Pension Relief and Fairness for All

This morning I spoke with a regular at Starbucks and he is retired.  We laughed about the pleasure of a “daily routine”.  If you wonder about me, I believe in Starbucks.

I believe that any person who has worked hard deserves their retirement, regardless of type of pension.  I believe in affording the simple delights of a morning coffee.  Too many are losing that which they have worked for. Is this fair?  I am working to fairly restore and reform; such is what economists do.

A commenter called and questioned the concept of fairness.  Suppose two states have a vastly different unfunded component and the more impoverished program had a string of broken promises and refusals to fund.  It could be said, in fairness, one system was more responsible than another.  It does not matter which is which.  If we bring new funds to pensions, as I intend, how can it fairly be apportioned?

I propose we not compare two pensions but something else, an internal comparison.  Separate any pension into two segments; retired and working.  Let the working pay for only their retirement and not have their funds contribute to paying retired benefits.  This may be happening now.

Many public pensions are beginning to scale back benefits and require new employees to pay more for smaller benefits.  This seems to be a paradigm shift, but cannot alleviate the current crisis.

Consider the 2016 audited NJ statements, page three under; “Fiduciary Funds – Pension Trust and Other Postemployment Benefit Plans-

  • Fiduciary net position decreased by $6.2 billion as a result of this year’s operations, from $85.4 billion to $79.2 billion.
  • Additions for the year are $11.3 billion, which are comprised of member, employer, non-employer and employer specific pension contributions of $12.0 billion and investment loss of $0.7 billion.
  • Deductions for the year are $17.5 billion.

If the fund paid obligations, and lost $6.2B, how are benefits paid, and what money was used to cover the losses?  Likely the contributions of currently working employees.   The same is true for CA teachers and pensions across the nation.

I have worked through the Banking Crisis start to finish.  One lesson learned is there was no bailout.  Rather, a bailout and reform; pity the latter receives so little media attention.  Banking reforms included the Dodd-Frank Act, Basel 2 Basel 3, and the pending Basel 4 international banking accords, the Leveraged Lending rule, Large Bank Assessments, etc.  These set about new definitions of capital and risk.

Taking lessons learned from the banking bailout, why not look at pensions in relation to themselves?  If we can define a “troubled bank” by low capital levels then why not a pension by an “unacceptable unfunded component”?  Such could be a trigger for federal intervention.

Another measure should be; are working persons contributing to their retirement or paying only for benefits to previously retired?  Is it probable that currently working people may not be saving?

Is this fair?

Yes, we can have a fairness test, just fair to ourselves.  We can and should demand better from elected representation.  And we have sufficient resources to cure much of the underfunded.  This is a problem we can solve.

Tim Alexander


23 responses to this post.

  1. Posted by Anonymous on December 21, 2017 at 4:26 pm

    Tim without delving into the detail even IF there was a bailout at the Fed level don’t you think it would or should include benefit reform on some level?


    • Posted by Triune on December 21, 2017 at 5:15 pm

      Thanks again. Am feeling a bit off this PM. I will offer you some food for thought first AM tomorrow. May I ask, how well do you understand the floating numbers; 7.65. 7.00, etc.


    • Posted by dentss dunnigan on December 21, 2017 at 5:23 pm

      LOL Murphy isn’t even in the office and already he’s blaming CC ….the next 4 years are going to be great


  2. Posted by Triune on December 21, 2017 at 5:10 pm

    Anonymous-I appreciate comments. Thank you. You are a regular and I value your insight and questions.
    YES! Reform is a requirement of my work. An absolute requirement!
    I believe the first step is to identify and reserve funds for relief. I am not saying spend the funds in a reckless manner. But it is important to reserve the funds immediately.
    Next, I recommend looking at the pension internally, as suggested above. Fairness should be looking at the benefits paid vs. contributions. If there is a mismatch, then corrective actions are needed.
    Finally, prudent pensions and benefits offered, should pencil out financially, from inception through retirement. It is simple math to look at what is offered and estimate what is an average return necessary, over the working life, to hit the desired retirement goals. The key is what average rate of return is necessary to hit the desired pension. At the time of new hire, there could be a pension calculator tool. This would be easy to build. It could estimate based on average returns, over time.
    Would you like me to expand on this?
    Please let me know, phone and email always welcome.
    Tim Alexander


    • Posted by Tough Love on December 21, 2017 at 8:11 pm

      Quoting ……………….

