First, let’s kill all the actuaries

From “The Clash of Generations” by Laurence J. Kotlikoff and Scott Burns, page 4:

Second, we’ll suggest that Shakespeare had it wrong when he said, “The first thing we do, let’s kill all the lawyers.” The right statement is, “The first thing we do, let’s kill all the accountants.”  Government accountants have concealed Uncle Sam’s Ponzi scheme since its inception by focusing attention on the official debt.  But they knew, or should have known, as a matter of economic theory, that official debt is a figment of our language, not a meaningful measure of our fiscal affairs.  As a result, they’ve made sure, with the help of the politicians, that the public (and most economists) would ignore the rapidly metastasizing economic tumor associated with our living beyond our children’s means.

In referring to the Social Security/Medicare Ponzi scheme the authors could have easily wished bloody annihilation upon actuaries as accountants.

The 2012 OASDI Trustees Report came out this week and the news got grimmer:

Social Security has moved three years closer to emptying its trust fund. Mark that on your calendar for 2033, not the 2036 projected only a year ago.

Medicare also is on life support. The hospital-insurance program for seniors is expected to spend its last dollar in 2024. That’s the same projection as the trustees who oversee these entitlement programs issued a year ago — but five years sooner than they had projected as recently as 2010. And the trustees also warned Monday that Medicare’s future could be even more dire than their report suggests.

A year ago, the trustees warned that Social Security’s disability insurance fund would be out of money by 2018. As of Monday, that date is 2016, four years from now.

The report itself begins and ends with the warning:

Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.

But my question is why should anyone be listening to these guys considering their track record?  Between the 2011 and 2012 report the drop-dead date for the Social Security ‘trust’ fund went from 2036 to 2033.  At that rate the 2017 report would project a drop-dead date of 2018 which makes more sense given the circumstances.

You have a ponzi scheme funded by a dwindling labor market which invests in Treasury bonds largely dependent on that same market having to fund payouts for baby boomers who, thanks in part to Medicare, will outlive mortality predictions all while tax increases or benefit cuts are impractical within a political system predicated on pandering.

Without actuaries and their 200-page jargon-laden reports that situation might be a little more obvious to a few more people.

26 responses to this post.

  1. Posted by skip3house on April 28, 2012 at 3:52 pm

    Suppose the $15 Trillion debt was a pile next to an even larger pile of wealth accumulated.
    What would be the solution? Eliminate the debt by those who created it!
    Both piles were created as a result of joint efforts of all citizens under their security umbrella.
    Enough wealth would be left to allow those in the wealthy pile to still live reasonably comfortable.

    Just watched Tony ‘Why do you ask…..?’ Robbins, and do understand . I have thought the same as his excellent putting words to common sense feelings. I describe 15 trillion as an imaginary number, Tony does it better by showing it is an impossible number…..but both of the same mind.
    No solution, but like how the Confederacy settled its debts. Ceased to exist.
    We are in …a boiling kettle here, the whole world. The debt is imaginary/impossible, BUT, the interest we ‘manage’ to pay is the big drain on our country and goes to those…………..(I don’t curse). Our leg irons. Solution is as simple as kids’ make believe games – there is no debt, so no interest.
    AND, no interest so government can’t ‘borrow’ more. Balanced Budget
    We are officially free.

    Let’s rid the country of its debt, and open Medicare to all, under 65, at cost.
    Declare all interest paid on this debt will be principal.
    See how to apply this ‘Principal’ to States,….student loans…and eventually credit cards.
    All this debt is hanging over us, never to be repaid ($15 Trillion is imaginary,…..), and only has meaning with the leg irons of interest payments.
    Medicare for all is logical as the 30%+ ‘OVERHEAD’ of monopolistic health insurers needs competition. Medicare overhead is 2.5%.
    Makes ‘ObamaCare ‘ unnecessary, and could reverse the flow of our jobs overseas, as employee health costs should drop 30%.


  2. Posted by Tough Love on April 28, 2012 at 5:55 pm

    Anyone follwong the issue knows that the SS Trust fund emptying in 2033 vs 2026 is irrelevent. Once the outgo exceeds the inflow, the Gov’t has only 5 choices (a) increase borrowing (b) increase taxes or (c) decrease expenditures elsewhere, (d) increase ss tax revenue (by increasing the rate or the earnings limit), or (e) redcue SS benefits


  3. Actuaries are going to take the blame for decisions by politicians. When actuaries gather, they complain about the “hired guns” who will tell politicians whatever they want to hear. Any actuary who pushes the truth is over and done. It’s like the old joke about the difference between a comptroller and a VP/CFO: The comptroller tells you what the number is; the CFO asks you what you want the number to be. It’s time for actuaries to stand up and be counted. Get involved. Run for office.


