Excellent Economist Mag. article on CA’s Gov. retiree Pension problems

[CA renter]

[quote=briansd1]The fraud on Wall Street made us all think we were wealthier that we really are.

Peak to trough $16 trillion of US wealth was lost. Poof, gone just like that.

We regained about 1/2 of that.

Want pensions to get back to health? Assets value increases is the best way to do that.

I’m waiting for CA renter to say that, no, we don’t want inflation because that only hurts the middle-class who needs to buy houses.

But asset value inflation is exactly what the pensions funds were counting on. The pension funds were thinking that asset value rises made contributions unnecessary at times.[/quote]

Which is exactly why I hate the focus on asset price appreciation. If not for the boom-bust policies of the Fed and Wall Street, pension funds would have been much more conservative. They would have assumed lower returns, required higher contributions, and kept benefits at reasonable levels. It was the Wall Street casino atmosphere, backed by the Greenspan/Bernanke put, with a large helping of perpetual inflation expectations, that led to the “pension crisis.”

I favor an economy with a much lower, but more sustainable, growth rate that’s centered around a productive economy, rather than on the FIRE sector’s asset price inflation schemes. Yes, I hate inflation for the sake of “inflation.” It benefits asset owners (“capitalists” who are less productive) at the expense of wage earners (the producers) whose purchasing power is eaten away as a result of this excess money being pumped into the system. Note that when the Fed (or anyone at CNBC) talks about inflation, they only call wage inflation “dangerous” or “bad.” When asset prices rise, though, they cheer it on.

[CA renter]

[quote=briansd1][quote=gandalf]That doesn’t make sense. The average employee contributing a portion of their paycheck to pension for 25 years had very little to do with the investing decisions between CitiBank and the State and County Employees of Wherever.[/quote]

As people here know, I’m not crazy about Republicans.

But the public employees contributed too little as did the governments. They could all have assumed a lower rate of return and contributed more.

It’s not like governments didn’t benefit from Wall Street. The promised unsustainable returns of Wall Street enabled governments to overspend.

If there were no Wall Street, governments would have had to set aside larger portions of their annual budgets to pensions.

Now, the government retirees are not hurting. Citizens are suffering from higher taxes and cuts in services.[/quote]

Bullshit. Public employees have been taking pay cuts and making a LOT of concessions over the past few years. Why are some of you so painfully ignorant about that? One has to wonder why the stories about increased employee contributions, pay cuts, benefit cuts, etc. aren’t making it in the news like all the anti-union propaganda. Think that might be deliberate?

[CA renter]

[quote=poorgradstudent]Econ 101 pretty much tells us that long term, in order to keep talent, if critical government jobs cut benefit plans, they’d have to raise salaries, basically making it a wash in terms of taxpayer benefit. I personally know several people who work for the State for wages lower than they could take elsewhere specifically because of the benefits.

There’s room for reform, and the Brown plan seems fairly reasonable. My understanding is a lot of new hires don’t enjoy nearly the same luxurious benefits some of the old timers qualified for, benefits that it would be illegal to strip now and the state pretty much just has to wait out and let those folks die. But reforming the public sector unions is not a silver bullet to California’s revenue problems. Prison reform would probably have a bigger, longer lasting effect.[/quote]

We can’t forget the burdens placed on the state by our illegal immigration mess. It’s supposed to be somewhere between $5 billion and $10+ billion per year, just in California. Numbers vary widely because many public agencies are not allowed to ask about a person’s immigration status (wonder why?), so these numbers are probably very low.

http://articles.latimes.com/2009/feb/02/local/me-cap2

http://www.nctimes.com/news/local/article_5cedf831-9d5d-5335-af7e-2af6730a577c.html

http://www.reuters.com/article/2009/02/06/idUS268071+06-Feb-2009+PRN20090206

Mind you, when you hear about the pension shortfalls, they are talking about fully funding ALL pensions that will be owed into the future, those are not annual shortfalls. As a matter of fact, the costs of illegal immigration and the costs for public sector workers are intertwined. The #1 expense associated with illegal immigration is public education, so if we could eliminate the taxpayers’ obligation to pay for educating illegal immigrants and/or their children (yes, it’s complicated), a rather large portion of our state’s pension problem would be resolved as well because fewer teachers, etc. would be needed.

