Padded Pensions and What to do About Them

The New York Times article Padded Pensions Add to New York Fiscal Woes has been making the rounds. At least 20 people sent me the link. Let's take a look at few snips, then a look at a followup Times article on addressing the problems.

In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year.

It�s what the system promised, said Mr. Tassone, now 47, adding that he did nothing wrong by adding lots of overtime to his base pay shortly before retiring. �I don�t understand how the working guy that held up their end of the bargain became the problem,� he said.

According to pension data collected by The New York Times from the city and state, about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes. The data belie official reports that the average state pension is a modest $18,000, or $38,000 for retired police officers and firefighters. (The average is low, in part, because it includes people who worked in government only part time, or just a few years, as well as surviving spouses getting partial benefits.)

Some will receive the big pensions for decades. Thirteen New York City police officers recently retired at age 40 with pensions above $100,000 a year; nine did so in their 30s.

The Times article is 4 pages long so please give it a closer look.

Legal Theft

Undoubtedly Mr. Tassone is not as stupid as he sounds. He knows full well he gamed the system, but it was legal.

Tassone argues he held up his end of the bargain. Excuse me for asking what end is that? Public unions are legalized mobs. They coerce votes from corrupt politicians willing to buy there patronage.

There is no "public end" because there is no one working on the public's behalf. Indeed the public in general has been crucified with never ending tax hikes to support union thugs who pack every school board in the country, and promise Armageddon if police or firefighters get laid off.

The public is fed up and rightfully so. But what to do about it.

Can States Fix Their Pension Problems?

Inquiring minds are reading a follow-up New York Times article Can States Fix Their Pension Problems?

The Times interviewed 9 people.

Alicia H. Munnell, Center for Retirement Research says. ...The only real option is to wait for the market and the economy to recover.

Excuse me for asking but what if it doesn't. What if the stock market is no higher 5 years from now, or 10? What happens to pension assumptions at 8.5% a year?

I have news for you Alicia, the stock market does not always go up. It can and has gone sideways for 20 years before and it is highly likely to do so again.

Alicia H. Munnell is a former member of the Council of Economic Advisers and professor of management sciences at Boston College�s Carroll School of Management and director of the college�s Center for Retirement Research.

She is also completely unfit to advise on economic matters. She should be fired for incompetence.

Teresa Ghilarducci, New School for Social Research says ... "Most public employees have pensions plans most every worker wants and should have."

Teresa Ghilarducci, director of economic policy analysis at the New School for Social Research, is the author of �When I�m 64: The Plot Against Pensions and the Plan to Save Them.�

If there is a plot against public defined benefit pension plans I am all in favor of it. In fact, I am against all public unions.

Ghilarducci has not yet figured out that public pension plans have essentially bankrupt most major cities in the country. We simply cannot afford the benefits offered by public pension plans.

Joshua D. Rauh, Kellogg School of Management says ...

The federal government should cut a deal with states. They should allow a state to issue tax-subsidized bonds for the purpose of pension funding for the next 15 years � if and only if the state government agrees to take three specific measures to stop the growth of unfunded liabilities:

The state must close its defined benefit plans to new employees and agree not to start any new defined benefit plans for at least 30 years.

The state must include its new workers Social Security, and provide them with an adequate defined contribution plan, again for at least 30 years. To this end, the federal government should start a Thrift Savings Program for state workers and operate it alongside the existing Thrift Savings Program for federal workers.

The tax subsidies for these new Pension Security Bonds would work like Build America Bonds, with the federal government paying 35% of all coupon payments directly to the state. The cost of this subsidy will be in large part offset by the gains to the Social Security system of bringing in new state workers. On net, this plan would cost the federal government $75 billion today, and would prevent a trillion dollar crisis in less than a decade.

Joshua D. Rauh is an associate professor of finance at Kellogg School of Management, Northwestern University.

We don't need a "Thrift Savings Program for state workers". What the hell is so special about state workers? Why not a Thrift Program for farmers? or computer programmers? or landscapers?

No, we don't need programs for them either.

While I applaud the idea of closing defined benefit plans, the rest Rauh's proposal is silliness if not outright lunacy.

Cynthia B. Green, ex-Governmental Accounting Standards Board member says ... "The only solution is to end the unaffordable defined-benefit pension plans for public employees once and for all."

That was one of the most sensible comments in the who article. However, she blows it with "The total actuarial cost of these benefits must be funded annually and jurisdictions should be prohibited from ever again celebrating a pension holiday."

I am sorry Cynthia, but that would be excruciating to taxpayers, especially if I am correct about where the stock market is headed. Something has to be done about projected costs for those currently in the system.

Steven Greenhut, author of Plunder! says ...

California voters are going to have to take matters into their own hands, through the state�s clumsy initiative process.

Courts have ruled that current pension deals are vested benefits that cannot be reduced, but there�s no reason not to fix the problem going forward. No initiative has so far gotten the backing necessary, but that�s only a matter of time. When unions complain about their vilification in a coming battle, they and their political allies will only have themselves to blame for ignoring the words of progressive Democrats like Willie Brown and David Crane.

Plunder! is a great book. For my review, please see Book Review: Five Thumbs Up for Steve Greenhut's Plunder!

Liam Dillon, voiceofsandiego.org says ...

Overall, the city hasn�t made fundamental changes to its cost structure, nor has it tried to raise taxes. Instead, change has been incremental, including a heavy dose of one-time budget fixes.

The horizon remains bleak. As it stands, in 15 years the city�s annual pension bill will eclipse $500 million.

Where's the "B" Word?

Even though a couple of the interviewees have a grip on the problem, I am disappointed in not seeing the "B" word once.

One potential solution is bankruptcy, tossing the mess in the courts and hoping for the best. LA, San Diego, Houston, and many other cities are walking dead. In time, bankruptcy may be the only way to escape these absurd pension plans.

Another possibility I have not seen discussed is to tax the hell out of pension benefits. Give everyone the benefits they have earned, just tax benefits exceeding some amount, say $100,000 at 90%. This would need to be done at the state level, and under my proposal it would apply to anyone collecting benefits in that state.

Moving out of state would not help as the pensioners get a check from the state. The state could return money back to the cities.

For cities that have the ability to levy taxes, it could also be done at the city level. Under my proposal, the tax would automatically be withheld from each check.

Of course, cities should immediately kill defined benefit plans for new employees. Cities should also privatize everything under the sun including police and fire departments.

Small cities are already cutting costs by using sheriffs associations, there is no reason larger cities could not do the same.

The ultimate goal is to eliminate public unions totally, not just public pension plans.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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