RNSP (2) – Drop-Dead Dates for State Pensions

Earlier this year Joshua D. Rauh of the Kellogg School of Management at Northwestern University released a paper that set drop-dead dates for selected state pension plans to which the government-plans community objected.  I too had my doubts about Professor Rauh’s methodology and assumptions and, having recently done my own study of 110 public pension plans, decided to embark on a similar study.

Here are the numbers.

I too get most plans going broke within 10-20 years though it must be considered that the employees’ own un-returned contributions would also be wiped out by that time.   My assumptions and rationale:

Trust Earnings – 4%: Not based on any historical returns but on the practicality of what can be earned when 10% (and rising) of your assets must be paid out each year.

Future payouts – 10% conservatively since COLAs, a wave of downsizing/retirements, and better than expected mortality make at least 10% growth in annual payouts inevitable.

Future contributions – 5% since most states are strapped and this line item (in NJ anyway) has been the easiest cut.  5% might even be optimistic with a decrease in higher-paid (and contributing) government workers and politicians being able to name their contribution number with impunity.

Influence of actuaries, GASB, or federal authority to force higher funding levels or lower benefits – 0%

I project the New Jersey plans going bankrupt in 2022 with $25.8 billion having to be paid from general revenues then.

16 responses to this post.

  1. Posted by Larry Littlefield on November 8, 2010 at 12:08 pm

    I wish people would include the NYC pension systems, which cover NYC local government employees and are larger than most state systems.

    They are in worse shape that the NY State systems, which cover local government workers in the rest of the state. People keep getting quotes about the NY State system being in better than average shape, and for NYC residents that is misleading.


    • Posted by Anonymous on November 8, 2010 at 2:57 pm

      You can get some idea from my post (#1) on John’s RNSP (1) – Introduction blog. NYC is fully funded (so they say as of today) but it’s
      gonna go off the cliff much earlier than the state plans. City contributions
      are increasing over $1B/yr. and for FY 2010 should approximate $8.5B.
      No way that can come close to continuing. It’s a train wreck waiting to happen. If the market takes another sustained plunge, or a big hedge fund or two says goodbye and moves to Ct. or N.J. because of city taxes, NYC’s 5 plans will go in the tank fast.


  2. Posted by Chris on November 8, 2010 at 12:50 pm

    During every bear market cycle, someone trying to make a name for himself flashes around doom and gloom numbers based on assumptions that are relevant only during the bad market. Soon afterward, the markets turn bullish for a long slow recovery and the bear market assumptions are proved wrong. This is the case here. The markets will adjust and flourish. The two assumptions you cannot account for is the will of a politician to properly fund the trust fund and the ability of Wall Street to take risk that is nothing short of criminal. This scenario has repeated itself over the last thirty years and will continue to do so. Your assumptions are wrong. Shame on you for posting them.


    • I too think the assumptions are wrong – as regards New Jersey anyway – but I’m guessing other states are not on NJs level.

      Knowing something about NJ budgeting I can’t imagine how they could maintain 5% annual contribution increases and how they could hold down annual payout increases to 10% if they can’t get rid of COLAs.

      It has nothing to do with a down investment cycle. If anything, the argument
      could be made that all this ‘quantitative easing’ is creating another bubble
      that will burst and speed up those drop-dead dates.

      As to publishing and circulating these numbers I make no apologies. I suspect the retirees of Prichard, Alabama would have preferred warnings earlier instead of being where they are now:

      Tomorrow, I’ll put up a chart by year for New Jersey to better show the methodology.


      • Posted by Fake OCO on November 8, 2010 at 7:14 pm

        If anything, the argument could be made that all this ‘quantitative easing’ is creating another bubble that will burst and speed up those drop-dead dates.
        You aint kidding, another wipe out ahead……


  3. Posted by Fake OCO on November 8, 2010 at 1:01 pm

    During every bear market cycle, someone trying to make a name for himself flashes around doom and gloom numbers based on assumptions that are relevant only during the bad market. Soon afterward, the markets turn bullish for a long slow recovery and the bear market assumptions are proved wrong. This is the case here. The markets will adjust and flourish

    During every instance of gov and business making BAD decisions, there is always some clown that says the laws of the economics do not apply to them and there is no need to worry.

