Michigan signs Right to Work Bills

[CA renter]

UCGal has recommended this book in the past (thanks, UCGal!), and I’m going to pass along the recommendation.

———–

Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers

http://www.barnesandnoble.com/w/retirement-heist-ellen-schultz/1100223730

Editorial Reviews
Publishers Weekly – Publishers Weekly
The retirement crisis is no accident, claims Wall Street Journal investigative reporter Schultz; large companies have played a significant role in its creation to protect the wealth of its top executives. When GE, IBM, Verizon, and others slashed pensions and medical benefits for millions of American retirees, they pointed fingers everywhere but at themselves—but who was really at fault? Pension funds were not bleeding the companies of cash. GE hadn’t contributed a cent to the workers’ pension plans since 1987, but still had enough money to cover all current and future retirees. Executive pensions at GE, with a billion obligation, are a drag on earnings. These are largely hidden, however, lumped in with the figures for regular pensions. Schultz’s methodical cataloguing of these abuses paints a highly unflattering picture of companies that cut benefits to boost earnings, lay off older workers who are entering the years in which their pensions will spike, inflate retiree health benefits to boost profits, lobby for laws that keep the system inequitable, hoard death benefits, and fire whistle-blowers. Heartbreaking stories of destitute seniors are juxtaposed with the obscene surpluses in pension funds for executives ( billion at GE; billion at Verizon; billion at AT&T)—and unless the global retirement industry is reined in, Schultz points out, it will continue to capture retirement wealth earned by many to enrich a relative few, and within our lifetimes, “retirement” will inevitably revert to what it was in the 1930s and before. A fascinating, troubling exposé and a sobering call to arms. (Sept.)

[davelj]

[quote=CA renter]

One more note. I’m not sure people understand how most public pension funds work, or how they are “guaranteed.” The pensions are NOT funded directly by tax dollars….

Most people don’t even understand that “taxpayers” do not directly fund pension benefits.[/quote]

This is 100% incorrect. Yes, the employees contribute to the pension fund but the “employer” in these arrangements is… the taxpayer.

To use a specific example, in 2011 San Diego County’s pension fund received $322 million in “employer contributions” (the employer is the County which is funded by tax receipts) and another $44 million in employee contributions.

[See for yourself: http://sdcera.org/CAFR/cafr_2011.pdf%5D

So, here in San Diego – and in the vast majority of other US municipalities – taxpayers absolutely DIRECTLY fund pension benefits.

I’m somewhat baffled that you don’t know this.

[CA renter]

[quote=davelj][quote=CA renter]

One more note. I’m not sure people understand how most public pension funds work, or how they are “guaranteed.” The pensions are NOT funded directly by tax dollars….

Most people don’t even understand that “taxpayers” do not directly fund pension benefits.[/quote]

This is 100% incorrect. Yes, the employees contribute to the pension fund but the “employer” in these arrangements is… the taxpayer.

To use a specific example, in 2011 San Diego County’s pension fund received $322 million in “employer contributions” (the employer is the County which is funded by tax receipts) and another $44 million in employee contributions.

[See for yourself: http://sdcera.org/CAFR/cafr_2011.pdf%5D

So, here in San Diego – and in the vast majority of other US municipalities – taxpayers absolutely DIRECTLY fund pension benefits.

I’m somewhat baffled that you don’t know this.[/quote]

I didn’t word that correctly. What I meant is that they fund a portion of the **contributions** which are made well in advance of a person’s retirement. They do not directly fund the **benefits.**

IOW, there are many people out there (the majority, from what I can tell) who think that the employer writes the benefit checks every month. That is absolutely not the case. The pension funds are separate entities, and in the case of municipalities that contract with CalPERS or other major pension funds, they aren’t even controlled in any way by the govt entities that the employees work for.

The benefits are paid from the pension funds which are funded primarily by investment returns, then employer contributions, then employee contributions…in declining order. Now, the employee and employer contribution amounts will be the same. That also means that if the return assumptions turn out to be wrong, the **employees** will be carrying half of the burden of the unfunded liabilities. Nobody is talking about this.

BTW, the government agency is *funded* by the taxpayers/consumers of public goods and services; the taxpayers are not the employers of public workers any more than I am the employer of Walmart employees if I shop there.

