> It is increasingly likely that retirees, as well as new workers, will be forced to take deeper benefit cuts.
Boohoo. Public service union members should have thought about that before pursuing a pyramid scheme retirement plan instead of a defined contribution pension like the rest of us.
Why in the ever loving fuck are you blaming the _workers_ for this shortsightedness instead of the government organizations who are about to fuck those people over when they're 70?
Maybe the administrators of the pension accounts and financial planners for these organizations should have done better by the people who are busting their (collective) asses to provide services for you, the taxpayer?
> Why in the ever loving fuck are you blaming the _workers_ for this shortsightedness instead of the government organizations who are about to fuck those people over when they're 70?
Well, we are the ones paying those people's pensions, in the form of taxes, so we're the ones fucking ourselves over if they got too sweet of a deal right?
I am personally not going to get 50-100% of my maximum salary as guaranteed compensation for the rest of my life until I retire - are you? I'm not super enthusiastic about paying taxes for someone else to get a better retirement deal than me, either.
I'm fine with paying government employees what they're worth while they're working - hell, I think most of them deserve a raise. But they also should have defined contribution retirement plans, not defined benefit, like everyone else working in private industry.
> Well, we are the ones paying those people's pensions, in the form of taxes, so we're the ones fucking ourselves over if they got too sweet of a deal right?
And how does this square with this being a democracy ? Or to put it another way: you're also (indirectly, but ...) the ones promising sweet pensions to these people if they would just work. And they worked. Now you want to revoke your part of the bargain ?
Furthermore, if you refuse to pay for their pensions ... do future kids get to refuse to pay for yours ? (either directly, or through devaluing the currency, just in case your answer is that private sector pensions are safe)
But we all know that there's no answer here, so it'll be devaluation. At least that means private and public pensions are equally screwed (I'm leaning socialist, so I like fairness in the sense that people get treated the same).
> And how does this square with this being a democracy ? Or to put it another way: you're also (indirectly, but ...) the ones promising sweet pensions to these people if they would just work. And they worked. Now you want to revoke your part of the bargain ?
So I think this argument actually works against you.
First, nothing can bind future generations. They can always change whatever they want to. In the United States, a future congress can revoke, alter or amend any law passed by a previous congress. So if you want your pensions to be secured, the benefits cannot be guaranteed by faith in future governments!
In this sense, a defined contribution plan is more secure than a defined benefit plan. This is because a defined contribution plan belongs to the recipient as soon as the funds are allocated - even if a future government changes the rules, the money that's already in your 401K is yours!
Consider the alternative - are you saying that future generations are always bound to the decisions of past generations, even though they may not even have been alive or of voting age? If a law is fair and benefits society, that future generation will respect it because it benefits society. If that law is unfair to them they can and absolutely should change that law! How could it be otherwise? As a socialist this should utterly appall you. Do you believe that laws put into place by capitalists and large corporations constitute binding pacts between governments and their citizens, and that any future government that seeks to amend them towards a more equitable balance is now acting unfairly?
If the median income in a nation is $40K, but the median pension given by the state exceeds that income, then who is suffering unfairly if the pension is reduced to be more in line with what the average worker earns? How as a socialist could you justify a pensioner earning more than a productive active worker?
So think of it this way, how would you feel if a socialist government took over and decided that your 401k is fair game for extra taxation? But it's _your_ money, capitalism promised you! "Boohoo", you should have thought of that before entering into a clearly unsustainable pyramid scheme.
Not so useful or interesting in terms of commentary, is it?
The standard shouldn't be that government decisions are set in stone forever, period. The standard should be good policy, in both directions. If a previous government sets a bad policy, a future government should not be bound to it. If it sets a good policy, a future government should uphold it. If a future government decides to be "bad" and tear up everything, no piece of paper will stop them.
> So if you want your pensions to be secured, the benefits cannot be guaranteed by faith in future governments!
It's funny how you see this as a positive ? If people have this attitude, of course the result will be mercantilism, or worse : the hoarding of jobs/companies/markets and the only way to get into a specific jobs is to do whatever "the guild" wants, which I guarantee will include paying pensions.
And if you "go around" the guild, they will either regulate you out of existence or outright physically attack you. Before you say that can't work I'd like to point out that they did this in almost all of Europe for ~1200 years.
And under these conditions, I would understand that way of working.
Such things are the alternative. So, I would very much want people to have faith in government, and that very much means you have to pay up the promises made before.
> Consider the alternative - are you saying that future generations are always bound to the decisions of past generations, even though they may not even have been alive or of voting age? If a law is fair and benefits society, that future generation will respect it because it benefits society.
You mean, paying people for their work what they were promised when they started that work, for example ? Like pensions ?
> How as a socialist could you justify a pensioner earning more than a productive active worker?
I don't understand why this would be a problem for a socialist ?
> Consider the alternative - are you saying that future generations are always bound to the decisions of past generations,
What I don't understand is that as a supposed capitalist alternative you're actually advocating making promises (like pensions), then reneging on them. Your alternative is to lie. Make promises, and exploit people who believe them ...
I guarantee if there is one thing that kills markets faster than anything else it's a loss of trust. You're advocating, unless I'm mistaking, exploiting trust. This is just not going to work.
There's a reason most historical capitalist societies had extreme versions of holding people to their promises. Slavery, debtors' prisons, forced labor, indentured servitude, ... were "solutions" used by past societies to avoid this problem. There was presumably a reason they did this ... do you really want to go back ?
If you are a socialist, you ignored my most important argument :
> If the median income in a nation is $40K, but the median pension given by the state exceeds that income, then who is suffering unfairly if the pension is reduced to be more in line with what the average worker earns?
If government pensions pay out more at retirement than the median worker makes while working, would you agree that under socialism this would be considered unfair to the worker, and overly exploitative for the pensioner?
> If government pensions pay out more at retirement than the median worker makes while working, would you agree that under socialism this would be considered unfair to the worker, and overly exploitative for the pensioner?
No, because, firstly, this isn't true. The government simply has started to pay less. From any individual's perspective, I assure you they don't earn more in retirement than when they were working. If you have heard differently, I assure you that's propaganda.
Secondly, I would simply say that current government employees have the right to be paid the same as their predecessors. Lowering pensions ? No way I'd agree to that as a socialist. No way in hell. But you should raise the conditions for government employees.
> I assure you they don't earn more in retirement than when they were working. If you have heard differently, I assure you that's propaganda.
They earn more than the average worker overall. In California the average government pensioner earns 26% more than the average non retired, currently working worker.
That's too much. As a socialist, I would find it clearly exploitative that a non worker is making more than an active worker. That's completely unjustifiable under socialism.
The point of a pension is to provide an income so a retiree doesn't live in poverty. Paying a pension that exceeds that of a younger worker who is actively working full time completely goes against that.
> That's too much. As a socialist, I would find it clearly exploitative that a non worker is making more than an active worker. That's completely unjustifiable under socialism.
I don't understand where this is coming from. Personally, I am a socialist and I think it's too little.
If I look at it from a capitalist's perspective, I ... also think it's too little.
> Personally, I am a socialist and I think it's too little.
I'm sorry, just to be clear, are you saying that as a socialist, you think a young worker who is actively working and only making $40K a year should pay more to support someone who is making $50K a year but isn't working at all, because $50K is too little?
I think they should both be paid more. In case you don't remember, socialism is about the state just taking control of the means of production, so where the money comes from is quite obvious.
> Well, we are the ones paying those people's pensions,
My dad (retired) was a career public employee. He paid into his pension every month of his entire career. He earned every damn penny he's getting right now.
Statistically speaking, he didn't. What he paid was way lower than the expected vsñue of what he'll get. That's the entire idea of a pyramid pension scheme.
The flip-side of collective bargaining is collective responsibility, I'm afraid.
The federal government saw this coming 30 years ago, moved to a hybrid, mostly-defined-contribution system and (surprise!) is doing fine. Most state and municipal unions fought to keep their defined-benefit plans and now are going to suffer for it.
Huh? As of 2012 "[t]he vast majority of full-time civilian federal workers receive roughly half of their retirement compensation through their defined-benefit pension plans (the rest comes from Social Security)." (https://www.nationalreview.com/corner/private-vs-public-defi...)
That National Review hit piece notwithstanding, in truth defined benefit plans are, technically speaking, the most efficient form of deferred compensation. Lowest overhead with maximum value received by the [average] retiree, which theoretically permits employers to minimize total amount of compensation.
The rub is that the employer needs to fully fund the liabilities as they accrue. Government and unions, however, have been content for state employers to "pay as you go"--use today's contributions to pay yesterday's liabilities. That's a recipe for disaster.
It sucks that we've thrown the baby out with the bath water--swapped pensions for 401(k)s. Defined benefit plans are annuities, and most economists agree that the most efficient retirement savings plan is an annuity. How we pay for that annuity is a different matter altogether. We know that people aren't rational enough to choose to put their retirement savings into an annuity, so it's obvious the employer should do this for them. The only real question is how to structure the premium payments so employers can't cheat (and employees can't be complicit in the cheating).
Reality shows annuities aren’t the most efficient retirement savings plans, otherwise this conversation about underfunded pensions wouldn’t be happening.
No insurance company would sell an annuity for as little as what governments claim they cost. And anytime you get a big pot of money, there will be corruption and cheating.
