Actuarial Lies and Consequences

Defined Benefit retirement systems across the country are all severely underfunded because an actuarial/political cabal has allowed Generally Asinine Approaches to Payments to pass for Generally Accepted Actuarial Principles. Now even the lowball contribution ‘requirements’ these methods are yielding have become onerous obligations for governments unprepared to actually pay for the promises they might have thought they could afford.  Which leads to some desperate measures:

The politicians’ solution comes from Jim Nolan, a former Illinois legislator, agency director and aide to three governors who in a piece on mywebtimes proposes:

Why struggle to set aside a mountain of assets when in practice they would be needed only if Illinois were at risk of going out of business? State governments never go out of business.

[David] Eisenman proposes that instead of setting aside so much wealth that will never be used, Illinois fund its pensions on a mixed pay-as-you-go basis, more like Social Security than private company pensions.

As if Social Security, a transfer mechanism between low-paid workers and retirees, is a model for anything but economic stasis.

Then Ed Bachrach, founder and chairman of the Center for Pension Integrity, in a Wall Street Journal opinion piece goes the MPRA route:

Instead of bailing out these pensions, Congress should pass a law allowing states and local governments to reduce promised benefits—something that is now illegal under some states’ statutes or constitutions.

The details, as with MPRA, would be worked out by bureaucrats and regulators and, when implemented, lead to token protests with token media coverage changing nothing as politicians claim only to be ‘following the law’.

56 responses to this post.

  1. Posted by dentss dunnigan on July 18, 2016 at 10:57 am

    “Instead of bailing out these pensions, Congress should pass a law allowing states and local governments to reduce promised benefits—something that is now illegal under some states’ statutes or constitutions”…This will become a certainty in the future .If ever the stock market sells off 30% it will become apparent to everyone how impossibly it really is to fund DB really are .Throw in medical with it’s rising cost and it should scare any politican to do the responsibly thing .


    • Posted by fair adjustments on July 18, 2016 at 1:15 pm

      You are so right. Defined benefit payments should be pay as you go. In fact to that end, I have passed a law for myself that from now on all my “defined payments” which i previously contracted will be reduced. My defined morgage payment, defined car payment, defined water, electric, and gas bills, my defined local and county taxes will now become pay as I go and adjusted according as I decide. And since my “defined benefit payment” of my pension and social security will surely be reduced, I must reduce my obligations of defined payments to my previously contracted payments. I can only pay .10 on the dollar, sorry roofer, plumber etc the work you previously did and excepted that defined contracted payment for has been adjusted. I have passed a law saying that is what I can do. In fact my grocery bill that is on my credit card, is now adjusted to .10 on the dollar. So I already ate the food too bad. In fact lets make speed limits an adjusted as you go too. If I get a ticket for 50 I am adjusting it to 10 because that is what my defined payment has been adjusted to.


  2. Posted by lFor fairness on July 18, 2016 at 1:00 pm

    So why were these pension plans not a problem to fund previously for 50 years or more ? Probably because people used to believe a promise is a promise and a deal is a deal. They never ever thought about reneging on a deal and never ignored the need to fund the programs as they went along at the necessary levels to keep the program solvent. Somewhere along the way today’s politicians like Whitman saw the pension money as free money that they could manipulate to their own interests and promise their constituents free money in the form of tax cuts without consequences.


    • Posted by Anon on July 18, 2016 at 1:10 pm

      If pensions were properly funded 50 years ago as you say, then why did the Illinois Legislature need to add a “cannot be diminished or impaired” clause to their state constitution back in 1971? This is not a recent phenomenon.


    • Posted by dentss dunnigan on July 18, 2016 at 1:39 pm

      We have never seen interest rates this low even in the 30′ and 40’s it was 3% ..but now we’re at zero for 10 years or more can’t promise to pay out a % of your pension assets when your getting zero interest rate back …it’s the game changer .


      • Posted by lFor fairness on July 18, 2016 at 2:38 pm

        Well the State is also paying less interest and is benefiting from the low interest which should make more money available in the budget. It isn’t a game changer. The state could afford to make higher payments into the pension fund to offset lower accrued interest.


        • Posted by Anonymous on July 18, 2016 at 4:23 pm

          So if the state can “afford” to make full pension contributions as iFor claims, then why aren’t they???


