We’ve known for more than 25 years that the government employee Pension crisis would be a disaster because of the various gimmicks built into it, and through all of the unsustainable excessive and unfunded promises made which will have to be borne by the taxpayers.
- GASB (the federal Governmental Accounting Standards Board) announced changes in accounting standards that because of greater transparency, disclosure and “sunshine” will very likely darken the pension picture for most agencies. Local governments must report BILLIONS in PENSION DEBT previously buried in footnotes rather than being reflected on the actual Financial Statements.
- “GASB voted to approve two new standards that will substantially improve the accounting and financial reporting of public employee pensions by state and local governments.”
- “The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations,” said GASB Chairman Robert H. Attmore.
This is a welcome change!
The system must be reformed to ensure greater certainty to retirees and greater fairness to taxpayers; otherwise, circumstances MAY FORCE a disastrous BANKRUPTCY which can wipe out most contracts.
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STATE:
Currently, pensions are funded are about 70% of what is required and there is an expected DEFICIENCY of about $550 BILLION for CA state government employees.
The taxpayer is being made responsible for this $550 BILLION PENSION DEFICIT, which consists of above average pension payouts, and with most taxpayers having ZERO pensions.
To put in perspective California’s budget is about $92-95 BILLION.
If you thought raising taxes to generate $10 BILLION “for education” which would go primarily to fund pensions was tough, wait till further reality hits, unless the various pension systems are reformed.
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ORANGE COUNTY:
The County of Orange has about $4 Billion in unfunded Pension and medical liabilities. To put in perspective, Orange County’s budget is about $3.5 Billion.
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FEDERAL GOVERNMENT:
The federal government has about $66 TRILLION of TOTAL UNFUNDED LIABILITIES. (about $50 Trillion consists of Medicare and Social Security).
To put into perspective, the Annual Federal budget is about $3.5 TRILLION (a record high). Our total annual US Economy is about $14.5 Trillion.
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OTHER DEFICIENCIES:
- Other deficiencies exist in the various districts, agencies, and city governments.
- Additionally, taxpayers face billions in unfunded liabilities for the Pension Benefit Guaranty Corporation, which covers retirement plans at failed companies.
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IMPACT:
We have pension/retirement deficits at various levels: Federal, State, County, City government and other local districts and agencies.
And yet we continue to act as if we have unlimited supply of taxpayers with excess money laying around.
We must act ! :
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CLICK HERE for “Deficit Reduction and Infrastructure Investments for America“
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CLICK HERE for “Debt & Sacrifice In America: Should 1% = 1%?”
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CLICK HERE FOR PRESS RELEASE from GASB – “GASB Improves Pension Accounting and Financial Reporting Standards” of June 25, 2012.
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Francisco “Paco” Barragan
http://www.linkedin.com/in/franciscobarragancpacia
Paco – You sound like a Republican here.
Thanks Paco for this…yes, I do believe that the GASB 67/68 changes will help with transparency but not with fixing this issue. Although, often the first step in correcting a problem is acknowledging and measuring the problem which GASB 67/68 should help in both of those items. Very complicated stuff.
Calling the forecast future pension obligations a debt as the headline of this post does is not correct. The court said so in the Moorlach initiated lawsuit against the OC Deputy Sheriff’s that sought to reverse the County Supervisors’ previous decision to increase the Deputies’ retirement benefits. A debt is something a person owes today. What these pension figures are is a forcast by actuaries based upon a dozen things assumed as to what the future cost of pensions could be over a 30 year period (For instance, one assumption is what the size will be of annual raises employees will receive each year over 30 years. Reality can vary tremendously) . If one looks at actuary studies in this field you will find that the assumptions made by the actuaries tend in some areas to be a worst case scenario, which makes the forecast come out on the high side. Calling these forecasts a debt adds to the current hysteria about pensions, which seems to be the agenda of some. Putting these forecasts in context, there is a likely future taxpayer expense that will be encountered, but unlikely to be as big as these forecast unfunded liabiilities. That being said, 401K’s do not work as the major tool for a person working for a paycheck to achieve retirement security. The rush to throw any kind of a defined benefit retirement plan in the trash heap and push everyone into 401k’s will fatten the coffers of brokers, investment advisors and mutual funds through disclosed and hidden fees, transfer fees, wirthdrawal fees, annual fees, transaction fees, and on and on. But it will not result in future generations being able to retire and even come close to maintaining their lifestyle. Defined benefit pension plans need to be fixed to prevent abuses that have occurred, and then that model needs to be expanded to all working Americans so there is not an avalanche of impoverished old people creating a social catastrophe in the years ahead. It can be done!
