Russell Mueller Was Right

Mary Williams Walsh in a New York Times article trying to put some perspective on the impending Detroit pension default ended referencing a 1978 report (available here) on ERISA applying to public plans:

Members of Congress wanted the funding rules to cover state and city pensions, too. Russell Mueller, an actuary who spent months researching public pensions for a House subcommittee, filed a report in 1978 describing a pension Wild West, where the federal government was running dozens of plans that no one seemed to know about, and the states and cities had more than 7,000 overlapping plans. The accounting was so haphazard that when Mr. Mueller totaled the forgotten assets, the discrepancy had a material effect on the gross national product.

The report quoted a Michigan state representative, Dan Angel, complaining about the way pensions in his state were being granted: “This takes place in a totally political atmosphere, without any regard for how the bill will be paid, by whom, and when,” he said. “Employees had better get concerned that there is enough cash on hand to meet retirement needs, and taxpayers had better get concerned with these massive and increasing debt obligations.”

“Public pension legislation is inevitable,” Mr. Mueller concluded in his report.

But he was wrong. State and local officials shot down the proposed federal funding requirements. Mr. Mueller’s research was filed away and forgotten for the next 35 years, leaving governments and their workers to rely on state laws and constitutions, whose protection now has been called into serious question.

Propagandists for the status quo will look to portray Detroit as an anomaly when it is actually a bellwether.

Over the last 35 years for private sector plans we have had mountains of legislation looking to assure that protections were in place for pensions and promises would be kept.  During that time absolutely no attention has been paid to public pension plans except by the sponsors of those plans and their enablers looking to maintain or increase benefit levels at the same time they were decreasing or eliminating contribution requirements all while maintaining the fiction of solvency which, in the case of Detroit, continued to the very end when the official funded level stood at 91.4%.

Public pension legislation will come (perhaps as early as 2024 if the Stubebaker timeline for federal action is adhered to) but it was needed in 1978 when the funding shortfalls emerging might have been manageable.

From page 4 of that March 15, 1978 Mueller report:

In the vast majority of public retirement systems, plan participants, plan sponsors, and the general public are kept in the dark with regard to a realistic assessment of true pension costs.  The high degree of pension cost blindness which pervades the PERS is due to the lack of actuarial valuations, the use of unrealistic actuarial assumptions, and the general absence of actuarial standards.

Detroit retirees will see the light with their March, 2014 pension checks which they might have been expecting to be $1,600 but now will be whatever a bankruptcy lawyer working behind closed doors for a generous fee will deem it to be.

8 responses to this post.

  1. Posted by Tough Love on December 5, 2013 at 1:14 pm

    The more the Taxpayers are EDUCATED as to the incredible generosity of the pensions ROUTINELY granted to ALL Public Sector workers (MULTIPLES greater than what they get from their employers) the sooner they will rise up and demand that these promises be REDUCED, and NOT an increase in funding (meaning Taxes) or a further reduction in services, to pay for them.


  2. Posted by bpaterson on December 5, 2013 at 6:45 pm

    just a little math exercise and a fair proposition, and JB1 has tables for this verification we’re sure: JB1 notes the year 1978 in the first red flag. Coincidentally if a public sector worker started that same year 1978 he would by today have worked 35 years in the public sector. The workers normally pretty much retire after 35 years right. Using some loose math and numbers reflecting pension systems over the many states as a guess: if the public worker started at $20,000 and ended at $100,000, he would have been mandated to put away in the govt pension an amount totaling around $80,000, that with compounding interest (say 6%) over that time would have accrued to $350,000 (which is a multiple of 8 on the average of 40). If the govt matched that the total would then be around $700,000 escrowed for him at retirement. Upon retiring at $100k final salary years and 35 years he could get $60,000/year pension. That means in 11 years at $65k the money escrowed is used up not even addressing COLA. Over those 11 years maybe the interest on escrow may cover the pension another 2 years. So that’s 13 years, but its based on 6% average compounding principle gains by interest and capital gains which IMHO is probably more reality based.

    However, the govts are using 8-9% gains. Compounding that gives a multiple of around 12! Making his escrow $1 mill after govt match. Then that would give him a more palatable 15-18 years pension and would make sense, but even that doesn’t take into account living longer.

    But assumption and reality rarely converge and so we have these problems. The public of course did their civic duty all these years in servicing the escrow. The worker did his duty toward his end expectations. There were red flags even back in the workers first year. The problem is between the worker and the govt, not the people. But the people are always the fall back so a compromise should be done and all parties take some pain. Between the people and the public worker maybe a 50-50 has to be hashed out, meaning taxes increase, but the pension decreases probably by 30-40%. As for the elected officials that by sin of omission came up with this contrived, corrupted and wrongly determined pension system, we say reduce their pensions by twice the amount of the public worker which would make the legislators pain as a hit of 60-80%.

    numbers are numbers……………………………


    • Posted by Jack on December 5, 2013 at 10:39 pm

      Nice analysis. There are a couple of important caveats. First, I would assume the pensioners will receive a higher priority in bankruptcy than other creditors. Second, since it is a bankruptcy, assets will have to be liquidated. There are enough assets to cover these pensions and surely the unions will seek to attach them. It will be interesting, but there is no way you are going to see 40-50 cuts.