          • Posted by lFor fairness on July 18, 2016 at 5:40 pm

            Because the courts let them off the hook, so the state has no incentive to make full payments. There is nothing the workers and retirees can do about it , so Christie and company can do whatever they want with the money. What they have created would be the equivalent 0f me spending all of my savings on new cars and trips, running up all kinds of debt and then telling my roofer ” I know I agreed to pay you $ 500 up front and $5000 at completion for my new roof that you just finished installing but I only have $3500 left so you’re going to have to accept that amount in installments over 12 months instead of $5000 in installments. That wouldn’t be a problem, right ? But I needed the cars and the trips just as much as the new roof even though I knew that I had already agreed to pay you for the roof before I spent all of my money. Now it would be immoral to stiff the roofer IMO, but if I had no morals maybe under today’s law in NJ maybe I could get away with it, but I would never think of doing so even if I thought the cost was too high because I told him I would pay it . It would be dishonest to not pay what I had already agreed to pay. If the citizens of the state allow such behavior on their part, they are behaving just as dishonestly as the politicians. The fact of the matter is many people have no moral compass anymore and will do and support whatever is in their own personal self interest. And that is what is going on . If the state said they were going to cut wages by 50% so they could give everyone a tax cut, there would be plenty of people on here and throughout the state who would argue and rationalize that the cuts were reasonable and that the taxpayers deserved the tax cut.

        • Posted by bpaterson on July 20, 2016 at 1:08 pm

          the easy answer is the extra money obtained from low interest debt burden went toward the health increases and the labor cost/salary increases over the past 15 years. The last decade saw public sector raises of 4-5 % most years, and while doing that the pensions were shorted. Include in this also the wild spending on all sorts of tepid social programs and overly-exotic transportation projects toward the voting bloc bastions. It was all a scam then and is still one now. The taxpayers have woken up finally since the yuuuge burden threat is being proposed to be on the taxpayer as fall guy and not the true direction of the system itself. (system IE the politicians, the public sector and the urban areas)


    • “So why were these pension plans not a problem to fund previously for 50 years or more ? ”

      the same reason all ponzi schemes pay out to the earlier participants, to keep it going for longer…..


  3. Posted by lFor fairness on July 18, 2016 at 1:26 pm

    Obviously the Illinois legislature didn’t think it was going to be a problem to fund the pensions if they were willing to protect them from the likes of politicians like Whitman and the like by adding such a clause. IF they feared that funding was going to be a problem, they would not have added such a clause that would tie their hands. They were just guaranteeing their promises. Your argument does not make sense.


    • Posted by dentss dunnigan on July 18, 2016 at 1:46 pm

      And they are paying for it …In 2016, a year of consequences. Driving their distemper: Gazillions of dollars that might pay for today’s crying needs already are committed to future retirement benefits and debt payments.
      They know they’re on track to bequeath to their children and grandchildren a legacy of dwindling services and punishing debt — an Illinois grossly inferior to the state their grandparents and parents bequeathed to them.
      As we said, just look at them. Listen to them. They’re miserable….Is this what we want to leave our children ….


      • Posted by lFor fairness on July 18, 2016 at 2:11 pm

        No, they knew that they were obligated to pay for pensions. If the money was not there to pay for other things they wanted to fund they had too choices ; don’t take on those other burdens or raise revenue. Once an obligation such as pensions, road construction, education funding, family services or whatever is taken on, all obligations are equal once the debt is incurred. You can’t go back and say with any moral standing that we won’t pay that bill or we won’t pay this bill. That is what is being done today in NJ and many other states. we now have irresponsible people making such decisions . I can’t get away with not paying for or reducing my payment for anything I already bought or service I received. I can’t go back to my auto mechanic and tell him I am only paying him $400 on a $600 bill. and I certainly can’t ask him to give me back money for a repair I received in 2010. Not budgeting enough money for car repairs will not result in me receiving a reduced repair bill , but that is how the State is now operating and people like you are looking at things. A promise should be a promise and an obligation in my mind is an obligation. If I did not budget properly it should be my problem not my creditor. Likewise for the State. The retirees are the state’s creditors. Sorry, we think we over promised is not an answer


        • Posted by Anonymous on July 19, 2016 at 11:49 am

          So you are saying basically that it is not immoral to impose a significantly higher tax burden for the same or potentially reduced level of service on the next generation of tax payers? What are you going to do when I say no or simply move out of the state? Indenture me to servitude to satisfy your retirement? Good luck with that.


