The pension shortfalls are 100% directly tied to the boom-bust cycles created by the Fed and Wall Street.
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You can’t have it both ways, CA renter.
The local and state governments relied on unrealistic Wall-Street forecasts for the contributions.
But they didn’t have to rely on those forecasts and they could have made larger contributions instead of spending money or promising generous benefits. Now it the time to cut benefits based on realistic estimates.[/quote]
It’s much more complicated than that.
It’s not just the contribution amounts, but the benefit amounts that are affected by the investment returns. The return assumptions used by most public pension plans are actually very conservative relative to historical return rates and when compared to assumptions used by other large investment entities.
Public pension plans do not tend to rely on “Wall Street forecasts,” but rely instead on historical return rates and assumptions about events that would likely transpire under various conditions — like some fiscal/financial interventions (or lack of interventions) that might occur under different circumstances. As you probably know, Federal Reserve/govt intervention in the markets has been pretty universally acknowledged, and everyone played by the rules that had been established over many years and/or decades. The fund managers have to walk a fine line between taking on too much risk (possibly putting taxpayers at risk) or taking on too little risk (putting public employees at risk WRT inflation, contribution rates, etc.). Risk has been — and still is — grossly mispriced because of toxic “financial innovations” and inflationary Federal Reserve tactics. THAT is the cause of our “financial crisis,” not public employee unions.
They did and do have to rely on historical returns, as do all investment managers. They use historical return rates and follow current events in order to forecast future returns which they use to determine compensation and benefit amounts. Which other strategies and methods would you suggest they use?
You have to remember that there are real fund managers who work directly and indirectly for the pension funds, as well as private equity and hedge fund managers with whom the pension funds contract. If they promise 2% returns in a world of 9% returns, what do you think will happen to them? If you think they’d be kept on, you’re dreaming. Just like the banks during the bubble years, those who didn’t compete in the high-risk world suffered as everyone migrated to the high-risk investments/managers.
It’s a systemic problem that ties into how credit is used and how investments are managed on a macro level.
Additionally, if the pension funds were collecting 25% of an employee’s paycheck while keeping future benefits low, how do you think that would affect public employment? I’ve tried to explain before that high turnover rates would kill public employers even faster than a “pension crisis.” Hiring and training new employees in the public sector is very costly, and they cannot afford the turnover rates seen in the private sector. The process is very bureaucratic, and for good reason. Public employers and employees have more liability than most private sector workers because of the perception of “deep pockets.” If a private sector worker screws up, they might lose their jobs; but if a public sector employee screws up, they could end up in jail and/or face stiff legal penalties.
Public employers cannot just file for bankruptcy and walk away when they screw up. They have to last far, far longer than the vast majority of private companies, so they have to follow different rules.
These are jobs where experience, character, and integrity are often more highly valued than a new college degree. Public employers actively seek to recruit the most stable, dependable, security-minded job applicants, and the benefits packages offered by many public employers is their most powerful hiring tool. They have to hire a certain type of employee because public employees/employers are scrutinized far more than most private employees/employers. Contrary to popular myth, standards for public employment tend to be higher than those for private employment, both in terms of experience and education.
It’s a much more complex issue than you’d like to believe.
