Sunday, April 8, 2012

States' Insufficient Pension Funds for Teachers and Other Public Employees

Want a peek at what state and city government all too often do when they operate as a monopoly? How governments manage their fiscal affairs? And how they function as stewards of taxpayer money?

Well, for answers to those questions, we need look no further than the public sector pension plans and the status of public education in America. We'll stick to the financial piece of the story today.

In simple terms, state public sector pension funds have nowhere near enough money to pay future retirees promised benefits. And they have no credible plans to remedy that mismatch of promises to funds provided either.

The states' pension underfunding problems are made worse by the fact that many states allow teachers (and others) to retire with full pensions much earlier than age 65, the traditional time when private sector workers retire.

How bad is it? Really bad.

And what exactly does a plan being underfunded mean? It means that an immediate cash infusion (by taxpayers, of course--who else?) equal to the amount of underfunding would be required to make the problem go away. And even that assumes that future investments of the fund would perform as actuarially assumed.

For instance, if a pension fund has only 50% funding, that means that an equal amount to that which is in the fund would need to be contributed to make the fund whole. At two thirds funding, a one time contribution of 50% of the current total would be required. And so forth. A one shot injection to right the ship and get things balanced, in other words.

Of course, that's not the end of the story. The fund would then have to meet its funding assumptions with regard to assumed future investment returns as well.

It's all one big mess, in other words.

Thus, the realistically available remedies are plain but painful. Either the promised benefits have to be reduced and the plans have to be changed with respect to retirement dates and such, investments have to perform better than assumed, or the employer and employee contributions have to be increased dramatically, or perhaps some combination of all of the above.

Pension Bust is a useful overview of the problems many states will have to confront sometime soon. In other words, some grownup decisions will be required, even if not desired, to set thing straight for the future. Let's quote from the article at length:

"One of the biggest problems facing these states is unfunded pension liabilities for public workers, especially teachers.

A majority of states' teacher retirement funds are underfunded, some significantly so, according to the National Council on Teacher Quality.

And with a million teachers set to retire over the next decade, the situation is stoking fights across the country.

Typically a pension plan is considered healthy if it meets an 80 percent funded benchmark.

More than 30 states have pension plans for teachers below that benchmark.

Nine are below 60 percent.

And Illinois, Rhode Island and West Virginia are funded below 50 percent!

So states are taking action.

Kansas wants to transfer new teachers and other government workers to a 401(k) style plan to help close a nearly 8.5 billion dollar gap.

California, where the pension fund is more than 50 billion dollars under-funded, is proposing employees (including teachers) contribute to at least 50 percent of their retirement costs, and all new employees would be moved into a hybrid plan that blends a pension with a 401(k).

But the most drastic move in the golden state would be to raise the retirement age to 67.

And the retirement age is a big part of the problem.

With the nation's life expectancy nearing 80 years old, the costs of paying for these pensions - with taxpayer dollars no less! - is skyrocketing.

And it doesn't help that the benefits are much more generous than in the private sector.

In all but six states, it is possible for teachers to begin collecting full retirement before age 65.

And in three states, Montana, Alabama, Kentucky, teachers can retire in their 40s.

Thankfully, Alabama is working to raise the age to 62.

If successful, that's a huge change for teachers, but it makes a huge difference.

Look at New Mexico. Right now, teachers can collect full retirement benefits at age 52.

If they’d raise the age to 65, the state could save on average $734,000 dollars per retiree!

That would go a long way in filling the $6 billion dollar gap in the pension fund. . . .

And it's not just teachers that are draining our pension funds. It's all public workers.

Teacher pensions are just a fraction of the more than $660 billion dollar shortfall in public, state and local pensions nationwide.

But the state of New York is doing something about it.

This week the state approved pension reform that will save $80 billion dollars over 30 years.

The new law creates a sixth tier of smaller benefits for future retirees, raises retirement plan contributions by up to six percent, and the retirement age gets bumped a year to 63.

Also, only $15,00 dollars of a worker's overtime can be used to calculate benefits.

It's the worst kept secret in the public sector. If you rack up the overtime in the last year or two of working, your pension will soar.

These are huge moves for New York where pension costs are of course rising, but the empire state's pension fund is actually fully funded.

It's time states like Illinois and West Virginia take notes.

Reform can be done. Not everyone is going to like it, but sacrifices have to be made, and reality has to be faced."

Summing Up

Teachers and other public employees are paid by taxpayers. Most taxpayers, other than public employees, can't retire with full retirement benefits anywhere close to when teachers and public employees can retire.

And the private sector worker is paying for all this. But now we know that sufficient funds haven't been contributed to pay for the promised benefits for future retirees. What now?

Hopefully, what now will be a recognition by the taxpayers that without their vigilance, their money will likely be wasted by the public sector. Both union leaders and public sector managers operate on the get-it-while-you-can principle. Even if that means sticking it to the taxpayers.

And as the evidence shows all too clearly, all too often the taxpayers are exactly that--the "stickees." How about a MOM approach to all this government waste, fellow taxpayers?

It's absolutely essential.

Thanks. Bob.

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