GASB is not necessarily concerned about a local lawsuit. They put forth rules that standardize financial statement presentation and disclosures so that users of the statements can discern what is being presented instead of everyone making presumptions from one set of statements to another. There are many assumptions made in financial statements every day.
A conversion from a DB plan to a DC (i.e. 401K, profit sharing, etc…) takes away a lot of those assumptions that make future projections a bit sketchy. DC’s also tries to encourage individual responsibility at the same time since the employee is responsible for determining what a reasonable personal investment strategy is instead of putting that responsibility on the employer. There are plenty of fees associated with DB plans also. If someone truly takes control of their financial situation, employers contribute to DC plans at a reasonable rate, employees contribute at a reasonable rate, an employee has a sufficient earning time horizon (i.e. # of working years), and they control their lifestyle appropriately I do see many workers who are able to retire.
As with many things, the solution is probably somewhere in the middle- a combined approach.
@OBNO:
You are correct!
It’s a matter of semantics, but to be more correct, I will change the headline.
paco
TJ – I particularly like your last sentence. You might find this report interesting reading – “Institutionalizing DC Plans: Reasons Why and Methods How” – an industry paper seeking to design a 401k plan that, combined with Social Security, can achieve retirement at 80% of one’s working wage. Keep in mind that most government employees do not get Social Security. Perhaps part of the answer would be to move government workers into Social Security, a combined approach. I believe this industry paper also states that DB plans return a higher yield than DC plans. Anyhow, give it a read. You can find it at: http://www.dci.org
OBNO- Thanks for the article link although after browsing and searching the Drum Corps Int’l website (www.dci.org) I was able to find the article here: http://www.pionline.com/assets/docs/CO760551018.PDF (I think the original site should have been http://www.dciia.org in case anyone is looking for it). Thought it was strange at first it would be on that site until I realized that it was an error.
Institutionalizing certainly would be a huge change. There studies do show that DB plans have a higher return than DC plans often based upon fees charged and the economies of scale that may be achieved by reduction of fees with large amounts of assets under management. As their study shows if people were to have high levels of the four factors studied (two of which was higher levels of employee contributions and increasing contributions as a % of income as time evolves), it will significantly increase the likelihood of replacing 80% of income (with SS income)…
I do believe that if SS is good enough for non-gov’t workers that it would be good enough for gov’t workers also…I don’t really understand why they don’t participate in it. They can still have their other plans but it sure would help I think knowing that we are all in the boat together trying to make things better.
Look behind the scenes of the pension “crisis”. A lot of the buzz about unfunded liabilities, cushy pensions, etc. is being driven by the same Wall Street cabal that destroyed the economy four years ago. Why? Because public pension trust funds are the last big pool of money they can’t get at, and they want to desperately. The move to 401(k)’s had very little to do with sustainability or even corporate greed. It was simply a way for investment banks and others to access a huge source of cash heretofore denied to them. And the result? Millions of people jumped into the stock market, most of whom had no business playing the role of investor. As a result, the market was artificially inflated until it all came crashing down in 2008. Now the same bunch want to “privatize” Social Security and switch public pensions to DC plans, when most of them should be in jail for destroying the futures of millions of working class Americans. What really surprises me is the excellent job most of them have done in shifting the responsibility off themselves and onto public employees and other working-class people. The sad fact is there is an ever-increasing amount of evidence showing 401(k)’s simply don’t work–such as the recent projection that up to 50% of Californians with 401(k)’s will retire at or below the poverty level. But I’m sure the Wall Streeters will come up with a way to blame the retirees for that, too.
I believe that many on Wall Street or other investment “streets” do have access to DB plans’ money…I don’t believe that DB’s are just investing in cash and sitting idle. It is working for the beneficiaries in many different types of investments. They are investing in a lot of the same things that others are- often some Wall Street type investments such as hedge funds that an average Joe may not even have access to. I highly doubt that the move to 401K’s were solely to get to that money but may have been a way to encourage individuals to save money in a tax efficient manner- just a thought.
I would also say that up to 50% of those who don’t have 401K’s will also retire at or below poverty level. It is a misleading stat…retirement has a lot more to do with personal responsibility; just because someone has a 401K does not mean that they are going to retire in style- nor does if someone who has a DB plan. I am not a Wall Streeter, but instead a Main Streeter.
