
The pension gap - abakker
http://www.latimes.com/projects/la-me-pension-crisis-davis-deal/
======
jstepka
_" More than 200,000 civil servants became eligible to retire at 55 — and in
many cases collect more than half their highest salary for life. California
Highway Patrol officers could retire at 50 and receive as much as 90% of their
peak pay for as long as they lived."_

It is simply not possible economically to support these type of benefits. Look
no further than the Greece or Italian austerity crisis to see how these type
of government payments will play out.

~~~
tajen
It's the same in every country: Some historical group's advantage can't be
removed because they are enough people to get leverage against any opponent.
There's a need for a new advance in democracy, because it has almost-
bankrupted a few countries now (including Greece). Perhaps the separation of
powers in our democracies (executive, judicial and law-makers) isn't enough.
Maybe we should add a 4th weight, which translates hard limits from nature
into limits that politics can't cross: "You can't allow a global warming",
"You can't increase debt beyond 4%", "You can't let people work dramatically
less for 5 decades (like in Greece), unless you justify it with an incredible
progress in NGP/GDP/technology" or "You can't have discrepancies between
public and private sectors". Somehow I'm happy Europe provides a bit of
pushback against my country (France) because God knows how much debt our
politics would otherwise subscribe.

~~~
twic
How about we weight people's vote by an estimate of how long they've got left
to live? After all, the longer into the future you'll live, the more seriously
you have to take it.

~~~
hkhall
I see several thoughts about that interesting proposal(offhand and only
related to USA):

1) Those that have participated in government/military have less say than when
they served. This could be a positive, but I feel some objection to a POW (my
grandfather for instance) having less say than someone who didn't serve. 2) Do
_really_ we want the least experienced citizens having the most say? The US
already has age limits for certain offices so that sort of reduces my concerns
about this, but... 3) Phase in plan? Currently voting is dominated by older
voters. I don't see those people rushing to their polling places to vote to
have the value of their vote lessened. Could be interesting to see the
reasoning that happens for people to vote for or against it from a game theory
perspective.

Still, I am interested.

~~~
mercer
> 2) Do _really_ we want the least experienced citizens having the most say?

That's the first thing that I thought of, but then I realized that I have a
pretty dim view of the 'experience' of most older people that I know. They are
woefully unable to use computers, and on account of their 'trust' in things
like fake news they seem incredibly unprepared to deal with our current
reality and are just as susceptible - if not moreso - to populism. And while
this is a bold claim I'm not quite prepared to defend, they seem quite a bit
more selfish and materialistic than the twenty-somethings I spend much of my
time with.

Maybe in times of rapid change like ours, 'experience' doesn't mean as much as
it once did.

Plus, it goes both ways. If we should defer to those with more experience,
it's only fair that they should take better care of their offspring.

------
kefka
Well, part of that deal is delayed pay, because the public sector pays a great
deal less. Without this, you're going to get menial and do-littles in public
service. ... Which the more I think about it, perhaps is the reason why they
want to, so the Republicans can look at their bad performance and cut funds
further. (Don't get me wrong, Democrats seems to like throwing money down
holes for populous programs, which have their own set of regressive issues.
I'm much for UBI, and scientific testing of laws and programs to determine if
the benefit is actually helping. If not, eliminate and move it to help more,
better.)

If you cut funds by what you can, and then blame them for bad performance, you
can "punish them" with less money, getting even worse. Wash, rinse, repeat,
until that program is effectively dead. We're seeing it in the schools right
now, with "No Child Left Behind" and the similar takes across the country with
it. Inner city schools have bad performance, primarily because of bad home
life, poverty, lack of food and resources... But because they do bad for
tests, they get less funds.

I always think, what would our system look like if we adequately funded our
programs? Would the BMV be such a cesspool? Not hardly. Would dealing with
government office be peachy? Well, no. But they would have quick serving times
and adequate material and time response in larger issues. Instead, what I hear
is "They're bad, so lets cut funding." which exasperates the problem by now
cutting personnel, time, and physical resources.

~~~
arielweisberg
I am not sure public sector work pays less than equivalent private sector work
on the whole.

I don't know for certain either way. My unsubstantiated belief was that it was
higher and sometimes significantly so especially taking into account benefits,
vacation time, and overtime policies.

So citation needed.

