
The State Pension Funding Gap - Four_Star
http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/04/the-state-pension-funding-gap-2016
======
replicatorblog
Reading about municipal finance makes the freewheeling world of VC look
positively conservative. E.g. there's this concept of a "13th check," at the
end of the year in many poorly run cities. Basically, and surplus growth in
the city's retirement funds were distributed to pensioners as a sort of annual
bonus, rather than left in the general account to help make up for eventual
shortfalls.

[http://www.mlive.com/news/detroit/index.ssf/2013/10/10_thing...](http://www.mlive.com/news/detroit/index.ssf/2013/10/10_things_to_know_about_detroi.html)

There's a serious moral hazard for politicians. It's easy to give constituents
services today at the expense of benefits in the future, when they'll be out
of office. I wonder if a law that clawed back these government official's
pensions if they were found to break from good accounting practices, would be
a deterrent?

~~~
awinder
I find this new wave of going after people’s pensions to be super unseemly.
All of this information has been public for decades, if you view the voter as
“the board”, there’s culpability in not managing politicians and allowing this
situation to spiral.

If we are going to be adults, these pensions are contractual and need to be
paid out. It’s not a responsible behavior to use retirement plans as weapons
at the 11th hour.

~~~
Zach_the_Lizard
> If we are going to be adults, these pensions are contractual and need to be
> paid out

If we're going to be adults, we're also going to recognize that many of us
were _not_ adults when these contracts were drawn up and signed. Many of us
were never even born, and some of those who were of the right age opposed them
to some degree or another.

Maybe we should recognize, in a truly adult fashion, that the mistakes of
previous generations should not be passed on to the current generation. Maybe
adults should recognize the math just doesn't add up.

> It’s not a responsible behavior to use retirement plans as weapons at the
> 11th hour.

It's not a responsible behavior to over promise pensions and bankrupt dozens
of states either. Nor, in the pursuit of fulfilling those reckless promises,
is it responsible to bankrupt future generations.

~~~
ThrowawayR2
> _If we 're going to be adults, we're also going to recognize that many of us
> were not adults when these contracts were drawn up and signed._

So are you okay with a future generation repudiating their contracts and
obligations with you when you reach retirement age? After all, all of us are
someday going to part of a "previous generation" and none of are so perfect
that our generation has made no mistakes.

Why do so many people behave as if aging is something that only happens to
other people?

~~~
1123581321
That’s why defined contributions in individual accounts make sense. The
promise is made good on a paycheck-by-paycheck basis instead of decades in the
future. And the amount contributed has to make financial sense now, which
eliminates the risk of inability to pay.

There are solutions that provide the benefits of retirement without pitting
young against old.

------
oflannabhra
In Kentucky, the situation is dire. KY’s pension system is ranked as the worst
in the nation across several metrics and agencies. The pension system was
written into our constitution as an “inviolable contract” with state
employees. [0]

Our current governor is the first to attempt to do anything about it in
decades, and is being blasted by unions, the press, and the public for it.
He’s most likely destroyed any chance of re-election by pushing hard for
reform. He also hasn’t done a great job of building consensus, to be fair.

The NEA/KEA especially has vehemently disagreed with _any_ proposed reform.
Teachers have walked out today in protest of a bill that _did not affect_ any
current state employees.

It boggles my mind that people respond to this topic so irrationally. It’s
like a patient arguing with their doctor over a diagnosis of cancer.

[0] - [https://www.courier-
journal.com/story/news/politics/2017/08/...](https://www.courier-
journal.com/story/news/politics/2017/08/24/kentucky-pension-crisis-question-
answers/549085001/)

~~~
dashundchen
The problem with Kentucky and many other states is that the politicans raided
the pension fund during good times to fund government operation, and then acts
surprised when it's facing a huge shortfall. So it's disingenuous to paint
this as greedy teachers and public servants when it was grossly mismanaged on
the state politician side. However that seems to be a certain faction's goal.

In addition, Kentucky teachers have worked under the assumption of getting a
pension because the state never extended social security to them. They worked
with lower wages and no future social security with the promise of pension
would be there for them, sometimes as their only retirement income. How can
you go back and threaten this pension when teachers took these low paying jobs
under that assumption?

[https://www.bondbuyer.com/news/bevin-citing-pension-
pressure...](https://www.bondbuyer.com/news/bevin-citing-pension-pressure-
proposes-budget-that-cuts-70-programs)

[https://www.courier-
journal.com/story/news/education/2018/03...](https://www.courier-
journal.com/story/news/education/2018/03/20/kentucky-teachers-pension-reform-
social-security/438031002/)

~~~
oflannabhra
Yes, I totally agree that the _problem_ does not come from teachers. The
problem comes from decades of shortsightedness of lawmakers.

