
In Puerto Rico, Teachers’ Pension Fund Works Like a Ponzi Scheme - JumpCrisscross
https://www.nytimes.com/2017/03/08/business/dealbook/puerto-rico-teacher-pensions.html
======
djrogers
> 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.

You're welcome kids - we've been stealing your money for the last few decades
by ignoring basic economic facts. As a result of our greed, instead of getting
_more_ out of your retirement savings than you put in (you know, from things
like compound interest and investments), you're paying for the previous
generation's unsustainable pensions. And of course since we've backed
ourselves in to this corner, we can't let you opt out of the pension plan so
you can behave responsibly on your own..

~~~
SilasX
This is what worries me about most such pension systems[1] -- because they
don't operate on an actuarially sound basis, but depend on there always being
enough payers, they are prone to "evaporative cooling"[2], which can strike
suddenly and without warning.

That is, as you keep goring a larger chunk out of newcomers, you make their
alternatives more attractive e.g. occupations other than teaching, or teaching
in other country. This looks disproportionately appealing to the biggest
potential contributors. So each person that leaves means a bigger chunk you
have to take out of other newcomers, and the process accelerates. So then you
may have little warning before you reach the point where enough have left to
make it bankrupt.

Unfortunately, it's an uphill battle just to convince people that pensions
should required to be funded at all, i.e. they set aside the discounted
present value of every future dollar promised, rather than "oh don't worry,
we'll totes have enough rev by then!".

[1] i.e. pay-as-you-go or underfunded

[2] To explain the metaphor, "Evaporative cooling" refers to how the exits
from the system are lopsided and change its average properties. For liquids,
the particles that evaporate away have the highest energy per particle,
leaving the average particle energy -- and thus temperature -- lower.

~~~
hackits
I'm from Australia and here is my pet hate.

Over here we have compulsory Superannuation Funds where 9-10% of your salary
is deposited into your superannuation fund of your choice. Although you cannot
access the superannuation fund until you turn 80, and this figure keeps
getting pushed back. The business tax rate is 30%, and also employee tax rate
for me is 25-27% of my income goes into income tax.

We get shoved down our throat's that we shouldn't be a burden on the tax
payer, and will have to provide for our own retirement using our own
superannuation funds. Well at the same time being faced with the following
situation.

27% of the wages go into tax. 9% of the wages go into superannuation fund for
retirement. 2% is the medicare levy that you have to pay per year. 5% or $70
per week for Private Health insurance or you get health insurance loading
after 30 years old that accumulates 2% per year.

Then we're faced with a situation where housing is 8-9 times medium income in
this country.

So in summary, you're faced with indirect costs to about 43% of your gross
income. So take my situation for example 85000+(85000*0.09) gross income the
take home at the end of the year is 52,810.5.

Considering a house is now 8-9 medium income, this comes to $680,000 for a
average 3 bedroom house. Using a full time income to pay that mortgage @ 4.5%
PA ($96 going to fees and associated council rates) weekly repayment of $919
this will take ~ 23 years to pay the mortgage off with the total cost of the
loan being $1,086,386, and total interest payable. $406,386.

So fast forward, forward 23 years I'm 58 with $175,950 in the super fund.
Assuming a 3% growth of the value of the house, it would be now worth
$1,382,299.

The only realistic option for the remainder is to save for the next 20 years
until I can access the superannuation (if its around)

$344,250 in super payments $1,284,081 in savings, $2,496,588 house value at
the time of retirement and medium wage would be ($277,398)

So what does this say about the Australian economy? Well everyone is banking
their house will pay for their retirement that they would draw down on in
later years. If by any chance house prices go through a major correction here
the whole system will be thrown into a massive shit storm.

~~~
dmagee
This is so on point.

The entire economy seems to be driven by housing in Australia.

Its a massive ponzi scheme with developers making the big bucks and the tax
system geared to assist investors at the expense of first home buyers.

If housing crashes there will be a lot of very angry people in this country.
Developers and governments need to wake up.

~~~
hackits
Wait until the May 2017 budget. The government may announce co-payment or tax
incentive to keep the system going. For my situation I will jump and purchase
a new house if I can deduct interest repayment from my taxable income. It
would level the playing field where as a investor you can deduct interest
repayments from their taxable income but as a owner occupier you cant.

