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Thread: A REAL problem - unfunded pension and health liabilities

  1. #21
    Senior Member Rogar's Avatar
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    There have been a number of articles about our state pension fund being underfunded. They are still projecting a return on their funds of 7.25% after reducing from 7.5%. That's just silly if you ask me and an invitation for under funding. They got into trouble when the markets slowed in 2009 and even last year did not meet the goal. Even in times of higher interest rates, that still implies investments in higher risk bonds and stocks.

    My last private employer, "almost" a fortune 500 company, allowed me a small pension, but they've discontinued any pension for new hires and have replaced it with slightly better matching of 401K contributions. My pension plus SS when I reach full retirement age will account for lees than half of my last middle class working wage. There is a perception among my former co-workers that state and government retirees get gold plated Cadillac pensions and health insurance that people with no pensions at all pay for in taxes. And on top of things, some have mismanaged their funding. I understand there are counter arguments to that, but I often get an earful on the issue.

  2. #22
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    Quote Originally Posted by dado potato View Post
    Wisconsin state and local government employees and public school teachers are in a pension plan called WRS (Wisconsin Retirement System). As of 2013, (and still, I believe) the pensions are 99.96% funded, according to annual reports by an independent firm. South Dakota is another state with a virtually 100% funded public pension plan.

    The employer-employee split in the contributions to WRS was changed dramatically by Act 10, Republican Governor Scott Walker's 2011 collective bargaining reform law. Prior to Act 10, state and local governments contributed in accordance with collective bargaining agreements 99% of the employer-employee contributions to the WRS. As of 2013 employers paid 57% and employees 43%. The change was bitterly resented by employees and their unions, particularly when the pension contribution split had been the product of a series of collective bargaining rounds in which both sides had made concessions to arrive at agreement. The unions involved were not wrong in hoping for some sympathy from "the public in general" over the harm done by Act 10. But I would agree with LDAHL that when the votes were counted in the recall election of Governor Walker, there were more votes for Walker than his challenger.

    Regardless of the changing split in employer-employee contributions, even Governor Walker has pointed with pride to WRS, as "the only 100% funded public pension in America". sic.

    The "promised" benefit to a WRS recipient is in no way dependent on taxpayers (with or without pension coverage) bailing them out. Pension benefits increase in proportion to the 5-year smoothed returns on the investments of the funds under administration. After 2008 there were several years of no increases in benefits for this reason. WRS is different in this respect from certain other public pension schemes that are running into problems of underfunding.

    I agree that an underfunded pension like you might find in Chicago or Dallas or Kentucky is a problem that will require painful choices.
    The WRS does have the feature of "risk sharing" that many systems lack. The only guaranteed payment is the annuity amount at the start of retirement. After that, market experience determines whether there is an increase or not, and annuities can be reduced to the extent of prior year gains. After the 2008-2009 crash, longer term retirees saw up to five years of reductions. There is no guaranteed cost of living escalator. Unlike some other states, Wisconsin Retirement System participants also contribute to the Social Security System, with the policy goal of eventually replacing 60-85% of a participant's income between the two at the end of a full career.

    I believe there are a few other national or provincial plans that tie increases to investment performance or compensation increases of the working population, but none in America that I know of. Some US states are moving to lower-risk defined contribution plans.

    After Act 10, taxpayers in some sense benefited from the fact that public employers were in a position to reduce budgets to the extent that their pension expenses were reduced. I don't know if Walker won the recall election because voters approved of Act 10 or because many (even those with little love for Walker) felt the recall process was being abused for political purposes.

    I think we are in for some emotional debates in the future on the subject of retirement. Neither governments nor most individuals seem to be adequately prepared, There may be little sympathy for bailing out public plans, perhaps even a strong element of "pension envy". At the national level, people who are more prepared to retire may resent being taxed for the benefit of the less prepared.

  3. #23
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    Quote Originally Posted by LDAHL View Post
    The WRS does have the feature of "risk sharing" that many systems lack. The only guaranteed payment is the annuity amount at the start of retirement. After that, market experience determines whether there is an increase or not, and annuities can be reduced to the extent of prior year gains. After the 2008-2009 crash, longer term retirees saw up to five years of reductions. There is no guaranteed cost of living escalator. Unlike some other states, Wisconsin Retirement System participants also contribute to the Social Security System, with the policy goal of eventually replacing 60-85% of a participant's income between the two at the end of a full career.

