Tuesday, October 22, 2013

Heads the unions win, tails the taxpayers lose

NY Times on the debacle of municipal pensions:

The city’s pension system made extra payments for decades to thousands of people, on the thinking that the base pensions were too small. The pension board thought it found the money for the extra payments by skimming off “the excess” when returns on investments exceeded the plan’s target — 7.9 percent in Detroit.

But the pension fund also had years when its investments fell short of the target. And with millions of dollars being paid out each year in the extras, the fund missed out on all the investment income that money would have brought in. So the extra payments fundamentally undercut the health of the pension plan.

Reform seems to come only from the threat of bankruptcy.

HT: Matthew


  1. Pension plans were developed as a mechanism to take care of employees, especially long-term government employees upon retirement. The principle for most pensions is simple: based upon the number of years the employee worked and the average wage earned, he or she would receive a determinant amount of money every month for the remainder of their longevity. To fund a pension plan, an organization allocates money into an investment account that earns income. In a perfect pension model, when the last covered employee (or their surviving spouse) dies, the bank account is at zero.

    Pension plans are based upon estimates formulated by actuaries, or professionals who analyze the financial costs of risk and uncertainty. Actuaries utilize actuary tables to calculate funds at present value of today’s dollar to determine the required monthly contribution to the pension plan for each employee/spouse (www.bls.gov). These variables are not stable and produce dramatic change in pension plans, especially since individuals are living longer, and the liability for coverage increases. Also, the financial crisis of 2008 destroyed the value of assets in most pension plans. The discount rate tied to long-term interest rates is now at a 60 year low, and the Federal monetary policy has caused most pension plans to become significantly underfunded in present value. Even though some government agencies followed protocol, their pension plans are in trouble today because of pension costs.

    In reviewing the performance of pension plans for the City of Detroit, one can readily identify the failure in decision-making. Detroit failed in its fiduciary duties to insure a viable long-term plan so retired government employees would have their promised benefit. Public political favor was purchased when excess payments were given out versus allowing assets to grow and offset down years in the market. The compound effect of those extra dollars in earlier years could have carried the City of Detroit later. Also, Detroit financed some contributions to pension plans by going into debt and paying interest on loans or bonds. This cost the taxpayers extra dollars to fund pensions. If the extra earnings had been retained in the pension plans, tax increases in later years to fund the pension plans would have been less (Riordan and Rutten, 2013).

    While Detroit is not alone in poor pension management, they clearly went farther than other organizations by paying extra to pensioners and not adjusting for economic changes.

    Karen Whelpley

    Work Cited:
    Riordan, R. and Rutten, T. (August 4, 2013). A Plan to Avert the Pension Crisis. Web. (February 13,
    2014). Retrieved from: http://www.nytimes.com/2013/08/05/opinion/a-plan-to-avert-the pension-crisis.html?page...


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