The latest baloney coming out of the union propaganda machine is about Wisconsin's state pension system, namely, that, while Gov. Scott Walker wants state employees to contribute half of their pension costs, that's impossible because they are already paying 100 percent of those costs.
What's more, they shriek, the system isn't even in trouble; in fact, the state's retirement system is fully funded, a virtual Fort Knox of retirement security.
This is how David Cay Johnston, apparently a former New York Times flack-hack, described the "deeply flawed coverage" informing Walker's plan to have state employees contribute 5.8 percent of their pay to their pension.
Johnston wrote, "out of every dollar that funds Wisconsin's pension and health insurance plans for state workers, 100 cents comes from the state workers."
Yikes, let's fold up the tents and surrender now.
Well, not so fast. As you might expect, it's utter nonsense, a smoke-and-mirrors matter of semantics - silliness from a supposedly professional journalist.
Still, it's all over the Internet this week, and the argument goes something like this: The pension plan is a form of deferred compensation, that is, part of the worker's compensation is paid in salary, part in health insurance, and part as deferred compensation to be invested and repaid later as a retirement benefit.
Thus 100 percent of the state's pension cost is funded by workers who "choose" to invest that pay and take it later rather than now in cash.
As such, it is impossible for the governor to be asking for a higher contribution from the workers; what he's asking for is a pay cut.
I'm going to concede the point and get it out of the way, because it's a clever linguistic distraction. Of course it's a pay cut - no matter how you frame it, it is in truth a reduction in the compensation package equal to half of the total pension payment for that worker - but it's the only real truth in Johnston's argument.
The rest of it is built upon union mythology and Leftist folly.
Indeed, the only reason Johnston makes the point is because the idea of a employee contribution sounds reasonable to the public, while a pay cut is more dissonant, hence the distraction, especially if you then argue a pay cut isn't needed. First, the union cheerleaders tried to sell the absurd idea that public employees were undercompensated to begin with, then they tried wishing away the state's $3.6 billion deficit, and now they say the pension fund is already fully funded, so why ask for more when poor state workers have already given so much of their own money.
But the question isn't whether the dollars can be defined as "their own money." The question is whether the pay or gift level is realistic.
Is it sensible compared to the private sector? Is it workable given a sound actuarial assessment of the plan's expected performance?
The answer to both questions is no.
For one thing, these employees are overcompensated compared to the private sector, not undercompensated. A 2009 Wisconsin Policy Research Institute report shows that a private sector employee earning $70,000 in the year before his or her retirement will receive comparable retirement income as his or her state employee counterpart earning only $48,000 per year.
Whether the pension contribution is earned income or a free gift from taxpayers, in this context - can the state afford it? - it's a distinction without a difference. Either way, the state has jettisoned too much taxpayer money for too liberal a benefit it cannot afford. The idea, to use one of the governor's favorite phrases, is to kick the can down the road and hope that investing those dollars will eventually yield enough returns to make the payouts.
This is true in any pension setting, but, in the public sector, there's no one overseeing how lavish those benefits are. And because public employee collective bargaining is no more than collusive bargaining, with unions sitting on both sides of the table - as some wise soul wrote - the generosity grows to ever greater heights.
What's worse, when the future arrives, and the expected returns haven't materialized, there's a serious funding gap. Guess who picks up the tab on the back end, after paying too much on the front end?
The taxpayers, that's who.
Our children and their grandchildren. That should tell you whose money it really is.
As a result, we are seeing growing mountains of unfunded liabilities in state after state. According to the Pew Center, in fiscal year 2000, half of all states had fully funded pension systems but by fiscal year 2008 only four were fully funded.
Ah, but the union propagandists sing, Wisconsin's pension plan is one of those fat-cat four. They point to a Pew Center report showing the system to be fully funded in 2008, having on hand 99.67 percent of a $77-billion liability.
Even the state pension system's 2010 annual report shows $69.1 billion in total assets at the end of that fiscal year.
But is the Pew Center study accurate? Is Wisconsin's pension system in as good condition as the state maintains? It's a safe bet the answer to both questions is no.
First, a 2010 report by the conservative Manhattan Institute says the Wisconsin system is funded at only 72 percent, while teachers' pensions are running an unfunded liability of about $10.9 billion.
Oh-oh, trouble in the mythos.
Of course the Manhattan Institute might portray a worse-case scenario, and the truth is probably somewhere in the middle, which is right where David Wirtz of the Federal Reserve Board puts the funding figure - at 88 percent.
"The 100 percent figure is derived," he wrote in fedgazette, because the state uses "a different method (frozen entry age) to calculate liabilities than the one used by most plans (entry age normal)."
Still, 88 percent would be pretty good. Why would it be that high, though, if the benefit is too generous?