          • Posted by lFor fairness on July 19, 2016 at 1:14 pm

            I say keep your promises. Before Whitman people weren’t leaving the state and the income tax rates were not onerous. Most of the tax cut money went to the top incomes and restoring the tax rates to what they were would not be onerous. You can say no now and move out and all public retirees could do the same at any time. At the moment they are the only ones bearing the burden. What sacrifice has been imposed on anyone else ? When and if you retire and if you have a 401 K how about the state coming along and taking a slice of it after you have already retired or the company you worked for asking for some of its contributions back because they wanted to use the money elsewhere ? I don’t think that it would be okay with you if they said we shouldn’t have matched your contributions 10 years ago and we want that money back. It is not immoral for the state to impose tax levels that fund its obligations. If the citizens going forward want to incur fewer new obligations in the future after settling the old ones they can do so . But you can’t just walk away from obligations that have not been met. If you think that is okay to do why not just default on the state’s bonds ? Why should those investors be paid before retirees ? it is no more or less an obligation to pay retirees what they are owed than it is to pay the bond investors, but I don’t hear anyone saying we don’t have to pay them or that it would be okay to pay them less than the rate of interest that was promised because the state just doesn’t have enough money. So should we continue to pay bond holders 100% of the interest or should they be forced to sacrifice ? Or ois it only current public workers and retirees who must bear all the burden caused by the citizens and their representatives ? Why do promises to bond holders remain sacrosanct , but other promises can be reneged ? I am not suggesting that bond holders shouldn’t be paid because that would be equally immoral as not keeping promises to anyone else. You probably don’t see anything wrong with defaulting on an obligation because it is better financially for you if you do and you probably don’t feel bad that you and your representatives have lied and taken advantage of a group of people who lived up to their side of the bargain only to find that they were dealing with cheats. And all of us including you are now among the cheats.

          • Posted by lFor fairness= Entitlement Mentality on July 19, 2016 at 2:12 pm

            lFor fairness, your “entitlement mentality” is on overdrive!

      • Posted by fair adjustments on July 18, 2016 at 2:26 pm

        not paying the bills back when you were given tax cuts that is when you left your children the debt. Now you are only teaching your children that they don’t have to pay for items and services they already received. I guess now they will think all their futures toys will be free. and they can be if we can do things like not pay for prior goods and services. although I don’t think Walmart would look kindly on that or accept it like the state workers had to. The money your children received was given to them in the form of tax cuts their parents demanded and whitman gave them. Although it should be noted that the richer the child the more free tax money they got. They are being taught to spend freely on things they just want, run up debt on services they need and get to reneg on the debt later. and of course there are no consequences


        • Posted by dentss dunnigan on July 18, 2016 at 5:57 pm

          You have to look no further than student loans …..and the democrats plan to forgive them …..I agree the lesson they are being taught is no a good one …


          • Posted by bpaterson on July 20, 2016 at 1:15 pm

            Dent, I still remember around 7-8 years ago the state was going to do a tax rebate to those who were paying state property and income taxes and the dems were clamoring that even those that did not pay taxes deserve money back. I think that rebate scheme fell apart fell aprat from the idiocy that was imposed on it

  4. Posted by lFor fairness on July 18, 2016 at 1:51 pm

    If the State of NJ is having trouble meeting its obligations, why has the State not reduced payments across the board to all contractors and creditors ? No the State picked out only one group to be punished for the State’s inability to manage its budget :Public Workers. Why is that okay ? They didn’t create the fiscal crisis. The citizens of the state received tax cuts from money that was made available by the governors and legislatures by not funding the pensions. It is time that those tax cuts are removed and proper funding is provided. The citizens of the state got free money and it is time we gave it back in the form of across the board tax increases. There was talke of shared sacrifice to resolve the crisis, but I don’t see anyone but the public workers and retirees
    sharing any sacrifices. So far Whitman’s free lunch program that was followed by future governors as well is still that: a free lunch and especially to the top incomes who benefited from tens of thousands of dollars annually.