  4. Posted by Al Moncrief on April 29, 2012 at 7:17 pm


    Did you see the new paper defending pension rights in Illinois? I pulled out a few highlights.


    The Illinois Retirement Security Initiative has published a very well-crafted and thorough legal analysis of the pension rights of Illinois’s public employees.

    The paper, written by Eric M. Madir, notes that the Illinois Supreme Court has invalidated the taking of vested pension benefits from public employees based on both the Pension Clause and the Contracts Clause of the Illinois Constitution. “The court’s principal holding that the Pension Clause (and the Contracts Clause in the public pension context) is an absolute bar to legislative impairments or reductions in pension benefits” cannot be ignored.

    The paper addresses the development of pension law in Illinois and other states, focuses on Illinois’s historical underfunding of its pension systems, and summarizes the past campaign for a constitutional pension protection provision in Illinois.

    Here is an introduction to the paper by the Illinois Retirement Security Initiative:

    Here is a PDF (76 pages) of the paper:

    Click to access Pension-Clause-Article-Final.pdf

    I gave the paper a quick read last night and was struck by the fact that it exclusively addresses the pension rights of current workers. The idea of taking of fully-vested benefits from retirees (Colorado’s pension theft target) is so far beyond the pale that it is not even contemplated.

    Below are some excerpts from the paper (in no particular order) that I found interesting:

    First a quotation:

    “There is no moral exemption for any man or body of men that breaks contracts. Nor is there any hope of public or private respect for a contract breaker. A contract breaker is an utter misfit as a citizen or a business man.”

    —Franklin MacVeagh, former President of the Commercial Club of Chicago and U.S. Secretary of Treasury.

    Particularly relevant to the current Illinois Governor’s pension reform proposal is the following statement:

    “An Illinois Appellate Court has explained that “the [government] cannot whipsaw citizens into ‘voluntarily’ choosing one of two means by which they will be divested of an existing property interest.”

    “Public employees have paid their required fair share of pension costs; it is incumbent on the State to meet its end of the bargain.”

    “These unfunded liabilities, though, are not the fault of public employees. Public employees have historically paid their fair share of the normal cost of benefits through payroll deductions. Rather, the liabilities principally stem from the State’s decades-long failure to make its required contributions to the five pension systems.”

    “Illinois courts have long held that the General Assembly lacks the power to amend or repeal legislation that affects vested rights.”

    “The Legislature and various governors chose for decades to use the pension system as a credit card to fund public services and stave off the need for tax increases or service cuts.”

    “In sum, welching is not a legal option available to the State.”

    From the case Felt v. Judges Retirement System: “The court ‘found that a contract clause violation was not defensible as a reasonable exercise of police power.’”

    “These are the ill effects of decades of skipping pension contributions to avoid tax increases and service cuts—a circumstance Illinois Governor John Peter Altgeld described long ago as the “cost of [getting] something for nothing.”

    From an Illinois Appellate Court decision in: Sklodowski v. State: “Once rights are created by the constitution or statute, ‘It is within the realm of judicial authority to assure that the action of members of the executive branch do not deprive [individuals] of an institution of rights conferred by statute or by the Constitution.’”

    The paper includes a concept from the case Ziebell v. Forest Park Pension Fund that adds clarity to public employee pension rights where employee pension benefits have increased over time. An employee’s right to a pension benefit is protected where the employee made contributions to the pension system after an increase in a pension benefit takes effect (for example, Colorado PERA members have continued their pension contributions after past increases in the COLA benefit took effect, and therefore have a vested right to that statutory benefit.)

    The paper cites an Arizona Supreme Court decision in Yeazell v. Capins. In that case, the court held that since pension benefit rights of public employees became “vested” upon accepting employment, the legislature could not later change those rights retroactively without the mutual assent of the employee. The court also held that the fact that the employee continued to work after the statutory change took effect could not be construed as employee acquiescence or a waiver of rights.