      “Fairness should be looking at the benefits paid vs. contributions. ”

      In my opinion, that’s a poor choice because it suggests that it’s OK to promise extraordinarily-generous pensions as long as we sufficiently soaked the Taxpayers.

      A far more reasonable and appropriate definition of fairness (as it relates to Public Sector pensions) is for Taxpayers to contribute towards their Public Sector workers’ pensions an amount that is VERY close to what they typically get in retirement-security contributions (typically 3% into a 401K Plan plus their employer’s 6.2% of pay contribution towards Social Security) from their employers. Similar consideration should be given to employer-sponsored retiree healthcare benefits.

      Quoting …….

      “Finally, prudent pensions and benefits offered, should pencil out financially, from inception through retirement. It is simple math to look at what is offered and estimate what is an average return necessary, over the working life, to hit the desired retirement goals. The key is what average rate of return is necessary to hit the desired pension. ”

      Conceptually, very reasonable, and not far from what is actually done today, but the devil is in the details:

      (1) Looking at the expected return is fine, but with the Taxpayers (NOT the Plan participants) responsible for all investment-return shortfalls, it is imperative that the cost of the “risk” of not meeting the assumed investment return is addressed. It should be addressed by NOT basing guaranteed Plan benefits on the “assumed” return, but instead, based upon a lower return that builds in the cost of the risk assumed by Taxpayers. Options pricing models can reasonably estimate the reduction in the assumed investment return to account for that risk.

      (2) Union/Politician “collusion” results in a continual stream of pension formula/provision improvements. Every one of these has a cost (usually ignored) and if applied to existing Plan participants’ PAST service (which they usually do), they create an immediate increase in the unfunded liability equal to the value of the enhancement. Politics being what it is, it is VERY difficult to end such practices (i.e., Politicians BUYING votes). This is one reason why DC Plans may be a better option than DB Plans because retroactive enhancement are essentially impossible.

      (3) Simply “working-out” mathematically (even after accounting for risk) does not address fairness to the Taxpayers. Logic suggests that a Public and Private Sector worker doing comparable work should be similarly compensated, with “compensation” being the sum of wages, pensions, and benefits (both while active and promised in retirement). Perhaps, where you stated that pensions and benefits should … “pencil out financially” you are ARE including a call for such “fairness”. I provided my definition of such “fairness” at the beginning of THIS comment.


  3. Posted by Patrick Whalin on December 21, 2017 at 5:25 pm

    You do understand, of course, that current administration’s goal is to REPEAL the Dod/Frank Act (all those nasty little rules that make corporations and banks more responsible). Now, I’m making a great leap of faith that the republican party also has employed some of the greatest economists in the world, yet the administration still thinks the over-regulatory burden on corporate america is a drag on the economy. Well, it will soon be 2008 all over again if these rules, restrictions and ratios are scaled back. Remember the phase, “too big to fail”. Then remember all the bailouts and lost pension funds due to a lack of oversight and regulation. Is it fair that the current administration has gone into $1.5 Trillion debt to finance a tax cut to wealthy? Where do you think this money will come from to pay back the Chinese? (You got it, ENTITLEMENT REFORM). Next year there will be a grand assault on the lower/middle income class like never seen before. You SS will be reduced; Medicaid will be parsed out in block grants and services severely restricted. You talk about fair? There is no fair. There is only political expediency at the hands of the unrepresented. Sounds more like tyranny to me!