    • Posted by fair adjustments on July 19, 2016 at 1:51 pm

      totally agree. Everyone got a free lunch with tax cuts. The middle class got next to nothing when it was done.The “whitmans” and their income bracket made out like bandits. So now the public workers are singled out to pay for everyone’s freebies and the wealthy tax cuts. There was not problem receiving the work that was done at the time. No one complained saying we are taking on debt for payment at a later time, just as if you take on debt when you buy a car or house or home improvement. What if you had no prison guards, police, social service workers? If you don’t want to pay for those services now, eliminate them…. but just like everything else, you got the benefit of their work, pay for the work that was done. Perhaps we should send a “bill” to everyone in NJ (with interest) like other creditors do. The bill could read…. you received the service of prison guards and administration from 1990 through 2016. The amount you owe is…. Bottom line is the people that want to reduce benefits and not pay the pension fund are just trying to get out of their obligations and are totally taking the free lunch without any consequences.


      • Posted by S Moderation Douglas on July 22, 2016 at 12:07 pm

        “No the State picked out only one group to be punished for the State’s inability to manage its budget :Public Workers. Why is that okay ?”

        “So now the public workers are singled out to pay for everyone’s freebies and the wealthy tax cuts.”

        Apparently neither of you has been reading this blog for the last half dozen years or so. The reason it’s OK to single out public workers is that they are all overpaid to begin with. According to the script, public workers now earn as much or more in wages than the private sector, so their pensions and benefits are not earned.


    • Posted by bpaterson on July 20, 2016 at 1:20 pm

      you can look at ti as the same way a few years ago, the state needed revenues and so picked out only one group to punish: the wealthy, with the millionaires tax increase. Adjustments obviously can be imposed to keep the state as a whole vital and financially sound. You are inarguably now in the cross hairs this time. We have to get the state back on solid footings without hurting the majority of the residents.


  5. Posted by Anonymous on July 18, 2016 at 2:28 pm

    Don’t stop with State and Local, let’s “be fair” and go after the Federal pensions – yes sorry to say including military! No different, it’s all about choices based on what you know (were told) when you “signed up”!


  6. Posted by Javagold on July 19, 2016 at 1:52 am

    The pensions are a mirage. If you can’t hold it, you don’t own it. IOUs.


    • Posted by S Moderation Douglas on July 19, 2016 at 6:23 pm

      Maybe you should hold gold bars, then?
      I have a modest IRA and an even more modest savings and checking account. They’re really not much more than ones and zeros in a computer somewhere.

      Tomorrow they could be dust in the wind. But unless I want to go off the grid, for today it makes sense to treat them as real. Same with my pension. But to paraphrase George Orwell, all pensions are unequal, but some are more unequal than others.

      California may be an example of the lies John is referring to: mainly the assumed rate of return is too high, I guess is what he is referring to, so the Annual Required Contribution is too low. But at least in California, the state and cities have been contributing that ARC, with some exceptions, like teachers retirement system.

      I don’t know if it’s the actuary’s job to determine the discount rate. I have heard “opinions” from supposedly knowledgeable people (Miller, Munnell, Buffet?) that it should be 6.2% or lower. But that was five years ago. Who knows what they recommend now?

      As a recipient, my inclination is to hope for the best and plan for the worst. I would feel much more secure if the state adopted a five percent rate, but… I don’t think the taxpayers in my town (myself included) would like to see taxes raised or services reduced enough to offset the higher contributions.

      But they get even more unequal in places like Illinois and New Jersey, where the discount rate was too low …and… the states didn’t contribution even that lower rate. I don’t know if you can blame that on the actuaries.


  7. Posted by MJ on July 19, 2016 at 8:49 am

    Tax cuts in NJ? Surely you jest……we have the highest property taxes, highest business taxes and worse business climate, highest income tax, high sales tax, highest fees, tolls, etc in the country, soon to have highest gas tax…..and iFor thinks that NJ residents don’t pay enough in taxes? Could it be that NJ has promised beyond its means and now the chickens are coming home to roost. Why “punish” the public workers who are the ones that vote for the morons that manage the state finances?


    • Posted by fair adjustments on July 19, 2016 at 1:23 pm

      is this what it is all about? who should be “punished”. That the public workers should be “punished” because after all they are the only ones who voted? If “punishment” is in order than spread the “punishment” around and raise the money through taxing EVERYONE. By reducing the pensions and not paying for services already done by retired public workers, At this time only public workers are being “punished” and you have gotten all the benefits of their work for free. You are just punishing, rather than paying what you owe. So let me punish my car dealer who sold my the car, my bank who gave me a loan for my house. Note if tax bases were increased, public workers would also pay those taxes in effect paying twice, once by not getting a cola that was contracted and the tax increase. Your theory only “punishes” and singles out one group. So fairness and morality is not an issue, who should be “punished” is.