      • Posted by Tough Love on December 6, 2013 at 1:23 am

        Quoting…”First, I would assume the pensioners will receive a higher priority in bankruptcy than other creditors.”

        Judge Rhodes, handling the Detroit Bankruptcy does not agree with you…. they have EQUAL footing.

        Quoting…”Second, since it is a bankruptcy, assets will have to be liquidated.”

        Wrong again. While liquidation of assets is often what happens in Corporate Bankruptcies (and often is forced upon the Corporation by the Court), Under Federal Chapter 9 Bankruptcy law that governs Municipal Bankruptcies, the judge CANNOT force asset liquidation.

        Quoting …” There are enough assets to cover these pensions and surely the unions will seek to attach them. ”

        Well no, the assets are not sufficient (even if including Detroit’s art work as just appraised by Christies), and regardless, under a Bankruptcy proceeding, the Court determines the outcome (by accepting or rejecting proposed plans). Creditors cannot seize or place any liens on the assets of the bankrupt party once the bankruptcy proceeding has begun.


        P.S. Sounds like you may be a Detroit worker/retiree grasping for a good outcome. Good luck, but it’s an uphill battle.


        • Posted by Jack on December 6, 2013 at 3:06 pm

          I am not a Detroit worker, just have compassion for them. You can’t live on $20,000. Seems like the art may be liquidated—-


          • Posted by Tough Love on December 6, 2013 at 3:17 pm

            Can a Private Sector Retiree live on $20K any better than a Public Sector worker ?

            Public Sector workers have ALWAYS gotten far more.on the same work history.

            It’s time to fix that.


    • Posted by Tough Love on December 6, 2013 at 1:06 am

      You figures are quite a bit off.

      Using your assumptions (and a spreadsheet I developed from them), we have the following:

      (1) A $20K salary in year 1 will grow to $100K in year 35 using a compound annual salary increase of 4.4875%. This is just an observation to see if the resultant growth rate in pay is reasonable. As consultants like to say, it’s not “unreasonable”.

      (2) For a level annual % of pay employee contribution to sum (without interest) to $80K, the resultant level annual %-of-pay employee contribution is 4.5705%. This is also just an observation to see if the employee contribution rate is reasonable. Again, for a period covering the past 35 years, it’s not “unreasonable”.

      (3) Assuming each employee contribution is made at midyear and accumulated to the end of the 35-th year at 6% interest (your interest rate assumption), the accumulated sum (of the contributions and the interest earned thereon) is $199,547……………considerably less than the $350K that you came up with.

      (4) Noting that a 35 year Public Sector employee would likely have a pension formula generating about 75% of their final 3-yr average pay ($95,447.90 from my spreadsheet), the starting annual pension would be 0.75 x $95,447.90 = $71,585.93

      (4) From a Unisex mortality Table used in the recent past for Private Sector Pension Plans, assuming retirement is at age 60, and assuming the same 6% interest rate that was assumed in the earnings rate calculation above, the present value (i.e.,the Lump Sum value of this worker’s pension at the time of retirement) of a life annuity of $71,585.93 (payable at the beginning of each year) is $864,615 assuming no COLA increases ever. If the pension included 3% annual COLA increases, the Lump Sum value at retirement would increase to $1,165,276.

      (5) While I know NJ’s COLA increases are currently suspended, in almost all Public Sector Plans elsewhere, they remain in place, so lets continue the discussion with the $1,165,276 Lump Sum figure as representative of this worker’s pension ……

      (6) Of the sum of $1,165,276 needed at the time of retirement, the worker’s own contribution (including investment earnings) is $199,547 (from #3 above), meaning the Taxpayers’ share is the balance of $965,729. In effect, the employee is paying 17% of total Plan costs and the Taxpayers are paying 83% of total Plan costs. And to head off the expected Public Sector Union response to the above, NO, there is no 3-rd party called “interest” that is a true source of contributions, ALL investment earnings generated are solely due to and arise from “real” employee and Taxpayer contributions……and none other.

      (7) To generate the needed Taxpayer-accumulated-value at retirement of $965,729 requires a level annual 22.1195% of pay Taxpayer contribution.

      For those who have read my comments for some time, you should recall that MANY times I have stated that RARELY do the worker’s actual contributions (INCLUDING investment earnings thereon) pay for more than 10-20% of their very rich promised pensions. The above demonstration supports that conclusion…..@17%


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