Category Archive 'Pensions'

15 Aug 2010

The End of Retirement

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Megan McArdle argues that the era of unionized public sector pension benefits keeping retirees living on full salary for decades is over. Demographics giveth and demographics taketh away.

It was nice that a combination of rising life expectancy and broader pension coverage allowed a large segment of American workers to take what amounted to a multi-decade vacation. (Though this was never quite as widespread as people now “remember”). But this was never going to be sustainable. Retirement experts typically say that retirees should shoot for 75-90% of their working income in retirement (the theory being that some expenses fall, but other expenses rise, and you don’t need to save for retirement when you’re already retired).

That’s fine when the ratio of workers to retirees is 1:12, as it was within the Social Security system in the early years. But by the time you get to 5:1, it starts to pinch–assuming everyone has the same income, each worker has to toss at least 15% of their own income into the pot to support the retirees. Once you get to 2:1–which is where we’re rapidly headed–33% of your income is going to support someone in retirement. Woe betide you if you also have kids.

It’s important to note that this is true no matter how retirement is funded. Whether you collect a dividend check, get a corporate pension, or live off your social security, your retirement is funded by real claims on the output of people in the workforce. Private pensions have a couple of advantages: the investments that fund them actually help make the economy more productive, unlike transfer payments; and they aren’t necessarily indexed to inflation, so over time, as incomes grow, it becomes easier to support the older retirees. But they don’t eliminate the problem; they merely mitigate it.

Mathematically, society simply cannot have a high and growing dependency ratio–at least, not if the retirees expect to be supported in the style to which they have become accustomed. (I take it that this is what is meant by “a decent living and a stable retirement”). We can warehouse people in spartan old folks homes (or treat them like kids and move them into the spare bedroom), in which case they can enjoy a lengthy retirement. Or they can retire for less time, and live more lavishly. But there is no conceivable system that is going to allow the vast majority of the population to spend a full third of their adult life in retirement, at anything like the same standard of living they had when they were working.

19 May 2010

California Government Employee Pensions Based on Projected 28,000,000 Dow

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How did California go broke? In the Wall Street Journal, David Crane how democrat giveaways to unionized state employees created an early retirement leisure class whose maintenance was soon consuming the bulk of the Golden State’s budget.

In 1999 then California Governor Gray Davis signed into law a bill that represented the largest issuance of non-voter-approved debt in the state’s history. The bill SB 400 granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries. The California Public Employees’ Retirement System sold the pension boost to the state legislature by promising that “no increase over current employer contributions is needed for these benefit improvements” and that Calpers would “remain fully funded.” They also claimed that enhanced pensions would not cost taxpayers “a dime” because investment bets would cover the expense.

What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls could turn out to be hundreds of billions of dollars, (4) Calpers’s own employees would benefit from the pension increases and (5) members of Calpers’s board had received contributions from the public employee unions who would benefit from the legislation. Had such a flagrant case of non-disclosure occurred in the private sector, even a sleepy SEC and US Attorney would have noticed.

Eleven years later, things haven’t turned out as Calpers promised. While state employees have been big winners from the bet, the state budget has been, and will continue to be, a huge loser. Far from being “fully funded” as promised, Calpers has already required $15 billion more from the state budget than projected in 1999 and $3.5 billion is budgeted for this year, a figure that is more than five times the expense projected by the state legislature in its SB 400 analysis.


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