I only mentioned teachers because of their response, which is largely
irrational. No ones benefits are being taken, the state is just ending a
program that is unsustainable.

The private sector did this decades ago.

What happens if the state government goes bankrupt? That is not outside the
realm of possibility with the current crisis.

~~~
SolaceQuantum
If what the parent above you said is true and teachers are not on social
security then the reform of pensions does indeed harm them.

~~~
justin66
It works this way in a number of other states. Ohio teachers (perhaps only
some, I'm not sure) give up their social security in order to collect from the
state teacher's pension fund, regardless of whatever they've already paid into
social security. Seems a little crazy, although until very recently the
pension fund appeared to be doing quite well. (they just suspended a cost of
living increase for the first time ever, which is not the worst thing in the
world, but I certainly am curious as to why their fund's performance has been
so mediocre as of late)

------
jknz
Elected Politician: what so you want?

Union: pay raises!

Elected Municipal CFO: we can't. No more money.

Elected Politician: what about retiring 5 years earlier?

Unions: we will take that!

Elected Politician: retiring earlier costs nothing right now correct?

Municipal CFO: yes but...

Elected Politician: Fine let's give everyone 5 years earlier retirement. My
successor will deal with that when I will be gone.

~~~
lotsofpulp
More like politician or candidate hires the actuarial consultant which will
use the most liberal assumptions they can to make the costs appear as cheap as
possible. And then not even fund to those calculations, because who is going
to force them to?

~~~
dashundchen
Or in many states, use the surplus from pension funds to operate the
government, writing an IOU they know future governments won't be able to pay.

Unsurprisingly when the shortfall comes the same politicians who borrowed will
be shouting how pensions are unsustainable.

In New York, the pension fund is firewalled from the state budget and run
fairly independently.

After the last recession, the pension fund made several changes in conjunction
with the unions:

* Ensured the forecasted return estimates were in-line with reality (7%, which it has exceeded in the past decade)

* Introduced a new tier so new employees contribute for their whole career, with contribution rates progressively increasing as you earn more

* Introduced a limit on the final average salary that determines pension payout

* Lengthened the window of final salary calculation and introduced rules preventing large overtime variances counting towards this calculation.

Still a decent pension system if you can vest, but with reasonable
expectations set. As a result, NYS is one of the best funded pensions in the
country and in the upper 90s% of future funding levels.

------
cs702
...and that's after one of the longest bull markets in recorded history.[a]

[a] [http://www.finra.org/investors/5-longest-bull-markets-
infogr...](http://www.finra.org/investors/5-longest-bull-markets-infographic)

~~~
youpassbutter
This is what is so weird. The stock market is at historic highs.

[https://upload.wikimedia.org/wikipedia/commons/7/7e/S_and_P_...](https://upload.wikimedia.org/wikipedia/commons/7/7e/S_and_P_500_chart_1950_to_2016_with_averages.png)

Our housing bubble just surpassed the housing bubble of 2007.

Interest rates are at all time lows and unemployment is at all time lows.

If they are having trouble now when it's the best of times, what are they
going to do when we have a recession?

------
LanceH
Maybe stop guaranteeing returns on investment?

"It worked in the past" isn't financially sound decision making. It might be
lucky from time to time.

~~~
maxxxxx
Isn't "it worked in the past" pretty much the foundation of all investment
advice? Based on what else can the average guy invest his 401k?

Regarding public pensions they should just adapt to reality and fund them
higher. This was willful negligence for a long time.

~~~
LanceH
Not when you're taking small data samples. If you look at past years of
investment, you'll either have a sample size too small to be meaningful, or
your start lumping years that don't reflect today's realities into the mix.

These investments are basically saying, "the market will always get 10%
return", so we're going to put future tax payers on the hook for 10% returns.
The average guy investing his 401k doesn't get guaranteed results at the
expense of other people's work.

Even if there is a historical 10% return that holds, that's still going to
produce underfunded (and overfunded) pensions based upon fluctuation in yearly
returns and population dynamics (like if an unusually large number retire in a
down year).

Then there is the pension spiking, and maybe even no consideration that people
are paying into the pension at low rates but tend to retire at high pay rates.