~~~
kefka
Admittedly, I found hundreds of resources.

Half of them said that "Private Makes More". The other half said "Public Makes
More". The ones that said that Private makes more, usually added in commentary
about Right-to-Work states, and discussed unions, whereas "Public Makes More"
discussed the excesses and governmental waste, and evils of taxes. I'm sure
you can see a trend of biases here. Attacking Private was Democrats and Left
leaning orgs. Attacking Public was Republicans and Right leaning orgs.

The best, most impartial was from a reddit posting
([https://www.reddit.com/r/engineering/comments/314v7b/does_pr...](https://www.reddit.com/r/engineering/comments/314v7b/does_private_sector_work_still_generally_pay_more/)
) asking specifically about engineering pay between public and private. Of
course, by the very definition they are anecdotal. But they seemed to try to
answer "What is better monetarily and compensation-wise, rather than bringing
in socio-politics in its stead.

~~~
crdoconnor
The third possibility that is curiously rarely considered by so called
'market' advocates is that it might be a competitive market and both groups
are offered more or less equally attractive compensation packages.

~~~
kefka
I would think a way to discern this, is that absolute cash in hand, private
makes more. Public, if you add in the non-cash benefits, makes more. The
argument however, of what I was making, is that if attrition destroys the
understood contract of the non-cash benefits, Public would make significantly
less and be less able to attract good talent. We are already seeing that with
regards to K-12 teaching profession in many states.

I was asked to cite sources; kindly at that after respectful disagreement.
After some searching, determined that answering that was going to be extremely
partisan, and refused to answer the question at hand of "citation needed". And
your suggested answer seems to be what the hordes on reddit kind of, not
really, sort of agreed to.

In the end, even on reddit, it was back and forth 50% one way, and the other.

------
davidf18
There are problems in NY State and Illinois as well. Illinois has been in some
sort of legislative standoff between the Republican Govenor who is trying to
rein in pension costs and the Democratic legislature.

NY State if I recall, has some sort of constitutional amendment that creates
huge pension liabilities for taxpayers.

These huge pension liabilities as well as increasing Medicaid costs means that
students attending public universities in California, Illinois, and NY State
have to pay higher and higher amounts of tuition, in effect subsidizing the
pension funds and Medicaid.

~~~
kodablah
It's happening everywhere, and not just at the state level. This is also
occurring at the city level, see Dallas[1]. They didn't have enough money to
pay out scared people that are all trying to withdraw now, though they have
implemented stop gaps[2].

1 -
[http://www.nytimes.com/2016/11/21/business/dealbook/dallas-p...](http://www.nytimes.com/2016/11/21/business/dealbook/dallas-
pension-debt-threat-of-bankruptcy.html)

2 - [http://www.dallasnews.com/news/dallas-city-
hall/2016/12/08/d...](http://www.dallasnews.com/news/dallas-city-
hall/2016/12/08/dallas-police-fire-pension-board-ends-run-bank-
stops-154m-withdrawals)

~~~
davidf18
From [1]: "This month, Moody’s reported that Dallas was struggling with more
pension debt, relative to its resources, than any major American city except
Chicago."

Chicago is even worse off than Dallas.

------
jorblumesea
At the same time, many public California institutions are outsourcing their IT
and other infrastructure costs while laying off workers because of budgetary
pressure. Just another case of the baby boomers destroying future generations
for their own personal gain. Pension funds are basically pyramid schemes and
are economically doomed.

~~~
DrScump
An example from just this week at UCSF:

[http://ww2.kqed.org/news/2016/12/14/ucsf-losing-some-it-
staf...](http://ww2.kqed.org/news/2016/12/14/ucsf-losing-some-it-staff-to-
outsourcing/)

------
notliketherest
Ah, the rooster always comes home to roost. Well funded public sector unions
and their pocket politicians robbed the state coffers blind. Will we see
anyone hang to pay for this thievery? Not likely. I simply expect higher taxes
in the future. This state will never learn until there's no more money left to
take from its citizens.

~~~
clarkmoody
> robbed the state coffers blind

State coffers filled with their neighbors' money.

Public union negotiations are always against the non-union taxpayers, which
are not well represented since the politician "representative" is bought by
the union. Public sector unions are the embodiment of moral hazard.

~~~
ng12
I don't understand why state/federal employees are allowed to unionize at all,
let alone why they have such strong ones. Are government employees actually in
danger of abuse or is it just because they can?

