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Blue Model Blues
NYT: Pensions Con New Teachers

We at Via Meadia haven’t been hesitant to use the word “Ponzi scheme” to describe mismanaged and underfunded state and local pension systems, but the Grey Lady has typically shied away from such evocative language. Not so in its latest piece on the Puerto Rico crisis by Mary Williams Walsh—a reporter who has done more than anyone else in the mainstream media to draw attention to the scale of the crisis of governance facing city councils and statehouses as pension systems come under increasing strain.

The teachers’ pension fund in Puerto Rico looks very much like a legalized Ponzi scheme — one that might hold a warning for teachers across America.

Puerto Rico, where the money to pay teachers’ pensions is expected to run out next year, has become a particularly extreme example of a problem facing states including Illinois, New Jersey and Pennsylvania: As teachers’ pension costs keep rising, young teachers are being squeezed — sometimes hard. One study found that more than three-fourths of all American teachers hired at age 25 will end up paying more into pension plans than they ever get back. […]

Pension funds are so short of cash that money contributed by working teachers basically flows straight out to retirees. None of Puerto Rico’s current teachers can expect to get their money back, because the fund is due to run out of money in 2018, long before they retire.

The defined benefit pension system could function in a world where the economy in a given city or state is guaranteed to continue to grow; where government actuaries could be counted on to be reliably honest about the state of pension fund assets and projected liabilities; and where the political power of public sector was sufficiently limited so that governments couldn’t be perpetually forced into unaffordable benefit expansions.

Sadly, none of these conditions obtain in the current political and economic climate. First, regional economies can be sure to expand and contract as new industries spring up and then fade away (think of Detroit). This leaves governments unable to support a large population of retirees on a diminished tax base. Second, many accounting rules and regulations that apply to private sector financial institutions are not in place when it comes to public sector pension funds. Many states base their pension forecasts on wildly unrealistic discount rates and rates of return. Finally, public sector unions have grown increasingly powerful and are in many cases the most influential interest group in blue state capitals. The pressure on legislators to maintain or expand overly generous pension benefits is unrelenting.

The best solution to this problem is to phase out defined-benefit pension systems and replace them with the type of 401(k) plans that are now the norm in the private sector. If they don’t, Puerto Rico-style crises are likely to proliferate on the mainland as well in the coming years and decades.

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  • ——————————

    “Pensions Con New Teachers”

    Pensions have conned everyone….

  • Andrew Allison

    ERISA, ERISA, ERISA. It would at least expose the unfunded liabilities to the light of day.

    • D4x

      Besides ERISA, this sounds a lot like when NYC was told to drop dead by Pres Ford in 1975. Oh, here is AEI on Oct 29, 2015: “We have seen the bankruptcy of the City of Detroit and now the insolvency of Puerto Rico. But municipal debt crises are hardly new. Consider the historic New York City financial crisis and what we may learn from it.

      October 29, 2015 | Real Clear Markets “The 40th anniversary of Gerald Ford disciplining a profligate New York”

      http://www.aei.org/publication/the-40th-anniversary-of-gerald-ford-disciplining-a-profligate-new-york/

      No wonder all of Obama44’s calls for a “conversation” failed. Can not always talk to yourself..

      • Andrew Allison

        There are two separate issues here. The one which I raised is to lift the rock under which the public employee pension horrorss have been hiding. The one which you raise is that in the long run there’s no way that municipalities and states can meet their public pension obligations. As I have posted previously, a supposedly solvent CA would need to triple its pension plan contributions simply to stop the unfunded liability from increasing further. The current trickle of municipal bankruptcies will inevitably become a flood and the states, facing the same problem, will be unable to bail them out. The question is whether the federal government will borrow money to bail out the states. The states at the greatest risk are Blue, and if the bubble bursts while Republicans control Congress, they are likely to be SOL.

        • D4x

          Perhaps the solution is for climate change to swallow Wall Street before antibiotic-resistant bacteria kill us because Medicare ran out of money, and everyone still alive is seeking permanent tattoo removal.

          Apologies for my cynicism.

