A bureaucratic twist to the public pension crisis

We’ve spoken several times about the crisis in public pensions that confronts this country.  It now emerges that a significant part of that crisis was caused by bureaucratic mismanagement.

The second-longest bull market in American history hasn’t stopped the deterioration of state and local pension funds, whose unfunded debt has almost quadrupled—by their own accounting—from about $360 billion in 2007 to $1.4 trillion today. Having relied on overly optimistic and inaccurate financial assumptions for decades, public pension administrators are now forced to acknowledge that the systems owe much more than previously thought. Even as local governments struggle to pay for this debt, it keeps growing.

. . .

In 2014, several communities in Illinois discovered that officials were using mortality tables from 1971, when life expectancy was much shorter, which vastly underestimated pension costs. The resulting outcry forced those communities to update their calculations, and led to average increases in costs by about 20 percent. Most state plans now use more recent numbers, but even year-to-year adjustments in mortality rates put pressure on communities already struggling to meet pension obligations. After New York State’s retirement system updated its mortality tables in 2015, for instance, localities increased their pension payments from 14.2 percent of salaries to 18.2 percent, according to S&P.

Longer lives for public employees will mean higher costs, and not just for pension plans. Many state and local governments promise to pay for the health care of their retired workers, but few have enough money set aside to do so. A recent analysis by Pew found that states spent $20 billion on retiree health care in 2015, and that, collectively, states owe nearly $700 billion in promises they’ve made to finance their workers’ health insurance in retirement. But that number is undoubtedly higher, given longer life spans.

. . .

In about half of the states, added costs from these inaccurate projections fall entirely on taxpayers. That’s because these states have laws or constitutional provisions that limit the ability of governments to alter pensions for current workers for as long as they remain employed. Among other things, governments often can’t require higher contributions from workers themselves; nor can they lower benefits. Consequently, the amount of money that local governments must pay into the system has been rising steadily. As the latest study on mortality rates shows, that trend is going to continue.

There’s more at the link.

In the old days, one might have a single job from college graduation to retirement.  A teacher might accumulate 40 or 45 years of service before starting to draw a pension, and would contribute to his or her retirement fund for that long – and then, of course, they’d die within a decade or so, not drawing a pension for very long.  Nowadays, a person might turn to teaching as a second career, starting in their 40’s and retiring at 65.  Others may retire as soon as they reach 20 years of service, when their pensions vest.  It’s not inconceivable that a teacher retiring today might draw a pension for more than twice as long as he or she was employed as a teacher . . . and that changes the whole actuarial perspective.  Health care costs, too, are so much higher today that they drastically affect long-term financial considerations.

One would have thought that the bureaucrats administering the pension plans would have been more alert to such changes . . . but they’re bureaucrats.  They push pencils, dot I’s and cross T’s.



  1. Another layer of bureaucratic mismanagement not mentioned here are the local rules, usually politically driven, about when and in what investments can be made – for example, some state funds are limited by the anti-Israel BDS movement. Others have fossil fuel or alcohol and tobacco limitations.
    An additional layer is poor management and the use of expensive consultants to justify investing in poor investments. One of the classic cases is CALPERS investment in the Stuvesant Town apartment complex in NY that holds the record for the largest repossession: https://latimesblogs.latimes.com/money_co/2010/01/money-cocalpers-loses-500-million-on-new-york-apartment-deal.html

  2. It's easy to blast pensions, unless you realize where they came from. In the late 1980's and early 1990's, the economy was booming. In good economic times, people leave public employment to seek employment in the private sector, which has better pay. That is exactly what happened. The public sector was being bled of talented employees, who were leaving government employ for the greener pastures of the private sector.

    For example, as a firefighter paramedic, I could have gone to a bridge program, transitioned from paramedic to nurse, and gotten a 40-50% increase in my pay while working fewer hours (Firefighter medics work a 56 hour week, nurses a 36 hour week). I stayed for the pension.

    The powers that be were busy wasting the newfound largess of tax receipts from the booming economy on governmental baubles that were designed to win votes, and therefore could not afford to raise employee pay enough to stop the bleeding of talent. So instead, they instituted a pay later approach- they started a pension system. The promise of a good retirement kept many workers in government employ. The government had the best of both worlds- buy good employees now, pay for them later.

    Now here we are, 20-30 years later, and the bill is due. Now instead of paying the bill, the government cries poor and refuses to pay the employees who stayed the benefits they were promised. The government is perfectly capable of paying, but like a consumer who had a big party on their VISA card, they would rather keep spending it on wasteful projects than repay the debt that they incurred.

    Don't blame the public employees. They worked as asked, fulfilling their end of the bargain. Now that they expect the government to hold up their end and pay what they owe, the government decides that they don't want to pay, because they have other things they would rather spend the money on.

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