It’s not that I have a problem so much with the immigrants, but with the people who employ them. Let them pay for all the infrastructure burdens and benefit costs for their employees and all of their dependents. I’ll bet those “cheap” workers wouldn’t look so cheap if the **employers** had to pay the true costs of employing illegal immigrants, rather than shifting those costs onto taxpayers’ shoulders. Why aren’t we all up in arms over these parasites (the employers) instead of just ranting about public employees?

Again, why is the message that’s being directed at the public so skewed?

[GH]

[quote=CA renter]Note that when the Fed (or anyone at CNBC) talks about inflation, they only call wage inflation “dangerous” or “bad.” When asset prices rise, though, they cheer it on.[/quote]

Asset price increases are a tax on the poor and young to pay the elderly and the wealthy who tend to hold assets.

Wage increases tax the elderly and wealthy and thus are a non starter.

[Anonymous]

[quote=gandalf]
You’re uninformed.

http://www.bloomberg.com/news/2010-06-29/banks-financing-mexico-s-drug-cartels-admitted-in-wells-fargo-s-u-s-deal.html
[/quote]

Did you even read the article?

The $348 billion number is the total amount that Wachovia handled for currency exchange. Almost all of that was legitimate business.

From the Justice department report (linked in your article):

The investigation identified at least $110 million in drug proceeds…

You are off by a factor of more than 1000.

As far as accountability goes: people went to jail, and multi-million dollar fines were paid by the bank.

So much for drug cartels being the solution to our pension problems.

[quote=gandalf][quote=pri_dk]
The money that the State of California has promised them is THE problem.[/quote]

No. You’re wrong again.

It is not THE problem. It is part of the problem, and as a matter of proportion, it is a smaller issue than financial industry misconduct, which led to the underfunding in the first place.[/quote]

The pensions were never “underfunded.” They didn’t get the expected returns. There’s a huge difference. Just like my 401K example above, they had unrealistic expectations and are looking to blame someone when those expectations are not met.

What sort of world do you live in, where people get a “do-over” at taxpayer expense if their portfolios don’t perform as well as they had hoped? Is this the perceived reality of the public sector employee? (“taxpayer bailout” – where have I heard that one before…)

It’s a $500 billion dollar problem. It is THE problem for California. In the decades to come, it will rob our schools, our elderly, our sick, our infrastructure and more. It has already crippled some of our cities: http://piggington.com/california_or_bust_san_jose_in_crisis

We can rant hysterically about drug cartels and high-frequency trading and other things that are loosely associated with the issue, but at the end of the day, there is a $500,000,000,000 bill coming due.

Who is going to pay?

The taxpayer, the public services, or the public sector employee?

False choice? They are the only choices.

Now do you have an answer, or just another conspiracy theory?

[briansd1]

CA renter, I do agree with many of your opinions.

Capitalism’s only reason for being is its purported effeciency at allocating capital to productive uses in the general economy, to facilitate trade and economic growth. For that investors get a fair return. Once that social contract is broken, we need reforms.

I’m not saying that the outrage is proportional, but I do believe that some anger should directed at government and public employees.

For example, the cuts at the state and local levels tend to happen in services that people depend upon most (school hours, library, street lighting, etc..) That’s done purposefully to rile up citizens and garner support for more taxes.

Now there’s talk of cutting the school year by 1 week. There are so many other things to cut, but we decide to cut education while our competitors in Korea, and China are increasing education. No wonder our economy is going down.

http://latimesblogs.latimes.com/california-politics/2011/11/budget-cuts-schools.html

[sdduuuude]

[quote=gandalf]People who are outraged about public pensions should FIRST direct their outrage at the financial industry. FOLLOW THE MONEY.[/quote]

But those in charge of the public employee pension system made the decision to rely on wall street by promising a certain output rather than forcing a certain level of input.