    The Madir paper notes that even if Illinois’s pension funds were to default, pension recipients would have a cause of action to receive their pension benefits. “Pension recipients will receive their pension payments when due even if a pension fund defaults or is on the verge of default. Any state pension participant placed in such a position would have a cause of action in circuit court to enforce this guarantee and obtain payment directly from the State’s General Fund. A participant need not pursue payment before the Illinois Court of Claims and depend upon the largesse of the General Assembly.” The Illinois Supreme Court has held that “where a constitutional or statutory provision categorically commands the performance of an act, so much money as is necessary to obey the command may be disbursed without any explicit appropriation.”

    Can legislatures breach contracts and blame it on a recession?

    “Courts, though, “sit to determine questions on stormy as well as calm days,” and the Constitution was upheld during the Great Depression.”

    “As the Oregon Supreme Court stated in a similar context, “Once offered and accepted, a pension promise made by the state is not a mirage (something seen in the distance that disappears before the employee reaches retirement).”

    What can you do? Go to the website, click on the “Support” tab, and send them a contribution. Call or e-mail every PERA member and retiree you know and ask them send support. Call your public employee union representatives and ask them how they can stand idly by while the Colorado Legislature attempts to breach its contracts with public employees. Colleagues of our public sector union officials across the country are aggressively defending the pension rights of their union members. What has happened in Colorado is truly bizarre.

    To follow developments in the Colorado pension theft lawsuit sign up as a Friend of Save Pera Cola on Facebook.

    Have your friends sign up as Friends of Save Pera Cola. Copy this post and e-mail it to PERA members and retirees you know.


    • Posted by Tough Love on April 29, 2012 at 8:50 pm

      Al, particularly when you bring up objections to the COLA freezes (and other reductions) in Illinois, you sound very foolish. Illinois is SOOOO broke and their Plans are SOOOO in the toilet that they could never pay what they’ve “promised”.

      So what is it that you want …. all the non-Civil Servant taxpayers to suffer endlessly so the Civil Servants can retire with 5-10 times those (the non-Civil Servant taxpayers) that you want to pay for it ?


      • Posted by skip3house on April 29, 2012 at 9:02 pm

        Good thinking. The legislators that did not fully fund their promises each year should be held liable for deficits. Mostly, will not get blood from rocks, though.

        If law abiding citizens of the time were not taxed for services rendered for that time, GONE! Today’s citizens should not be liable for yesteryears’ services.

        Public Employees – if not shown on your pay stub, likely a good chance it will not be there. Be sure politicians’ promises are fully funded each year.


        • Posted by Tough Love on April 29, 2012 at 9:09 pm

          The key words are “each year” …. which is exactly why Civil Servants should get Defined Contribution (NOT Defined Benefit) Plans, because, BY DESIGN, DC Plans are always fully fund each year.

          Taxpayers are fed-up with being hoodwinked by the Public Sector Unions in cahoots with the politicians whose favorable votes on pay, pensions, and benefits are bought with campaign contributions.


    • Posted by Tough Love on April 30, 2012 at 12:33 am

      Al, I took another look at your footlong comment. Particularly irksome is your repeated quote …”Public employees have paid their required fair share of pension costs”

      If you work up the #s, it’s VERY easy to demonstrate that the workers’ contributions (WITH Investment earning throughout their careers) rarely accumulate to an amount at retirement sufficient to buy more than 10-20% of the total cost of their pensions.

      The taxpayers are supposedly on the hook for the balance, and I can assure you that as I do, they do NOT find the 10-20% that the workers pay to be a “fair” share of the total cost of their pensions.

      Sure, it is their “negotiated” cost, but only because (as I said in my earlier comment) the Public Sector workers and the politicians have (for decades ) been in cahoots to financially rape the taxpayers with promises of extraordinarily expensive benefits and well hidden costs.


      • Posted by Al Moncrief on April 30, 2012 at 12:28 pm

        Wo TL, you read it twice . . . I really touched a nerve. Hey, this post is drawing attention to the new Illinois legal analysis of pension rights. I have provided excerpts from the document, it is not my writing.

        Did you notice? It looks like Raimondo is starting to wig out this morning with fear that her unconstitutional COLA-theft bill from last year is heading for the dust bin.

        P.S., I have no objection to legal, moral, prospective pension reform. I just abhor theft and breach of contracts.



