NCPERS Looks To Dismantle Public Pensions

Don’t Dismantle Public Pensions Because They Aren’t 100 Percent Funded

So argues the National Conference of Public Employee Retirement Systems (NCPERS) in a new paper that actually does advocate for the dismantling of the current defined benefit funding system.

Their points:

We have addressed the issue of whether taxpayers can afford public pensions in our earlier research, which shows that public pensions impose little or no burden on taxpayers. If anything, we have demonstrated that public pensions are revenue-neutral or revenue-positive. (page 1)

The reason these defined benefit systems impose relatively little burden is that the real cost of benefits are not being deposited – hence the deteriorating funding levels.

Then NCPERS comes to the crux of their argument.

As long as pension plans’ contributions and investment income exceed their annual benefit obligations, the plans can be sustained in perpetuity. (page 11)

Very true. You could have no assets in a plan (Puerto Rico, Social Security, New Jersey JRS in 2021) and still pay retirees. But you need to get the money from somewhere and it will not be from the retirees (unless you start taxing their benefits) or trust earnings (when assets hit $0). So what these public pension systems turn into are transfer mechanisms dependent on each succeeding generation keeping an increasing onerous promise to a prior generation that never did anything for it, pension-wise. Prefunding mitigates the likelihood of reneging on these obligations and that is exactly what NCPERS is arguing against.

21 responses to this post.

  1. Posted by NJ2AZ on November 20, 2017 at 3:40 pm

    Am I wrong, or are they basically arguing that pensions having always been paid is evidence that pensions can always be paid despite the major structural headwinds on the horizon (which they seem to completely ignore) ?

    Reply

    • Posted by NJ2AZ on November 20, 2017 at 3:48 pm

      “We have addressed the issue of whether taxpayers can afford public pensions in
      our earlier research which shows that public pensions impose little or no burden on taxpayers”

      yeah, until the fund balances are $0 and you get into pay-go territory. I think the taxpayers might notice then….

      Reply

  2. Posted by Brian Grinnell on November 20, 2017 at 3:52 pm

    Well put. That NCPERS paper is a travesty. They are arguing that “pay-as-you-go” is sufficient to ‘guarantee’ the systems will be able to follow through on their promises. That is true only if there is no limit on what the systems can extract from their funding sources – as you pointed out, that is the taxpayers and the beneficiaries. I don’t know what the limit on their willingness to fund is, or should be, but I’m sure it is not limitless.

    A promise only has value to the extent that those making the promise have the intent and the ability to fulfill their commitments.

    Reply

    • Posted by NJ2AZ on November 20, 2017 at 4:29 pm

      thank you. My initial reaction to this paper was that is was so absurd, i felt i had to be missing something. Now i’m just afraid and sad that people might actually believe this drivel… 😥

      Reply

  3. Posted by Tough Love on November 20, 2017 at 4:29 pm

    Mr. Bury, Excellent post.

    Quoting ………….

    “The reason these defined benefit systems impose relatively little burden is that the real cost of benefits are not being deposited – hence the deteriorating funding levels.”

    Indeed yes …….. because ludicrously excessive pensions are VERY VERY costly, and hence VERY VERY difficult to fully fund.

    ***************************************

    What’s particularly galling is that much of the VERY clearly inaccurate & misleading points came from NYCERS General Council.

    Don’t attorneys have a code of conduct that’s supposed to prevent such outrageous behavior.

    Reply

    • Posted by NJ2AZ on November 20, 2017 at 4:33 pm

      its fine!

      Pension funds have always been able to make their payments because their assets have never gone to zero, so they will always be able to make their payments because their assets will never go to zero.

      Q.E.D

      Reply

  4. Posted by Tough Love on November 20, 2017 at 4:55 pm

    I’ve always found it helpful to examine extreme cases to uncover the fallacy of a specific position.

    NYCERS position is that since we have always been able to pay whatever has been promised, there is no problem.

    Now consider a Gov’t entity that establishes a Final Average Salary DB Plan for the first time, with a 5 year vesting period (measured from the date the DB Plan became effective). NYPERS would evidently be fine with ZERO EE or ER contributions for the first 5 years because no payments are payable in those years.

    Would ANYONE consider that reasonable or appropriate?

    Reply

  5. Posted by stanley on November 21, 2017 at 10:28 am

    “Prefunding mitigates the likelihood of reneging on these obligations and that is exactly what NCPERS is arguing against.”
    I don’t think they are arguing against prefunding. More likely, they are arguing against changing over to defined contribution programs. As to whether prefunding reduces the chances of defaulting on pension payments–it may or it may not. This is a world-wide, everything bubble that will break sooner or later and then it’s hard to say what asset levels will be and what pensions are affordable. Pensions are a serious train wreck in progress and the Multiemployer Pension Reform Act most likely sets up how the adjustments will be done. Let’s say that a plan has assets in bonds. And another city chooses paying pension payments and defaults on paying bond owners. If we were adults about this and we are not and won’t be, we would face up to the fact that late life health and pension benefits have been grossly over promised.

    Reply

    • Posted by Tough Love on November 21, 2017 at 11:16 am

      It’s not rocket science.

      Fully funding such extraordinarily generous pensions requires VERY VERY high contributions (far more than what is currently contributed). If the taxpayers were required to do so:

      (a) there would be a combination of huge tax increases, salary freezes (or reductions), and massive reductions in necessary services (for the poor, the elderly, the sick, etc.), and

      (b) The Public Sector Unions/Workers would no longer be able to hide the extraordinarily high cost of their pensions ….. resulting in taxpayer demands for them to be materially decreased or frozen, with a switch-over to a much less generous DC Plan.

      It’s all driven by self-interest, greed, and a taxpayer-be-damned attitude.

      Reply

      • Posted by NJ2AZ on November 21, 2017 at 11:58 am

        part B is what always gets me. People complain “Oh well the pensions would be fully funded if only the state made their required contributions!” and my immediate reaction is “If the state actually HAD To make those contributions, the pension benefits never would have been what they were in the 1st place because the taxpayers would have flipped their lids”

        It’d be like saying i can’t afford to buy a $1,000,000 house today because i didn’t go through the equally impossible scenario of socking away $100k in cash each of the past ten years.

        Reply

  6. Posted by anon on November 21, 2017 at 1:02 pm

    NCPERS has lost any and all credibility already, but this doesn’t help. I’m amazed so many professionals that consult to public pension plans are willing to sign a code of conduct from this organization.

    Reply

    • Posted by Tough Love on November 21, 2017 at 1:13 pm

      The 2 “problematic” points in NCPERS “Code of Conduct” for service providers are the following:

      Support the sustainability of public defined benefit plans and retirement arrangements that add to overall retirement security

      Fully disclose all contributions made to entities enumerated in Schedule A that advocate for the diminishment of public defined benefit plans.

      Reply

  7. Posted by Just Bob on November 21, 2017 at 4:04 pm

    Question. My pension system has been around since 1937 (80 years) and currently funded in the high 80’s percentage wise.
    It is my understanding that in that 80 year time period there has only been a few years where it has been funded at over 100%. The rest of the time it has been funded in the 80-100 percent range except for a few years where it went into the 70’s. So after 80 year my pension fund is still here despite very rarely having 100% funding. Why is that and why can’t it continue into the future?

    Reply

    • No reason it couldn’t continue forever as long as there is a ready source of contributions to make up shortfalls. The problem with NJ, Illinois, et alia is that they gimmicked contributions down so low, with the approval of actuaries making up their own funding rules, and due to the miscalculation of liabilities that worsens as the real funded ratio declines those plans are in the 30% funded ratio and inevitably moving to pay-as-you-go. Again, nothing wrong with that as long as current taxpayers do not mind (and can afford) paying for services provided to prior taxpayers. However when we get there it becomes a transfer mechanism like most other taxes with little relation to a defined benefit plan model.

      Reply

      • Posted by PS Drone on November 21, 2017 at 9:25 pm

        You forget to include that much larger contributors to the poor funding status of these ridiculous pensions are: a) the benefit period beginning after 20, 25 or 30 years of service regardless of age at retirement, and b) that there is no hard cap on the max annual benefit payment.

        Reply

    • Posted by Tough Love on November 21, 2017 at 7:08 pm

      I agree with Mr. Bury, but want to point out that there is a fairness or generational issue at work.

      Ideally the compensation provided a worker (both in wages and deferred compensation in the form of pensions and retiree healthcare subsidies) should be FULLY paid for during the working years of that employee. That way, those costs and NOT paid for by future-year taxpayers that received no benefit from that employee’s services.

      That being said, IF there exists a multi-generation “stationary population” with a relatively constant number of actives, retirees, and taxpayers, it would matter to a much lesser degree if the funding ratio cruised along at say 80% because any given cohort of taxpayers would have 2 roughly offsetting amounts at play:

      (a) PAYING FOR about 20% of the retirement benefits of those who retired years ago and from whom they received no services, and
      (b) NOT PAYING FOR about 20% of the retirement benefits of those working for them NOW.

      But demographics are such that we RARELY have “stationary populations”, and counts & ratios of actives and retirees rarely remain constant for long periods of time.

      Consider the following ………..

      The baby boom generation corresponds to those born in the period 1947 to 1964 with birth rates dropping precipitously in the years that followed. Birth rates were also much lower in the 2 decades that preceded 1947. Suppose we maintained a fixed (unchanging) DB Plan over all of these periods with an 80% funding ratio. The Baby Boomers got a GREAT deal (i.e., underpaying) because they paid a far SMALLER amount towards the 20% under-funding of the much smaller pre-1947 employee-cohort than they will receive by NOT paying for 20% of the much GREATER retirement benefits that THEY (being a much larger group) will ultimately receive. And oppositely, the cohort that follows the Baby Boomers (being a much SMALLER group) gets a BAD deal because theyh will pay a far great amount for the 20% of the Baby Boomers retirement not pre-funded than they will receive by NOT paying for 20% of their own retirement benefits.

      Reply

  8. Posted by S and P 500 on November 21, 2017 at 10:36 pm

    Public employees always say “schools (or cities, fire depts, public services, etc.) are not a business.” I don’t know what is their definition of a “business”, but schools and cities do have to report their assets and debts on balance sheets just like IBM or Walgreens. The School District of Philly has $2 billion in assets and $7 billion in debts and unfunded pension liabilities. When I point that out the usual response from teachers is “when will our schools be fully funded?”

    Reply

    • Posted by Tough Love on November 22, 2017 at 12:31 am

      I believe the point they are getting at is that Cities and Towns very Rarely “go-out-of-business” (or just dissolve), and as such there is less need to fully fund pension promises because taxes can always be raised to fill asset shortfalls.

      Of course they will NEVER get into a serious discussion of the generosity of their pensions (AND benefits) vs those typically granted the City/Town’s Taxpayers.

      Reply

  9. Move everyone to Social Security

    Here’s my solution:

    https://drive.google.com/file/d/0B90sU3A85q46OE9BZHJFSWEzbGM/view?usp=drivesdk

    Thoughts?

    Reply

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