Well, for one thing, the numbers look so good today because in 2003 Wisconsin issued $950 million in bonds to fund the plan, at annual interest rate costs of about 6.5 percent.
Just as with Stewardship bonding, the money has to be paid back. The betting is the return on investments will cover the debt, but there's still those interest costs costs to factor in.
What's more, the economy is increasingly cranky and refusing to play by market rules set down by bureaucrats, who constructed public employee pension plans using more lenient accounting standards than private-sector companies use.
For example, most public-sector plans apply rather indulgent asset growth projection rates to their investment portfolios, typically assuming an 8 percent return over time; Wisconsin pegs its rate of return at 7.8 percent.
The problem is, it's utterly unsustainable, and that's why Wisconsin and the three other "fully funded" states will likely join the 46 remaining states in the seriously underfunded category, if they haven't already (and weren't always).
Virtually no serious pension consultant or economist - excepting a few pseudo-economists for The New York Times and the Huffington Post - believe that number is sound or sufficient. For example, between 2007 and 2009, when the stock market plunged, Wisconsin's investment portfolio was torched for a 26 percent decline in value, which the state taxpayers will be on the hook for if the market doesn't recover and, indeed, exceed historical patterns to catch up with actuarial expectations.
The market isn't likely to be in an obliging mood. Consider that even a 15-percent stock return this year would not provide a sufficient boost to overall portfolio growth rates, and that pension portfolios haven't returned 8 percent in nearly 10 years.
To be sure, pension consultant Girard Miller has a bleak view of the next few years.
"Until mortgage foreclosures begin to decline in 2012, there is no reason to expect the American economy to grow rapidly enough to justify rapid and euphoric escalation of equity (stock) market valuations," he wrote in January. "A double-digit increase in the broad market averages is plausible in light of global growth and continued cost-management in the corporate world. But it is hard to see how stocks can grow much faster than their long-term averages."
He points out that a typical expectation of a 7.5-to-8 percent return on a public pension portfolio assumes double-digit stock increases "every year for eternity" because stocks represent 60 to 65 percent of a typical portfolio, and bonds will only return 4 to 5 percent in the next 30 years.
"The failure to account for business cycles and normal recessionary market declines in bear markets - and the mathematical necessity for markets to significantly outperform their long-term averages during expansion periods - is one of the true shortcomings of public pension fund leaders and their advisers," he wrote. "Policymakers assume that trees will grow to the moon forever, and in a straight line. Financial markets don't work that way."
We have solid evidence that Wisconsin's policymakers and their assumptions long ago launched and are already on the moon. Whether economic reality makes a lunar landing, too, is doubtful.
So let's recap., shall we?
First, Wisconsin public employees have much better benefit plans than their private-sector counterparts, and that's true in general of unionized public employees. The Wisconsin plan effectively guarantees workers a 7.8 percent return, but, as Andrew Bigg and Jason Richwine wrote in the Wall Street Journal, a private-sector employee with a 401(k) can achieve a guaranteed return of only around 4 percent by investing in U.S. Treasury securities.
Second, rather than agreeing to pay a fair down payment today on a generous future benefit, public workers expect the entire cost of these Cadillac benefits to be borne by the struggling public as an entitlement, whether it is called earned income or a taxpayer gift or a Royal Bureaucratic Grant In Aid.
To wit, from 2000 to 2009, public sector employees in Wisconsin paid only $55.4 million into a pension system that cost $12.6 billion, reported The Daily Caller, and, as Gov. Walker said on Meet the Press Sunday, local unions are scurrying to complete contracts before the budget-repair bill takes effect - contracts without benefit concessions.
Third, without the budget-repair bill and future additional pension reforms, there will be growing unfunded liabilities passed on to future taxpayers because of the unsustainable level of benefits and the unrealistic actuarial assumptions behind them. There is not a scintilla of evidence Wisconsin can avoid the fate of other states, given the accounting methods being employed, the ongoing sluggish economic outlook, and the raw greed of public-sector workers.
So-called deferred compensation is slapping upon future generations an obligation and a debt over which they have no say.
Finally, Wisconsin's unionized public employees continue to turn their backs on the budget crisis, for which they are partly to blame. In 2007, the WPRI reported, public employee pension costs in Wisconsin totaled $1.3 billion. If employees paid their fair share, if they paid half of that, state and local government budget deficits could be reduced by $650 million.
That doesn't get us to the promised land, but it moves us closer to it. It puts us on the banks of the river Rubicon, waiting for Gov. Walker to finally ford us across, leaving behind union mythology and Leftist folly.
Posted: Thursday, February 27, 2014
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One other factor largely ignored. ALL pension funds use outdated mortality tables, understating the expected lifespan of retirees. They show PAST mortality -- not reflecting the long term trend of longer life spans. Those last few "unexpected" retiree years are hence 100% unfunded.