TJ–1) Its a well-known fact that investments in DB plans tend to perform better than the average investment portfolios because the actuaries are working for the good of the members rather than trying to make a commission. 2) Its kind of hard of put extra money away when most worker’s salaries have stagnated ,indexed to inflation, since the 1970’s, while real costs have increased. Most people are spending too much of their income simply living to put away the 15% to 20% needed for a decent retirement–assuming they don’t retire in the middle of another stock slump. Its a little hard to believe we can brand half of California’s workers as irresponsible if they can’t retire decently.
I would dispute your well known fact…actuaries don’t invest and make a commission, they mainly project and do complicated math- investment advisers, investment committees, trustees, etc…make the investment decisions. Assuming the use of actuary was just a simple mistake, I don’t believe that the returns in DB plans are higher based on the intentions of those who make the investment decisions but instead due to the factors mentioned in the 3 studies referenced above in my prior post which was originally referenced by OBNO…it states:
“The difference has been attributed to various factors, including lower investment fees for DB plans, bundled administrative fees for DC plans, differing equity allocations, and the use of a broader array of asset classes by DB plans, resulting in lower volatility.”
Does not seem that it is due to their intentions as much as it is by reduced fees (often due to economies of scale) and better investment strategies and decisions (often by those Wall Street types).
As the same article also indicates, success, measured as 80% income replacement combined with SS, in DC plans can be significantly increased when the 4 factors identified are present…up to about 79% probability for those in the lowest income quartile.
Life is kind of hard. Saving for retirement is kind of hard. Lots of things are kind of hard. If you make a choice to do it and put the important things first you can make things happen. I agree that most of people are spending too much of their income simply living…that needs to change. There are two components of that- cash coming in or cash going out. Often, cash coming in may be harder to control than cash going out. I have faith in my fellow human beings…maybe a little too much.
TJ – your concept of personal responsiblity does not work for the average working guy or gal who does not have the time or education (and, yes, perhaps also not the smarts) to become a financial investment expert to manage their own funds. In addition, company provided 401k’s (with or without a company match) typlically do not offer the wide array of investments used by DB plans, such as commodoties, hedge funds, venture capital, real estate, etc. nor can the individual raid their DB plan for perceived current needs at the expense of their future retirement as is common in DC/401k plans. The data of the investment industry itself shows that DB plans outperform DC plans, including 401k’s. The 401k option has a place in individual’s retirement planning for saving on a tax deferred basis as a supplement to a sound DB plan, but their track record as a primary retirement savings tool is one that does not lead to the retirement security for the vast majority as a DB plan does. DB plans can be structured to share risk, constrain abuses, set limits, and that is what needs to happen – not just for government employees, but for all working people. Such a DB model should be available as the primary means to provide for retirement, combined with what individuals might do on their own initiative, such as take advantage of a company match if offered for a 401 k.
ET- I can’t really dispute much of what you are saying and I likely agree with you as follows, I just don’t like it:
1. Average working guy currently probably does not have the smarts…if it is important to them, they SHOULD invest in themselves- change the family tree. It is amazing how many families will spend hours upon hours figuring out where to go on vacation (or insert any other discretionary activity) yet not want to invest in their own knowledge of how to secure a future. The kids then think that is how it is supposed to be…change the family tree. If people don’t want to do it for themselves, do it for the kids and grand kids.
2. DB’s have been shown to outperform DC’s- yes they have, as cited above for a few reasons two main ones are investment choices (i.e. again, likely by those Wall Street types who are so despised making money on the same investment vehicles you just cited) and fees achieved by economies of scale. The size of DB plans also allow more Wall Street specialty investment choices such as hedge funds. Some love to pile on the Wall Streeters but then also say that we should all be achieving the extra 140bps (1.4%) that DB’s often outperform DC’s.
3. Regarding raiding of a DC plan…see #1 above- not a smart move, take responsibility for your own actions. Just because you can, does not mean you should. I would be fine in saying that we should not allow anyone to raid their retirement plans, but my gut tells me that will not go over well with a certain group of people and it likely won’t be those will think they will be financially sound in retirement.
4. I really don’t have much problem with a DB plan being available for the masses…just don’t force employees into it or force employers to participate. Essentially, a large accessible plan that the administrator tells them how much they have to put in in order to receive a retirement stream of income. If it is a good thing, then people will do it. If they don’t do it and it is a good thing, see #1 above.