    Enron said it, GM, Vallejo CA said it and Prichard Alabama said it.


  4. Quoting …”I project the New Jersey plans going bankrupt in 2022 with $25.8 billion having to be paid from general revenues then.”

    Hopefully, BEFORE anything is paid from general revenue, the Pubic will have come to understand how they have been taken for a ride (i.e., ROBBED), and refuse to pay anything further.


  5. Posted by Muni-man on November 8, 2010 at 4:14 pm

    JB, what does the ‘Current Deposits’ column represent?

    Do you know what NJ vs. the towns kick in for teachers
    (does NJ foot 100% of employer contributions for teachers)?
    Do towns foot 100% of the employer contribution tab for cops/fire/muni workers? I’m unclear on these points. Thanks.

    I think your investment return scenario of 4% is realistic in
    light of the 10% NJ payout ratio. I don’t think longer life expectancy is gonna be a biggie in the future though since
    I believe increasing population pressures, some form of medical rationing likely within this decade, maybe a pandemic or two, etc. will effectively cap any increases in longevity and may actually start to result in a significant lowering of average life spans by mid-century. If life spans do increase it’s gonna be so small as to be negligable, sorta like trying to improve on the world record time for the mile. Someone may eventually shave a few milliseconds off it, not much more.


    • Current deposits are a combination of employee, employer, and other deposits. Some states make one-time payments and others put some court fees, for example, into the plan which may be another mini-solution: a dedicated fee so it wouldn’t have to come from taxes. I also suspect in NJs case that some health premium payments may inflate that employee contribution total since $1.8 billion seems high to me.

      NJ towns kick in exactly $0 for teachers. The state took it over when they figured out that the newly-childless were moving to Toms River to avoid school taxes so now they move to Pennsylvania and Delaware.

      The towns pay for their own employees and cops according to a theoretical allocation that kept coming up with $0 for a lot of years. I still think it’s grossly understated what they’re asked to put in because of actuarial shenanigans.


  6. Posted by no name on November 13, 2010 at 2:34 pm

    I’m a public school teacher who has been following research on these pension blowups for the last year. It didn’t take much to see the problems are huge and insurmountable in many if not all cases including my own fund. (BTW…my system is the Ga TRS which is one of the better funded ones on the scale of it, but that’s not saying much. I certainly am not solely counting on it in my long term plans)

    When the actuarial projections are done I see estimated salary increases are included. Our fund projects 3-8% increases. I’ve not seen a salary increase except 1.5% once in the past 7 years and can’t imagine another anytime soon. In fact my salary has dropped the past two years years ago due to furloughs. My questions is are these projected increases another way of cooking the books? The fund can pretend more money will be coming from employees than actually will happen?

    My second question involves turnover rates. About 50% of teachers leave within 5 years. Our fund vests after 10 years so that’s a lot of money the state puts in for these teachers that they never see. (One reason for moving to a contribution plan). I don’t know how you could project this but do you have an estimate of how this could affect a fund’s payout?

    I’m utterly horrified by the lack of any movement forward by all parties involved. I really appreciate the work you and others are doing towards honest disclosure of this mess.


    • 1) Assuming a higher salary assumption could be a way to lower future contributions by assuming employees will put in more
      than they actually wind up putting in but it’s an inefficient way of going about understating contribution requirements since the
      higher projected salary would result in a higher liability number. It’s much easier to do what NJ does which is basically ignore
      or slash whatever number you’re told to put in.

      2) Those early-terminees are usually younger with smaller benefits under a Defined Benefit plan so they’re a blip. Presumably their
      own contribution money comes back to them with some interest which actually hurts the plan
      while the benefits they’re forfeiting are likely those that would have been due them in 20 years,
      by which time most of these plans would be broke anyway.

      3) I too am horrified by the lack of movement. I ascribe that to politicians not appreciating the severity of the problem and not enough
      people who understand the mess running around as if their hair were on fire.