The most efficient retirement plan is having multiple successful children who are raised to take care of their parents.
Corporate management and worker unions have what I'd call a "healthy" adversarial relationship. Corporations want to pay workers as little as possible, unions want workers to make as much as possible, so hopefully you get a decent compromise.
With public sector unions, especially in smaller cities and states, the relationship is more incestuous and oftentimes the settlements aren't really made in good faith. The politicians desire the political support of the unions they are negotiating with, and figure by the time the pension bomb explodes it will be some other poor sucker's problem. Taxpayers are the ones that get screwed.
Exactly. Not to mention that by the time it gets to the elected official's desk for signature, it's been negotiated between government employees and their senior managers, who are also government employees...
It's basically a deal negotiated by government employees among themselves, and approved by a politician who often needs to maintain favor among these employees.
Add to that the fact that these agreements only lead to a crisis long after the politician is retired (or dead), and it's no wonder these unsustainable deals get approved as a matter of course.
No one busts their ass like government workers! Government jobs are well known for high job security and very few performance based incentives. Not exactly a recipe for hard work.
Like it or not these pensions are already legal obligations of state and local governments. Yell about or at the unions all you want, but if these obligations are not met, get ready for lawsuits and negative consequences for municipal credit ratings. Would you rather pay somewhat higher taxes now to cover pension obligations, or significantly higher taxes later because of the higher muni bond rates your state will have to deal with when the problem worsens (or your state is forced into bankruptcy)?
This is not just a problem of public employees or their unions. You are on the hook for these payments and will remain on the hook even if starting today everyone had a defined-contribution plan. Yes, this is your problem too.
I am not convinced that things are hopeless. If we continue to avoid the problem then eventually it will become unsolvable, but we still have a chance to fix this. Step 1 is finding leaders who "tell it like it is" (not the idiotic version that our president practices, but the version where you give people a clear and honest assessment of the situation they face) and are prepared to make hard decisions that might risk their political aspirations. We might also take a moment to reexamine the seemingly religious devotion some politicians have to cutting taxes and accept the fact that sometimes higher taxes are necessary to prevent even costlier outcomes (in NJ we pay more to repair the damage potholes do to our cars than we would pay in higher taxes to properly maintain our roads -- somehow people have trouble connecting the dots).
Maybe so, but wealthy people seem to like living in high-tax areas like NYC and SF, and I am pretty sure they also like having paved roads, functioning transit systems, and all the other things they would lose if the state had to find a way to meet its obligations without raising taxes. Things are not yet hopeless and if we had politicians who did their jobs and demonstrated competent leadership we could sort out this mess.
> if we had politicians who did their jobs and demonstrated competent leadership we could sort out this mess.
This feels like the crux of the problem, but we've got the politicians we voted for. I'm starting to wonder if its even possible for the average person to vote in the long-term interests of their community against their own short-term interest. Some will... but the majority?
The majority won't because they haven't the luxury of time to understand the consequences of the politicians being voted into office. Your average person doesn't actually understand the differences between a Republican and a Democrat. They assume the label that works for them socially and run with their herd. Both of which are aimed off the cliff by the inane policy makers elected on popularity over policy. This system works and the average person is too short sighted to see the cliff, at no fault of their own.
For the most part the average citizens do everything they should and a bit more. Sadly resources are mismanaged and citizens carry the burden because our system is collectively failing to stop bad actors at every stop.
Every good solution ive heard comes at the expense of higher taxes especially on rent seekers and high income/ wealthy individuals and families. Ignoring the political suicide of going after those classes, the entire proposal is a catch 22. How can these victims be expected to trust a politician when they've been taken advantage of by politicians their whole lives?
And all that money they saved increased demand for real estate, so not only does the younger generation get stuck with the bill for everyone who found a free lunch, but the younger generation now has to pay more for real estate because there’s less supply.
Comparing stock variables (Pension liability shortfall) vs. flow variables (GDP, a rate of annual output) is a mistake that peeves me to no end.
That said, the pension shortfall is a disaster playing out in slow motion. We're just waiting for the hard cash constraints to bite - when they do it's not going to be pretty.
But it's not a real comparison. It's just contextualizing.
If I say that a brachiosaurus was the size of a house, I'm not saying that your current dwelling is comparable to a 65-million-year-old pile of death and dust.
Huge numbers are essentially meaningless to the human mind. But "all economic output of Japan in a year" is something that most people can wrap their heads around a little more easily. We know it's a fairly rich, industrialized nation, and so therefore that's a crapton of money.
We all know they meant "in a year", but the article isn't explicit about it -- it just says
>> the output of the world’s third-largest economy
Not "annual", not even "GDP". I bet a lot of readers came away thinking "a shortfall as big as Japan".
And maybe not just lay readers -- a "smart but not knowledgeable" reader might try to convert the stock into a flow or vice versa by assuming some interest rate and doing a back-of-the-envelope net present calculation and be off from the real numbers by an order of magnitude.
His argument isn't about conception of scale, it's about a fallacy of units. The analogy would be comparing the annualized diameter increase of a tree to the width of CO2 molecules in a conversation about inputs to environmental policies. The CO2 molecue simply doesn't grow. You have to compare the rate of CO2 release.
GDP comparisons are worthless, but cash flow to debt is an important metric. If it was compared to cash inflows of the actual government entity it would be interesting (and depressing).
In 2005 (pre bankruptcy) each GM car had $1525 worth of health care costs and $675 worth of pension cost built into the price.
So $2200 was being spent on benefits for a population that had 1 worker for every 2.5 retirees.
In California, School Districts are increasing pension contributions from 8 percent of their payroll in 2013 to 19 percent in 2020. This is already creating havoc as teachers unions are threatening to strike unless they get pay increases because districts were saving money to prepare themselves for the 2020 budget math!
The choice is raising taxes, reducing spending elsewhere, or demanding workers give up the pensions they were promised. Somehow I doubt anyone is going to agree to pay more in taxes to cover pensions in their state or city. After all, why should the government keep its promises (especially if it means we have to pay for it)?
There is also simple attentuation. Workers have to pay more and for longer to be vested. They will receive a bit less, plans will be a little less generous. It has already happened in the NY teacher pension system. The sky isn't falling.
Does stability in retirement add enough value to society and the economy for it to be a good investment? I've been an adult less than a decade, so without a return why should I pay for the promises of my predecessors? So many questions.
In my view, yes, for at least a couple of reasons. First, because people survive whether you want them to or not, and driving old people into poverty will end up burdening you in some other way, probably worse. We pay a lot for not having a decent safety net.
Second, old people vote. If you drive a political wedge between the young and old, I can't say what will happen, but it won't involve the young ending up on top.
Third, retirees are a huge consumer group, and also a non-obvious but important source of support for families.
In fact, telling young people that they will see nothing of social security is a propaganda position intended to drive that wedge.
> First, because people survive whether you want them to or not, and driving old people into poverty will end up burdening you in some other way, probably worse. We pay a lot for not having a decent safety net.
You're falsely trying to paint the choice as only between driving retirees into poverty and paying the full pension.
I certainly won't be receiving 60-100% of my maximum salary forever after I retire, and I won't need nearly that much in order to not be in poverty. And IMO it borders on unjust to underfund a pension with tax dollars while those workers are working, then force younger workers that weren't even old enough to vote when those benefits were created to now shoulder the burden.
Why can't we cut pensions, without eliminating them? Why can't the state switch from defined benefit to defined contribution plans, like practically ever other non-government employee gets?
> If you drive a political wedge between the young and old, I can't say what will happen, but it won't involve the young ending up on top.
This is true only up to a point. The old aren't exactly going to be the ones who will win if the economy collapses or the country descends into chaos, are they?
Also young people can just leave if the economy is just feeding on them.
I left the UK partly because between insane housing prices and paying for the triple-locked pensions of the elderly - the economy has little to offer young people and there are better opportunities elsewhere.
I actually think the answer is simpler and more immediate than that. The government made a promise. If the government does not keep that promise, can it be trusted with other obligations?
In fact, this problem of unfunded pensions has impacted municipal credit ratings and wound up costing taxpayers more in higher interest rates than they would have had to pay in higher taxes to stabilize the pension funds.
It makes no difference, because the promise was already made and now you have to choose between (a) destroying your government's credit rating or (b) making good on the promise. Complain all you want, but that's just the situation we find ourselves in.
In the short term, sure. In the longer term, when increased taxes and decreased services impact the average person, these promises will be renegotiated.
Because the government existed before you and will exist after you’re gone. It exists (in part) to enable continuity of society, and that is the compact you agree to by remaining a resident/citizen.
Promise, in this case, is a nicer version of the word debt. The government that made the promise is just an abstraction or buffer for the people making the promises, the people voting for them, and the people benefiting from those decisions. Note how current stakeholders (me and you) had no say on a decision that they would be (potentially) responsible for.
Thomas Jefferson's view of deficit finance was that one generation has no right to impose its debts on the next. He would have refused deficit spending that would not be completely paid back within 19 years (roughly, a generation).
I don't think many people listened to him on that. Here we are.
I think we do have the right to ask this question. We should have the option of denying that the previous generation ever had the right to impose this upon us.
At the very least, we should learn from this, recognize these types of short-sighted promises for what they are, and reject them when we see them. This is one big way we can be better than our forefathers.