~~~
maxxxxx
As individual you can't really compensate for the update and downs of the
market but a pension system with an eye on the long term could do this.
Sometimes it's overfunded, sometimes underfunded but in the end it will
converge to the average.

------
hackermailman
All these pensions are going to be wiped out soon in the coming run. Most
funds currently assume 7% to 8% future rates of return but the ability to
generate returns like that have been impossible for a long, long time now. To
compensate for low returns, pension funds have dumped money into stocks,
private equity funds and illiquid and very risky investments, like subprime
auto loan securities and commercial real estate. Some pension funds have as
much as 20% of their assets in private equity. When the stock market
inevitably crashes a little, it will wipe pensions out. Then politicians will
be forced to admit there's a problem, and everybody is going to immediately do
a run on their pensions to try and cash them out. For anybody who doesn't know
if your job offers a pension scheme and you quit before retirement, you are
paid out a lump (taxable) sum. There's no way these states like CT or NY with
massive unfunded liabilities can afford 20%+ of their employees trying to cash
the pensions.

The International Forum of the America's holds an annual pension conference
where the data on the coming run on public sector pensions can be found, such
as all the risky investments to make up for poor returns. Interestingly,
private sector pension schemes are fine.

~~~
lainga
I'm not surprised -- they're not at the whim of municipal politics.

------
roenxi
My memory of the statistics is that the median voter does not save. The
government's approach to creating reserves of wealth follows on from that
naturally.

An aspect in this that I find very interesting is the realities behind the
numbers which will be revealed as the situation plays out. The money is a bit
of an illusion, retirees need an available reserve of wealth (be it in the
form of productive land, goods, labour, rock solid infrastructure and houses
with little need of maintenance) to sustain them when they can no longer
produce.

Where will this wealth reserve come from? Who will have to go without? What
compromises will be made?

Undoubtedly one part of any proposed solution is 'tax the rich', because there
are no other wealth reserves in America, but if this is a more fundamental
problem of demographics and ratios the real resources might not be available
to meet peoples expectations. Somebody is in for a very rough 20 years.

------
rufusroflpunch
In Kentucky, we're going through a pension reform as we speak. Of course, the
Republicans are claiming to have fixed it and the Democrats are protesting it,
saying they're hanging future retirees out to dry. What no one is saying is
that the hole is so deep there's no way to get out of it. If I were a state
employee, I would start planning now for my pension not to be there when I
retire.

~~~
Someone1234
As someone who works in a different state, this is why when given the option I
went 401K only.

401Ks have a lot of issues, and definitely aren't superior to a pension scheme
in general, but pension schemes are so poorly run and have so many corruption-
like issues that at least with a 401K it is just a simple vested savings
account I can move if need-be.

I guess what I am saying is, trust in traditional pensions is so low to some,
getting a worse but safer alternative looks nice by comparison.

------
brudgers
Original report, [http://www.pewtrusts.org/en/research-and-analysis/issue-
brie...](http://www.pewtrusts.org/en/research-and-analysis/issue-
briefs/2018/04/the-state-pension-funding-gap-2016)

------
citilife
I wonder how much Illinois impacts the average...

At this stage, there is literally no way to even pay back the pension (it'd be
$20k per person in the state, if we needed to pay it back today).

~~~
nfriedly
Yea.. Illinois is in bad shape. My father-in-law retired from Western Illinois
University a little earlier than he had initially planned so that it would be
before his union contract expired.

That was over a year ago - the folks left are still working without a
contract. That doesn't necessarily mean they won't get any pension if they
retired today, but it puts it at even more risk than it already was.

------
arca_vorago
You think states are bad, you should check some of the city level pension
issues, which I think are much larger in aggregate per state than the state
pension funds.

A really good intro to the city level issues would be the Dallas police and
firefighters pension (just duckduckgo it)

------
wolfspider
I imagine not too many devs have the option of a pension like I do so I'll
relay what was told to me about my pension. ~4.5 years ago I was told along
with all the new hires in the room we would be the last generation of new
hires with an option for pension. I opted not to take it as that said to me
this would be the hardest to fund pension ever. Really my matching 401K and
superior insurance do the trick for me even if the returns aren't high. After
the '08 crash I've hedged against private stubbornly and admittedly have been
pretty jealous of other benefits devs in the private sector get.....until now.