I get a bit emotional about this because I went got a CS degree in 2000 and my
colleagues quit high school at year 10, and purchase a house in 1998 for
$80,000 and in 10 years time that same house was now worth $450,000. In that
time they've leverage themselves with 2-3 investment properties. They pay less
tax than I do and simply because they got in before the massive housing boom.

Yes I'm pissed about the whole situation.

~~~
hackits
Turns out the May 2017 budget has been announced and the headlines are:

`The federal government has given the go-ahead for a scheme in which the
private sector would be given access to cheap capital in return for building
more community housing.`

So no alteration to stamp duty, negative gearing, or capital gains tax
discount.

Oh well....

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WillyOnWheels
I don't see anything in the article mentioning a huge factor in Puerto Rico's
poverty, the Jones Act.

It requires all goods that Puerto Rico buys be transported on an American made
ship(as in built in an American shipyard), staffed with an American crew,
jacking up prices.

It causes a crazy situtation where Puerto Rican company will ship their goods
to the mainland, and THEN ship them back to the island, so that Puerto Ricans
can buy them.

Puerto Ricans don't have decent representation in the national government, so
they have no hope of getting it repealed.

Shipping companies LOVE the Jones act, Puerto Ricans hate it
[http://www.businessinsider.com/r-us-shippers-push-back-in-
ba...](http://www.businessinsider.com/r-us-shippers-push-back-in-battle-over-
puerto-rico-import-costs-2015-7) "The report found that the price of imports
from U.S. states was at least double that in neighboring islands like the U.S.
Virgin Island, which is not covered by the act."

[http://www.fundacionlibertadpr.org/single-
post/2016/09/14/Th...](http://www.fundacionlibertadpr.org/single-
post/2016/09/14/The-Jones-Act-and-Puerto-Rico%E2%80%99s-Economy)

Richard Wolff interviews Professor Ian Seda of John Jay College on the legacy
of colonialism and the Jones Act in Puerto Rico:
[http://www.democracyatwork.info/eu_puerto_rico_s_crisis_is_s...](http://www.democracyatwork.info/eu_puerto_rico_s_crisis_is_systemic)

~~~
yummyfajitas
Puerto Ricans have had numerous opportunities to change their situation, most
recently in 2012. The results were ambiguous.

[https://en.wikipedia.org/wiki/Puerto_Rican_status_referendum...](https://en.wikipedia.org/wiki/Puerto_Rican_status_referendum,_2012)

Puerto Rico actually has a pretty good deal - no federal income taxes. I'd
happily give up my right to vote for the same benefit.

~~~
amorphid
Can I move from California to Puerto Rico and stop paying federal income tax?

~~~
hiphipjorge
Absolutely.

~~~
true_religion
Wait? This is true in all cases? I thought the US government required you to
pay income taxes after a certain income point even if you were in foreign
countries.

Why would Puerto Rico, which is part of the US itself, be an exception?

~~~
vinay427
Because foreign countries are not explicitly exempted, while PR is due to past
agreements. Note that you have to live there for a good amount of the tax year
to qualify, which is fairly typical.

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haroldp
Not to put too fine a point on it but...

> In Puerto Rico, for instance, the pension funds are so short of cash that
> money contributed by working teachers basically flows straight out to
> retirees. ... That is, essentially, a Ponzi scheme.

Is that different by anything but degree than the US federal Social Security
system?

> Puerto Rico... ran off the rails by using debt to spend beyond its means.
> Year after year, the government could not balance the budget and borrowed
> instead

Is that different by anything but degree than the US federal government?

~~~
GabrielF00
Currently, social security takes in $801.6B in revenue and pays out $750.5B a
year, and social security has a $2.8 trillion trust fund. After 2022, outflows
will exceed inflows, and social security will have to draw down on that trust
fund, which will be exhausted by 2035.[1]

From the charts in the NYT article, Puerto Rico's fund is taking in <$400M a
year and paying out >$600M, and their trust fund is less than $1B, and will be
exhausted by 2020.

Social security is still running a surplus, and still has a massive trust
fund. It definitely seems plausible to make changes that will make it solvent
well into the future.

[https://www.ssa.gov/OACT/TRSUM/index.html](https://www.ssa.gov/OACT/TRSUM/index.html)

~~~
mason240
> social security has a $2.8 trillion trust fund.