        • Posted by muni-man on April 30, 2012 at 1:00 pm

          That’s gonna be nothing compared to the wiggin’ out the publics are gonna be doin’ when their pensions mysteriously stop getting EFT’d into their accounts if the reforms aren’t made. She’s one of the few honest ones out there and she knows what she’s talking about. They’re doomed without cutbacks.


        • Posted by Tough Love on April 30, 2012 at 3:57 pm

          Al, Will a RI Court’s reversal of the COLA freeze CREATE any money to pay the promised benefits (including the COLA increases)?

          Putting on blinders in the midst of a critical situation is not a “plan”.


          • Posted by Al Moncrief on April 30, 2012 at 7:58 pm

            Hey TL, as you know, when a court overturns Raimondo’s pension theft it will prevent RI from skipping payments for contractual obligations in order to make discretionary expenditures, exactly what you do in your household.


          • Posted by Tough Love on April 30, 2012 at 8:20 pm

            Depends on what you consider “discretionary”. I would consider keeping a library or a park open more important than the upper 50% of a retiree’s pension (considering that all Public Sector pensions are all at least 2x what their private sector counterparts would be).

  5. Posted by SNJGuy on April 30, 2012 at 3:04 am

    The calculations were done in the comments in a previous post… on average (AVERAGE) the public workers would probably pay about 25-30%; not 10-20%.

    And over the past two decades the taxpayers have essentially had a pension payment holiday so while they may get hit in the future with the 75% portion, they absolutely have not paid 75% of any public retiree’s pension over the past two decades. That is a fact.

    And, if the fund simply stays under funded by 30-35% for the forseeable future (quite likely) then the taxpayers share in reality drops to 35-40% because the employee has and will continue to pay into the fund every pay check while the shortage will be coming from the employer’s share.

    The governor shorted the fund by $3B last year, $2.5B this year (if and when he makes a payment), $2.0B next year, etc. By the time he is out of office (assuming 2 terms) he will have under funded the plan by around $10B. That $10B is his gift to the taxpayers and the royal screw to public workers.


    • Posted by Anonymous on April 30, 2012 at 8:35 am

      You’re still out to lunch on the required funding by publics – their funding is usually no more than 15% (20% max.) of what would be required to fully fund their pensions. However, that’s academic since pensions aren’t contracts in NJ. Ergo, NJ can ‘adjust’ its payments as it sees fit, or not make any payments if it chooses. That gift to NJ taxpayers you mention is perfectly legal and the converse is actually true – the real gift is ANY contribution gooberment makes into the plans.


      • Posted by skip3house on April 30, 2012 at 9:15 am

        “Public Employees – if not shown on your pay stub, likely a good chance it will not be there. Be sure politicians’ promises are fully funded each year.”

        Strange how simple obvious solution here was ignored for all these many years.
        As I was told by a Teachers union committee, ‘better to have a promise than nothing at all’.
        They were warned.


    • Posted by Tough Love on April 30, 2012 at 11:24 am

      The 25-30% of the total cost that you claim the worker’s pay is bogus, as it depend on the investment earnings meeting the lofty assumed 7.5-8.5% investment returns long-term, the employees paying the full share of their allocation, no benefit increases after employment (especially retroactive ones), and no pre-retirement spiking via excessive overtime or late career promotions.

      When reality steps in, the 10-20% of the total cost IS the accurate figure.


      • Posted by Anonymous on May 2, 2012 at 11:19 pm

        The AVERAGE 25-30% total cost calculation paid by public employees was based on a 7.0% return and NOT 7.5-8.5% as you claim.

        Public employee pensions are based on regular base salary; overtime pay is not included as you claim. (possible exception is NJ/NY Port Auth police)

        What is the percentage of public employees that receive a late career promotion? Provide your sourse please.


        • Posted by Tough Love on May 2, 2012 at 11:33 pm

          First let’s address the main issue. Where do I find the details of the 25%-30% you state? It won’t take much to pinpoint the study’s flaws.