> The government made a promise. If the government does not keep that promise, can it be trusted with other obligations?
This is way too absolute and simplistic. Past governments can make bad policy. Past governments can be corrupt or make decisions based on personal interest against the public or incomplete or bad information at the time. The obligation of future governments has to be balanced with whether the past government instituted good policy or not.
But even when a city says to unionized workers, you can keep your pension but new hires get moved to a 401k, the unions say no. See San Jose as an example
Well, what exactly do you expect? Unions do not like having some members receive wildly different benefits from others because that breaks their unity. Gradual phase-ins are needed if you are going to move to a defined-contribution plan; see e.g. the introduction of 401k plans for NYC subway workers, which has been slow and mostly agreeable to the union.
The other thing to keep in mind is that the problem is not merely that future pension obligations for new hires might not be funded. In some cases the problem is immediate or very near-term -- pension funds have become so depleted in some states and cities that retirees may not receive their checks, and in some cases people have been forced to accept less than they were promised (see the article for examples).
> But even when a city says to unionized workers, you can keep your pension but new hires get moved to a 401k, the unions say no.
Well, yeah, because then 5 years down the road, when the city tries to shift pension contributions from the city to covered employees on the defined benefit plan, newer employees have no incentive to support the older employees and the employer can split the union. Which is why unions resist anything that gives different covered employees radically different contract interests.
I feel wary of doing this because I feel this is what's going to happen with my IRAs. I was promised that if I pay my taxes now I don't have to pay them when I'm old, but supposed the next generation decides they want to change the rules. Do I just pound sand and give up?
Pensioners were given a promise and now we're changing the rules. It feels wrong even if the promise was unrealistic.
Just for clarification... you described a Roth. Usually, when someone says "IRA" without further qualification it would be assumed to be a traditional.
> Pensioners were given a promise and now we're changing the rules.
There is a slight difference between the two situations you describe. That being that the promises being made to the unions were not being done by disinterested parties. Public services unions are notorious for being some of the largest donors to state and local candidates. The negotiators on the management side of the table are deeply beholden to the unions and have no personal interest in paying the obligations they are agreeing to, it's all put on the tax payer.
Pensioners voted for free money at a cost to future generations, unsurprisingly future generations we're not interested in giving greedy old timers free money.
Yes! Some city or state is going to go bankrupt because of this, and the people affected are going to sue. It will take at least a decade to work up to the Supreme Court, who will find (no matter WHAT the liberal/conservative makeup at the time) that, surprise, surprise, the government is NOT legally obligated to pay out the benefits they said they would. Various governments will try to implement various forms of austerity to make it work, and former employees are just going to have to suck it up.
Don't worry though. This exact same thing is also happening to Social Security, which will crash around the same time, or shortly after, so everyone working now will get the shaft.
Of course, the latest date I've seen (2038) is almost exactly when I should have been eligible to start drawing on it.
Well, let's just say that somehow what you are saying is correct. How comfortable would you be investing in a long-term muni bond after that? If you were a contractor, how would you feel about working on a long-term project for a state or local government? Who would want to work for the government when there is no way to trust that any of the benefits will materialized (other than the salary; then again, who knows?)
It's not just former employees that will suffer. Everyone suffers when states have to pay higher interest rates on their bonds because of poor credit ratings (that's what bankruptcy does to a state) or have to pay more for workers and contractors. Everyone will have to pay higher taxes and everyone will receive less from the government.
I cannot understand the logic of not making good on government obligations. You can take the position that the government should stop promising pensions, but how can anyone think it is a good idea for the government to fail to pay for the pensions it already promised people (or, frankly, any other promise the government made)?
This is exactly why people have been screaming about this problem for a couple of decades.
It is going to be HUGE and do incredible damage. Retirees will be hurt catastrophically, costs of government borrowing will skyrocket, programs will be cut massively, workers will abandon government.
The issue is that the costs of meeting the prior obligations will be completely impossible. States, cities, and school districts will go bankrupt, massive numbers of people will be fired, and taxes will go up while service goes down.
Unfortunately the politics prevent a fix today and prevented a fix 10 or 20 years ago when it would have been much cheaper. The fix will happen in 10 to 20 years and it's going to be horrific.
Happened in the private sector. Most millennials don't trust pensions and prefer 401k. As you are in control of the money and there isn't much that could be changed unfavorably in 50 years.
I am not sure millennials don't trust pensions; I think we never had the choice. It is also wrong to assume you are in control of your 401k, since for most people a 401k will be invested in mutual funds managed by the same businesses that manage pension funds. Some of those funds have absurd expense ratios that erode retirement savings.
A government changing its mind about pensions could easily change its mind about the favorable tax treatment of 401ks. Or go even further and follow HN's exhortations to implement a wealth tax. Upper-middle-class retirement funds are a huge component of inequality; reducing that can only be good, right?
You pay tax when withdrawing funds from 401k. Worst case they'll remove the 401k and force everyone to migrate to a Roth IRA. Which is the same as the status quo...aka not that bad.
As for Roth IRA. I don't trust the government to honor their end of the deal. I can see them taxing withdrawals for the top 10% in the future.
> Some city or state is going to go bankrupt because of this,
States cannot go bankrupt, without a change to federal law. Cities can and have, and pensions have already been addressed in that context. It's not a new question.
> and the people affected are going to sue. It will take at least a decade to work up to the Supreme Court, who will find (no matter WHAT the liberal/conservative makeup at the time) that, surprise, surprise, the government is NOT legally obligated to pay out the benefits they said they would.
It's already been established that pensions can be cut in bankruptcy, so, yeah, that's not even a question.
> Various governments will try to implement various forms of austerity to make it work,
They already are to prevent running into the major crises (e.g., recent pension funding requirements reforms in California.)
> Don't worry though. This exact same thing is also happening to Social Security, which will crash around the same time, or shortly after, so everyone working now will get the shaft.
Social Security won't crash; even with scenarios projecting Trust Fund exhaustion it still ends up paying at worst something like 2/3 of eligible benefits out or current revenues out to the limit of projections.
> It's already been established that pensions can be cut in bankruptcy, so, yeah, that's not even a question.
Minor nitpick, but it’s in Illinois’ state constitution that pensions cannot be reduced. Republicans want to change the constitution to remove this rule, but Illinois is an overwhelmingly Democratic state so that’s never going to happen. It will be interesting to see how all of this plays out.
> Minor nitpick, but it’s in Illinois’ state constitution that pensions cannot be reduced.
Major nitpick, but in the event of municipal bankruptcy (the context of the store you responded too), federal bankruptcy law trumps state law—including the state constitution—because Supremacy Clause. The bankrupt entity doesn't cut pensions, the bankruptcy court does.
A major problem is that this is a case of I'll be gone, you'll be gone.
The union leaders and the politicians - typically in their 50 to 70s - who made the promises will be dead by the time the 25 year old new hires try to collect their pensions at 55 or 65. The incentives are all sorts of screwed up and it's very difficult to create a healthy set of constraints for this kind of bargaining.
> ... create a healthy set of constraints for this kind of bargaining.
They should simply put the burden of new obligations (debt or pension guarantees) on individuals rather than on the city. If you live in a municipality when they take on a bond for a stadium, or agree to pension payments, then you pay those debts regardless of where you have moved to. Or put the obligations on property, so people have an interest in not burdening themselves or their investments.
QE is not something municipal governments can do, so it is irrelevant to this discussion. Since you brought it up, it is worth mentioning that QE actually contributed to the pension shortfall because pension funds suffer when interest rates are low.
Quantitative easing was not for banks. Also, the bailouts to which you refer were not free money, they were loans with low interest rates that have been paid back.
The pensions don't have enough money so easy access to debt does nothing to help them solve that problem.
> Somehow I doubt anyone is going to agree to pay more in taxes to cover pensions in their state or city. After all, why should the government keep its promises (especially if it means we have to pay for it)?
I agree with it but then again I'm not opposed to paying taxes. Why shouldn't we provide for the retirement of our workforce?
Boomers and their parents took out wayyy more than they put in. Whenever it has been time to pass the cup around for other groups, they haven't been what I would call generous. Look at the funding difference between Medicare and Medicaid if you want a feel for it.
Given all of that, I'm not too excited about propping-up their pension shortfalls.
I agree with you. I think it's a bit dangerous to start splitting boomers out though. All it's going to do is create division between young and old resulting in defunding for both groups.
Between this, Iraq/Afghanistan, China's ascent, and global warming, defunding (by circumstance rather than choice) is probably inevitable at this point.
Apparently it’s common for police to stack their final few years of work with excessive overtime to inflate their pensions for the rest of their lives. I wonder how much that contributes to budget problems. It certainly seems to be something that could throw off projections. http://www.courant.com/opinion/editorials/hc-ed-police-overt...
It's nice for the previous generations that got something out of nothing.
Too bad that "nothing" is my generation and we'll be putting our "contributions" into a pit that will give us actually nothing in return when it's time for us to retire.
As I get older I realize why people say if you're not a liberal at 20, you have no heart but if you are not a conservative by 30, you have no brain (or something to that effect).
The previous generations are far more conservative than our generation and they are still all for these sort of entitlements. This is not a liberal vs conservative argument, this is a "fuck you, I got mine" argument from the beneficiaries of these pensions currently
> It's nice for the previous generations that got something out of nothing.