Focusing on contributions takes wall street out of the picture.

Why force administrators to meet a certain level of growth ? It is just stupid because you can’t count on the world to provide you a certain level of growth, and we clearly can’t (and shouldn’t) rely on wall street to provide it.

Just make the benefit contribution-based and whoever is manging the fund will do their best with the money.

Nobody is entitled to a 15% return and certainly the taxpayers shouldn’t be making up for the shortfall.

[gandalf]

[quote=sdduuuude]
Why force administrators to meet a certain level of growth ?
…
Nobody is entitled to a 15% return and certainly the taxpayers shouldn’t be making up for the shortfall.[/quote]

Yeah, I actually agree. These are good points, sdude.

The taxpayer is footing the bill, both directly and through stealth inflation.

Compensation / pensions need to be reformed. I just don’t think it’s the root of the problem.

The root of the problem is THE REASON this board exists — bullshit asset bubbles and the aftermath we’re all living through.

[sdduuuude]

[quote=gandalf][quote=sdduuuude]
Why force administrators to meet a certain level of growth ?
…
Nobody is entitled to a 15% return and certainly the taxpayers shouldn’t be making up for the shortfall.[/quote]

Yeah, I actually agree. These are good points, sdude.

The taxpayer is footing the bill, both directly and through stealth inflation.

Compensation / pensions need to be reformed. I just don’t think it’s the root of the problem.

The root of the problem is THE REASON this board exists — bullshit asset bubbles and the aftermath we’re all living through.[/quote]

Not so sure the bubble is even the problem. I mean – it is a problem, but the reason it hurts is because taxpayers are bailing out those who were stung by the bursting bubble, which is kind of the same problem as the pensions.

So, the taxpayers are burdened with bailing out the stupid banks, the stupid homeowners and the entitled public employees.

So, I see the real problem is that the gubmint feels the need to save everyone’s ass using taxpayers money. I would rather divorce the taxpayers from all these bailout efforts so that the decisions made by stupid people affect those stupid people in particular and not taxpayers in general.

Do this and we don’t need to regulate wall street as much because they can suffer from their own mistakes.

[SK in CV]

[quote=sdduuuude]Nobody is entitled to a 15% return and certainly the taxpayers shouldn’t be making up for the shortfall.[/quote]

Just to add fuel, no 15% return assumptions were ever made. (As an aside, I don’t think
“entitled” belongs in that sentence anywhere, it doesn’t really fit.) I believe over most of the few years preceding the crash it was like 8%. And returns met or exceeded those assumptions. Except that one time when they didn’t. Before the crash, most public pensions were very close to fully funded (albeit with what in hindsight were faulty return assumptions). My recollection is that in 2007, CalPers was like 96% funded. I believe both CalPERS and CalSTRS, the two largest CA public retirement plans, are both now using 7.5% return assumptions.

[gandalf]

del

[CA renter]

[quote=sdduuuude][quote=gandalf]People who are outraged about public pensions should FIRST direct their outrage at the financial industry. FOLLOW THE MONEY.[/quote]

But those in charge of the public employee pension system made the decision to rely on wall street by promising a certain output rather than forcing a certain level of input.

Focusing on contributions takes wall street out of the picture.

Why force administrators to meet a certain level of growth ? It is just stupid because you can’t count on the world to provide you a certain level of growth, and we clearly can’t (and shouldn’t) rely on wall street to provide it.

Just make the benefit contribution-based and whoever is manging the fund will do their best with the money.

Nobody is entitled to a 15% return and certainly the taxpayers shouldn’t be making up for the shortfall.[/quote]

Where are you getting the 15% return assumption? I’m not aware of any pension funds using those numbers.