~~~
neaden
Why wouldn't they be allowed to unionize? In America you have a right to a
union.

~~~
ak217
Because their employer can't go bankrupt if they happen to bargain themselves
an impossible deal.

~~~
jhayward
Of course they can. Every city, county, state, individual and corporate entity
in the US can go bankrupt. The federal government can't, technically, but it
can default,

~~~
ak217
States and the federal government cannot meaningfully go bankrupt. The problem
is described in the article. While cities and counties can technically go
bankrupt, they will externalize the costs and take on debt burdens at
taxpayers' expense before they do so, to an extent that private companies are
not allowed to. There have been just 9 city and county bankruptcies in the
United States since 2008. Only 6 of them resulted in debt shedding,
representing less than $30B in debt. That's 0.06 percent of total
municipalities that could theoretically go bankrupt. In that time, tens of
thousands of business entities and hundreds of publicly traded companies,
representing trillions of USD of capitalization, have gone bankrupt. The
overall ratio of public:private sector economy in the US is roughly 1:2.

------
delinka
Surely it was someone's job to project these future costs when putting such
promises into employment contracts. And I would also presume that these future
cost calculations should result in some amount of planning to understand what
the minimal amount of tax revenue or investment would have to be to support
the future obligation.

However, even if that happens, how do employees prevent politicians from
mucking about with those plans so that they can receive the retirement
benefits that helped convince them to take jobs? These fears are why someone
must have encouraged Congress to muck about in the USPS budgets wrt retirement
accounts.

The only solution I see is mandating that (gov't) employers pay, during an
employee's employment, into a retirement account such that politicians and
bosses can't touch the money, and only the employee can do anything with it
during retirement.

~~~
nevdka
Your proposal is essentially what we have in Australia with superannuation.
Employers pay a minimum of 9.5% of pre-tax salary into the retirement
accounts, and then can't touch it.

~~~
fowl2
And this is the same system that the public sector uses (grandfathered
exceptions exists, of course).

Of course once your super fund runs out, and it will very likely run out,
you're back on the tax-funded age pension.

------
gavman
>Asked to study differing scenarios for the financial markets, Seeling told
the CalPERS board that if the pension fund’s investments grew at about half
the projected rate of 8.25% per year on average, the consequences would be
“fairly catastrophic.”

8.25% per year? No one averages 8% per year growth. That's not even an
optimistic projection, just a stupid one.

~~~
bittercynic
A stupid, but widely believed projection. In the years before the .com crash
many people really believed that "This time is different."

~~~
iagreeentirely
Many people believed the housing crash wouldn't happen, many people often
believe incredibly naive things. This should not excuse them. There were
people among them trying to be voices of reason, they ignored them -- as they
always do.

It doesn't matter that it was a terrible idea. The people who voted in favor
got the poll bump they wanted and everyone is gone by the time the bill comes
due.

Burn this pattern into your brain, it has happened hundreds of times and will
happen hundreds more. Every single time people will exclaim "We couldn't have
known!" That is simply misdirection, they didn't even TRY to know.

~~~
bittercynic
Yes, there are many stupid but widely believed projections.

.com boom is not a regular boom. It will rise forever!

Housing prices will always rise!

Ad-tech will grow boundlessly!

In my opinion one of the greatest tragedies of these cycles is that many
people desperately want to believe they hype about "This time it's different",
and they can find plenty of "experts" to tell them what they want to hear.
Regular people who could have had a solid place in the middle class are thrown
into chaos because they lack financial savvy.

Is it stupid to expose yourself to a level of risk that can cause this? I
think so. However, it seems like we provide more and more opportunities for
unsavvy people to do severe and long-term damage to themselves and their
families.

------
soVeryTired
If you want to blame someone, blame the accountants. Pension funds'
liabilities are long-term and inflation linked. If they had invested fully in
inflation-indexed bonds (as the Bank of England pension scheme does), they
would mostly be alright now. But pension fund accounting allowed them other
options.

During the 1990s and 2000s, pension funds underfunded their liabilities,
assuming they'd be able to make up the difference from gains in equities,
property and other high-yielding assets. In the process they created quite a
few hedge fund billionaires and funded the venture-capital tech boom. Many of
those investments subsequently turned sour.