    • Posted by lFor fairness on July 19, 2016 at 1:40 pm

      Okay, MJ so were promises only made to public workers and retirees ? Of course not. So why is that group the only ones whose promises are being reneged upon ? Should money be clawed back from road contractors and all who have done business with the state in the past 20 years ? How about bond holders ? Should their interest payments be reduced ? And if not why not if it is okay to take from retirees ? Should other programs be reduced including corporate tax breaks and small business tax breaks ? Should school aid be reduced ? Should aid to townships be reduced ? How about Abbott District aid ? Should all funding of every kind be reduced ? At the moment only public workers and retirees are feeling the brunt. What are you being asked to sacrifice ? No you should get a free ride after getting a free tax cut from Whitman that is now completely on the backs of public workers and retirees. The fact is that you through your representatives skipped out on your obligations so that you could benefit from a free tax cut and only one group is now paying the bill for the free tax cut . The tax cut was created out of thin air. There were no budget reductions, no service reductions. You received the same services for less money because Whitman put it on a credit card through borrowing and now the bill is do. You already received the benefits. Isn’t it time you actually paid for them ?


      • Posted by bpaterson on July 20, 2016 at 1:26 pm

        Ifor-bondholders do get punished, watch Puerto rico. Sometimes items need to be adjusted or renegotiated to remain on sound footing to avoid hurting the largest majority. read the bondholders versus the integrity of the state of Puerto rico. It obviously is beginning to happen here in NJ


      • Posted by MJ on July 21, 2016 at 2:55 pm

        iFor, I didn’t get anything from Whitman and yes I think everything, everybody, every salary, every benefit, every service and every social program should be cut 10% across the board…that would be a pretty good start to some level of fiscal sanity.


  8. Posted by George on July 19, 2016 at 11:22 am

    Question about, Department of Investment NJ, monthy reports.

    The last page, pg 22, Transfers between Common and Pension Funds

    What exactly is shown on this page. The last exhibit, Transfers between Common and Pension Funds, Summarized? Is this the amount paid out of the pension scheme minus the amount paid in for the month and a yearly total? The numbers have been rounded, the rest of the report pages do not round, so I wonder if it is the amount paid in only?


    • From reviewing this page going back it looks like the amount deposited into the funds from the Common fund, which might be a master fund where the state keeps all their money, probably including employee and employer contributions. The June 30, 2015 Fiscal YTD amount came to $4.642 billion which is about what those contributions would have been for that plan year.


      • Posted by George on July 21, 2016 at 4:52 pm

        Thanks. Now I am looking for the monthy payments to beneficiaries. Oddly that should be the easiest number for them to present.


  9. all benefits must be reduced. there is just not enough money to pay for everything.


    • Posted by lFor fairness on July 19, 2016 at 1:49 pm

      Maybe your employer can also reduce your benefits and that of your co workers as well and contribute that money to the state because as you said there is just not enough money to pay for everything. Is that okay with you ?


      • Posted by lFor fairness= Entitlement Mentality on July 19, 2016 at 2:14 pm

        Maybe you can stop living at the trough and get a real job and stop whining lFor fairness.


        • Posted by Anonymous on July 19, 2016 at 3:56 pm

          since you believe that someone who works is an entitlement mentality because they ask to get paid, then you need to give up your entitlement mentality and go to work without pay…. since accepting a paycheck is an entitlement mentality or perhaps if you are so rich you don’t need to work, you need to give up all your wealthy since accepting it Is an entitlement mentality


        • Posted by lFor fairness on July 20, 2016 at 1:05 pm

          And what qualifies as a real job ? Is a teacher a real job ? Is a prison worker a real job ? Is a policeman a real job ? Is a lawyer a real job ? Is a construction inspector a real job ? How about a food inspector ? We would all be in trouble if we didn’t have any people doing all of these real jobs. And yes I performed one of those real jobs for 35 years.


          • Posted by S Moderation Douglas on July 20, 2016 at 4:03 pm

            Makers and takers.

            How many times have I heard that all wealth is created in the private sector, and government only consumes, but does not create.

            The “taker” gets called out at one AM to clear accident damage on a high voltage circuit, in the rain, so NB Hwy 99 will be open for commuters. (Been there.)