~~~
frockington
What has recently happened to curb your jealousy?

~~~
wolfspider
serious illness

------
pasbesoin
Pensions would work a lot better if they were independently managed and
firewalled from the employer.

A family member has a state pension in one of the states known for having some
of the worst of these problems.

However, their corner of state employment was smart and set up an independent
pension management situation. It remains fully funded and not at risk. Well,
except that the state keeps trying to break down the firewall and raid it.

However, people who instantiated it did a good job of guarding against this.

Pensions aren't "evil". And who wouldn't mind worrying less about making
retirement decisions as an amateur investor on one's own, and focusing more on
doing a good job and raising a family and having a happy life?

What is "evil", is structuring them without defense against expropriation of
funding for other purposes. As far as I'm concern, that is "theft", plain and
simple. And failing to fund them per established schedule is breach of
contract. You are essentially not paying employees for work done.

Maybe given that, well defined in law and practice, organizations also
wouldn't make unrealistic pension commitments in lieu of providing better
immediate compensation and benefits.

In addition to all the rest, there is the aspect of the turn to 401K's and
similar vehicles, that money managers saw and pushed an opportunity to grow
the fees they collect.

I held off from writing it a couple of paragraphs ago, but I'll say it now.
Pensions aren't a fundamental problem. Banksters and their political enablers
are.

~~~
lotsofpulp
Fees to manage pension fund investments are higher than 401k fees for index
funds offered by Vanguard/Schwab/Fidelity.

~~~
pasbesoin
Those have only really caught on more recently.

And as more and more investment moves into them, they become mono-cultures
vulnerable to large-scale exploitation.

I'm using some right now, but I don't count on their indefinite viability and
performance.

Remember how LIBOR exposed fundamental problems and manipulation with respect
to indexing and pricing?

Different aspect of finance. Nonetheless, you're pinning everything to indexes
someone manages -- and to systems performance versus competition.

They do reflect a similar aspect; taking the average investor's attention away
from individual purchases and sales, where most get fleeced to varying
degrees.

Wherever your investments, you have to keep paying attention.

P.S. Have an upvote. I'm not disagreeing.

~~~
lotsofpulp
I agree that there is concern for large scale manipulation, but it seems like
that concern is still there with actively managed investments. Especially from
governments manipulating via bailouts. At least with passive index, you're
only paying a few basis points.

------
PeterStuer
Why not just 'quantitative ease' the differences? We seem to have no qualms
about it when it comes to burning cash on private corporate initiatives.

~~~
lotsofpulp
That is what will happen. Each US dollar will become less valuable, and the
nominal debts will be satisfied. Hope you're invested in inflation resistant
assets. Some of the pension recipients who don't have enough clout to force
the federal government's hand will lose though.

~~~
stephen_g
That's an intuitive theory, but inflation doesn't really have that much to do
with the quantity of money, because the value of money is almost entirely
based on what you can buy with it. Price inflation happens when the aggregate
demand (the sum of all the spending over a certain period) outstrips the
amount of goods and services produced (or held in inventory) in the economy.
Yes, adding more money can increase aggregate demand, but it is also saved or
invested in productive ventures that mean more goods or services are produced.

If it was simply a fact of more money == inflation, we'd be screwed since the
money supply is almost constantly growing through bank lending.

At the end of the day, all _spending_ carries inflation risk (since all
spending adds to aggregate demand). This equally applies to money saved
earlier, new money created in the banking system, or new money created by the
Government (say, QE). It's at the time of spending that's the risk, not the
time of creation.

The limits of Government money creation therefore have more to do with the
productive capacity of the economy.

~~~
lotsofpulp
In an environment where income and wealth disparity is growing, and birthrates
are just at replacement level or lower for those with wealth, wouldn't
aggregate demand outstrip goods and services produced?

------
justin66
The underfunded part is sadly not unusual or unpredictable and neither are the
unrealistic performance expectations. On the other hand, the poor returns some
of the funds have seen in recent years is quite a surprise. How badly designed
did the average portfolio have to be to only gain 1% in 2016?

