Boring but potentially important: http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/09/state-retiree-health-care-liabilities-an-update shows that folks in New Jersey will need to work a second job during the summer of 2018 and give all of their wages to the state government to pay the hoped-for cost of health insurance for retired state government workers.
Figure 2 of this report calculates, as a percentage of personal income, the amount that state and local governments have failed to set aside for likely health insurance costs. (Of course the actual amount could be much less or much more depending on future health care costs, longevity of retired workers, etc.)
Note that the states depicted are not directly comparable. For Massachusetts, for example, the percentage shown covers only state workers and not local government workers or teachers. For New Jersey and Alaska (workers there will need to work a second job for another year and pay state taxes on that second job at a 100% rate), on the other hand, the percentage shown covers all categories of retirees.
I remain curious why voters don’t rebel and, via referendums, forbid politicians from promising to pay unknowable amounts to retired workers, as opposed to having 401k-style retirement provisions in which the taxpayer contribution could be calculated without input from God (regarding human longevity 50 years from now, health care costs 50 years from now, interest rates 50 years from now, etc.).
Related:
- Real World Divorce on New Jersey (some ways to make money in that state without working)
as opposed to having 401k-style retirement provisions in which the taxpayer contribution could be calculated without input from God (regarding human longevity 50 years from now, health care costs 50 years from now, interest rates 50 years from now, etc
If state pension funds, with all of their actuaries and Wall Street consultants can’t forecast these variables, how can individual workers?
>in which the taxpayer contribution could
>be calculated without input from God
“The average state OPEB funded ratio is low because most states pay for retiree health care benefits on a pay-as-you-go basis, appropriating revenue annually to pay retiree health care costs for that year rather than pre-funding liabilities by setting aside assets to cover the state’s share of future retiree health benefit costs.” indicates that there has in act been little attempt to calculate and set aside funds for this particular retirement expense so the purported need for God’s input doesn’t enter into it.
On the more general issue of public retirement funding I suspect the problem is less that the calculations have been wrong because they were done without God’s input and more because politicians, management, and unions have conspired to understate the true cost of currently provided government services. Actuarial risk does exist, of course, but it is relatively small and manageable when averaged over decades as governments can do. The existing defined benefit system may be poorly managed, but that doesn’t mean it is impossible to manage such a system properly as is implied by the claim that God’s input is required to do so.
Vince: Actuaries and Wall Street consultants don’t get to the heart of the issue, which is what assumptions to use about life expectancy, costs in the future, overall inflation in the future, and investment returns in the future. Private sector workers currently have a guaranteed minimum that is protected from both inflation and longevity risks (i.e., they have Social Security). Private sector workers can purchase annuities from life insurance companies (which are not exposed to longevity risk when they sell annuities because they have a complementary life insurance business). Finally private sector workers have 401k plans and can try to spend prudently from those. I don’t see any reason why a private sector worker would vote to transfer risk from government workers onto taxpayers who work for the private sector. Remember that there is no way, other than running a life insurance business, to reduce the actual risk. The only thing that can be done is transfer risks and liabilities from one group of favored humans to a group of disfavored humans (i.e., the suckers!).
Actuaries and Wall Street consultants do not grant those pensions, it is we are the people in form of strong-arming unions and not caring politicians. Not really specifc to public sphere, GM executives back in 50s thought it was great bargain for them to promise impossible. So far it payed off for autoworkers, general public did subsidize their private pensions. Will feds subsidize state and local pensions too? So far it seems to be more prudent to gang – up and push for non-sustainable benefit than to conservatively invest in 401 K individually. Of course inflation will increse when number of unfunded pensiosn becoems too large, but I guess that non-indexable 401K acounts will be among first victims of inflation
Similar situation in Kentucky, where teachers are demanding $3,200 from each household to fund pension ponzi for next 2 years.