  • FriendlyGoat

    Unfortunately, the chances of many individuals ending up under-funded or out-traded (or both) on their retirement savings/security in perhaps 20-30 years of post-working life still exceed their chances of being stiffed in the average (average) pension plan. Shifting all the risk downward to the individual worked great for many private-sector companies and may by necessity “work” for some states or cities in the future, but we have not yet seen how well it will work for the individuals as a whole. Let’s talk in 2050 or 2060 about whether 401(k) actually does/did a good job of taking care of old people——understanding, as we should, that it was not enacted in 1978 to be a wholesale replacement of defined-benefit. (It’s good to remember that 401(k) never really even had a name, which is why we still call it 401(k).)

    • Proverbs1618

      OK, I’m going to say this as gently as possible. Defined benefit scheme of pensions is dead. Please accept reality and let it go with dignity. Everybody knows it leads to bankruptcy as the costs growth inevitably exceeds revenue growth. We have seen this repeatedly. So let it go.

      • FriendlyGoat

        You are explaining why DB plans made a lot of sense for employees until the culture of high-end tax cutting killed them in the private sector.

        • Thom Burnett

          In what way did reducing taxes (which taxes, please?) kill private sector defined benefit pensions?
          I know you dislike reducing taxes on rich people but I’m not seeing how reducing their taxes helps (or hurts) corporate pensions. What’s the connection?

          • FriendlyGoat

            The connection is that the more you lower income taxation at the corporate level, lower income taxation on the CEO-level decision makers, lower income taxation on equity trading (capital gain and shorter term trades including all the derivatives) and lower income taxation of dividends, the more you increase a pressure for LESS to be spent on employees—-including pension.

            We have been seeing this play out in increments for almost 40 years now, with the effect of the stock market going to the moon and workers wondering why they were increasingly left behind in the whole economy.

        • Proverbs1618

          The questions that Thom asks….
          There is no connection between the two. You are just making it up. Everybody sees that and some are politely pointing it out. I’m just making fun of you for your delusions that socialism can somehow someway be made to work in real life. it can’t. I’m sorry. I wish it could. It would be a better world if it worked. But it doesn’t work. Let it go. I know you won’t, but you should.

          • FriendlyGoat

            Aren’t you the guy who will admit (to almost everyone but me) that you see a likely necessity for some kind of UBI in the future? Well, DB pensions were designed to be a modest UBI for people aged beyond working years. Just when we should be moving toward more solid (even if modest) pensions at least for the elderly class, you claim they should all be eliminated. I say you’re both drunk on high-end tax cuts and full of double-talk too.

          • Proverbs1618

            Yes. IN THE FUTURE. When robots take over. Have robots taken over? Now they haven’t. Hence the precondition of UBI is not there.
            As for high-end tax cuts, that’s your crazy. Thom didn’t know just how deep that crazy goes. I do. That’s why I enjoy making fun of it,.

          • FriendlyGoat

            The thing is, your understanding of real economics in the 21st Century is suspect at best.
            Since you’re a trader, I’m sure that you understand how wrong the retail herd often is with respect to trends and the meaning of trends. I believe the same effect occurs before our eyes in economics. Everyone and his pet dog say to cut income taxes in both the past and future. It was an already-proven bad idea in the recent past as it turned out very badly for all those folks in flyover country and it’s an even-worse idea for the future.

          • Proverbs1618

            “The thing is, your understanding of real economics in the 21st Century is suspect at best.” Well, compared to whom. Compared to my professors at U Chicago? You bet your last dime. Compared to you? I’m freakin’ Milton Friedman.
            You have this thing where you hate people keeping their money. You prefer a benevolent all powerful State to take care of all. You are a totalitarian Statist. Once taxes are cut and economic growth goes up you will find some other reason why stealing other people’s money to spend as you see fit is a good idea. Your belief is rooted in religious faith, not empirical evidence.

          • FriendlyGoat

            It takes some considerable nerve on my part to buck both you and your fancy degrees, but the fact of the matter is that high-end tax cuts did not, do not, cannot and will not increase the number of middle-class-life jobs for ordinary people in 21st Century USA on a net basis. Even with $20,000,000,000,000 in deficit spending and a nearly a decade of unreal monetary policy we have been struggling to claw back from the mess already made by the tax cuts already done. Yes, I know there is going to be a new debate again this year. Maybe I will not be the only lone voice on this by summer when the “SHTF” Trump budgets and tax-cut talk suddenly converge on Congressmen’s heads just as health insurance is now doing.