But their most significant error was to assume that bond yields would stay
high. Today's low yields mean that they can't discount their future
liabilities as heavily. The icing on the cake has been a moderate increase in
longevity, which has been enough to tip the whole industry into crisis.

~~~
gaius
_During the 1990s and 2000s, pension funds underfunded their liabilities,
assuming they 'd be able to make up the difference from gains in equities,
property and other high-yielding asset_

Not in the UK - if a company is deemed to be overpaying, according to the
Revenue, they pay tax penalties. The Revenue don't care that the value of
investments can go down as well as up, their pensions are paid from
taxation...

~~~
soVeryTired
BHS and a number of others took contribution holidays in the 90's, on the back
of a stock market boom. It's those that I was referring to.

~~~
gaius
They had no choice, because of the rules I mentioned. The Revenue deemed their
pensions "over-funded".

~~~
soVeryTired
If you've got a link explaining the tax rules I'd be interested to see it.
Seems to me like companies should prudently fund their pension obligations
before minimising their tax bill.

------
ng12
Why would you _ever_ pass legislation which is entirely dependent on the stock
market performing well?

------
edabobojr
I'll just throw for the opposing side and point out that "Gov. Pete Wilson,
took $1.6 billion from CalPERS accounts in 1991 to help close a state budget
gap". A random internet calculator tells me that investing in the S&P 500 with
reinvested dividents since July, 1991 has had a 844% return. I wonder impact
$1.3 trillion would have on the CalPERS shortfall (edit: this would only be
$13 billion).

~~~
Zanta
Your math is off by a couple orders of magnitude :)

~~~
edabobojr
Ouch! I feel the fool.

Revised thoughts. It would only be 10 billion, which would equal two years of
payouts for the entire pension.

~~~
wahern
obligatory XKCD: [https://xkcd.com/947/](https://xkcd.com/947/)

------
csense
In the private sector there's a balance: First, union and management are
adversarial, since management's pay is often partly/wholly in stock/options or
otherwise tied to the company's financial performance. Second, if the union
pushes too far then the whole enterprise will sink.

But in the public sector, neither of these things are true. Unions and
management can collude to fleece the taxpayers, since management's tenure is
tied to votes, not financial performance. Additionally there'll be increased
taxes, a federal bailout, or some other steps taken to allow the government of
California to continue to operate no matter how much their pension obligations
rise.

IMHO public sector unions should be illegal.

------
seibelj
US government pension funds (state, city, etc.) are basically doomed
universally.[0] Tax payers cannot stomach having to pay more for less services
so that a small fraction of society can retire much earlier and with cushier
benefits than the vast majority. As happened in Detroit, benefits will be cut
in order to prevent catastrophe. It's both the morally right solution and
realistically the only solution.

[0] [http://www.nytimes.com/2016/03/18/business/dealbook/study-
fi...](http://www.nytimes.com/2016/03/18/business/dealbook/study-finds-public-
pension-promises-exceed-ability-to-pay.html)

~~~
neaden
The alternative interpretation is that politicians and the people who elect
them (meaning all of us) tend to be short sighted and underfund pensions for
public workers. Many of those public workers are willing to work for less pay
because of the pension, so in effect we are defrauding them. Detroit is an odd
example to use as there we are dealing with a severe population crash, that's
not the situation in California.

~~~
seibelj
Public workers don't settle for less pay than private sector workers, that is
an often repeated talking point that simply isn't true.[0] A garbage man,
janitor, administrator, etc. working for the government isn't going to
magically make more salary by quitting and going to the private sector. Top
level employees can make more in the private sector, but the average worker
cannot. Public employees make more money, are very difficult to fire, and have
far more benefits than most workers.

[0] [https://www.downsizinggovernment.org/federal-worker-
pay](https://www.downsizinggovernment.org/federal-worker-pay)

~~~
neaden
"Other studies based on comparisons between similar federal and private
workers find either no wage gap or a federal wage advantage. A 2012
Congressional Budget Office (CBO) study found that, for comparable workers,
federal wages were similar to private wages overall, with just a small two
percent advantage for federal workers" Looking at that report it looks like
from a bachelors on up public sector workers get less compensation then
private.

