Hatching a Bad Idea

“America cannot continue sleepwalking into the financial disaster that awaits us if we do not get the public-pension debt crisis under control,” Mr. Hatch is set to say in prepared remarks on the Senate floor Tuesday. “The problem is getting more serious every day and cannot be remedied merely by fine-tuning the existing pension structures available to public employers.”

Mr. Hatch said his proposal, which would not be mandatory for governments, offers cost certainty for state and local governments and steady retirement income for their employees.

WSJ, July 9, 2013

Acknowledging that there is a “public-pension debt crisis” is a good first step but proposing that insurance companies fix it through deferred annuities is naive and dangerous because it ignores some basic facts:

The Debt

All state pensions are severely underfunded and operate ponzi schemes to varying degrees.  Having future accrual pieces annuitized removes the inflow of available cash to the benefit of current workers but does nothing to fill the $5 trillion (or whatever it might be now) hole created by a dysfunctional funding mechanism for public plans.

The Cost

Insurance companies send a bill and expect to get paid and governments won’t be able to pass a bill to avoid paying.  New Jersey governments, for example is putting about $3 billion into their retirement system annually.  That cost could conservatively rise to about $5 billion using pension funding assumptions ($10,000 average cost per year for 500,000 participants) and maybe even $10 billion using insurance company annuity rates and that would only be the piece for current workers.

Insurance Company Regulation

Insurers are essentially self-regulated as the federal government is precluded from regulating them and state governments are bought off with premium taxes which is one reason why every captive line of insurance we have (auto, malpractice, health) comes with the word ‘crisis’ appended.

The Hatch proposal to extend deductions to purchasers of deferred annuities will be major profit center for insurance companies once it gets extended by amendment to the private sector after a decent interval but it has no practical application for government plans and will do nothing to help taxpayers of either Illinois or New Jersey or retirees of Prichard,  AL, Central Falls, RI…….or Detroit.

16 responses to this post.

  1. Posted by Anonymous on July 9, 2013 at 9:46 am

    Tough Love, I admire you for never giving up. However I have a feeling we are all going down the tubes together here. Sorry dude


    • Posted by Tough Love on July 9, 2013 at 10:50 am

      You may be correct … Greece did nothing until it was too late. Surely some knew of the pending crisis.


      • Posted by bpaterson on July 9, 2013 at 12:28 pm

        Couple years ago, there was a Greek blogger who discussed it on the internet. I think his name was John Burypopolus


  2. Posted by skip3house on July 9, 2013 at 10:34 am

    Good and practical, giving up. Let the United Corporations of America assume all debts, public/private, along with their successful power grab (great chess game).
    We wil be serfs as we deserve from not participating intelligently in our former government.


  3. Posted by Tough Love on July 9, 2013 at 10:48 am

    What never ceases to amaze me in proposals like this is either (a) the lack of full understanding of the implications of their proposal, or (b) the full disclosure of its consequences.

    Being well versed on pension funding, here’s how this proposal shakes out …

    (1) the Annuity-writers will “price” their products very conservatively to minimize the risk that they will be assuming. In other words, the cost to Taxpayers to fund the SAME level of pensions currently promised will skyrocket. Essentially the 7%-8% assumptions for earnings growth (currently used by all Public Sector Pensions Plans) will drop to the 2.5%-4% level used by the annuity-writers. These rates are even considerably below the (roughly 5%) rates Moody will use in evaluating such Public Sector Plans for the Credit worthiness of their sponsors, and below the rates Private Sector Plans are REQUIRED to use in their pension valuations. Did Senator Hatch think that off-loading that significant risk would be cheap ?

    (2) While the Unions would love the strong “guarantees” AAA or AA rated annuity writers would bring to the table, there isn’t a snowballs chance in hell they will accept the significantly lower pensions that could be bought with today’s Taxpayer contribution levels. Of course they would gladly let the Taxpayers pay 50-100% MORE for the SAME pension levels promised today. If Senator Hatch thinks this proposal is (even remotely) a “solution” to this problem, clearly the Utah Citizens have elected someone incompetent to do the job.

    (3) The ROOT CAUSE of the pension-generated financial mess many States and Cities are in today is BECAUSE the promised pensions are simply FAR TOO GENEROUS, and THEREFORE very very costly to fully fund without SIGNIFICANT Tax increases and/or completely unacceptable reductions in govt-provided services. And when I say FAR TOO GENEROUS, I mean pensions for which the Taxpayer paid-for share is ROUTINELY 2-4 times (4-6 times for safety workers) greater than the pensions typically afforded Private Sector workers retiring at the SAME age, with the SAME years of service, and with the SAME Age at retirement.