    I believe there are a few other national or provincial plans that tie increases to investment performance or compensation increases of the working population, but none in America that I know of. Some US states are moving to lower-risk defined contribution plans.

    After Act 10, taxpayers in some sense benefited from the fact that public employers were in a position to reduce budgets to the extent that their pension expenses were reduced. I don't know if Walker won the recall election because voters approved of Act 10 or because many (even those with little love for Walker) felt the recall process was being abused for political purposes.

    I think we are in for some emotional debates in the future on the subject of retirement. Neither governments nor most individuals seem to be adequately prepared, There may be little sympathy for bailing out public plans, perhaps even a strong element of "pension envy". At the national level, people who are more prepared to retire may resent being taxed for the benefit of the less prepared.
    As someone who lived and taught in Chicago, I have watched the Illinois pension debates with real horror. I think you are so right about emotional debates, and much injustice is coming down the road. I think Baby Boomers are already despised and perceived as somehow having a free ride. I talk to 30-35 year old who have no idea how social security works or was supposed to work and think it is somehow a free ride on their backs. I think those of us at retirement age are going to be handed a "ticket to Oregon"--there, I have just coined that phrase and am going to claim ownership here and now. Assisted suicide is what I think they have in store for us, as we are going to be perceived very soon as "useless eaters."

  4. #24
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    Quote Originally Posted by Tybee View Post
    As someone who lived and taught in Chicago, I have watched the Illinois pension debates with real horror. I think you are so right about emotional debates, and much injustice is coming down the road. I think Baby Boomers are already despised and perceived as somehow having a free ride. I talk to 30-35 year old who have no idea how social security works or was supposed to work and think it is somehow a free ride on their backs. I think those of us at retirement age are going to be handed a "ticket to Oregon"--there, I have just coined that phrase and am going to claim ownership here and now. Assisted suicide is what I think they have in store for us, as we are going to be perceived very soon as "useless eaters."
    Illinois may be the most extreme case right now. I have read that some of their major plans are less than 40% funded. They recently narrowly avoided being assigned junk status. The potential for conflict between public and private workers, older and younger generations, and even different regions of the state seem high.

  5. #25
    Senior Member razz's Avatar
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    What can one do to prepare for the challenge? It isn't decades away from happening.
    Quote Originally Posted by LDAHL View Post
    Illinois may be the most extreme case right now. I have read that some of their major plans are less than 40% funded. They recently narrowly avoided being assigned junk status. The potential for conflict between public and private workers, older and younger generations, and even different regions of the state seem high.
    Gandhi: Happiness is when what you think, what you say and what you do are in harmony .

  6. #26
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    For those who are relatively early in their "earning years", it may be possible to prepare by a retirement planning strategy that visualizes retirement income as a three-legged stool: Social Security benefits, Qualified pension distributions (defined benefit or defined contributions), Investment Income. Set goals of frugality and saving.

    For those nearing retirement "the die is cast". It may be that (as Central States Teamsters have experienced) retirement benefits will not be paid as promised. After exhausting any legal or political remedies, if the lost benefits can not be replaced, flexibility about living arrangements and detachment may address the problem. I would see if it is feasible to double up with a boon companion or two... maybe fellow sufferers... before opting for the ticket to Oregon.

  7. #27
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    Quote Originally Posted by razz View Post
    What can one do to prepare for the challenge? It isn't decades away from happening.
    I would say try to evaluate the policy risk of any government-sponsored program you participate in, perhaps discounting promises for planning purposes. I don't know if we're in "the new normal" permanently, but it might be prudent to err on the conservative side in estimating future investment returns. If you can, arrange for multiple uncorrelated streams of income in retirement. Do what you can to arrange the lowest tax liability possible. I would expect new or increased taxes as politicians finally react to "the most predictable crisis in history". Avoid unnecessary debt. Make a fetish out of living below your means. Have a plan. So many people seem to plan more carefully for vacations than their last 20-30 years of life.

  8. #28
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    One good thing about ours is that the state can not rob it. One Governor tried unsuccessfully. It is protected in the state constitution.

  9. #29
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    Quote Originally Posted by Teacher Terry View Post
    One good thing about ours is that the state can not rob it. One Governor tried unsuccessfully. It is protected in the state constitution.
    Several states have something like that. It's a tribute to the power of public employees unions of vears past, and currently one of the many roadblocks to Illinois getting its finances in order. I'm not sure it would offer complete protection in the event the state wound up in whatever version of receivership applies to state governments or if the constitution were to be amended.

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