Isn’t the ability to levy taxes pretty much the same thing as a mandatory life insurance business? Also: do life insurance profits and annuity losses really cancel each other out? Certainly when extending lifespan from 35-75 years they would, but not nearly as much by extending lifespan from 75-95. (People living longer in mid-life are likely to be paying for life insurance the whole time, but people living longer in old age are probably not as likely)
‘annuity losses’ are primarily for those who invest in annuity. Did you check current annuity yelds? It is not guilded age anymore.
>private sector workers have 401k plans
This begs the question of whether this is the best option for private sector workers since 401K plans work better if one is wealthy enough pass along a significant inheritance (beyond a primary residence) to heirs since the heirs then bear the risk.
Most people don’t understand these issues. According to the Manhattan Institute, NYC spend 11% of its budget on public sector pensions, more that is spent on schools, bridges and tunnels combined. And probably the dismal state of the NYC infrastructure is a function of excessive spending on public employee benefits at the expense of infrastructure maintenance. Outside of public sector workers very few workers will receive a defined benefit pension — I for example don’t know a single person who will receive a DB pension. It will be interesting when these pension obligations come due and future workers see that they are receiving social security plus whatever they have been able to save while the public sector workers are receiving DB pensions. Also as population continues to exit the public sector unionized states for places like Texas and Florida.
>NYC spend 11% of its budget on public
>sector pensions, more that is spent
>on schools, bridges and tunnels combined
That 11% is a payroll overhead; it is a part of the spending on schools, bridges, and tunnels (etc.) which is apparently being accounted for in a separate bucket.
While underfunding pensions is not a good idea, it is also worth noting that to the extent that pensions are underfunded it is taxpayers who get the benefit of the float.
In California, the courts used to say that pension benefits cannot be cut. Even future benefits cannot be cut. I think that it is being reconsidered.
>Similar situation in Kentucky,
>where teachers are demanding
>$3,200 from each household to
>fund pension ponzi for next 2 years
Where is the Ponzi scheme? The government induced the teachers to perform work by promising them pensions upon retirement. Now the teachers want those pensions.
Actuaries and Wall Street consultants don’t get to the heart of the issue, which is what assumptions to use about life expectancy, costs in the future, overall inflation in the future, and investment returns in the future. Private sector workers currently have a guaranteed minimum that is protected from both inflation and longevity risks (i.e., they have Social Security). Private sector workers can purchase annuities from life insurance companies (which are not exposed to longevity risk when they sell annuities because they have a complementary life insurance business).
Actuaries only need to calculate life expectancy statistics (average, median, etc.) for the beneficiary group. They should be able to do that with much greater accuracy than an individual can predict how long he will live. I also have a feeling that the life insurance annuity is not so straightforward. Also, if public employers who currently offer pensions were to switch to 401(k) plans, presumably that would mean higher taxes now in order to reduce future liabilities. The amounts involved would determine whether taxpayers see any savings over the long run.
@ neal #10: “to the extent that pensions are underfunded it is taxpayers who get the benefit of the float”
This is a very misleading interpretation. Due to the multi-decade time scale and the ease of moving across a different tax district when things start looking bad (not even requiring a change of jobs given the multitude of city, state, and county boundaries in most metro areas), these obligations will fall largely on taxpayers who didn’t benefit from the past services they are paying for.
Crazytrainmatt: Even so, it is taxpayers to benefit from the float.
Note: I did not claim that the benefits are distributed fairly among taxpayers.
The solution is the “Social Security Equality for All” act – we retroactively look at all previous government employees (including senators, presidents, public university presidents, etc) salary and benefit payment history and force them into social security based on what that would have entitled them to. All other future benefit promises disappear, they will only get/not get the same as the rest of us. All of the funds held in those other programs are confiscated by the government.
I seem to recall Detroit too is struggling with these issues while in bankruptcy.
That does suggest a course of action though. Perhaps the solution is to declare the current regime bankrupt and defunct and wind it down, replacing it with a fresh, unencumbered one. (A Second Republic, even?)