          • Proverbs1618

            Crisis of 2008 was not caused by tax cuts. See, when you say things like that, it makes me really doubt your sanity. I mean, you are literally the only person who makes that claim. Like I said, your religious believes prevent you from seeing reality as it really exists.
            Health insurance reform is proceeding well. We have something that won’t pass all the while creating an illusion of action. In reality, we are all just waiting for Obamacare to collapse. Everything else is a red herring. After Obamacare hikes premiums 25% again, Republicans would be able to say that they tried to help, but Democrats wouldn’t let them. This has been a winning strategy in 2010, 2014, and 2016. Democrats are really committed to making it a winning strategy in 2018.

          • FriendlyGoat

            I saw we made a lot of tax cuts at the high end several times. I saw we went through two ridiculous bubbles—–with stocks in 2000 and real estate in 2008. I saw that the second one came so near to melting down the world that absolutely CRAZY monetary policy was instituted in many places and for a long time to “save the institutions” which Bernanke correctly understood cannot be allowed to go down. I saw that private-sector pensions went away as “silly”. I saw the unions put under siege.I saw that the middle class peaked in 1979. I saw that CEO pay went to multiples of hundreds of times a worker’s pay. I saw some individual trading fortunes made into the billions while average family wages absolutely stagnated across flyover America. I saw Manhattan and San Francisco become absurd havens of wealth when other places were barely treading water. I saw sports coaches become the highest-paid public employees in the country—-bar none else. I saw the deficit go to $20 trillion. I saw America very, very, very ANGRY at all this. So, we’re overdue for better explanations of what the hell went wrong.
            I happen to have the one which best fits the facts.

            As for religion and health care, I would invite you to read here how the medical system and medical insurance system works in Israel—–where apparently “religion” has its head on straight enough to understand its duty to make things “socially” work.
            https://en.wikipedia.org/wiki/Health_care_in_Israel

            Since I am aware you do not despise Israel, can you please get off my back for merely wishing America had enough political honesty to do health policy as sensibly as Israel does it?

          • Proverbs1618

            Are you aware of the problem of scaling? Why do you think that what 8 million Jews can do for themselves is somehow a guide to a country of 300+ million that is very ethnically diverse? Please compare apples to apples.
            As for crisis of 2008, it was caused by the entire world writing credit puts. when that bet went bad, the system seized. It has nothing to do with tax rates as the same thing happened all over the world, in vastly different tax climates.
            I agree with you. Lightbringer, Person Lord and Savior, King Hussein did double our national debt. Yes, he was horrible. How does that relate to tax cuts? In what way? He raised taxes and debt went up.
            Like I said, you have a religious belief in taking other people’s money to support the benevolent, all seeing all knowing State. The facts that I presented to you will not affect your opinion, since it is rooted in faith and not logic. You have tax derangement syndrome, and like all sufferers of derangement syndromes you are unable to think and process facts. Even more unfortunate, you don’t understand how others process facts.

          • FriendlyGoat

            Bullhockey on the “scaling” excuse. You actually belong to a religion which has more social sense than you do. It voted 71/24 for Hillary Clinton, would not have been unhappy with Bernie Sanders, and in its own nation runs good health care where people are not left out and lied to about the “wonders” of free market.

            As for under-taxed trading and the potential for huge errors and seize-up——the more we allow the former, the more risk we invite of the latter. Makes far more sense than you admit.

          • Proverbs1618

            Majority of Jews who go to synagogue regularly voted for Trump. Are you saying that a large portion of American Jews have abandoned Judaism for every other -ism in the book. Yes, I must bear their shame as my own. That is part of the deal. It has always been thus. Majority of original Comissars of the Russian Revolution were Jews. Doesn’t make Communism any less evil.
            You still haven’t answered how exactly you would scale up the system. You just dismiss it as something unimportant, because you know it won’t work. It’s OK, I expect lies like this from people like you.
            BTW, your lunatic idea of taxing financial transactions was given a try in France. It was such a catastrophe that it was quickly abandoned, never having reached execution phase. Now, do I expect this fact to change your opinion? Of course not. Your religion allows for no doubt. But tell me, how will your tax plan be different from what failed in socialist France? Oh I forgot. When asked direct questions like that, you never answer. You just scatter like a cockroach when the light is turned on.

          • FriendlyGoat

            I do not believe in taxing financial transactions. I believe in heavily taxing income from trading. In a sense, we now have two classes of people in this country——those who dream of becoming wealthy from the stock market and other sophisticated trading vehicles, and those who dream of winning Powerball or Mega-millions. We’d be better off with a throttle on both so that the “dreams” would be more realistic and not the driver of bad politics and economic fibbing.