The same generation that mindlessly claims that millennials are spoiled while we field $10K+ medical bills for things like childbirth when they cost <$1K for them. I haven't seen any data to back this up but I suspect they're also far higher in diabetes diagnoses which is another reason our care costs so much more.
>As I get older I realize why people say if you're not a liberal at 20, you have no heart but if you are not a conservative by 30, you have no brain (or something to that effect).
Being liberal and conservative is what got us here in the first place. Expansion of political ideas is only now becoming popular as this generation really feels the effects of wishy-washy American liberalism and conservatism that favors the already extremely wealthy.
Or from the perspective of someone who has to run for election:
Candidate A says, "We need to cut benefits now to make sure the pension has enough money in the future." Candidate B says, "No we don't." Everyone votes for Candidate B.
It's not like we accidentally elected people who don't value the long term. It's that voters don't value the long term when there's real short term money at stake.
Pensioners, union members, and their families always vote for B. The people who care about the long term hardly form a solid block to elect the candidate A.
Just cutting benefits misses the point, how is austerity a long-term solution?
The US has a massive problem with the perception of "government usefulness", heck you've got whole political wings solely trying to appeal to "the only good government is no government" mentalities.
As a result, barely anybody wants to pay taxes for anything, in their extremely egotistical and narrow-sighted definition of "freedom".
Cutting existing benefits is the only way to avoid bankruptcy in many states and cities. The long term solution is to switch to a defined contribution plan instead of defined benefits.
The reason why many on the right are wary of government programs is because they’ve watched the government horribly mismanage their tax money over and over and over again. It’s not necessarily because politicians and bureaucrats are necessarily stupid or evil, it’s because the government is generally not incentivized to do a good job, since they don’t face competitive pressure like businesses in the private market.
> the government is generally not incentivized to do a good job, since they don’t face competitive pressure like businesses in the private market.
Isn't that exactly the kind of mindset that facilitated this whole situation in the very first place?
"Government can't handle money, that's why we gotta privatize everything".
And if that would be true, how come it wasn't a private business that took us the moon, with all the resulting auxiliary inventions, but the combined effort of a whole nation in education and research [0]?
"A better job" isn't always the one that "makes more money", some ventures don't need to be directly financially profitable, in some fields introducing a profit-incentive can have rather negative consequences (Education, Healthcare) and in others, it's just perverse (for-profit prisons).
Would any private company have taken the risk, of flying to the moon, back then? Hell no, because there was literally no money in it back then, it was all just a big venture of "wasting money".
That's why I don't think literally everything needs to be "profitable", we can't eat money and money doesn't make anybody a better person.
It's also friggin weird how on issues like this there's never "enough money", but when it's about tax-cuts for massive corporations, which is, in essence, nothing but handing out free money to private businesses, then there seems to be always plenty of enough money to justify it.
1. So, what tangible benefits did you get from the country going to the moon? How has it affected your everyday life? Sure, we have more space based stuff, but most of those things don't contribute anything to our well-being. No new mining operations on the moon for new resources. Nothing. Sure, maybe in the very long term it will have a return, but now, nothing. All the auxiliary inventions from it were already possible without going to the moon itself, just continuing space exploration.
2. And the government was facing competition like a private business. Soviet Russia provided the competition. If Russia didn't, there's no reason for the US to. In that way, even the moon landings were operating capitalistically, just on a higher level. Most of the resulting inventions from it anyways were for bettering weapons of war than anything truly substantial for the people. So, we went to the moon, cool.
I do not think it is quite as simple as that. Pension funds often invest in bonds because they provide reliable cash flow, but for the past 30 years bond yields have been falling, to the point where 3% on a 10-year treasury is considered big news today (it was much lower just a year ago). For the past 10 years interest rates have been kept artificially low as part of the response to the great recession, but pension funds have still had to make their payments.
Retirees are also living longer thanks to advances in healthcare. It would not have been easy to predict those longer lifespans decades ago when they were first promised their pensions, but the pension still has to keep paying as long as they live.
None of this is to say that governments have no share in the blame for this. Failing to take action to stabilize these funds, or worse, cutting taxes when the money could have been used to help keep the funds solvent, was a bad decision too many states made.
Both US Democracy and CEOs at large companies both have an adverse interest in short-term success, even at the cost of the long term.
This is why in both cases out-sourcing/privatization is popular. It shows a short term benefit, the long term is someone else's problem.
How can we expect politicians to care about the pension fund if the problem isn't going to materialize for tens of years pass the end of their term limit?
And if they were a "hero" and increased taxes to try and tackle it, they'd only get voted out next election, so someone else can come in, undo it, then spend all the savings.
In a theoretical Parliamentary Democracy, the "upper house," with lifetime terms would exist primarily for this function, consider the long term interests over the short term point-scoring. But no country that I know of can be described as having an effective upper house.
"And if they were a "hero" and increased taxes to try and tackle it, they'd only get voted out next election, so someone else can come in, undo it, then spend all the savings."
George H. Bush is one of the few important fiscal conservatives elected in my lifetime, and he is despised for it, especially by people who like to claim they are fiscal conservatives.
Overal taxation in the U.S. is low compared to other OECD countries [1]. We, as a nation, decided that low taxes was the goal. As a result infrastructure is poor, toll roads are increasing, privatization of prisons, intelligence gathering, war, etc. are rising too. Yet Americans falsely believe they are overtaxed. The situation is easy to fix in economic terms but not in political terms. The road to an Ayn Randian paradise in which everyone fends for themselves will lead us to ruin.
Corporations have largely shunted the responsibility for retirement savings onto individual workers. Now said workers have no pensions and have uncertain retirements. Instead of asking why they have no pensions they seek to equalize status by falsely believing we can't afford any sort of pension.
As a nation we need to seriously rethink the role and purpose of government and how taxation is a part of the proper functioning of government.
Taxes being lower or higher are not what determine size of pension hole. Greece and Italy have higher taxes and still have a pretty big pension hole. The problem is public sector employees are promised pensions higher than county/city can afford. Unlike a corporation which has to balance its budget, city officials go beyond means with their promises in order to get elected and leave the problem for the next set. This is one of the main reasons why many in this country prefer a small government vs big.
> The problem is public sector employees are promised pensions higher than county/city can afford.
Precisely. But in fact, it's worse:
The people doing the promising and those receiving the benefits are in fact the same.
Who makes the promises? Local and state government employees.
Who receives the benefits? Local and state government employees.
Who pays for them? Us ordinary taxpayers who can only dream of such sweet defined-benefit pension deals.
Yet some folks see this as reason we should pay even higher taxes, and sacrifice our own pensions, which are already lower and less secure than these privileged government pensioners.
I'm a public employee. I don't cause the government to write its contract with me to be the way it is. It's negotiated between my union and the state Department of Education. It is then voted on by the legislative branch and signed by the governor. It's a long process. At no point am I or my fellow workers the ones making the promises.
It costs money to run government. Employees need to be paid. We have had lay offs when budgets were constrained. The funding per pupil has steadily decreased the last 30 years and hence tuition has similarly increased. Our salaries relative to purchasing power has decreased over this time.
> I don't cause the government to write its contract with me to be the way it is. It's negotiated between my union and the state Department of Education.
Exactly. So one group of state government employees (your state's DoE) meets another group of state government employees (your union) and decide to give each other an incredible defined-benefit pension deal that nobody outside of government can even dream of.
State government employees are giving each other dream pension plans, that are unsustainable and wildly over-budget even if they were well-managed (which generally they are not).
You know why nobody outside government has defined benefit pensions? Because they were proven to be unsustainable decades ago. Yet government employees keep conferring them upon themselves.
Then, when the inevitable deficit arises, as any economist would predict, you have a great solution: me and my peers in the private sectors should pay more taxes to bankroll your party!
I hope this slow-motion trainwreck would be a wakeup call, but either way, know this: there is no amount of taxes that will prop up your unsustainable pension plans. State and local governments wasted billions mismanaging these funds, that are unsustainable even under the best management.
Any more taxes you collect will just fuel this fire for a couple more years, before the inevitable next crisis arises.
You can't fix fiscal irresponsibility with more money, because all that money (and no accountability) is what created fiscal irresponsibility in the first place!
Your state government needs to start applying the same basic fiscal responsibility that every single business in your state is adhering to.
Pensions are not inherently unsustainable. They exist in the private sector in other countries and there are still some well funded private sector pensions in the U.S. They don't work well if they are not properly funded. Corporations got rid of pensions not because the concept is inherently unsustainable but because it's more profitable to do away with them.
My pension plan is not a good one. You characterization of one group of state employees giving a dream set of benefits to another is not based in reality. Administration does not negotiate strongly with us the contract won't be approved by the legislature or signed by the governor. Our wages relative to buying power has not been going up or remaining steady.
If pensions are inherently unsustainable then you must conclude that it is unsustainable for a society to care for itself.
> If pensions are inherently unsustainable then you must conclude that it is unsustainable for a society to care for itself.
How do you figure?
It is unsustainable for us to support all people over e.g. 60. But we can support the 5% over 60 who really need the support and can't look after themselves.
Supporting that 5% who really need it would effectively be a means tested pension system. The point of a pension (retirement savings) is to prevent masses of destitute elders. The goal is to have a society in which masses of elderly are not left without means to live at a reasonable standard. That’s the purpose of a pension system. If the goal can be effectively accomplished in another way then I support it. I’m not personally tied to the notion of a pension system.
