Public Sector Pensions Are Blank Checks Negotiated by Unions and Signed by Government Officials on Behalf of Unwitting Taxpayers ... Trick Question ... How Much Underfunded are Public Sector Pensions?

A blank check, feigned precision and other phrases come to mind when reflecting on the nature of our public sector underfunded liabilities for retirees. It's a blank check because nobody knows with any degree of certainty how much the promised benefits will cost the taxpayers.

IT ALL DEPENDS is the only correct answer to how high is up in the area of guaranteed pension promises. All we do know with certainty is the name of the supposed guarantor.  The only one on the hook as the guarantor, even though he didn't volunteer to take the bait and reel himself in, is the TAXPAYER.

The shameful facts are that government and union officials have committed taxpayers to trillions of dollars in obligations to make future payments without the knowledge of those taxpayers or even the identity of those future taxpayers as to what fulfilling those promises will cost. Feigned precision is the closest thing we have to a known number, but we do know it's an astronomical and unaffordable sum.

We hear a lot these days about the underfunded nature of public sector pensions. In Illinois, for example, the number is approximately $100 billion. That's a nice round number but is it credible?

And what about the other cities and states, or the federal government, for that matter? How deep is the hole?

Well, nobody knows and the answer is unknowable.

And the reason nobody in government or public sector union leadership has been genuinely concerned in the past is that it hasn't made any difference. The taxpayers are on the hook for any shortfalls, or so the conspiring elitists in government and public sector union leadership thought.

The real answer is a "known unknown" as it depends on how much is  contributed, how much those contributions earn over time, how long people work before taking benefits and how long those same people live after beginning to receive those benefits. And in case that's not enough "known unknowns" to ponder, there's also the matter of automatic cost of living adjustments in many plans.

So the cost to taxpayers will be bigger than a bread basket. That's for sure. But how much bigger, nobody knows.

That's how shameful the situation is and we have government officials and union leaders to thank for this entirely confusing and miserable state of affairs.

Detroit Gap Reveals Industry Dispute on Pension Math provides a good overview of the difficulty with quantifying the issue. While the real answer is that 'IT ALL DEPENDS ON WHAT HAPPENS IN THE FUTURE', let's see why that's the case:

Many in Detroit were alarmed recently when, seemingly out of nowhere, a $3.5 billion hole appeared in the city’s pension system.

"Until mid-June, there was one ray of hope in Detroit’s gathering storm: For all the city’s problems, its pension fund was in pretty good shape. If the city went under, its thousands of retired clerks, police officers, bus drivers and other workers would still be safe.

Then came bad news. Seemingly out of nowhere, a $3.5 billion hole appeared in Detroit’s pension system, courtesy of calculations by a firm hired by the city’s emergency manager.

 

Retirees were shaken. Pension trustees said it must be a trick. The holders of some of Detroit’s bonds realized in shock that if the city filed for bankruptcy — as it finally did on Thursday — their claims would have even more competition for whatever small pot of money is available.

But Detroit’s pension revelation is nothing new to many people who run pension plans for a living, the math-and-statistics whizzes known as actuaries. For several years, little noticed in the rest of the world, their staid profession has been fighting over how to calculate the value, in today’s dollars, of pensions that will be paid in the future.

It may sound arcane, but the stakes for the country run into the trillions of dollars. Depending on which side ultimately wins the argument, every state, city, county and school district may find out that, like Detroit, it has promised more to its retirees than it ever intended or disclosed. That does not mean all those places will declare bankruptcy, but many have more than likely promised their workers more than they can reasonably expect to deliver.

The problem has nothing to do with the usual padding and pay-to-play scandals that can plague pension funds. Rather, it is the possibility that a fundamental error has for decades been ingrained into actuarial standards of practice so that certain calculations are always done incorrectly. . . .

Since the 1990s, the error has been making pensions look cheaper than they truly are, so if a city really has gone beyond its means, no one can see it.

“When the taxpayers find out, they’re going to be absolutely furious,” said Jeremy Gold, an actuary and economist who for years has called on his profession to correct what he calls “the biases embedded in present actuarial principles.” . . .

When a lender calculates the value of a mortgage, or a trader sets the price of a bond, each looks at the payments scheduled in the future and translates them into today’s dollars, using a commonplace calculation called discounting. By extension, it might seem that an actuary calculating a city’s pension obligations would look at the scheduled future payments to retirees and discount them to today’s dollars.

But that is not what happens. To calculate a city’s pension liabilities, an actuary instead projects all the contributions the city will probably have to make to the pension fund over time. Many assumptions go into this projection, including an assumption that returns on the investments made by the pension fund will cover most of the plan’s costs. The greater the average annual investment returns, the less the city will presumably have to contribute. Pension plan trustees set the rate of return, usually between 7 percent and 8 percent.

In addition, actuaries “smooth” the numbers, to keep big swings in the financial markets from making the pension contributions gyrate year to year. These methods, actuarial watchdogs say, build a strong bias into the numbers. Not only can they make unsustainable pension plans look fine, they say, but they distort the all-important instructions actuaries give their clients every year on how much money to set aside to pay all benefits in the future.

If the critics are right about that, it means even the cities that diligently follow their actuaries’ instructions, contributing the required amounts each year, are falling behind, and they don’t even know it.

These critics advocate discounting pension liabilities based on a low-risk rate of return, akin to one for a very safe bond. . . .

Year after year there has been consistent resistance from the trustees of public pensions, the actuarial firms that advise them and the unions that represent public workers. The unions suspect hidden agendas, like cutting their benefits. The actuaries say they comply fully with all actuarial standards of practice and pronouncements of the Governmental Accounting Standards Board. When state and local governments go looking for a new pension actuary, they sometimes post ads saying that candidates who favor new ways of calculating liabilities need not apply.

Much of the theoretical argument for retaining current methods is based on the belief that states and cities, unlike companies, cannot go out of business. That means public pension systems have an infinite investment horizon and can pull out of down markets if given enough time.

As Detroit has shown, that time can run out."

Summing Up

The fat lady is singing in Detroit and all across America as well.

And while the song she's singing about public sector pension unaffordability and duping the taxpayers is indeed a sad one, it's one we all need to hear.

Only then can We the People intelligently decide what needs to be done in the future.

And decide we must for the sake of all Americans, including future generations.

That's my take.

Thanks. Bob.