————-

In your example above (using your numbers), the total employee and employer contributions total $366 million. The employee portion was $44 million. It will now be $183 million under Gov. Brown’s reforms. THAT is what I’m referring to when I say that the media did not adequately explain what Brown’s reforms have done. No big media push to explain any of the cuts that have been taken by govt workers. Nope, instead, we get to hear the loudest drumbeats when a single public employee in the entire state commits fraud (for which they’re being investigated…and under Brown’s reforms, they will lose ALL of their pension and other benefits if found guilty) or works a tremendous amount of overtime and gets an unusually large payout.

[CA renter]

And, since we’re on the topic of government guarantees, would you also favor getting the government out of guaranteeing loans and investments of all kinds? No “loss-sharing” agreements, no guarantees for student loans, GSE loans, FHA loans, government bonds, etc.? What about FDIC? Surely, some people benefit far more than others because of these guarantees. If we’re going to lose the guarantees for people who actually do the work of the government, should we not also lose the guarantees for those who don’t work for these benefits?

[davelj]

[quote=CA renter]

I didn’t word that correctly. What I meant is that they fund a portion of the **contributions** which are made well in advance of a person’s retirement. They do not directly fund the **benefits.** [/quote]

The contributions go into investments which later turn into… benefits. So, there’s really no difference between “employer contributions” and “future benefits.” You can word it however you’d like but those contributions ultimately turn into… benefits. I think what you’re trying to say is that the contributions don’t fund CURRENT benefits, but rather are invested to fund FUTURE benefits. But no matter how you want to torture the prose the taxpayers are still funding a portion of the benefits.

[quote=CA renter]
IOW, there are many people out there (the majority, from what I can tell) who think that the employer writes the benefit checks every month. That is absolutely not the case. [/quote]

You’re right on this. It’s not like Social Security which is more of a pay-as-you go system.

[quote=CA renter]
The benefits are paid from the pension funds which are funded primarily by investment returns, then employer contributions, then employee contributions…in declining order. [/quote]

That’s correct.

[quote=CA renter]
Now, the employee and employer contribution amounts will be the same. That also means that if the return assumptions turn out to be wrong, the **employees** will be carrying half of the burden of the unfunded liabilities. Nobody is talking about this.[/quote]

This is incorrect. In fact, so long as the assumed rate of return is greater than the actual rate of return on a public pension fund, the TAXPAYERS will ultimately bear a larger share of the pension liability even if the current “split” is equal on paper. This is a simple actuarial fact. Because the taxpayer must ultimately make up any shortfall, it’s in the employees’ best interests to keep the assumed rate of return higher which keeps their contribution lower (than it otherwise would be)… once the assumed rate of return is shown to be fantasy – say, in a decade or whenever – the taxpayers will have to fund the shortfall. This is one of the insidious outcomes of using a fantastical assumed rate of return and why every union rep on a pension board fights to keep it as high as possible (because they know it benefits the members in the long term at the expense of the taxpayers).

[quote=CA renter]

BTW, the government agency is *funded* by the taxpayers/consumers of public goods and services; the taxpayers are not the employers of public workers any more than I am the employer of Walmart employees if I shop there. [/quote]

You don’t have a choice as to paying your taxes; you do have a choice as to whether you shop at WalMart. So, yes, you’re not the employer in either case, but… when your tax dollars fund the municipality and the municipality is the “employer” I’d say there’s a pretty direct link between the taxpayer and the employees, much more than in the case of your WalMart shopping.

[davelj]

[quote=CA renter]And, since we’re on the topic of government guarantees, would you also favor getting the government out of guaranteeing loans and investments of all kinds? No “loss-sharing” agreements, no guarantees for student loans, GSE loans, FHA loans, government bonds, etc.? What about FDIC? Surely, some people benefit far more than others because of these guarantees. If we’re going to lose the guarantees for people who actually do the work of the government, should we not also lose the guarantees for those who don’t work for these benefits?[/quote]

Yes to all but government bonds and the FDIC. Recall that the FDIC is funded by the banks themselves. If you’d like to remove the Treasury’s theoretical back-stop of the FDIC, I’d be fine with that.

[CA renter]

[quote=davelj][quote=CA renter]And, since we’re on the topic of government guarantees, would you also favor getting the government out of guaranteeing loans and investments of all kinds? No “loss-sharing” agreements, no guarantees for student loans, GSE loans, FHA loans, government bonds, etc.? What about FDIC? Surely, some people benefit far more than others because of these guarantees. If we’re going to lose the guarantees for people who actually do the work of the government, should we not also lose the guarantees for those who don’t work for these benefits?[/quote]

Yes to all but government bonds and the FDIC. Recall that the FDIC is funded by the banks themselves. If you’d like to remove the Treasury’s theoretical back-stop of the FDIC, I’d be fine with that.[/quote]

Why should we backstop government bonds? If we’re against using tax money to bail out others, why be selective?