      • Posted by Muni-man on November 14, 2010 at 11:26 am

        JB, the blatant self-dealing by pols and unions is to blame. Add in a public that’s in a virtual stupor about how their $’s get spent and VOILA! – a recipe for disaster. The info that should really get disseminated to the public is just how much these ridiculous plans cost taxpayers. If the average private sector taxpayer knew that, then all hell would break loose. When private sector taxpayers have to pay $6, $7, $8+ for every $1 a public employee kicks in to fully fund these white elephants, it shouldn’t be surprising that they’re underfunded because they’re simply way too expensive. Many of them fully recover their lifetime contributions within the first year of collecting the pension. Virtually none of them are in the red after 2 years of collecting a pension. Totally asinine for private sector taxpayers to continue to fund this nonsense.

        We discussed this at length over on NJ Voices, but the plans are either gonna be forced to make severe benefit cutbacks in the future or they will go under pure and simple. CC is doing the right thing by forcing the issue. These plans can’t and WON’T continue to exist in their current forms all that much longer. I wouldn’t be all that surprised either that the so-called bulletproof contractual nature of many of these plans could be successfully challenged under the various self-dealing provisions of the law. It’s pretty obvious how unions and pols have worked to corrupt the entire process for their benefit and to the detriment of the general public.


        • Mostly disagree here.

          1) I don’t blame the unions since they’re doing the job of getting as much as they can for their members.
          Can’t really blame politicians since most are clueless on issues with math involved.
          If there’s a primary villain here it’s the actuarial community that’s debasing the profession for easy money.
          They see the problem but sit tight collecting fees and making sure their E&O premiums are paid up.

          2) Members take a while to get back their money. For a cop putting away 8.5% of pay for 25 years when you adjust
          for interest it takes 5-7 years to get back their contribution. However, they will be receiving that pension for 30 years so
          they do make out, just not as well as Christie would have you believe with his denial of the time value of money.

          Where I agree is that these plans will default. Government makes the rules and they will villainize public retirees, get rid of
          COLAs, and get the money back somehow.


  7. Posted by lily on November 14, 2010 at 5:18 pm

    I got involved in researching my pension fund after I heard that Watson and Wyatt spun off their actuarial division that advises unions a few years ago. The new company does not hold much money and put a limit on how much they can be sued for. Warning bells went off in my head when I heard this but it took awhile to put the pieces in place.

    I heard a few weeks ago another actuarial firm also did something similar with US clients. This does not bode well. I don’t know what the outcome of this will be as many of us, as public employees, are also out of social security and the pension is basically it. Personally I have about 300K in savings but that was to supplement a pension not create one. To create a pension on a teacher’s salary would have been almost impossible and I’m one of the cheapest people I know.

    I know one thing though….my current job teaching is now 100% secondary to recreating a stable second career for myself. I also believe QEII (and probably foreclosuregate) will speed up the demise of pensions. It would be absolutely folly for me to not plan for the worse and pray for the best.


    • Unions are another mess. Lower base, more retirees, and the government (IRS and PBGC) making up special rules to
      keep them underfunded has created a situation where the plans are going bust too and they’ll be going after the
      actuaries. They’ve done that to public plan actuaries in Milwaukee (http://www.pionline.com/article/20090521/DAILYREG/905219966),
      and Alaska (http://www.law.state.ak.us/press/releases/2010/061110-retirement.html) and more are sure to follow.


      • Posted by lily on November 14, 2010 at 7:14 pm

        We don’t have a teacher’s union in Ga only associations and they’re pretty weak.

        Thanks for the links…I saw the Alaska one last summer but didn’t see the one on Milwaukee. Mercer is the other company I was thinking of. I believe I saw a week or so ago they’ve pulled out of actuarial work with US pensions or maybe it was just with public pensions.

        I wonder what other actuarial companies are going to pull out and try to protect themselves. I’m sure they all can see the writing on the wall. Personally I believe they deserve to be sued and so do the politicians and unions. They are all in bed together. And we employees should have used common sense….my pension isn’t any supersize ones by any means but over 30 years ..should I live that long….it’s an awful lot of money. Of course we should be asking where that would come from!

        I’m not sure who will take many public jobs without a carrot……certainly not the kind of inner city teaching I’ve done. I’ve had along successful career and am good at it but had I known what I do now I certainly would have chosen different. I hate to say it but I would have gone gone after money and let job satisfaction follow. Not a good thing to find out at age 55.


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