That trust fund is in form of IOUs from the general fund of the Federal
government - where do you think the money to pay back those IOUs will come
from?

~~~
unclenoriega
Probably taxes, where all SS funds have always come from.

~~~
mason240
That's the point. If the IOUs have to be repaid with extra tax revenues, it is
functionally equivalent to a deficit and not really a "trust fund."

------
bjornsing
In Sweden most of the national pension system [1] is a Ponzi scheme, in the
sense that there are no invested funds: money flows straight from working
people's taxes to retirees pensions.

So far it has worked fairly well, but I guess that's what they say about all
Ponzi schemes. :P

1\. All except the so-called "Premiepension". See e.g.
[https://www.pensionsmyndigheten.se/forsta-din-pension/om-
pen...](https://www.pensionsmyndigheten.se/forsta-din-pension/om-
pensionssystemet/finansiering-av-pensionssystemet).

~~~
mjfl
They work well, until they don't.

------
pryelluw
My wife is a teacher in PR. She is paying her pension but knkws wont be able
to use it. This is the cherry on top of an education system that has _me_
paying for the costs of running her classroom and even the cost of her
students' materials costs. I do it for the kids, so that they have a betyer
chance in life. But damn how it hurts to see politicians and department
officials walk around with millions in their pockets while I spend my heard
earned money (that has been taxed) on things they should be making sure are
provided. How thry expect schools to work without paper, pencils, toilet
paper, light bulbs, or books is beyond me.

And now, well, they are looking for ways to cut costs and benefits to
teachers. Fucking assholes.

~~~
noonespecial
>How thry expect schools to work without paper, pencils, toilet paper, light
bulbs, or books is beyond me.

They don't. Somewhere along the line, they noticed that if they don't provide
these things, teachers and parents would do it out of their own pockets
because they care about the children.

They realized that they could consume the latent altruism of the moral
stakeholders for their own enrichment.

~~~
pryelluw
Food for thought

Most teachers in my wife's school _do not_ buy any materials and do without.
They go all year with the initial batch of materials the department sends them
(which is a small quantity).

I used to work in EdTech and the situation in many other states is similar. In
fact, I know certain big companies who will not even give some districts the
time of day because they know any time spent there is wasted. That's how the
next generation is being educated.

------
patio11
If this general issue interests you, pensiontsunami.com is a great aggregation
of stories about it.

Long story short: defined benefit pensions are the biggest financial
catastrophe in history, with the worst cases exacerbated by self-dealing
between government employees and elected officials.

------
Neliquat
I hare to say it, but most pensions are headed this way due to mismanagement,
and lack of revisitation of rates vs payouts over time. Most companies have
already eliminated theirs in good faith, or desparation.

------
seibelj
The thing about math is that you can't reason with it, hide it, debate it, or
pass laws that make it untrue. Eventually, pension systems with poor
structures collapse, and a lot of people get hurt.

------
Entangled
In Puerto Rico only?

------
pbreit
Aren't social security and many/most pensions ponzi-like? And all underfunded?

~~~
astrodust
Not by design, but some end up that way due to looting.

------
mrslave
This is why the estimates of total US government debt are in the ballpark of
50 trillion USD, instead of the official almost 20 trillion.

They're on the hook for all the unfunded liabilities like federal pensions,
and are expected to take on bad state and municipality debt, much of which is
also pensions.

Puerto Rico is the most recent example of this, and it is why - funny as it
may be for other reasons - California will not secede.

------
redwood
Social Security too

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wheelerwj
so is all of our medicare and social security...

------
askvictor
To be fair, the entire economic system is just an elaborate Ponzi scheme.

~~~
elastic_church
I see you got downvotes, but any semblance of a distinction has been lost.
Whatever legal standard federal agencies have used to shut down private
versions of these has been totally muddied revealing the moral relativity of
all institutions that slowly pay your money back to you.

So yes, today, in 2017, "Ponzi" is used as a pejorative, and comparing
accepted good things to a pejorative will garner you downvotes, but there is
no distinction.

------
unlmtd
Holding a USD makes you a creditor. A Dollar is 1.5 grams of gold, but it used
to be a quantity of silver. So it's _all_ a big ponzi. USD, EUR, JPY, BTC, et
al. - sell them as quickly as you get em. There are ways now to hold insured
gold that can be withdrawn at ATMs in a jiffy. Or be a sucker.