Defined Cost pensions are sustainable. That's what we in the private sector have: 401k and Roth.
Defined Benefit pensions aren't sustainable. That's why nobody outside of government has them, and the ones sponsored by the government suffer huge deficits and are slowly but surely edging towards bankruptcy.
The teachers union is a powerful lobby in California. By paying dues to your union you are supporting their efforts to lobby for the unfunded pensions.
Teacher unions are also responsible for keeping bad teachers employeed. See NYC rubber rooms.
Is there no level of personal responsibility involved? If the whole of my retirement was tied up in the promises of one entity... I have to imagine I'd be deeply concerned when my pension is underfunded. And underfunding is not new, there has been plenty of time to adjust on a personal level.
The people doing the promising are the same as those receiving the benefits.
That's the key point. Budget broken so we can't pay for something? Let's talk about putting money in. Systemic problem where the people making decisions about spending the money are the same people receiving benefits? You can't write a check to fix that. This isn't a traditional "how much do we tax and what do we spend our money on?" public policy discussion.
Systemic problems are another kind of problem entirely. They deserve and require non-partisan attention and discussion.
> Also notice that some of the worst problems are in locations that already have very high local and state taxes, such as California.
California has, along the US states, a fairly moderate pension issue measured per capita or per GDP. It has big absolute numbers, as with nearly every other issue, because it's a very big state.
> A more important question is how much room to manoeuvre does California have?
That's very hard to say.
> If California increases taxes by 5% to fix the issue how many businesses and highly paid employees will leave?
Even if it was a simple as taxes being a single number where distribution of the taxes doesn't matter, there's no consensus on the average effect of increases. And, in reality the distribution probably matters intensely.
(And, of course, taxes aren't the only lever; maybe California instead radically cuts back on mass incarceration; to the extent that California has less room to maneuver in taxes it has more on spending, which in some ways is better for this purpose—spending cuts tend to also inherently reduce the rate at which the problem is made worse, before you even consider how the savings are applied. Either spending or tax, though, may take ballot action or legislative supermajority, because much of State spending in CA is programmed by Constitution/ballot measure, and tax increases can't be done with a simple legislative majority.)
In some specific cases it's actually quite clear that specific tax increases drove out a large number of high-income earners and were thus a net loss. See for example Rhode Island's Millionaire Exodus: http://theluxuryhub.com/the-tax-factor-in-rhode-islands-exod...
Yes, a few, but those cases aren't really useful for answering quantitative questions about general tax level changes and their effects on tax base, because the only time the effects are even remotely clear (and it's telling that your one example is an article whose lead paragraph says “There could be several reasons for this out-migration, but one possible reason that finds support is estate tax”) tend to be fairly extreme cases of fairly targeted taxes, where there is a clear visible link between the change in policy and the change in behavior.
Pension holes mostly formed because interest rates dropped. Higher interest rates mean less money can be paid in to fund a pension today, since it will grow faster.
The critical error that pension providers made was to buy equities and 'alternative' investments instead of bonds. Had they bought bonds, their assets would have matched their liabilities. Instead, they assumed riskier investments would grow faster, effectively making pension promises cheaper.
Following the financial crisis, rates were cut aggressively, making bond prices and the present value of pension liabilities soar. IMO this is an under-appreciated facet of the financial crisis that's still waiting to bite us.
Perhaps people feel overtaxed, not in absolute terms, but relative to the services provided? The US Gov collected approximately 3.3T in revenue in FY2016--more than $10,000 for every person in the country. By comparison, the Netherlands collected 255B Euros from a population of 17M, or about $17k USD per person (2016 figure, according to OECD statistics). Clearly, a much higher number at the federal level, but they have a much lower average provincial tax (~$1,500) compared to the average state tax in the US, which varies widely, but averages out to about $4,800, bringing the totals to ~$14,800/person in the US, vs ~$18,500 in the Netherlands. Yes, the Dutch pay a 25% premium, but in my opinion they get a good ROI for their tax dollars. I think the issue of ROI is a major barrier to increasing tax rates in the US.
Yes, clearly the return on services and government investment is quite poor in the U.S. It's a situation in which people reasonably believe that paying more in taxes is throwing money at the problem. This is especially so when one of the major parties actively seeks to prove that government is incompetent.
A great comment. Usually the US state taxation is ignored when making comparisons.
You need to go further however, as the vast budget deficit is ultimately an inflationary tax on the US people (we'll follow the Japan scenario, and debase the dollar to deal with it over time, hammering the standard of living). You can see that represented by the dramatic damage to the US dollar during the Bush deficit years, which simultaneously sent the dollar plunging, commodities soaring and all other nation GDP figures soaring (when priced in dollars).
Total spending is about $7.1 trillion, between Federal + State + Local. What kind of return are Americans getting for their $22,000(!) per year? An absolutely horrendous return, that's what.
The US state + local spending is like an entire extra Federal Government stapled on.
I'm not concerned with slashing spending as some are, I'm overwhelmingly concerned about using that spending effectively instead. There's vast progress to be had in focusing just on that.
That is not the issue this article is talking about. Public pension spending in the US is not especially low compared to the rest of the OECD [1]; as a portion of GDP it's larger than Norway or the Netherlands, which have much higher taxes.
The issue is that those pensions have been comically mismanaged; edit: and were not sustainable in the first place
Defined-benefit pensions are economically bankrupt when lifespan keeps increasing. This has been known for decades[1] and is the reason why none of us reading this have a DB pension, except those lucky few state employees who got a sweetheart deal all those years ago.
Of course, the fact these pensions were managed by state government (read: mismanaged) only accelerated the inevitable crisis.
Public sector pensions are deficits and eventual bankruptcy are the result of greed and politics and not taxation.
chicago is a poster child for the corruption that has created a system which will bankrupt in three years [1]. It was never sustainable but its continued expansion kept politicians in office. just look at the numbers in the story I linked, what reasonable group of people would have ever signed off on this? Chicago isn't alone. Its rampant. six figure retirements? no public service job warrants that.
and it isn't just the public sector employees, there are story after story of city bureaucrats making a quarter million or more and that is just up front money. simply put, they control the piggy bank and they are willing to loot it for gains today because they don't plan to be in office when the bill comes due
I'm always dismayed here and elsewhere to see everyone assuming that collection is the problem, not the dispensing and management. If someone proves incapable of proper budgeting, surely it is foolish to want them to have more money? Always sad that it's everyone but the policy and budget makers being blamed for the failures of policy and budget making. You can argue an honest politician can't survive, but you shouldn't shift blame.
It seems like some feel it's a catch 22, that citizens don't want to pay for things yet they want things. But in reality, those clamoring for the improvements and government assistance are rarely those that don't want to pay and/or recognize government fallacies wrt spending. If you want to tackle the problems, you need to first be honest with where they lie...and not having enough money is not where the problems lie.
I agree that it's largely a crisis of leadership. Both major parties are to blame. Kicking the can down the road, so to speak, has proved politically rewarding. I think that we, as a people, need to stop thinking that taxation is inherently bad. Taxation with incompetent governance is inherently bad. Taxation with little in return is bad. But taxation itself is not bad. Nor are we overtaxed in absolute terms. We are overtaxed in terms of return from government.
I certainly don't advocate throwing money at the situation. I advocate that as a nation we take a step back on reassess what our views on government are. We've largely bought into the false beliefs that government is always incompetent, government regulation is inherently bad, and taxation is bad. I don't see how to get out of the mess we are in. These are structural problems in the nation and I think secession is going to occur in the next 50 years or so.
> I don't see how to get out of the mess we are in.
Gotta start at the top. Transparency and clarity of spending coupled with simplification of the tax code. In the meantime, deference to smaller regions can help (but not on everything) where accountability is more real.
> These are structural problems in the nation and I think secession is going to occur in the next 50 years or so.
Nah, apathy wins in these situations where boats are not rocked significantly on either side.
As someone who supports higher taxation, I've come around to the idea that liberals and conservatives are largely talking past each other on this point. Yes, our taxes are too low (if we want to have the kind of welfare state Sweden or Germany have). Yes, our public sector is particularly inefficient, compared to Sweden or Germany (or France or Canada).
In my experience your average voter who opposes higher taxes isn't a Randian. Rather, they feel like they're not getting enough in return for what they pay in taxes. (And when you look at data about how we spend more to get less in education, transit, etc., turns out they're right!)
> our taxes are too low [...] our public sector is particularly inefficient
Right. You cannot begin fixing the first problem in a democracy until you begin fixing the second. The solutions cannot happen in parallel either. So we either need to better prioritize our complaints or accept that attempts to fix the first problem is often just flushing people's money that they may need. Perfection is not a requirement, just some level of mediocrity could be enough to restore some trust.
There are political choices behind the decline in infrastructure.
It costs NYC $2.1B per mile to build the Second Ave subway while in Europe it costs $200-500M per mile. There's California High Speed Rail, and then there's just the cost to build a condo in San Francisco (see the "historic" laundromat in The Mission).
You have interlocking legislation, many reasons and opportunities to sue, esoteric work rules. Regardless of the validity of each element the structure as a whole is patently absurd and abhorrent.
