Walker – and the citizens of WI, it turned out – wanted govt sector unions to collect their own dues in a Right-to-Work (ie. voluntary unions membership) mode. And, of course, the workers AGREED that they wanted CHOICE, the roles of SEIU and AFSCME dropping dramatically within weeks.

    I continually am fascinated by the refusal of the party of CHOICE to refuse CHOICE to workers as to whether to pay bribes to hold a job. (Seriously. This is AMERICA. We need laws giving a man or woman the right to work? Really?)

    I think it’s pretty much a given at this point that Democrats are against any and all choice not having to do with abortion, and honest Democrats would come clean about that. Progressive Democrats are dictators, and honest ones, if any existed, would admit it.

    CA’s pension is underfunded, per Stanford, to the tune of about $500B. CA cannot pay that. Anyone thinking they can is deluded. But of course Moonbeam insists our debt is only $16B, conveniently forgetting the $14B we owe the Feds and about $10B we owe the cities, giving CA a real debt of over $40B – not counting the $500B of unfunded pension liability. Even $16B is unconstitutional in CA….

    If you want to talk about symptoms – and that is likely all that reasonably can be talked about until a few more major cities and perhaps some states declare bankruptcy (and understand that for Dem pols in, say, CA, to DECLARE (if congress created a Chapter for State Bankruptcy) would be for those Dem legislators to commit political suicide – abrogating the contracts that are the ONLY reason for their election (because of the dues), would signal the end of the Dem party in nearly all races at nearly all levels. This is why JFK decided to legalize govt-sector unions to begin with, and why Gov Jerry Brown extended unions to govt sector employees in 1977, setting the stage for the state bankruptcy that now exists in all but formal declaration. It’s the only way Dems get elected; they haven’t had a new idea since 1932 – and that idea currently is bankrupting europe.)

    … but back to the discussion of symptoms. Much of this could be cleared out, much of the nonsense and lies and inflated projections done away with and the taxpayer presented with an honest outlook on THEIR finances, if GAAP and all other private sector fiscal regulations – enacted, after all, to keep the financiers honest – were applied to the govt sector. That they are NOT speaks volumes about the honesty of pols, and particularly Blue state pols. You may have noticed that all the states in de facto bankruptcy are Blue. We don’t need to adopt all kinds of new ways and bureaucracies to manage State pensions. We just need to apply private sector accouinting rules to the States.

    Or abolish their pensions completely and force them into the same “pension” system into which taxpayers are forced: SS.

  • Mick The Reactionary

    @OneHundredYearsOfBlogPosts:

    “Do you seriously think you’re going to make make Chicago into a Sweden on the Lake? ”

    No problem. As Professor George Bush said all people want the same things for themselves and their children.

    If you don’t believe in that something is wrong with you.

    And Romney was a raciss when he noticed that the difference between the first world Israel and the hell-hole of Palestine perhaps, maybe, can be explained by difference in culture.
    How Politically Incorrect of Mitt.

    It appears that thibaud does believe that the only difference between Chicago and Switzerland is lack of mountains in Illinois.

  • thibaud

    Ontario has some of the better-managed pension systems in the world. How come Ontario can do it and Oklahoma, Kentucky, Alaska and Illinois cannot?

  • Jim.

    Has anyone ever met a teenager who insisted his family was a pack of losers because he didn’t have a swimming pool like friend #1, a luxury car of his own like friend #2, a dad with a cooler job like friend #3, and so on, not noticing (or caring) that his own family had quite a bit going for it — including some very strong values he simply dismissed and ignored?

    My brother was like that when he was a teen. The family he’s tried to put together is such a mess on very basic matters that I don’t have the heart to bring up his youthful expectations of how things ought to be. It just hurts to think about it, in fact.

    Anyway, coveting others’ success and ignoring (and refusing to build on) your own is not a road to prosperity or happiness.

    Obama might be a good president of Sweden or Holland. He’s a lousy president of the US (and should be replaced). Some of our citizens might similarly be happier if they moved to places they admired more.

    On no account should they be given control over the US’s future, destroying what we have (economic freedom, an actual future represented by replacement fertility rates) in pursuit of a system we’ve demonstrated (Social Security, Medicare, Medicaid) we can’t handle.

  • Rob

    Ontario has some of the better-managed pension systems in the world.

    And there is no difference at all between Illinois and Ontario.

    Oh, I forgot: Illinois is run by criminals from Chicago.

  • thibaud

    Jim – so you think Americans are stupid? That we can’t attain the level of governance and pension management that our northern cousins have attained?

    Not very patriotic of you.

    You’re beginning to come across like that Cayman Islands “Blocker” candidate.

  • Jim.

    @thibaud-

    Americans who run Leftist institutions like Medicare and Medicaid are incompetent. What can I say?

    Americans are good at what we’re good at… and we’re very good at those things. (Breaking new ground in technology and reaping the benefits of early adoption, in particular.)

    It may not even be possible to structure an economic system such that you can have cradle-to-grave welfare benefits (including comprehensive health care), a functional industrial economy (much less the most innovative technological economy in the world), and a replacement fertility rate. And even if you did manage that, there’s probably something else critical the government was beggaring to achieve success in its chosen favorites.

    Government can only pay attention to so many favorites at once; everyone else gets shafted. (Individuals, on the other hand, can pay attention to everything, because there are so [very] many of us.)

    Government that tries to avoid shafting anyone goes broke in the attempt… not least because the mass of laws and regulations they put in place to do so chokes out economic growth and initiative critical to the tax base.

    Eurosocialism is a bridge too far, thibaud. We’ll lose the good that we have if we pursue it. ObamaCare needs to be REPEALED, and buried in an unmarked grave.

  • Andy Freeman

    > Which nation’s fund managers manage their pensions in-house instead of paying absurdly bloated 2-and-20 fees to external fund managers like Mitt Romney?

    None.

    The only funds run that charge “2-and-20″ are VC and hedge funds. No sane pension has most, let alone, all of its money in such funds.

    Note that other nations’ pension funds do invest in hedge and VC funds. Some do well, others don’t. Let me suggest that the problem with the “others” isn’t the fault of the funds that they pick, but the fault of the pickers.

    Of course, there’s nothing stopping someone from doing a hedge or VC fund on less costly terms.

    What? You can’t produce the return to investors that Bain did?

  • Andy Freeman

    > That we can’t attain the level of governance and pension management that our northern cousins have attained?

    The available evidence suggests that we can’t.

    Until that changes, it’s absurd to behave as if we can.

    We shouldn’t have a welfare state unless we can actually run one.

  • thibaud

    What was William McGuire of United Healthcare good at, exactly?

    Besides grand larceny, that is?