            The “maker” is a fluffer for porn films in the San Fernando Valley.

            Now that’s a real job.

            In Econ 101, they tell you there are private goods and services and there are public goods and services. Either one is useless without the other.

          • Posted by PS Drone on July 20, 2016 at 8:56 pm

            There are lots of “real” jobs in both the private and public sectors. Unfortunately, those jobs supported solely by taxation or government borrowing are overhead the cost of which must be applied against the portion of the economy that actually produces (agriculture, mining, manufacturing, etc.) positive economic output by adding value along the way from raw material to finished product. There are many private sector jobs that are also overhead – lawyer, accountant, insurance agent on and on. Since we have offshored many of our productive jobs, all we can do as a nation is continue to borrow more and more to finance, for example, 22 million government employees and 18 million health care employees, the vast majority of which (some pharma and medical device employees excepted) are pure overhead.

      • Posted by MJ on July 21, 2016 at 2:58 pm

        iFor most private employers large and small have cut staff, frozen salaries, required higher pay in for less health insurance, reduced or eliminated retirement plans through the company, merged, consolidated or plain closed down to meet the new normal economic and financial situation. Time for the public sector to do the same starting from the top down


        • Posted by S Moderation Douglas on July 21, 2016 at 6:19 pm

          In 2015, PEW Research said unemployment was down to 5.6%.

          “All of that growth came from the private sector, while the public sector shrunk: Private payrolls have added 7 million jobs over Obama’s presidency, while government payrolls (federal, state and local) have contracted by a combined 634,000 jobs.”

          They didn’t just shrink in numbers, either. Many public workers had no general increases from 2007 to 2112. Some negotiated pay decreases. At least 25 states and numerous local governments reduced their pensions and/or increased employee contributions.

          My private sector brother in law was cut down to four days a week for much of 2009. But he was cut back because his boss didn’t have enough orders to keep his workers busy. The state workload, for the most part, didn’t decrease, but our hours were cut back by three days a month.
          We are all well aware of the opinions that government workers are underworked, so you can believe it or not, but what happened was that a lot of maintenance got deferred. And what naturally follows when maintenance is deferred is that eventually, the need for emergency repairs increases. I think management even admitted, belatedly, that there were little, if any savings from the furloughs. It was all optics.

          And I’m not so sure “most” employers had to cut back. Mainly just certain industries. My wife never lost a day, and got regular COLAs right up till she retired in 2013.


        • Posted by lFor fairness on July 23, 2016 at 8:38 pm

          Staff reductions in NJ started over 20 years ago and there have been cuts in staff every year since so that in many areas including corrections there are no more places to cut without risking lives even more than they are already at risk.


  10. Posted by dentss dunnigan on July 19, 2016 at 2:19 pm

    Everyone is missing the point …if Actuaries put the right estimate for the pension the yearly contribution would be much higher for both the employee and the employer .But by saying at 7.65% return is normal is almost criminal .The best way for pensions to be funded would be pay-go every year the state could but in their part and the employee would do the same .With the interest rate where is is now I could say the contribution would be more than double than what is estimated …This way you don’t get behind in payments and people would get a better idea as to what should be paid .If that was the way the pensions were to be funded to start taxpayers would have seen exactly what it would cost …bottom line .But nobody asked the politicians that made these promises where the money was coming from …..


    • Posted by S Moderation Douglas on July 21, 2016 at 8:44 pm

      At what point in time, roughly, should the actuaries, have reduced the discount rate, thus increasing the normal contributions?

      No experienced investor am I, when our youngest daughter got married and moved out, I opened a 457 account and began contributing 5% of pay. My advisor recommended a somewhat aggressive mix of investments and said to expect ups and downs, and don’t panic. I lost quite a bit in 2008, and got most of all of that back. The last two years I have been up and down, but mostly breaking even.

      If the actuaries were prescient, they could have increased contributions in 2003-2004 before local and state governments took the big hit in revenues in 2007. But many systems then were fully funded, or over funded. They couldn’t raise contributions in 2008 because gov. revenue was down and cities couldn’t afford the bills. California and, I have read, some others are in the process of reducing the discount rate further (and adjusting the asset mix.)


  11. Posted by George on July 19, 2016 at 2:55 pm

    “Congress should pass a law allowing states and local governments to reduce promised benefits—something that is now illegal under some states’ statutes or constitutions.”

    Congress could enact such a law.