The pension funds use historical return rates in their calculations. Unfortunately, when you have a financial system that’s designed to go through exaggerated boom-bust cycles, trying to gauge return rates gets tricky. Fix the actors behind the boom-bust cycles, and the “pension crisis” will be fixed.

[CA renter]

[quote=sdduuuude][quote=gandalf][quote=sdduuuude]
Why force administrators to meet a certain level of growth ?
…
Nobody is entitled to a 15% return and certainly the taxpayers shouldn’t be making up for the shortfall.[/quote]

Yeah, I actually agree. These are good points, sdude.

The taxpayer is footing the bill, both directly and through stealth inflation.

Compensation / pensions need to be reformed. I just don’t think it’s the root of the problem.

The root of the problem is THE REASON this board exists — bullshit asset bubbles and the aftermath we’re all living through.[/quote]

Not so sure the bubble is even the problem. I mean – it is a problem, but the reason it hurts is because taxpayers are bailing out those who were stung by the bursting bubble, which is kind of the same problem as the pensions.

So, the taxpayers are burdened with bailing out the stupid banks, the stupid homeowners and the entitled public employees.

So, I see the real problem is that the gubmint feels the need to save everyone’s ass using taxpayers money. I would rather divorce the taxpayers from all these bailout efforts so that the decisions made by stupid people affect those stupid people in particular and not taxpayers in general.

Do this and we don’t need to regulate wall street as much because they can suffer from their own mistakes.[/quote]

The “bailouts” wouldn’t be needed if the bubbles were prevented from happening in the first place. The bubbles caused outsized returns on investments during the good years, and actuarial assumptions were made based on those numbers. These artificially inflated (due to the bubbles) return assumptions are responsible for the insufficient contribution rates and too-high benefit levels that have caused the “pension crisis.”

If we had focused on the problems with the Fed and the Wall Street casino, we wouldn’t be having this discussion about the “financial crisis” or the “pension crisis.” Our problems are 100% related to Wall Street and our financial system, in general.

[Anonymous]

[quote=SK in CV]I believe over most of the few years preceding the crash it was like 8%. And returns met or exceeded those assumptions. Except that one time when they didn’t.[/quote]

Funny how it works, this investing business.

[quote]Before the crash, most public pensions were very close to fully funded[/quote]

I’m sure many personal 401Ks and college savings plans were “fully funded” as well.

The CalPERS and other fund managers should have known that downturns happen. And their clients – the public sector unions – should have checked their fund manager’s numbers. If you look at economic history, the recent bubble isn’t even an outlier.

Who blindly trusts someone to manage more than $100 billion in assets?

Answer: Someone who who has a built in “bailout” clause in their portfolio.

8%, 7.5%, 1% return – it doesn’t matter. The taxpayer will be forced to pony up any shortfall. The “investments” are just a sideshow.

It’s a dream portfolio – guaranteed returns while others carry all the risk. No banker, trader, or “Wall Street” type in history has ever had such a sure deal.

[Anonymous]

[quote=CA renter]Unfortunately, when you have a financial system that’s designed to go through exaggerated boom-bust cycles, trying to gauge return rates gets tricky. Fix the actors behind the boom-bust cycles, and the “pension crisis” will be fixed.[/quote]

Yeah, the system is “designed” to go though boom/bust cycles. Right now there’s a secret committee of powerful men planning the next bubble of 2063.

But you are right about one thing: If we could just find a way to have predictable, steady growth every year, we wouldn’t have these issues.

While we are solving that problem we can cure all disease, end all bigotry and racism, and work out those little wrinkles in cold fusion so that we can all have flying cars that we ride to other galaxies.

[quote]If we had focused on the problems with the Fed and the Wall Street casino […][/quote]

If not “Wall Street,” then which “casino” do you think CalPERS will get consistent 8% returns every year with their $100 billion portfolio?

CalPERS is one of the largest investment funds that has ever existed. They are one of the few organizations that has enough size to move the entire market with their trades.

They ARE Wall Street.

You think they would know something about booms and busts, eh?

[Author]

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