  6. Public sector workers receive on average, 66% of their final salary in the form of a pension, which on average is 50% greater than the final salary of a private sector worker. Private sector workers receive on average 33% of their final salary in the form of a social security benefit. Since public sector workers comprise 30% of the retired population (they actually only are 20% of the workforce, but due to their much earlier average retirement age, they are 30% of the retired population), taxpayers are actually on track to disburse more money each year to retired public employees in the form of pensions then they will disburse to the entire private sector retiree population in the form of social security. Here’s the math:

    1.5 S x .66 x .3 > S x .33 x .7

    Moreover, because public sector employees retire 10 years earlier than social security recipients, we are on track to have a 1:1 worker to retiree ratio for public employees whereas our private sector workforce, worst case, will always have at least a 2:1 ratio of workers to retirees. This means that social security can be sustained at current benefit levels with a 16% payroll contribution, whereas public sector pensions can only be sustained at current benefit levels with a 66% payroll contribution. To suggest that investments can ameliorate this, or that even public sector administered retirement security funds even belong in investment accounts, is beyond the scope of this comment, but nonetheless a very problematic notion – especially given the inconsistencies of which funds receive investment treatment, and how speculative many of these investments really are.

    To point at social security as a financial time bomb is prudent, but pointless if one doesn’t first point at public sector pensions for what they are: A bigger bomb, set to explode much sooner.


    • Posted by Tough Love on April 30, 2012 at 1:30 pm

      Ed, Thanks for an interesting perspective. Those supporting and against pension reform tend to get too caught up in the trees w/o seeing the forest. For example, arguing over what share of the total Public Sector pension costs is not the definitive issue. The appropriate (and FAIR) goal should be equal Public and Private sector “Total Compensation” (cash pay + pensions + benefits) in comparable jobs. The split between the 3 components is not really relevant as long as pension & (retiree healthcare) benefit elements, being deferred compensation, are fully funded as accrued.

      While we have competing studies, most conclude that “cash pay” in comparable Public and Private sector jobs is now quite close. However the long-ago established Public Sector Defined Benefit pensions (always more generous than similar Plans in the Private sector, to offset lower Public Sector cash pay years ago) have continued (most often with improved benefit formulas). This combination of now equal cash pay together with much richer pension formulas, earlier unreduced full retirement ages, inclusion of COLA increases, and MUCH more liberal definitions of “pensionable compensation”, have combined to produced Public Sector pensions, the taxpayer paid-for share of which is ROUTINELY 2, 4 even 6 times (for safety workers) greater in value at retirement than the employer-provided pensions afforded comparable Private sector workers.

      In addition, most Public Sector workers get free or heavily subsidized retiree healthcare, a benefit that is almost unheard of in the Private Sector any longer. When the much earlier retirement ages of Public Sector workers are taken into account, this is an extraordinarily costly benefit, which (for family coverage) can alone cost taxpayers and additional $500,000.

      The combination of roughly equal “cash pay” together with MUCH greater pension and benefits results in much greater “Total Compensation”. This is unnecessary to attract and retain a qualified workforce, and is grossly unfair to Taxpayers who pay for almost all of it.

      Another problematic issue is the much greater legal protections afforded Pubic Sector workers. While ERISA allows Private Sector Pension Plans to reduce (or even end) pension accruals for FUTURE service for CURRENT employees, a variety of legal protections (constitutional, property rights, contract law, etc.) makes such changes difficult (or impossible) in Public Sector Plans. At the extreme end, Public Sector Unions take the position the even for the brand new employee, the pension formula in place on the date of hire can never be lowered even for FUTURE service and even if the employing city has clearly demonstrated it’s inability to maintain such a rich pension formula. Further exacerbating this situation, in California, the Courts have taken the position that even employee contribution increases are not allowed and that any pension element taken away must be replaced by another benefit of equal or greater value. A stranglehold on the options to address reform is counterproductive.


  7. Posted by Dave S on April 30, 2012 at 11:01 pm

    1) Re: actuaries. Actuaries, accountants and economists are all separate professions. Any projection by economists or actuaries involves assumptions and estimates about the future. No certainty. Political manipulation, that’s another story.

    2) Rhode Island and Illinois. While each state’s circumstance is different of course, the legal reasoning is coalescing around the concept that the COLA freeze is an improper taking after the fact. There’s more than a fair chance the conclusion will be the same in New Jersey.

    Uncertainty regarding future obligations is a good reason for the State to gradually exit the pension business. That means the governor & legislature can change the benefits that accrue in the furture. They should expect to meet the obligations they have already incurred.


    • Posted by Tough Love on April 30, 2012 at 11:07 pm

      Re your last sentence ….

      Which is why that migration to DC Plans should be sooner rather than later.


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