            To religion, I hope you notice that I brag on yours——just not the mindset you personally spin on it. Real religion, Jewish or Christian, should be focused on telling truth and taking care of the neighbors in realistic ways. It is not about Marx. It is about sensing what is right, fair, true, workable, desirable and DOING IT IN PRACTICE.

            Churches in America have made a mess. Mosques in many parts of the world have made a mess as well. Now you are trying to tell me that synagogues would too——-if people went to them more. I’d be for folks attending less and spending more time asking God in their prayer closets what they can do today to bless somebody and bless our society. Anyone who does that, in my opinion, will NOT be out shilling for Trump/Bannon, BECAUSE their hearts will not stand for the incongruity of humility in the prayer closet and the rancor of modern Republicanism.

          • Proverbs1618

            Synagogues making a mess? Wow, you are all of a sudden an expert on Judaism. What Yeshivah did you go to? Who was your Rabbi?
            Listen, you have an opinion. That’s fine. I think it is stupid, but then again, being stupid is not a crime. I was just pointing out that to people whose most important identification is being Jewish voted for Trump quiet heavily. I guess Hussein’s overt anti-Semitism and anti-Israel sentiment had something to do with it. BTW, Jews in Israel absolutely love Trump. I guess they are not real Jews, amiright? A real Jew is the one who votes for people with D in front of their name. The whole believe in tenets of Judaism is secondary. That is some profound religious analysis you got.
            You divide people in good and bad categories based on whether or not they share your politics. That’s fine as I mentioned above. But please spare me your lectures how not going to synagogue and placing values such as forcing bakers to bake cakes for gay marriage above values of Judaism makes somebody a better Jew than doing the opposite.
            So which taxes you want to raise? Retail investing? Good luck with that. You want to tax trading incomes at large investment banks higher than other forms of income? Good luck with that as well. And to what level do you want to raise them? You have a number in mind. You claim that your previous career was numbers oriented. So I’m sure you won’t begrudge me a simple number.

          • FriendlyGoat

            Religion is much better practiced in the heart than in the herd. I think I made that point.

            As for taxes, as long as the unfettered track exists for trading workers’ interests away, they will be traded away. This is the lesson of recent years. There is simply no reason for saying we need low taxes for gains of millions, tens of millions or hundreds of millions. We don’t. Somebody with deep capital (and therefore high risk tolerance) will place the risky bets to make such gains, will be correct in the market moment and will hurt both the losers in the trades and (usually) workers every time it happens. This should be moderately discouraged by any sensible society.

          • Proverbs1618

            Once again, you failed to give me a number. Why am I not surprised?
            Also, if this is what should be done by a sensible society, can you tell me where this is actually practiced?
            The only thing that protects workers’ rights’ is them having skills that are valuable. Nothing else does and nothing else will.

          • FriendlyGoat

            The only thing which protects workers’ rights is not being hoodooed in politics. It would be wise for those who don’t wish to be ruled by “the robots” to not give away every ounce of power to those who will own “the robots”.

          • Proverbs1618

            And still no number. How sad. Even you can’t defend your own ideas.

          • FriendlyGoat

            Numbers are details and negotiable. We’re talking about principles. The principle for workers is to STOP voting to make your betters better and yourself irrelevant—–BECAUSE—–you’re not gonna like being called a bum by those to whom you electorally gave the moon.

          • Proverbs1618

            But voting for socialism, which is what you are proposing, leaves workers better off. Here we come to the usual sticking point. You have a religious belief that you know what’s better for people than they themselves do. So tell me, what did people in Rust Belt who voted for Obama twice get?

      • f1b0nacc1

        Nice try, but you are familiar with the phrase ‘casting pearls before swine’?

        • Proverbs1618

          Yes I am. But when people start to openly hallucinate and become a danger to themselves and ours, like a good Samaritan I feel it is my duty to speak up.

  • champ

    Most US cities/counties with underfunded pension liabilities have an out that Puerto Rico does not have: bankruptcy. In the next 10 to 20 years, look for lots of cities/counties to declare bankruptcy, and then listen for the public “employees” to scream bloody hell…

    • Andrew Allison

      The municipal employees will demand that their states, which can’t declare bankruptcy, fulfill the obligations. Given that the states are also largely bankrupt under GAAP principles, that will only delay the inevitable. The real threat is that the federal taxpayer will be required to bail out the states.