------
kombucha2
The amount of mismanagement and lack of foresight on both sides of the aisle
is disgusting.

------
m0llusk
I tried to read this article on an Android mobile and it started playing a
podcast even though I hate podcasts and have limited bandwidth.

~~~
ec109685
For shame that the LA times doesn't know you don't like podcasts ;)

~~~
m0llusk
Traditional media outlets are desperate to save themselves but instead of
trying to serve customers what they want they are indulging in tech dodads and
hypermedia push assaults. LA Times won't be around much longer by their own
projections. Attempting to force feed people content they don't want might be
a factor in that.

------
mathiasben
I finished reading this book earlier this month -
[http://www.retirementheist.com/](http://www.retirementheist.com/) pension
funds work if they are managed responsibly!

------
FreedomToCreate
Every time I read calPERS, I think scalper.

Anyway, just goes to show that its not just big corporations that are greedy.

Any reform will be difficult without adjustments to the promised pensions.
With an economic slow down coming in 2017-2018, the gap isn't going to get
smaller.

------
n00b101
_" One of the few voices of restraint back in 1999 belonged to Ronald Seeling,
then CalPERS’ chief actuary. Asked to study differing scenarios for the
financial markets, Seeling told the CalPERS board that if the pension fund’s
investments grew at about half the projected rate of 8.25% per year on
average, the consequences would be “fairly catastrophic."_

Who decided on the projected rate of 8.25%, in the first place? Wouldn't that
have been the work of the CalPERS’ chief actuary, Ronald Seeling?

The root cause of the problem was the actuarial assumption of an 8.25% rate of
return. This is what allowed the new Defined Benefits to appear to be "free,"
and that is what enabled the board and politicians to ram this through.

Assuming an "average case scenario" of consistent 8.25% annual return on a
pension investment portfolio is subjectively irresponsible, even in 1999. But
more egregious is the fact that the actuarial profession failed miserably to
recognise that the Defined Benefit was a financial guarantee similar to a put
option, which means that the value of the put option should have been
explicitly calculated - which would have been done by projecting scenarios
using the "risk-neutral" rate of return (i.e. the yield on US government
bonds) instead of the "real-world" rate (i.e. the super-optimistic assumption
of 8.25% annual returns).

The article goes on to explain that the Chief Actuary ran 3 different
scenarios: a "pessimistic" scenario of 4.4% returns, "average" scenario of
8.25% and "optimistic scenario" of 12.1%. This is the crux of the problem, and
it is not the first time that such actuarial calculations have blown up a
pension plan like this. The right thing to do would be to calculate a single
"scenario" using the risk-neutral rate, which would have been lower than 4.4%
in 1999 and today it would be closer to 0% ... That would have correctly
valued the economic cost of pension benefit as a multi-billion dollar expense
that no politician would be able to so easily ram through the legislative
process.

 _" Lou Correa, then a freshman Democrat who carried the bill in the Assembly,
said he fell victim to inexperience. He remembers seeing actuarial reports and
assuming he’d “kicked the tires” and asked the right questions. Correa, now
running for Congress in Orange County’s 46th district, said he should have
sought independent financial advice."_

I think Correa was reasonable in assuming that actuarial reports, signed by
the Chief Actuary of CalPERS, would have properly "kicked the tires." That is
what the actuarial profession is supposed to do. Just like if an engineer
signs off on the construction of major transportation bridge, we can
reasonably expect that that the bridge won't be be designed with fundamentally
incorrect physics calculations.

~~~
neaden
Agreed. If I knew someone who was investing for retirement on the assumption
of an 8.25% growth I'd be worried about them. The fact that a government
agency did it is scary.

~~~
user5994461
From what I recall, 8% returns might have been correct in 1999.

~~~
n00b101
See above, the problem does not lie in the subjective question of whether or
not 8% return is a reasonable assumption for an investor. The problem lies in
how the actuarial liability was (mis)accounted for - specifically, the value
of the guarantee was accounted by assigning it _zero_ cost - which is
completely incorrect.

It is as if an incompetent real estate appraiser were to assign zero value the
Golden Gate Bridge, and then your local politician legally transferred
ownership of the bridge to some friends for free because the appraisal
assigned zero value to the bridge. And then those friends started charging
tolls on the bridge, and pocketing the money for themselves. That would
normally be considered fraud or embezzlement.

