Posted on 05/21/2008 8:09:57 AM PDT by george76
By firing its actuarial consultant last week, the New York State Legislature shone a light on one of the public sector’s deepest secrets: All across the country, states and local governments are promising benefits to public workers on the basis of numbers that make little economic sense.
The numbers are off-base for a variety of reasons. Sometimes there is a glaring conflict of interest, as there was in Albany, where the consultant was being paid by the workers seeking richer benefits. More often, there is subtle pressure on the actuary to come up with projections that make the pension fund look good.
Most of all, public pension actuaries use old methods that have fallen far out of sync with the economic mainstream. That does not necessarily mean their figures are wrong, but it does make them vulnerable to distortion, misunderstanding and abuse.
“Financial burdens have been hidden” as a result, said Jeremy Gold, a New York actuary and economist who was one of the first to call attention to the gap between actuarial figures and economic reality...
In the private sector, pension funds are highly regulated, and actuarial numbers are less of an issue. But in government, actuaries and the consulting firms that employ them are starting to draw lawsuits ...
Two big problems are being laid on actuarial doorsteps: overly aggressive investing and overly rich benefits. Benefits can go off the scale because widely used actuarial methods tend to make them look inexpensive. And this tends to encourage aggressive investing, because the greater the risk in the portfolio, the less costly it can seem to provide the benefits.
“Actuarial assumptions based on misinformation are a recipe for disaster,”
(Excerpt) Read more at nytimes.com ...
Especially in New York.
State, County and City governments exist for the sole purpose of supporting government unions...
Taxpayers can not pay for all of these promises...
“All across the country, states and local governments are promising benefits to public workers on the basis of numbers that make little economic sense.”
Why not...that’s how social security works.
That won't stop the unions from getting theirs - to the point of insane taxes or bankruptcies (see town of Vallejo) or BOTH!
Promising benefits based on an assumption of 8-10% annual returns from the stock market has been mistake #1. These guys have dug huge holes for themselves, and when Vito and Vinny find out the union doesn’t have enough money to pay for their retirement, they just might show up at the actuary’s office with crowbars for a little “corrective accounting therapy”. ;)
Isn’t it time we go after the Republicans behind this ponzi scheme?
Of course, since the story comes from Corruptica, there’s no chance that this is about the actual problem; it’s actually about someone in gov’t wanting some other company to be hired to do the dirty deeds. Thanks geo.
This is the ticking time bomb that is way worse than the problems with Social Security or Medicare.
When you have the accused murderer suburban cop in IL making a $75K pension. My brother’s father in law making $86K per year pension after 24 years as a supervisor with the Chicago Parks Department. Small city planner in North Texas making $92K per year after 20 years as a street and highway planner in Colleyville, TX.
See anything wrong with this picture? I sure do.
Some anecdotes from San Diego: retired librarian, $125,000. Retired police Lt: $165,000. Both also got a $750,000 (yes, thats 750,000) lump sum upon their departure due to a deferred compensation program called ‘DROP’ (google ‘San Diego DROP Program’) if you want the gory details. The benefits promised and being paid to San Diego city employees are absurd.
These stories are only somewhat extreme. I have published a study that separates the investment component and the deferred compensation component of public employee pensions in Colorado. For long term employees, the deferred compensation is 1.5 times the investment component. The average amount of deferred compensation in my study was $520,000 with the highest amount at $1,850,000.
These pensions are just huge slush funds manipulated by politicians for their public employee friends. Somehow, public employees have been told that they are entitled to very early retirement with substantially lower taxes (no Social Security tax), early retiree medical benefits, and inflation protection. Early retirement in these pensions is heavily subsidized.
The worse part of these pensions is that the actual compensation value of the pensions is hidden from taxpayers. Many states claim that retirement compensation of public employees is about the same as retirement compensation in the private sector. This ridiculous claim is used to pump up compensation of public employees. My study indicates that public employee pensions add 25% to 35% to the compensation level of public employees.
Public employee pensions are rotten to the core. It is a cozy cottage industry bankrolled by gullible taxpayers. Without the open ended taxpayer subsidies, most pensions would collapse within several years. It is time for a taxpayer revolt. The pain of these pensions will only get worse.
1. “Defined benefit” public union pensions are cruel & unusual punishment for taxpayers. Taxpayers are not financial wizards, but are expected to “backfill” public union pensions when the economy (tax base) dips due to normal changes that are part of a dynamic, changing economy. (Or dips, due to instability caused by govt. intervention, such as the moral-hazard problem and “mortgage crisis” created by having gov’t. pick up (subsidize) private lenders’ subprime-mortgate losses.)
2. The Democrat Party gets a cut of every public union member’s paycheck. The cut is called the “non-chargeable expense” portion of union dues. This portion is used for political activism, while the “chargeable” is allegedly used for bargaining over contracts, only. Of course, this nonchargeable fee goes directly to the Dem’ causes and candidates, not to Republicans or fiscal conservatives.
Why would politicians of the Dem persuasion move to cut public sector costs (spending on labor) — when their party’s political war-chest depends on this flow of union revenue? They wouldn’t. Direct conflict of interest, here.
It’s disturbing that union laws have not been changed as of today, to get rid of this overt conflict-of-interest and obvious public corruption. It’s been tried in various states, but it is politically difficult to get around the entrenched public power held by these bass turds. California’s state government has been particularly bad, in this regard. The Governor tried to get rid of the forced political dues component, but the unions shot it down when it reached the ballot for a vote. Over time, the taxpayers suffer, and the future taxpayers, the children, will suffer fiscally, as well.
Greed, greed, greed and corruption on the part of the Dem party & public unions. I’m sure they know all of this - they know exactly what they are doing. They just don’t care. Therefore it would be inaccurate to call them “uninformed” about the accounting and financial effects of their actions. They are fully aware of their actions. All one can say is that they’re blatantly immoral.
4Liberty (econ prof.)
I agree with your assessment of defined benefit pensions in the public sector. Taxpayers and conservative politicians do not understand the compensation hidden in the pensions. My study of defined benefit pensions in Colorado indicate a vast repository of deferred compensation, equivalent to $520,000 as a lump sum or 26% to 36% additional salary if allocated across each year of employment. This deferred compensation is in addition to the employer and employer contribution compounded with interest.
The worst part of this situation is the outrageous claim that retirement compensation in the public sector is lower than the private sector. My study was not necessary to know that this claim is outrageous. Public employees retire at much younger ages with more replacement income, better inflation protection, and early retirement medical coverage that private sector workers. Public employees think it is a birthright for vastly superior retirement compensation.
Public employee pensions are government gone wild. The agencies managing the pensions are arrogant. Every crisis leads to taxpayer incrimination. The problem is usually not pension management but the moral hazard. If the target returns cannot be met, the taxpayer is at fault. My study has received just a little attention because there is no crisis now. At the next crisis, I will be ready to provide a realistic assessment of the golden parachutes that public employees receive.
“Moral hazard.” Exactly.
When I’m at budget meetings at my college and employees bring up the need to preserve their defined-benefit pensions, I think to myself: “Like “drama”? Then go for it.”
In other words, government subsidies and inflexible programs create MORE instability (not LESS) over time - because these programs do not require the Public Sector, to respond to Market Conditions, or Price Signals.
It’s a recipe for an “unsustainable” fiscal situation, when the private sector is experiencing routine instability due to competitive changes that are part of a growing economy, but the public sector (the unions) demand CONSTANT & STABLE (or rising) pension payouts & salaries.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.