    (4) REAL pension reform MUST include either (a) or (b) below, with (a) being the MUCH better choice. Unfortunately, we have yet to find a politician with the guts to confront the very Greedy Public Sector Unions, and Senator Hatche’s proposal certainly does NOT put him in that category:

    (a) hard freeze the ALL current Public Sector Defined Benefit (DB) Plans (meaning ZERO future growth) for all CURRENT workers, and replace them for FUTURE Service with 401k-style Defined Contribution Plans with a Taxpayer “match” of 3%-5% of pay which is what Private Sector workers typically get from their employers …. and with all Gov’t workers participating in Social Security, or
    (b) IF (a) above simply CANNOT be accomplished (and only AFTER exploring all avenues to do so), then continue the DB Plans, but reduce the pension accrual rate for future service by A MINIMUM of 50% (66% for Safety workers with the richest pensions).


    • I disagree if you mean by ‘their proposal’ the insurance companies’ proposal. They fully understand the implications of opening up a vast market for their dogshit product:

      The amazing part is that they would be solving a real problem (taking the ponzi aspect out of the accruals for current workers) while exacerbating the stated objective – the debt – and I’m curious to see if anyone else notices.


      • Posted by Tough Love on July 9, 2013 at 11:02 am

        John, When I said “their proposal” in my first sentence, I meant Senator Hatch’s proposal. Clearly, from your write-up, you agree with me on the financial consequences of his proposal


        • Posted by Anonymous on July 9, 2013 at 2:25 pm

          Would this mean that public pensions could then be taxed? Surely the government will have to get something out of this hatched scheme.


          • Posted by Tough Love on July 9, 2013 at 3:10 pm

            Public Pensions, just like Private Sector pensions are subject to Federal Income tax (other than Disability pension, of which all or a portion may not be taxed).

            In some States, Public Sector pensions are not subject to State Income taxes …… another ridiculous perk they have due to their Union’s bribing of the politicians with campaign contributions and election support.

          • Posted by briandin on July 20, 2013 at 4:13 pm

            Yes, but what needs to be done is to tax the net present value of the taxpayer portion of what goes into these pensions – make these publix pay as they go and make it hurt.

  4. Posted by joe on July 9, 2013 at 10:29 pm

    “…they would negotiate how much the local employer would pay the insurer upfront..” So I assume that for the insurance company to pay an annuity equal to what the public employees are or are expecting to receive, then the payment to the insurer will have to be far higher than the current amount in the public pension funds, which means a big kick-in from the taxpayers. and of course, if the insurance company cannot pay the pensions down the road then the feds will step in to make everyone whole. the problem is not the state-run pension funds, the problem is the size of the promises.


    • Posted by Tough Love on July 9, 2013 at 11:12 pm

      Quoiting …”the problem is not the state-run pension funds, the problem is the size of the promises.”

      EXACTLY !


      • Posted by Anonymous on July 10, 2013 at 11:39 am

        So the taxpayers are on the hook one way or another? Am I understanding this correctly? How will this work at the state and municipal level? Most homeowners are being taxed out of their homes and businesses now. No more bankruptcies?


        • Posted by Tough Love on July 10, 2013 at 11:59 am

          Are the Taxpayers on the hook ?

          I hope not. Taxpayers should fund their share of pensions no greater in “value at retirement”* than what THEY typically get … especially since the significant excess ABOVE that is the result of the Public Sector Union’s buying the favorable voters of the elected officials who approve these excessive pensions.

          Now do I really believe there won’t be more pain for Taxpayers ? Of course not, but I hope we will eventually find a way to AT LEAST freeze these pensions or very materially reduce the pension accrual rates for future service of CURRENT workers. Reductions for PAST service accruals (justifiable as well on the same grounds) will be a lot harder to reduce short of major financial problems with the State’s finances.

          * “Value at retirement” takes into account not just the much richer formulas, but the earlier full retirement ages, the very liberal definition of “pensionable compensation”, end of career pension “spiking”, and COLA-increase provisions.


          • Posted by Anonymous on July 10, 2013 at 12:38 pm

            Sounds like a long way of saying that the publics will get all that they were “promised” at the cost of everyone else

          • Posted by Tough Love on July 10, 2013 at 1:36 pm

            Anonymous, If Illinois goes down and their pensions are reduced, perhaps a good thing will come out of it for OTHER places …. that we needn’t continue to spiral down the financial drain (as Illinois did) and to stop that downward spiral now … by ending these excessive pension promises now.

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