5. 401K’s with or without a match is a great part of a sound financial plan if it available. People need to save more for retirement. 401K’s can provide a vehicle to do just that. Just as SS should not be one’s entire retirement plan, neither should a 401K plan. For a lot of people it won’t be enough…supplement with IRA’s, taxable accounts, etc…
I and many others are on the road to have a comfortable retirement without a DB plan. I am very blessed in so many ways and thank the Lord every day for those blessings. I know that I am not the average person now, but I do think that I somewhat started out as the average person. Save now in order to live later- there are many material things that I see others have that I kind of “want” but know that I cannot have as it would harm my future plans, unfortunately those who have those “things” may be in even a worse situation than I am yet they decide to go for it anyways. Not sure how anyone can argue with the notion that taking responsibility for your own future is a bad thing (not saying you are btw).
TJLocal – sorry about the web address. The copy of the document I have is in Adobe, and it showed that address in the upper right corner of the front page. Glad you found it though. My experience with the public employer I worked for is they fought tooth and nail any time there was serious federal legislation proposed to require the enrollment of government employees in Social Security because of the cost to the employer and the perceived likelihood that an equal new cost to be borne by the employees would add pressure for salary increases over time. Short sighted? – I would say based upon where things are today, yes! (There are some government agencies that do have their employees enrolled in both Social Security and a retirement plan, but they are in the minority).
yeah no prob on the website…I did have a good chuckle under the though that the Drum Corps was providing a retirement plan study. Thanks for the article…I really did enjoy reading it and likely will reference back to it in the future as it had some really good ideas. Probably stuff that if we were starting over, would be great to implement. Unfortunately, change of an existing program can far too often be tougher than the initiation of it to begin with.
*Remember that old tried and true Profit and Loss Statement? Actuarial Assessment and Projections are all well and good based on current market returns and forces at work. Deflaitionary issues still at work on Commercial and Residential Real Estate…come into the picture? How about all those lovely Goldman-Sachs Credit Default Swaps and Derivative Computations?
If the County presently owes $550 million dollars for Pension yet to be paid…….hmmm
when is that stuff due and passable? 2025, 2050….when? The good news is that letting folks know the degree on endebtedness is always nice to know…especially when investors want to buy some Tax Free Municipal Bonds that might go belly up sometime soon.
The final, final answer is: Yes…the public needs to know and each Municipality should have disclosed this stuff 100 years ago, whether it was to pay for a new Fire Truck or pay for the brother in law’s mobile home!
I read a lot of libertarian philosophy about “taking responsibility” . You should “take responsibility” for your retirement, for your health care, etc. etc. Some of that is true. But if you’re going to take responsibility, you also need ability and authority. I know many people with 401k’s who did all the right things, and when the market crashed they ether couldn’t retire or had to go back to work. Under the “responsibility” philosophy, shouldn’t the “experts” who got them in this mess take some of the “responsibility” as well? How can an individual take responsibility for his or her future when their income is at the mercy of someone else. It sounds to me like “responsibility” is just a convenient euphemism for throwing most working people to the wolves so a few investors can reap the profits.
If they were so over weighted in volatile investments when they were looking to retire in a short period of time that when the market crashed that they were uanble to retire, they were likely not doing all the right things. Or, it was not the right time for them to retire…working a couple of more years is part of responsibility also and in many cases it may not be as desired as retiring but part of the circumstances we live with. If they stayed the course, then they would have seen their accounts rebound quite nicely by now.
If the experts forced their hands and did not allow them to allocate their investments how they wanted, then they can easily be sued and may even be able to succeed in a civil action. I doubt that the experts did this in most of the cases (yes, it happened for sure). In most of the cases that I see, people got to used to the scenario of great growth and were not properly allocating their investments–essentially investing like a 30 year old instead of a 60 year old. Some were relying upon those returns in order to retire early or spend money on things that they likely did not need. 5 years before the crash they were assuming that the party was going to last forever and said, boy if I continue to get 12% returns (some even higher), then I will be able to retire early/on time/at X date.