Then you have government spending. A university does not need much beyond some blackboards and some professors to teach most everything from Philosophy to French to Advanced Data Structures to Topology. Certain PhDs need more equipment but essentially all the expensive equipment should be paid for by research grants or contracts.
Over the past decades more and more classes are taught by adjuncts at Starbucks level wages. Meanwhile the percentage of staff and spending on administrative functions has climbed dramatically. Adjusting for inflation, from 1947 to 1995, overall university spending increased 148 percent. Administrative spending, though, increased by a whopping 235 percent. Instructional spending, by contrast, increased only 128 percent, 20 points less than the overall rate of spending increase.
Obama promised to invest in "shovel ready jobs". There was a backlash because so much money was being spent on construction and thus, due to the current makeup of construction workers, the vast majority of money would go to men. Spending was adjusted to include other projects so that the gender balance of spending would be more palatable.
So to get $1 in new infrastructure spending you need an additional $1 in net new other government services. Or possibly much more than $1, depending on the various worker populations. This in an environment where you're getting only 25% to 10% of your initial money's worth.
So $1 in net new infrastructure costs $20 or more.
> As a result infrastructure is poor, toll roads are increasing, privatization of prisons, intelligence gathering, war, etc. are rising too.
I wouldn't bundle military expenditure with the rest of public spending. Our military budget currently stands at a staggering $639bn (that's billion) for FY2019.
In fact, there's a good argument that if we diverted some of these enormous funds to invest in other areas, those problems you mentioned (infrastructure, etc) would be fixed.
> The situation is easy to fix in economic terms but not in political terms.
The article is about defined-benefit pensions. Nobody has those anymore, not in the US. This is a large group of privileged individuals, who years ago got themselves a sweetheart deal as employees of the state. It's basically another case of the previous generation mandating extremely comfortable benefits for themselves, and passing the bill to the next generation.
These are people who worked for the government their entire lives. They may not be rich, but they were generally comfortable, and certainly not the neediest part of the population. They can stand a modest cut to their pensions.
Otherwise, your argument is that all of us should pay substantially higher taxes to bankroll these lucky few individuals who got themselves a sweetheart deal thanks to their affiliation with state and local government. In most places, you'd call that "corruption".
You could fix infrastructure by slashing the US military down to a reasonable size (~2.5% of GDP), there are no other large problems you can fix with that money. The scale of the entitlement problem, healthcare cost problem, etc. is far beyond anything that $150b-$200b per year will solve long-term.
I have no interest in seeing Chicago fix its pension problems by using funding taken from the US military. Chicago made its bed by intentionally, dramatically over-promising, it gets to sleep in that bed. National high speed rail? That would get my vote, so to speak.
We could throw some money at the university cost problem. However that's not lacking funding at all. In fact it has far too much funding, we need to deprive it of the federal slush money and legally mandate how funds can be spent (ie restrict admin spending). It's a massive theft cartel run by the admins at the universities, they're the ones that have universally benefitted by perpetually raising the cost. You can see that represented in the charts comparing the extreme expansion of admin cost & employment at universities, vs the employment of eg professors, over 30 years.
> I have no interest in seeing Chicago fix its pension problems by using funding taken from the US military. Chicago made its bed by intentionally, dramatically over-promising, it gets to sleep in that bed.
Taxpayer money should be not be used to fix any of these over-promised pension problems, and certainly federal tax money should not bail out corrupt, irresponsible local governments.
> Instead of asking why they have no pensions they seek to equalize status by falsely believing we can't afford any sort of pension.
More accurately: we can't afford the pensions we've promised with the taxes we're willing to pay. It's not a normative argument but a descriptive one.
And within the American free market, there is little incentive for people to pay more taxes to close that gap. Why pay more taxes to Illinois--and not get any increased public services from those taxes, because the money is going to people who have already retired--when you can move to Tennessee or Texas and pay less?
I believe at some point in time California and other wealthy states will want to secede. They are subsidizing the poorer states and at some point they may question the benefits of the union.
> Corporations have largely shunted the responsibility for retirement savings onto individual workers. Now said workers have no pensions and have uncertain retirements. Instead of asking why they have no pensions they seek to equalize status by falsely believing we can't afford any sort of pension.
Aren't you ignoring Social Security? For example, average Social Security monthly payments appear to be around $1400/month [1]. Spain, as an example of a high-tax, cradle-to-grave care system, provides pensions that appear to average a little under 800 euros/month ($940/month) [2]. And that's ignoring all of the Roth and 401(k) extras available out there. Am I missing something?
I'm not sure how much I trust these tax rates. My understanding was that government spending is roughly 33% of GDP here in the US. This was true when I was in undergrad, and it looks to be roughly correct today. https://www.usgovernmentspending.com/percent_gdp (not sure how much I trust this site, but it corroborates what I learned in undergrad with only a few minutes of googling). This means that the tax rate must be close to 33%. Else you'd have amazing deficits balooning quite quickly.
Maybe it's ignoring corporate taxes? or ignoring other things on our W-2, like L&I and social security/medicare? It 's also probably ignoring local taxes, a 10% sales tax is hard to ignore.
I once calculated my effective marginal tax rate at 45%, and it stopped me from pursuing a higher paying job, since my take home didn't change enough to be worth the higher stress and the money I'd have to spend to combat said stress.
Federal marginal tax rates for 2018 are capped at 37% if you make $500K ($600K for a couple). If you're hitting that plus 8% for state, then I don't have too much sympathy. And that's a marginal rate, not an effective rate (which it seems you're conflating).
If you earned $500k, and were single/no deps, and just took the standard $12K deduction, your Federal tax would be 29% ($145K). I can't imagine someone with that income not having more deductions or IRA/401 contributions that would minimize the tax burden, but I suppose there's always someone out there completely clueless.
The next table (the one below, right?) shows only the relative percent of where taxes come from. It does not describe tax rates. It merely states that around 50% of U.S. tax revenue come from taxing income and profits. This is not the tax rate on that source.
> shows only the relative percent of where taxes come from. It does not describe tax rates.
I know. But if the US is to raise rates they would raise them on Goods and Services, not on income because the tax is already very heavily skewed toward income.
And regardless of that, the breakdown alone shows that the US tax code is more progressive than other countries.
You raise the other really important consideration, which is that if we were to raise taxes to the same levels as Germany or Sweden, taxes wouldn't go up on rich people and corporations: https://taxfoundation.org/how-scandinavian-countries-pay-the.... The top marginal tax rate for someone in California, even with the Trump tax cuts, is similar to someone in Sweden. The difference is that in the U.S., the 50%+ rate kicks in around $500,000-1,000,000 HHI, while in Sweden it kicks in at the equivalent of around $100,000 HHI. Sweden collects as much revenue from its 25% VAT, which is enormously regressive, as from income taxes.
The US middle class is entirely oblivious to how extraordinarily low its taxes are. Despite having one of the highest disposable income levels on earth, it somehow manages to blow all of its money on consumer crap from China, $300/month cell phone plans, $200 DirecTV plans, etc., instead of saving it. That's despite the US having a lower cost of living than Germany and France.
All the right politicians bleat about lowering taxes - you really can't, the rich are already paying for everything as it is now, we can hardly get more progressive (on income taxes at least). You can't lower taxes on the bottom 75%, it's just pandering. The left bleats about the well-off not paying their fair share, somehow paying for nearly everything isn't a fair share. They're both wrong as usual. More plausibly, to pay for ballooning entitlement costs, infrastructure, expanding healthcare, etc. taxes need to go up on everyone.
> Yet Americans falsely believe they are overtaxed.
Perhaps the observation of government wastefulness is conflated with feeling overtaxed. There are two ways the government can raise more money:
1) Raise taxes
2) Use existing taxes more efficiently
If you look at where the tax money is going, infrastructure is one of the smallest pieces of the pie. Why not divert defense and/or social service tax to infrastructure for a few years?
50 years of Cold War propaganda exacted its price. Communism, socialism, and taxes are trigger words for a large number of Americans aged 40 and over.
One thing I really appreciated about Bernie Sanders was that he did not shy away from the term "socialist". It's engendered a conversation America really needed to start having.
Raising taxes is not the only way to improve public infrastructure. One can also lower the trade deficits, improve the technology the government uses, and legislate away some of the problems (jails would be less full if drug offenses didn't carry such harsh penalties). Taxation should only be tried when nothing else has worked. With 50% marginal income tax rates in many states, the US leans much more towards the communist than Randian side of the spectrum as it is.
is ayn rand a real influence ? i've seen one interview of her and I can't read her name without being filled with negative emotions. such a free-market fanatic.
> The road to an Ayn Randian paradise in which everyone fends for themselves will lead us to ruin.
It always depresses me to read comments like this. Rand's central themes were about corrupt relationships between pseudo-capitalists and government, the immorality of a desire for the unearned, and the consequences of what will happen to a society that can't be bothered to concern themselves with ethics.
Well, one of these days these chickens are going to come home to roost, and instead of people hanging their heads in shame and regret because they ignored her supremely confident warnings, instead they're going to charge her with the crime. The irony.
"The Objectivist ethics holds that human good does not require human sacrifices and cannot be achieved by the sacrifice of anyone to anyone. It holds that the rational interests of men do not clash - that there is no conflict of interests among men who do not desire the unearned, who do not make sacrifices nor accept them, who deal with one another as traders, giving value for value."