      • f1b0nacc1

        This gets worse when you see that many states have written into their constitutions prohibitions against doing anything to reform their pension plans.

        • Andrew Allison

          The constitutional provisions to which you refer can be interpreted in various way, e.g. for IL “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” is a bit squishy. Most importantly, it’s a contract with the State, not the Federal government. When, as is inevitable, the State runs out of money, it will necessarily default.

          • f1b0nacc1

            Sadly the courts in these states have interpreted this clause to mean that no modification of any sort to the terms of the contract will be tolerated. So rather than squishy (and I agree with you that the language is indeed open to interpretation) it is rock solid in their eyes.

            As to the consequences, they are obvious. States will eventually default, but only after a long slow decline as the courts relentlessly enforce the terms of the contracts to the detriment of virtually every other state function. You might see an example of what will happen by looking at Kansas, where the Blue-dominated Supreme Court has found that there is a constitutional requirement for certain levels of education spending, which in turn has bigfooted the rest of the budget. Expect this to increasingly be the case in places like CA, IL, NY, etc as the courts increasing impose spending mandates to support their preferred policy alternatives.

          • Andrew Allison

            Yup, the deep blue state judiciary will interpret the clauses to the benefit of their constituencies, at least until the voters revolt due to the crowding-out of government services or it becomes apparent that the burden on the rest of the citizenry is too great. One thing’s for sure, there will be tears before bedtime.

          • f1b0nacc1

            Even when the voters revolt, the judges will not relent. Just look at what has happened in both IL and CA, where local voter initiatives have been overturned by the courts.

          • Andrew Allison

            Judges (except, in CA at least, Appeals and Supreme Court) are elected too. The public employee lock on CA makes it unlikely that it would happen here, but two-thirds of the States are now controlled by the GOP.

          • f1b0nacc1

            Yes and no. Kansas, for instance does elect its judges (sort of), but control over the nominations is maintained by the Topeka mafia in both parties, which is far, far to the left of the state as a whole. This isn’t all that uncommon (Texas is often described as a mass of red with a tiny blue dot in the middle around the capital of Austin), and these blue enclaves often wield power far in excess of what one would expect from their numbers.

          • Andrew Allison

            Actually, two appeals courts in CA of all places have said that pensions can be changed, and it’s now with the CA Supreme Court. The issue will probably go to the US Supreme Court and establish a nation-wide precedent, hopefully after Gorsuch is appointed. What may be happening is that municipalities are recognizing that the crowding-out of government services by pension benefits is causing voter unrest which threatens their jobs.

          • f1b0nacc1

            I wouldn’t bet on the CA Supreme Court to do anything that undercuts the positions of public employee unions, but overall your strategy is correct. This will end up in the SCOTUS sooner or later, but I suspect only after some very ugly defaults at the state and municipal level, possibly as a result of an attempt to get the Feds to cover the difference.

            Interestingly enough though, Gorsuch may make a ‘nationwide precedent’ difficult to produce. He is a big believer in the 9th and 10th amendments, which might very well translate into a ‘you’re on your own, good luck’ message to the states that have gone too far down this road. I have a hard time seeing how the SCOTUS would take the step of invalidating a pile of state constitutions with such a ruling (especially in the teeth of fearsome opposition by tons of angry public employee retirees), though it certainly is possible….

          • Andrew Allison

            It’s clear that, one way or another, the States are screwed and will do everything in their power to pass the buck (pun intended) to the Federal government. As I’ve written before, we can only hope that the GOP is still in charge when they do so.

        • LarryD

          “What cannot continue, will not continue.”

          Social Security, public pension plans, all work as long as the economy grows. The anti-growth agenda the bourgeoisie adopted in the 1970s doomed all of these institutions.

          • f1b0nacc1

            While I agree with you in principle, there was no amount of growth that could have sustained this institutions, particularly as the most common response to growth (and there was plenty in the 80s, for instance) was to expand the generosity of the contracts driving them….

  • Andrew Allison

    Proposition: a teacher too dumb to figure out that, like the rest of us, they need to take care of their own retirement is too dumb to teach. If it seems unfair, given the fact that most government employees don’t earn their living, to pick on teachers, consider that they are charged with a specific responsibility, namely educating our young.

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