[CA renter]

[quote=davelj][quote=CA renter]

I didn’t word that correctly. What I meant is that they fund a portion of the **contributions** which are made well in advance of a person’s retirement. They do not directly fund the **benefits.** [/quote]

The contributions go into investments which later turn into… benefits. So, there’s really no difference between “employer contributions” and “future benefits.” You can word it however you’d like but those contributions ultimately turn into… benefits. I think what you’re trying to say is that the contributions don’t fund CURRENT benefits, but rather are invested to fund FUTURE benefits. But no matter how you want to torture the prose the taxpayers are still funding a portion of the benefits.

[quote=CA renter]
IOW, there are many people out there (the majority, from what I can tell) who think that the employer writes the benefit checks every month. That is absolutely not the case. [/quote]

You’re right on this. It’s not like Social Security which is more of a pay-as-you go system.

[quote=CA renter]
The benefits are paid from the pension funds which are funded primarily by investment returns, then employer contributions, then employee contributions…in declining order. [/quote]

That’s correct.

[quote=CA renter]
Now, the employee and employer contribution amounts will be the same. That also means that if the return assumptions turn out to be wrong, the **employees** will be carrying half of the burden of the unfunded liabilities. Nobody is talking about this.[/quote]

This is incorrect. In fact, so long as the assumed rate of return is greater than the actual rate of return on a public pension fund, the TAXPAYERS will ultimately bear a larger share of the pension liability even if the current “split” is equal on paper. This is a simple actuarial fact. Because the taxpayer must ultimately make up any shortfall, it’s in the employees’ best interests to keep the assumed rate of return higher which keeps their contribution lower (than it otherwise would be)… once the assumed rate of return is shown to be fantasy – say, in a decade or whenever – the taxpayers will have to fund the shortfall. This is one of the insidious outcomes of using a fantastical assumed rate of return and why every union rep on a pension board fights to keep it as high as possible (because they know it benefits the members in the long term at the expense of the taxpayers).

[quote=CA renter]

BTW, the government agency is *funded* by the taxpayers/consumers of public goods and services; the taxpayers are not the employers of public workers any more than I am the employer of Walmart employees if I shop there. [/quote]

You don’t have a choice as to paying your taxes; you do have a choice as to whether you shop at WalMart. So, yes, you’re not the employer in either case, but… when your tax dollars fund the municipality and the municipality is the “employer” I’d say there’s a pretty direct link between the taxpayer and the employees, much more than in the case of your WalMart shopping.[/quote]

But you’re assuming that the actuaries don’t understand the issues with the assumed rate of return. They DO understand, and so does everyone else involved. You’re claiming that nothing will be done about the shortfalls until the last second; I’m claiming that they will increase contribution rates (and lower assumed rate of return — as they’ve done at least twice in the past couple of years) before that day arrives. I’m saying that the “guarantee” will be on the contribution side, and you’re saying it will be on the benefit side. We won’t really know until we get there.

Also, regarding the return assumptions, the pension funds have certainly shown that actual historical return rates are very much in line with, or higher than, assumed return rates. I’m sure you and I both recognize that we are in a different investment environment than what we’ve had over the past 50+ years, but their numbers are reasonable based on historical returns.

Even so, they have been steadily reducing their return assumptions, and I am pretty confident that they are willing to do so even more going forward specifically because of the pension reforms which put a much larger portion of the costs of unfunded liabilities onto employees. I think they were afraid to come up with more realistic return assumptions before because of the PR issue with “taxpayer” guarantees. IMHO, you give unions way to much credit; they don’t have nearly the power that you seem to think they do.

As for not having a choice WRT paying taxes, I’ve made the point before that there are many cities and states (or countries) that have much lower taxes. If one felt strongly enough about it, they could move to one of these places to avoid paying certain taxes (or all taxes, if one is so inclined). They have every bit as much of a choice as I do in where I can shop for gas (a small number of companies control most of our gas stations), or energy (no choice but SDG&E), or cable (only TWC in our area), or municipal water, etc. People do have choices, it just depends on how strongly they feel about something, and whether or not they are willing to deal with some discomfort in order to not patronize a certain business or taxpayer-funded service area. No matter how you slice it, taxpayers are not employers; they are consumers of public goods and services. They make a choice when they choose to live in a particular area to pay the costs of living there, and that includes taxes.