    Bankruptcy in the United States is governed under the United States Constitution (Article 1, Section 8, Clause 4) which authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.”


  12. Posted by AnonActuary on July 20, 2016 at 5:37 pm

    Long time lurker here’s my rant.

    1). A pension benefit is a loan that the employee makes to it’s employer. Employee works now and gets paid later. The employee could have opted for higher direct/immediate pay but chose (or bargained for) lower direct/immediate pay and some level of deferred pay.

    2). The size of the typical teacher pension is ridiculously high. Why should my school district continue to pay a teacher 75% of their salary for 30 years after they stopped teaching? It’s easy to see how this is great for the teacher – but how are the interests of the taxpayer served?

    3). Those giant loans are looking shaky. They were never properly financed simply because the value of the loans – the actuarial liability – was systemically undervalued.

    4). The liability should always have been calculated using a discount rate that reflected the risk of the employer to actually make the payments. Since the payments are guaranteed, this risk is quite low, and discount rates of 4-5% would have provided far better estimates of the liability. Instead they were undervalued by 40-60% using fantasy discount rates like 8.5% that recklessly overstated the risk of nonpayment.

    5). Telling taxpayers that the obligations should be based on a discount rate that reflected significant risk of nonpayment, when in fact barely any such risk existed, was probably criminally fraudulent behavior. Actuaries are complicit in this crime, failing to grasp the import and proper determination of the discount rate.

    6). Because the liability was undervalued all resulting contributions that were based on it were far too small.

    7). Employers failed to routinely make 100% of these undersized contributions.

    8). When assets occasionally eclipsed the liability figure, benefits were typically increased, making the problem even worse. They thought they were 105% funded but in reality, under 70%.

    9). When entities are insolvent (and many more will be) their lenders take a haircut on their loans. There isn’t any other way. The lenders assumed the risk of nonpayment at the outset and sadly it has been realized. You should have bargained for more direct pay.

    10). I predict a round of voluntary buyouts where lenders/pensioners are offered e.g. 75 cents on the dollar in order to shrink the plans and the debt. I predict many people seeing a lump sum value (even 75% of their actual benefit value) will jump at the chance and take the offer. However they overall effect will be small.

    11). Nothing will be fixed as long as there are public sector unions. These are criminal organizations engaged in extortion. As individuals the teachers, etc. are typically decent, well intended people, but their union is pure evil.


  13. Posted by S Moderation Douglas on July 20, 2016 at 7:32 pm

    You are right, that is a rant.

    First, “75% of their salary for 30 years after they stopped teaching”

    Is a bit of a stretch, most teachers don’t retire at age 55, and those who do in most cases will get nowhere near 75% of salary.

    Second, your number 11). is pure, unadulterated rant.

    Third, “discount rates of 4-5% would have provided far better estimates of the liability.” ?

    Comme ci, comme ça It may be, as the financial economists insist, the proper way to compute the value of my future pension in today’s dollars. This is how Biggs determined that New Jersey and California state employees earn 23% more than equal private sector workers,


    I worked 37 years with pay varying slightly between 6 to 12% below average wages for the private sector, and a pension formula which increased by about 3% of pay in 1999. My total compensation was pretty consistently in line with my peers in the private sector, using the assumed ROI as discount rate. Using the “risk free” rate, my compensation would have been extremely low compared to private workers in 1983, when 10 year treasury rates were 15%.

    The pay and benefits were somewhat consistent. ROIs and risk free rates not so much.

    No one knows what tomorrow may bring, but unlikely as it seems, if it were politically and economically possible to set normal retirement contributions using 4% as a discount rate, most systems would probably be overfunded again, in the near future, How often and how much do we want to raise or lower that rate. The aim is for predictability and gradual changes.

    “7). Employers failed to routinely make 100% of these undersized contributions. ”
    (and other common problems.)

    The federal government doesn’t have much control (and shouldn’t) over how states and local governments run their pensions.

    But, they do have a big stick. They can’t tell Chris Christie that he has to pay up the ARC… but they could tell him if he doesn’t pay the ARC, he will lose all or part of the tax deferment on pensions. They can’t tell California that is an employee has Social Security plus a pension, that they can not total more than 90% of final salary, but they could reduce or eliminate the tax deferment over that amount.

    They can’t tell the state all employees are required to participate in Social Security, but they can tell the state they must have pensions at least equivalent to SS.


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