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Forecasts of the future cost of public pension programs offered by states, cities, counties, school districts and other government entities have for the last few years been identifying a problem. The problem is that forecast future costs exceed forecast future funding, leaving a gap called an unfunded liability. This has caused much consternation among most everyone – taxpayers feeling this gap means the promised retirement benefits are too generous – public sector retirees and employees feeling a sense of betrayal that their employer seems to have made retirement benefit promises that they did not fund.
There is a lot of room in the process of projecting future retirement program costs for wide variation. Such projections are based upon myriad assumptions covering 30-50 years in the future. Assumptions like at what age public sector employees will be when they are hired, how many years they will work for the public agency, how old they will be when they retire, what their wages will be that are going to be used to eventually calculate retirement pay, and what the rate of return will be for the monies on deposit in the retirement system are just a few.
The rate of return on investment is the focus of but one controversy. I sure do not know what my savings will be returning a year from now, much less 30-50 years from now (if, that is, I am still alive). The retirement systems have to estimate a rate of return to estimate their total revenue, so they tend to assume a rate of return based upon past experience, in many cases over a 10 year period. Currently there is considerable debate about whether the investment world has changed so much that assuming a future rate based on past experience is wise.
Many public sector retirement systems are revisiting their assumptions, and among them the state employee retirement system known as CalPERS and the state teachers retirement system known as CalSTRS. CalPERS is considering changing from a currently assumed rate of 7.75% to either 7.5% or 7.25%. CalSTRS currently assumes an 8% rate of return, and is considering moving to 7.5%. According to a publication called the California Public Retirement Journal such a move by CalSTRS would add $ 800 million in new unfunded liability to the system, and to cover that employers (school districts) would have to increase their retirement system contributions by 1.9% of payroll annually going forward. If CalPERS moved to a 7.5% assumption, state payroll costs would have to increase by anywhere from 1.5% to 5% a year depending on the bargaining unit (Public Safety is at the higher end, rank and file at the bottom).
So, does prudent judgment warrant a reduction in the assumed rate of return? Are our elected leaders, including our new Governor, ready to deal with this kind of change? Can California, already facing a $26 billion (or more) 18 month deficit deal with increased payroll costs that a change in investment assumption would trigger? I guess it could be worse –a recent study released by the Stanford Institute for Economic Policy Research used a 4% rate of return, arguing that is a risk free assumption. The result? Unfunded liabilities for most public sector retirement systems would rise dramatically – for instance, the CalPERS retirement system would change from a current funding level of 88.3% to only 44.7%. If anyone thinks accountants and their assumptions don’t matter, I suggest they re-read this post.
Solve the problems in both social security and public pensions at the same time.
Cancel all of the public pensions, and include all of those workers into the social security system with the accumulated dollars assets that would have been paid into social security if they were always in that system.
That would save social security until the baby boomers died off and the next surplus occurs.
Then take the balance of any funds left in the public pension and ratably pay out to the current and future retirees. Also with the movement of these plans and funds into the US pension guaranty fund, with its maximum payout of 65,000 per year per retiree, balance will return, and the people will not be forced into future slavery to pay for the excessive benefit’s a large minority of public servants created for themselves.
Or either we can do what was done in France in the late 18th century. Anyone for cake?
Cook.
Great Idea,
Steal money from some and give it to others.
“Cancel all of the public pensions, and include all of those workers into the social security system”. If this was a great idea you would not need to force it by fiat. Oh, by the way, I have been paying into SS since 1965. Do I get double SS? You don’t give a lot of thought to this.
“with the movement of these plans and funds into the US pension guaranty fund, with its maximum payout of 65,000 per year per retiree.” Was it your right or your left ear you pulled this out of? No one gets half of 65K per year out of SS. Do your homework before you post.
charles, re read what I wrote.
One part dealt with Soc Sec and the other part dealt with the excess assets of public pensions not used to cover the SS benefits.
I think its all a bunch of b.s. designed to move people from pensions to the stock market where someone can make money over and over from their deposits. None of these pension funds is having trouble paying their bills, they do not project a problem paying their bills. The pension funds are not sounding the alarms. Its other people who don’t have a dog in the hunt other than its tax dollars and they pay taxes so now they are worried that these working people’s pensions are in trouble. How do they intend to tell if they are in trouble? Well they create a fictitious balance sheet of accrual figures based on a series of assumptions. Its all very nice but its all fiction. Its just another way to separate a sucker from their money. Public employees look out when someone wants to help you protect your rights, they are going for your wallet more often than not.
I thought April Fools wasn’t for a few more months. “Public employees look out when someone wants to help protect your rights, they are going for your wallet more often than not.” I don’t even know how to respond to this its so preposterous. Yeah, those public employee unions are all about taking money from its members. And since when are pensions a “right”? I must have missed that in my US Constitution classes.