Alan, Tom: Comparing the US to other countries with similar economies suggests that on a per capita percent of GDP basis we want higher than average levels of government service (we maintain a huge standing army with even bigger international commitments and, why aren’t our streets as clean as those in Switzerland and Japan?) while spending (at most) average levels on government and collecting below average levels of taxes. The fact that we are a relatively wealthy nation on a per capita GDP basis (especially for our size) suggests also that our government is less efficient than average. I agree that borrowing from pension funds is not a good way to bridge these gaps, but that doesn’t mean we need to blow everything up and start over. Our fiscal problems are manageable and could be addressed with relatively modest changes over time.
We can start by adjusting our expectations and taxes to match what we are actually spending. Our government was designed for a huge diverse country at a time when communication and transportation was relatively slow and expensive; there are many obvious inefficiencies which could be remedied with incremental reforms. This is all clearly doable since it only requires us to bring ourselves up to average levels of performance for countries like ours.
While the above program would address our fiscal problems, I do agree that it would leave us with a huge, ponderous, and inefficient government which would still be a serious drag on our modern fast paced economy. Unfortunately I think there are too many areas where government involvement is required for the answer to be simply make government smaller. I see this as a technical problem with a currently unknown solution: Can we devise a management system which retains the lack of corruption and cronyism produced by the civil service system while eliminating its elephantine inefficiencies?
Government as a service is the answer. US governmental system has been structured the way it is on purpose in large part to protect liberty. At this point European-style government is already impossible and is not a role model anyway, as Europen nation states crumble for multiple reasons, including their government system and their spending.
US residents out to be able select educational services providers. Private schools seems to be able hire teachers with graduate degree for only a part of expense of unionized teacher with undegraduate degree. Public schools do have some good teachers and I am sure they will be able to compete on educational market as public schools are already granted huge free real esate resources. The way to solve Kentu
The way to solve Kentucky style crisis is to have public schools compete with local educational providers on individual basis. If they can cut the costs, including by adjusting retirement package, they will stay in business. If not they go bankrupt, long term pensions will cease to exist and current/prospective retirees case will eventually end in state courts or SCOTUS. In any case liability will be limited to money already promised. This is of course a joke that taxpayers get benefit of ‘float’. What real US locality demonstrates this statement, comparatively what private/remote education costs in the same area?
No need for some made-up 2nd, 3rd, etc republic that comes form socilaist thinking either
Anonymous: Charter schools have been the primary mechanism by which the “competition” you want has been introduced into the existing system. So far, they have demonstrated that with the right people it is possible to do better than existing public schools in under-performing areas, but at a high risk of corruption and cronyism with subsequent under performance or failure.
Neal,
There are efficient cyber schools, charter schools, religious schools, home schoolers that compete with public schools and it keeeping public school on their toes, at least in places I have experience with. I have also seen disastrous public schools not financed by local taxpayers by various reasons but neverlessed financed very well in areas with 0 competition, homeschoolong prohibited. You seem to want unrealistic goal of having perfect inexpensive charter school that produces next Nobel laureate. If charter school produces average output of public school for less expense it is already a win. Public school can compete with charter schools.
Why don’t voters rebel? They are in deep denial.
When I mention the outrageous inefficiencies and costs of modern American government, my average dinner companion expresses disgust towards me. They feel it is very impolite to question the productivity of the public sector since it consists of police officers, teachers, health professionals…etc. Unless it is about republicans taking a pay cut or job loss, it is an unapproachable topic.
However, I did find one public sector employee who really seemed to agree that the government was wasting our time and money: He was a tenured professor facing dubious criminal charges and simultaneously dealing with the fallout from a divorce…
So people will pick up the rebellious spirit just as soon as they are practically bankrupt and society has found some imperfection to label them with (racist, negligent, sexist…).
Another way to save on costs and expand tax base is to cut off 12 th grade – there is way too much repetition in studies already, make schooling 11 year affair, and let young people enter workforce 1 year earlier
I’m familiar with a 75 y/o woman who collects four monthly pension checks: one for her 20-years of federal service, one for her fifteen years of state service, one for her deceased spouse’s 20 years of federal service, and one for her deceased spouse’s fifteen years of state service.