As a cherry on top, while there's still time to recover from mistakes of the past (there is a great deal of ruin in a nation, as they say), rather than eating a little humble pie, listening for a change to those who said "I told you so", and getting our affairs in order, we will actually choose to blaze straight ahead at full throttle on the exact same trajectory. And in the end, we'll end up selling off infrastructure, piecemeal, for pennies on the dollar, some to the very criminals we were warned about, and the rest to other nations who were smart enough to crack a book.
I use Any Randian to describe those who publicly cite her and they tend to have a certain political philosophy that is best described by me as, "I've got mine, fuck you." I'm not critiquing her personally or her philosophy. It's sort of like Ghandi's famous quote on Christianity. He said, "Your Jesus I like. Your Christians, I do not."
> I use Any Randian to describe those who publicly cite her and they tend to have a certain political philosophy that is best described by me as, "I've got mine, fuck you."
a) Do you think it is responsible to be opaque on whom you are attributing the belief to, particularly considering the topic of conversation and the fact that her warnings on the matter were clear?
b) These people you cite, are they Ayn Rand supporters, or critics who "think", despite no actual evidence beyond 4th hand also-uneducated opinions, that Rand's philosophy was anything remotely resembling "I've got mine, fuck you." Here's a fun experiment: try to google up a statement by an actual Objectivism supporter that supports anything near that sentiment, and observe how many false hits you get of the latter in your search.
> I'm not critiquing her personally or her philosophy.
Of those HN'ers who hold an opinion on Rand, you belong to a very exclusive club in my experience. Regardless, your sentiment now being explicit is good enough for me, thanks for straightening it out.
There is colloquial and there is technical usage of terms. I’m speaking colloquially. Like some people generally refer to the US as a Christian nation. They typically mean this in the sense of history or values and don’t necessarily mean to say that a majority of the population fits their personal definition of what a Christian is.
I don't think I can. I gave an example of how people speak colloquially. For instance, one can mention Christianity in a discussion but that term means different things to different people. People will say things like, "Christians believe this..." without it being literally true. Most people speak colloquially and not in a technical sense. The phrase "Ayn Randian paradise" does not imply the sort of paradise envisioned by Ayn Rand. It's a reference to a belief commonly held by people who nominally agree with Ayn Rand's view as they understand it to be.
> It's a reference to a belief commonly held by people who nominally agree with Ayn Rand's view as they understand it to be.
I asked a question specifically about that above, see: (b)
Is asking for substantiation of a claim, an insulting claim at that, now considered improper etiquette around these parts?
Ask yourself this: how do you know this to be true? Can you share where you've encountered Randians in sufficient numbers to form an opinion with high certainty? And, can you no longer find any trace of these people and their words?
As with most beliefs my belief about "Ayn Randians" comes from anecdotal experience. I can't cite a study or source. Just going by my experience with such people.
Some beliefs are based on facts, others on anecdotal experience, sometimes the difference matters and should not be left ambiguous (in case you were wondering where my determination comes from).
Taxes are pretty high in the US for the upper middle class especially.
IMO corporations should be taxed in a way that the more they make with fewer people the more they get taxed relative to other companies who make the same but have more people.
Productivity in the age of digitalization is not what it used to be and I don't think it's a good way to measure anymore as we have way more supply than we have demand.
>For the past century, a public pension was an ironclad promise
Let's not pretend like this was ever seriously going to be sustainable. It's just a big middle finger to future generations while an opportunistic generation got to suck the system dry in prosperous times then peace out.
> Let's not pretend like this was ever seriously going to be sustainable.
Why not? Each year machines become more efficient, and productivity has gone up. The main problem has not been to create wealth, it has been on how to share it.
Politicians also say that health care for everyone is impossible, but there is a lot of countries that do just that.
This is about setting expectations. If you convince your citizens that paying pensions is wasteful and not sustainable, you can diverge that money to other places.
Look at tax breaks and you will find where your pension is.
> Each year machines become more efficient, and productivity has gone up.
That actually highlights a lot of problems with defined-benefit plans: sometimes economic circumstances change so drastically based on social or technological change that the promises of the past are no longer viable. How could places like Detroit or Puerto Rico continue to pay their promised pensions when their economic base has evaporated?
> How could places like Detroit or Puerto Rico continue to pay their promised pensions when their economic base has evaporated?
As a manager of a small team, I had this problem. My team was composed of very senior people and I had a big bag of money to share for salary increases. Another manager had a very junior but very brilliant team and his bag was quite small.
We joined efforts, and we joined the bags. Now we had the flexibility to give the correct salary increase to everybody.
The way to solve this problem is to share the burden. That is the base for insurances.
Governments should offer an insurance against local changes. As the economy goes global, it should be a global effort. This is easier said than done. But it is the real solution.
Yep, just like college tuition, social security, health care, war funding, and housing prices. Pension promises have always been a way for boomers to get the things they want while making future generations pay for it.
> Let's not pretend like this was ever seriously going to be sustainable.
There’s a bit of nuance to it. Predictions were made based on historical market returns we’re only now discovering are unrealistic going forward (7-8% historically, 4-5% predicted going forward).
The only issue is that no “relief valve” was constructed in the event predicted returns turned out to be inadequate to fully fund the system, triggering benefits cuts. This is the part that is generationally regressive.
Of course, there is no benefit to anyone whose wants to solve this prior to insolvency, only pain. So the sinking ship continues and the band plays on. Taxes, local, state, and federal, are going up eventually to pay for all of this. Plan accordingly.
Were predictions made based on historical market returns? Or were the predictions optimistic even when they were made?
My understanding (which is from a distance, and could easily be wrong) was that even when made, the estimated returns were optimistic - not necessarily wildly optimistic, but toward the top end of the historic range of returns. This reduced the burden of funding the pensions at the time they were defined, making funding them less painful for the people running things at the time they were granted.
Until the 2008 recession, the vast majority of Illinois public pension funds assumed returns in excess of 8%: https://www.civicfed.org/iifs/blog/comparing-investment-retu.... That was more than the market returned in 1960-1980, but less than the market returned from 1980-2005.
But, those projections don't include unplanned pension benefit increases for existing retirees, which happens periodically.
Since the comments in this thread are missing historical context, here's a review wrt California:
1) the State Treasurer presented 3 options (low - 6%, middle - 7%, high - 8%), but said high was dangerous
2) the State picked high, since they were voting on their own pension payments
3) the municipal unions went to the mayoral candidates across the state and said, "if you want our support on election day, support 8%"
4) the courts have ruled that once a pension plan is approved, it can't be repealed for existing members
5) the San Jose mayor actually tried to repeal it to prevent city bankruptcy, and was ground into the dust by the public unions and courts
6) the last city employee in each city will be the Treasurer, to sign pension checks. There will be no city services (fire, police, libraries, etc.) - just pension payments. This is already happening in California
7) Public union members receive higher salaries now (thanks to COLA) than the private sector, plus multi-million dollar pensions. My dentist calls them "royalty" because their benefits are on a different level than the private sector.
What's ironic is that Marx predicted that in a democracy, the voters would eventually vote themselves ruinous entitlements. He was correct, but all it took was the public unions.
I’m a teacher in NY. My pension plan is self funded by our membership (teachers). Taxpayer dollars account for the annual school budget (you vote on!) which does include salary and employer healthcare contribution however it also pays for grounds and buildings, transportation, extracurriculars, etc...
Additionally, the current tier 6 of NY state workers pays a “retirement fee” into their retirement which is how the TRS in NY is funded. This fee is not a % of salary, it is an annual fee spread over pay periods.
So just to debunk one point, most public worker retirement funds are self funded by members.
If I paid for WSJ and this is the low quality journalism I got I'd be peeved. This article barely touches on how it got to be so bad. Excuse me but no - a single paragraph stating the obvious 'benefits promised were too rich' doesn't cover it. How is it possible that a solvency ratio can drop from 100% to 75% in 18 years? This doesn't just happen because eh seemingly every pension administrator just decided. How much does WSJ cost again?
This topic comes up in the WSJ every couple of months. Not every article can cover every side of the story, and this particular piece isn't aimed at the underlying causes -- it's not an exhaustive or investigative history, it's analysis on the recent/current figures.
One reason is that many places changed the actuarial tables. Average life expectancy is higher than it was, driven by improvements in outcomes and more women at work.
Another is that monetary policy has made fixed income securities a low yield investment. Funds need to diversify and add risk.
Another reason is that folks writing these things assume workers work a full career. The reality today is that many government workers start in their 30s and 40s, and only get the rich benefits if they work until their late 60s. That neutralizes the problem, as they will be dead sooner.
Personally, I think the WSJ and other anti-pension people overplay the liability. The drivers of pension expenses are police and firefighters, and these (mostly) guys tend to die young.
They also tend to report on the problem in masse, while it varies from outright disaster (Illinois) to Oregon, which is overfunded.
Many also retire young. My firefighter buddy will retire well before his 50th birthday and collect >$100k/yr in a relatively low COL state. He's in good shape, physically and mentally. He could easily live to 90, no problem. Good for him, but not great for taxpayers.
>My firefighter buddy will retire well before his 50th birthday and collect >$100k/yr
How is this possible? The state that he lives in hasn't changed the rules for vesting/collection? That seems like an absurd amount of money for what I'm assuming is a career that's lasted less than 30 years.