[davelj]

[quote=CA renter]

But you’re assuming that the actuaries don’t understand the issues with the assumed rate of return. They DO understand, and so does everyone else involved. [/quote]

The actuaries completely understand the issue. As do most of the pension trustees. I never claimed otherwise. But you’re ignoring the “kick-the-can-down-the-road” element of this. As I explained, the union reps want to keep the assumed rate of return high for the reasons I mentioned. The politicians want to keep the rate high for a completely different reason: they don’t want to be blamed for, in effect, raising taxes by voting in favor of using a lower rate. In most cases, once you eliminate the union reps, the politicians, and the folks who one day want to run for some office… you don’t have many trustees left. Ultimately, however, it’s the taxpayer that will foot the bill for this circle jerk… eventually.

[quote=CA renter]

You’re claiming that nothing will be done about the shortfalls until the last second; I’m claiming that they will increase contribution rates (and lower assumed rate of return — as they’ve done at least twice in the past couple of years) before that day arrives. I’m saying that the “guarantee” will be on the contribution side, and you’re saying it will be on the benefit side. We won’t really know until we get there.[/quote]

No, I didn’t say that nothing would be done “until the last second.” You put those words into my mouth. What’s happening is that the reality is VERY slowly seeping into the rate of return assumptions. But it will be years before the rate is anything close to justifiable. I’d say that 6%-6.5% is the VERY highest rate that’s not laughable. Well, to use SD County as an example, every 10 bps decline in the assumed rate of return requires ~8-10 million more in annual contributions from the taxpayers (“employer,” in your parlance). So, given the internal trustee dynamics, it’s going to be quite some time before that assumed rate of return gets to a reasonable level. And all the while, the ultimate bill to the taxpayers, as compared to the employees, will be rising.

[quote=CA renter]
Also, regarding the return assumptions, the pension funds have certainly shown that actual historical return rates are very much in line with, or higher than, assumed return rates. I’m sure you and I both recognize that we are in a different investment environment than what we’ve had over the past 50+ years, but their numbers are reasonable based on historical returns. [/quote]

Yes, while you can eat historical returns today, future meals require future returns… which are going to be much lower than historical returns.

[quote=CA renter]

Even so, they have been steadily reducing their return assumptions, and I am pretty confident that they are willing to do so even more going forward…

[/quote]

Spoken like someone who’s never served on a pension board. You’re smoking crack. Lowering assumed return assumptions is like pulling teeth – everyone involved does so after much kicking and screaming. Basically, the trustees have to be shown that their assumptions are completely indefensible before they act on this issue.

[quote=CA renter]
As for not having a choice WRT paying taxes, I’ve made the point before that there are many cities and states (or countries) that have much lower taxes. If one felt strongly enough about it, they could move to one of these places to avoid paying certain taxes (or all taxes, if one is so inclined). [/quote]

No doubt. Wasn’t my point. My point was that whatever taxes are levied by the municipality you live in are not optional. Going to WalMart is.

[CA renter]

Again, if the shortfalls are made up on the contribution side (which I believe will be the case), then current employees will be liable for 50% of the “guarantee.” As it stands, this is the most likely scenario, IMHO. It’s also not true that taxes will have to be raised to pay for the employer portion of the contribution increases. Many employers are currently putting aside money to cover this, and they will make cuts before they increase taxes.

You also have to note that the new contribution formulas mean that the employer portion of the contributions will move to the low side of historic norms (as a percentage of payroll). That potentially leaves more “pension” money in the coffers that can be used to cover some of the shortfalls if they set aside amounts equivalent to historic norms. Of course, being politicians, they are just as likely to spend that money somewhere else (and unions will be wrongly blamed, once again), so we’ll have to see how they handle things.

If shortfalls are made up on the benefit side, then taxpayers will foot the bill. I seriously doubt that this will be the way the shortfalls are addressed, though it is possible that there may be a combination of the two — benefit and contribution-side fixes.

I also know that CalPERS is prepared to lower their return assumptions even further. They fully understand what they are dealing with and have their finger on the trigger. Governor Brown’s reforms will make it politically easier for them to do so.

Don’t give unions so much credit. They don’t have nearly as much sway over this issue as you seem to think they do.

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