How can someone take responsibility if their income relies upon someone else? Many ways, here are a few: spend as if you make 40% of what you actually do, have zero (yes zero, zilch, none, nada) debt, have a cash emergency fund of a year of expenses (w/ no house payment it is a hell of a lot easier), downsize the house, do not cash out refi for anything, save for things BEFORE they are bought and pay cash for them thereby avoiding debt, have a back up income plan, marry someone who has income earning potential (diversify and don’t rely upon one income stream), become the owner and not the employee, play better defense (cut down spending) instead of always focusing on offense (income), make sure the house is paid off and retire with no mortgage, don’t buy too much house (many of us live in way too much of a house), relocate to a cheaper place to live, have a second source of income, don’t buy new cars, don’t be a car snob, don’t buy designer/expensive/new clothes, don’t eat out, drop cable, go to the library, etc…Not everyone can do all of these, but if they start making smart financial decisions early in their life, they will continue to make smarter decisions later in life and it is quite a bit easier. Make a goal to do it…so many people do stupid financial things and then can’t understand why they can’t get ahead. Do smart things, sacrifice today for tomorrow, make it happen! I have faith in my fellow humans- more faith in most…I also know that most will DECIDE to not do these things (even the small ones) which is their choice.
I understand that this sounds elitist…it is how a lot of people develop true wealth and security though- not everyone is a trust fund baby, has mom and dad giving them cash, has the family business, etc…Some make tremendous sacrifices today in order to have a secure future.
TJLocal – I understand your views. Reminds me of the Rush Limbaugh book titled “The way things ought to be”. Unfotunately we have to deal with what is. Good discussion though!
Thanks…I am sure my rant right above (11:37am) this will ruffle some feathers. Yes, we have some fun discussions in my house- sometimes I think my kids think they will be sold at the next garage sale, just kidding- sort of. I am not familiar with that book, but yes, we do have to deal with what it is, but we can change where we go.
TJ
I’ve pretty much done all those things. We save and pay cash for our cars (not fancy). We bought a house within our means that will be paid off before we retire. My old man owned his own business and scraped by, but was able to send me to college. Like you, I’ve worked hard and earned everything I made. So I think it’s legitimate to expect those who make money from my earnings (e.g. brokers) do so with some kind of integrity.
Sounds like we are probably in somewhat the same boat although my father was in the public sector, but was still able to help me to go college along with student loans, summer & in school jobs, and scholarships. The work ethic was probably much more valuable thing he provided me though.
You are definitely right that those who provide services to you do it with integrity…not only your investment advisor but also your doctor, accountant, police officer, fire fighter, food server, etc….we should expect it and take action if they are not.
“spend as if you make 40% of what you actually do”
If you’re going to discuss things as they ARE and not as you’d like them to be, start with TJLocal’s above statement.
Most americans earn less than 50,000 dollars a year. They have no wiggle room. They are living paycheck to paycheck.
http://en.wikipedia.org/wiki/Household_income_in_the_United_States
I think TJLocal is talking about the top 10% of americans, those that have the luxury and the ability to save and make financial decisions.
The above was in response to the question “How can an individual take responsibility for his or her future when their income is at the mercy of someone else”…spending less than you make is a way to be responsible when your income can be cut at anytime. You can put any % you want with that statement and it is still sound advice…maybe not achieved on day but should be a goal regardless of whether you make $20K or $200K. Most people do have some some wriggle room if they look hard enough and are willing to give up something today. Obviously, the more one makes, the easier the 40% goal is to achieve, but hopefully the point gets across.
noclib1 – Too Socialist really! You see, we all have choices. Some people buy swampland in Florida and later surprised to find out….they can’t build their winter dream home there. Others trust their tried and true “Mutual Bond” brokers and then
surprised to learn they have been sold out for a Derivative Credit Default Swap.
You answer however has a good start: Send those slime to jail. Make sure that the penalties are great enough and make sure that all their ill-gotten profits have to be brought back as restitution…..
If you pick a stock and it triples – Congratualtions! If you pick a stock and it falls to nothing…….sorry about that – this is called the “Free Market Capitalistic System”. What we hate are those that take a perfectly good FMCS and screw with it – to rip folks off. Countrywide is a perfect example of how easy it is to take advantage of the disadvantaged.
When it comes to protecting your “Nest Egg” or “Your Forever Pension”…..either stick in under your bed, put it in a safe deposit box or send it to your mom and pray one of your brothers or sisters doesn’t get into financial trouble any time soon.
No Guarantees in America! No guarantees….anywhere!
Ron and Anna – I think those people who buy swampland, or beachfront property in Orange County for that matter, expect the Army Corps of Engineers to protect their investments, using taxpayer money of course (dredging, sand replenishment, disaster assistance, etc.).
*Equal Time – Dude…..when someone buys something in 1900……and expects that the land that is designated as a Federal Natigational Tideland and Waterway……you are probably right.
If you buy Swamp Land in Florida….you better check with Chief Oscela before you
crank up that old Mercury Outboard. You may just run into a crock….or water mocassin and get wrapped around the propeller.