    • Posted by Triune on December 21, 2017 at 6:09 pm

      Thank you for your comments, but you seem both woefully informed and clinging to moldy rhetoric. Please remember that I am, as an economist, politically neutral. I will cite fact.
      The last round of banking deregulation was under president Clinton, the Gramm–Leach–Bliley Act of 1999. Do you feel banking is an honorable industry? I do not and I work there.
      I do not support the current efforts of deregulation. To me, de-reg should be a reward for good behavior, clearly lacking. I am suggesting we tell Congress “Wait one Year (a complete year with no scandal)” before reforms.
      I disagree that Republicans have the “greatest economists in the world”. The greatest economists are apolitical. The ability to problem solve is not based on political affiliation.
      I have never accepted the concept of “too big to fail”, but “too big to regulate”. I say this because our economy changes dramatically, but not the oversight. Consider the huge changes from the Clinton era deregulation, yet no significant increase in theory for oversight. When you take a rule book, throw it away, then not replace it, should you be surprise you end up with a mess?
      You mention the suggest $1.5T debt from the tax relief with the current administration. If debt is a worry to you, why not complain of the more than$1.0T per year, of debt added over the eight years of the prior president, more than $9T total? Again, this is an observation not a criticism. Why are you complaining over the molehill and not concerned over the mountain?
      Economically, Ireland is an excellent example of lowering the cost of business (taxes) can lead to tremendous prosperity. If companies enjoying the tax cuts can reinvest into America, then the cuts are worthwhile. If the savings go into shareholder pockets (and banks) or is not invested, then perhaps not so smart. But we have examples of how tax cuts can increase prosperity.
      As to repealing Dodd-Frank, it is a dreadful law. Are you aware it is more than 2,300 pages? The banks I work with received more than an additional 10,000 pages. Dodd-Frank is too big to implement.
      In July 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act created the Consumer Financial Protection Bureau (CFPB). I agree with very little about Dodd-Frank, and I have worked with it since 2010, but I do agree with the CFPB, and think, for now, it should be left alone.
      Circling back to pensions, you paint a gloomy picture of which I do not agree. May I suggest you go back and read your Declaration of Independence; “But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security”. You need never fear tyranny.
      On pensions, I am not certain of your point. We need not panic, simply acknowledge a simple truth. Each citizen has the right to participate in government and determine our own fate.
      Tim Alexander


    • Posted by Tough Love on December 21, 2017 at 8:15 pm

      Trump’s escapades will assuredly guarantee a Democratic House or Senate in 2018. It’s more likely there will be a roll-back of the Tax changes than material Entitlement “reform”.


    • Posted by PS Drone on December 21, 2017 at 8:36 pm

      Guess what Einstein? When resources are not sufficient, everything gets “rolled back”. That includes SS, Medicare, Medicaid and your favorite, public sector pensions. Reality is a bitch.


  4. Posted by George on December 21, 2017 at 8:15 pm

    FWIW Congress just passed a stopgap to avoid shutdown without any mention I can see of the Pension Rehabilitation legislation. On theory is that if it were to pass it would have to be in one of these stopgap spending bills as it cannot pass if Congress is voting on it alone. I wonder if the Pension Rehab legislation will apply to state and local pensions or only multi employer plans?


    • Posted by Tough Love on December 21, 2017 at 8:19 pm

      There is not a snowball’s chance in hell that any Federal Pension Rehab will apply to State & Local Public Sector pensions.


    • Posted by Triune on December 21, 2017 at 8:33 pm

      Thank you for your observation. Remember the one topic discussed is a loan, and that a pension underwater has no chance of repaying a loan.
      If you asked this question a year ago, I would have not considered private pensions, but with the recent press attention to the PBGC, I would guess all are open for consideration.
      Also remember that states are not allowed to file bankruptcy. However, we have several states moving that direction.
      I am taking my model as far and wide as I can. I am very grateful for John Bury and the opportunity to publish here. Remember, mine is the only proposal that is not a taxpayer funded solution.
      Please keep the excellent questions coming.
      Tim Alexander


  5. Posted by Tough Love on December 21, 2017 at 10:36 pm


    Seriously, it would be very helpful if you would lay out your full proposal ….. with minimum “fluff”.