Most public safety people can retire at half pay with 20 years, and it goes up year by year, usually capping at 60-70% of the average salaries of the last 3-5 years. Many contracts don't cap overtime with respect to pension calculations.
If you join at 18, at 50 you'll have 32 years, which in many departments means seniority to get alot of overtime. It's a decision that the municipality makes -- they understaff to preserve cash and dump the longer-term problem on the bigger pension fund.
The early retirement is important, as the life expectancy for police/fire drops significantly based on retirement age. But the polices re: overtime as it impacts pensions are often too generous. These issues are "fixed" for normal employees in most places -- for example in NY non-public safety employees and teachers have caps (~10%) on how much your salary can increase for pension purposes and either eliminate or cap how overtime applies.
My wife worked for a public employer who had a way to let overtime go into an optional 401k-type plan at a higher rate so that blue collar employees would have an easier time retiring on time. (Many blue collar folks basically depend on OT)
More like politicians and union bosses lobbied for taxpayer funded pensions to be exempt from laws like ERISA and PPA so that they could play games with the pension fund money and purchase votes from the union members without stating real benefit costs.
The thing is solvency ratios should move like icebergs. Demographics, life expectancy and salaries don't change that quickly. Ok so stock markets move but reviews should be annual to allow for course corrections. So seeing it get so bad in such a short amount of time is a bigger story
Three major reasons are: 1) deferred/missed contributions; 2) expenses growing faster than originally expected, due to benefit increases and rising healthcare costs; and 3) unrealistic projections of future return that are being revised downward over time to be more realistic.
If you subscribed to the WSJ you wouldn't be reading one article in isolation, and you'd already be well-informed about this issue, because the paper has regularly covered it (due to its massive impact) in various forms for decades.
I see no fewer than four paragraphs indicating it was a combination of over-promising benefits, longer lifespans, higher medical costs, boomers retiring at the same time, and poor portfolio performance.
What I can't understand is that the stock market in the past 8 years has been one of the best in history. Wouldn't that make up for losses somewhat, and what would happen if the market tanked during that time?
Many pensions have ambitious assumptions of 7 or 8% annual returns.
S&P went from 1565 Oct 07 2007 to 735.09 Feb 27 2009.
We're now up to 2818 but if we had delivered 8% since october 07 we'd be at 3649 by this Oct 5. So we're 28% short!
If you use S&P peak in 2000 it's 1552 and to deliver 8% since then we'd need to be at 6209!!!
Catching back up to steady state growth, especially after a 50% loss, is unfathomably hard!
What makes it worse is that the present value of obligations skyrocketed as interest rates went to 0. In 07 the Fed Funds rate was 4.5% and it's currently 2%. This rate was 0.25% until the end of 2015. For a payout of $50k per year for 10 years, ten years in the future, the present value is $481,031 at 0.25%, $368,442 at 2%, and $254,761 at 4.5%.
So the current obligation is 44% higher than it was in 07 and the amount of money is 28% lower than expected. And this is AFTER the S&P has had an incredible run from 735 to 2818!
you know that research test they do where the subject can have $5 now or $50 at the end if they don't take the $5 and a disappointing amount of times they go for the $5.
The problem is everyone cheers on the politician that says you can have the $5 AND the $50.
the ones in the test the took the $5 look like untrusting fools because we make assumptions about fair and reasonable outcomes with repercussions on those parties in an agreement that don't fulfill their obligations.
politicians should be held accountable like CEOs. They should be able to be sued. Screw over the company? your ass is going to get kicked. Say you didn't know? you shoulda listened to the people giving you the numbers. didn't have the numbers? shoulda hired people to give you the numbers.
there needs to be a lot more repercussions on those people making bad decisions.
How are AI and automation going to affect pensions? If many jobs become automated who contributes to the pension funds and Social Security to support the previous generations? All the discussion I see here seems to assume the future is like today. Those lists of which jobs are most likely to be automated soonest may also be lists of which pensions will not be funded in the future.
OTOH administrations have to deal with significant shortfalls due to corporate tax elusion, compounded by the interests paid to compensate for them (possibly and ironically the bond holders might be the same corporations whose tax money is missing.)
I wonder how significant that amount is. I’m a Scala jockey and I bookmark a totally different part of the internet, I'd love the input of someone who has a better idea of these numbers...
Why no comparisons to the pension systems in other countries? I'm always hearing about how Europe has a much more generous pension system. Do they work the same way? Are they all similarly underwater? If not, what are they doing differently?
I can't help but think of my father, who has been a firefighter for the last 20+ years. He lives a comfortable middle class life, and still works even though he already qualifies for retirement.
The paywall prevents me from reading it, but the title makes me wonder. Does it claim that the per year pension deficit matches the entire economy of Japan, or are they saying the cumulative debt (which would accrue over decades) matches one year of Japan's economy?
How much money does one need to live in retirement? If they are doing daily exercise(1-2hr), cut out most processed foods and sugar , no alcohol , cook all their food from scratch using cheap staple ingredients , entertain themselves with books , community , local events and cut out expensive vacation plane trips (only an invention of the past century). An ‘uncomfortable’ lifestyle shift but doable for a human.
[edit] Yes for people who are permanently injured, its great we have these systems in place. But for otherwise healthy retired individuals, I think the 21st century western 'retired' lifestyle is a bit rich in comparison to what the rest of the world is living.
Just because something's technically doable for a person doesn't mean that the government is going to be able to enforce that on a population eho was expecting a different and, more importantly, a better life than that. That's how you get rebellions or voted out of office if you're the politician trying to enact such legislation.
We have a problem in the US where no one wants to be told what to do my the government but they also expect government handouts regardless of their behavior, and this is a bipartisan issue so it's not some minority of the population that needs to be convinced
How much money does the low-taxed wealthy need that so many others need to live a paupers life style. Is there not productivity enough in our society to provide better?
What are you talking about? figure 2 is a share of total tax total revenues by source. Figure 1 shows that Us total tax percentage of GDP is lower than every OECD nation out there with the only lower total tax share in the nations of Korea, Ireland, Chile and Mexico.
The figure 2 breakdown also does not distinguish between taxes on Income + "profits", and capital gains and corporate taxes where the wealthy accrue significant wealth are very low in the US...
Go read it again. The only reason the US is lower on a GDP basis is that the US does not have a VAT on goods and services (which as you know, hurts the poor much more than the rich).
i.e. the US taxes the wealthy much more than virtually any other country.
The VAT figures into the "total taxes" of figure 1 as described in the last paragraph is broken out as "goods and services" category of fig 2. This still does not change the meaning of fig 1 where the US is strongly below average taxes.
If the wealthy are the most taxed in the US, how is it what inequality of both income and wealth is massively skyrocketing in the US?
>If the wealthy are the most taxed in the US, how is it what inequality of both income and wealth is massively skyrocketing in the US?
Asset appreciation - a massive bull run in the stock and housing markets. The side effect is that those who own assets benefit far more than those who don't.
When everyone talks about Bezos making a huge amount of money this year, they're talking about his unrealized gains. If he actually tried to realize those gains into USD (at which point he'd pay taxes), his wealth would shrink very quickly as Amazon's market price dropped.
That reminded me of this quote from Arnold Bennet[0]:
"Nothing that really helps towards perfection costs more than is within the means of every person who reads these pages. The expenses connected with daily meditation, with the building-up of mental habits, with the practice of self-control and of cheerfulness, with the enthronement of reason over the rabble of primeval instincts--these expenses are really, you know, trifling."
The point is that these people worked under a contract that promised them a certain pension for a certain amount of work. Even if the amount was unrealistically high, reneging after the person has put in all the work is basically fraud, or theft of wages.
While you're right about the broken promise amounting to being defrauded, a similar argument could be made about tax payers who will be responsible for picking up the tab (Millennials, Gen Z etc.): They're going to have their wages taken for promises they never made in the first place, while also not having the same benefits enjoyed by those that came before them.
While the outcome might be similar, I think a new generation reneging on the deals for that reason might be more legitimate. But just saying "oh, we lied" or "oh, we don't feel like paying you what we agreed (e.g. by raising taxes)" is pretty bogus.
This is a good example of the type of debate that well-meaning, thoughtful people decide just steer clear of due to the (lack of) perspectives of the majority of those currently taking part in the conversation.
The United States spends the better part of a trillion dollars per year on its military. A relatively small fraction of that would solve any issues their social welfare programs currently have.
It's a matter of prioritization and the perspective of those leading the discussion. Instead of turning focus towards changing priorities (the priorities are already seemingly in their favor), they turn to how expensive and unmaintainable the programs are that they wish to further de-prioritize. In the process, they draw attention away from the stark contrast of funding between various government programs. Namely social welfare vs military, or improving their society vs destroying others.
...Given that the "Pension Hole" the article is describing is a total shortfall of five trillion dollars, I don't think you could easily solve it with a "relatively small fraction" of 1 trillion dollars.
And what would you do with the large number of unemployed people that would result?
You can't just change one thing and ignore any consequences.
And don't forget that the broken window fallacy only applies to economies where everyone is working full time. If they are not then it does not apply, and your analysis needs to be more thorough.
Boohoo. Public service union members should have thought about that before pursuing a pyramid scheme retirement plan instead of a defined contribution pension like the rest of us.