  6. Posted by Patrick Whalin on December 21, 2017 at 10:47 pm

    2 years ago I suggested the federal government underwrite a pension relief bonds relief to troubled states in the amount of 2% (then much lower than the federal funds rate…thereby earning a “profit” for the federal treasury, but still much lower than a state’s borrowing marginal rate. (i.e. federal bailout without losing money). My hypothesis was laughed at. Now it seems like it would have been a good deal (with rising interest rates on the horizon). Pay the bill. somehow.


    • Posted by Tough Love on December 21, 2017 at 11:09 pm

      A “profit” for the US Treasury ? Yeah, perhaps if neglecting that there is a HUGE chance the loan principle will never be repaid.


    • Posted by Triune on December 22, 2017 at 10:34 am

      Good morning Patrick Whalin: I wish you and your family a very merry Christmas. Thank you for sharing your plan. I perceive some problems with it, may I elaborate?
      First you mention the Treasury and Fed Funds. Fed Funds are a Monetary Policy tool of the Federal Reserve (Fed). The Fed and Treasury are completely separate, so we have a comparison of apples and giraffe, very different.
      You mention the Fed Funds rate of 2015 much higher than your proposed borrowings of two percent. This is incorrect. In late 2008 Fed Funds (FF) were pressed to record low of between zero and one quarter of a percent, 25 basis points. We had the first FF increase in late 2015. This took the FF to about 50 basis points. Not sure where you got FF exceeding two percent, but not correct.
      Remember there is a great difference between short and long-term interest rates. The FF is a short term rate for banks to borrow, generally overnight. Bonds can exist for decades; 10, 20, even 30 years. Pricing a long term bond at short term rates will just not work.
      You mention the “government” underwrite these bonds. I presume you mean the Treasury. Do you propose a single bond issue for any states needing relief, or state specific bond series?
      There can be a considerable difference between the level of crisis between IL or NJ than AZ and MO. States needing the most help have the lowest (and falling) credit ratings, meaning they would be sold at a very heavy discount (if sold at all), and the yield would be much, much greater than two percent. Remember you presume these bonds can be sold, a dangerous presumption.
      You mention borrowings at two percent are; “but still much lower than a state’s borrowing marginal rate.” I would disagree depending on the type of state bond being discussed. States will have many bonds with a variety of purposes and repayment vehicles. Pricing can vary between length of bond, state overall credit rating, quality of collateral, if any, specified repayment plan, etc.
      May I refer you to the State of New Jersey Debt Report, Fiscal Year 2016. Please see the Summary Tables under Outstanding Obligations, page five. You will get a sense of the complexity of bond types.
      We know there is great turmoil now in the bond industry and now may not be the best time to float new, low grade bonds.
      Consider CALPERS, the net investment return for 2014 and ’15 was about 2.4%. We know pensions need much higher average returns. If you deduct 2% from the 2014 and ’15 earnings, the pension remains unsustainable. Then look at the NJ net investment income. It is gyrating so wildly that no institutional investor would likely bid, at any price.
      Even with a loan of one percent, pensions cannot afford a loan. This is why I continue to say pensions need new capital, not loans. We have the ability to begin recapitalizing now, along with prudent reforms.
      Suppose a newly elected state official desires to be honest and fair. It is well known the rates published in pension annual reports are misunderstood, and not reflective of the accurate pension condition. But each time the rate is lowered to a more realistic level, the state must make up the difference in cash, to the pension. Here is the greatest dilemma. Our hypothetical “newly elected and honest” official wants to lower the rate to better reflect reality, but cannot because the coffers are empty. There is no incentive for elected officials to be accurate. This is the single greatest risk to your retirement. I hope you understand this.
      You are thinking-both a rare and beautiful gift. Please never stop.
      Tim Alexander


      • Posted by Tough Love on December 22, 2017 at 10:54 am

        Quoting …………..

        ” This is why I continue to say pensions need new capital, not loans.”

        Certainly sounds like you are again suggesting a Taxpayer “bailout”.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: