Pension explainer
December 10, 2018 7:49 AM Subscribe
Conservatives and neoliberals say pensions are a "crisis" that will bankrupt our cities and states. Progressives say...
Can someone explain or point me to good lay person explanations of the progressive view of how to fund public pensions?
Can someone explain or point me to good lay person explanations of the progressive view of how to fund public pensions?
If they're underfunded, then we need to put more money into them, either by reallocating it from somewhere else or by raising taxes. Which is why it's unpopular. The progressive view is that pensions are an earned benefit of the employees and that it's wrong to renege on the deal, even if it's more pleasant to do so.
They should also be checked to see if they're underperforming as far as their investments and adjusting them to be competitive with their peers.
And some evaluation needs to be done on whether the pension plans are economically infeasible and future pension plan benefits need to be reduced, though that needs to be balanced with boosting the take-home pay for workers with a worse pension plan than their peers on the older one. If the tax payers lack the will to adequately fund the existing plans, it's better to be realistic and pay the employees more so they can make their own savings plans than to leave them with a bankrupt pension decades down the line and little savings to cover their retirement.
posted by Candleman at 8:08 AM on December 10, 2018
They should also be checked to see if they're underperforming as far as their investments and adjusting them to be competitive with their peers.
And some evaluation needs to be done on whether the pension plans are economically infeasible and future pension plan benefits need to be reduced, though that needs to be balanced with boosting the take-home pay for workers with a worse pension plan than their peers on the older one. If the tax payers lack the will to adequately fund the existing plans, it's better to be realistic and pay the employees more so they can make their own savings plans than to leave them with a bankrupt pension decades down the line and little savings to cover their retirement.
posted by Candleman at 8:08 AM on December 10, 2018
If they're underfunded,
And generally they are, massively. This is not partisan opinion, this is fact- promises were made and now that the bill is coming due, there just isn't enough cash to go around. My state (NJ, one of the worst) is projected to be somewhere around $100 billion in the hole.
The progressive view is that pensions are an earned benefit of the employees and that it's wrong to renege on the deal, even if it's more pleasant to do so
I think a lot of people feel this way, which is a fair view but doesn't really help the situation.
posted by ThePinkSuperhero at 8:21 AM on December 10, 2018 [4 favorites]
And generally they are, massively. This is not partisan opinion, this is fact- promises were made and now that the bill is coming due, there just isn't enough cash to go around. My state (NJ, one of the worst) is projected to be somewhere around $100 billion in the hole.
The progressive view is that pensions are an earned benefit of the employees and that it's wrong to renege on the deal, even if it's more pleasant to do so
I think a lot of people feel this way, which is a fair view but doesn't really help the situation.
posted by ThePinkSuperhero at 8:21 AM on December 10, 2018 [4 favorites]
Its really pretty simple - there are inputs (money paid in by workers) and outputs (benefits paid out to ex-workers/retirees). In New York, for example, the way they manage this process in the long term is by reducing benefits via various tiers (current new hires are, i believe, in tier 6). In comparison to the prior tier (tier 4) new employees will have to contribute more, for longer, and cannot draw money out until they are older than those enrolled in prior tiers.
thats still not going to be enough to overcome the demographic shifts (there are just many more older former workers now than at the time all of these pension systems took off) which have turned the ratio of workers to retirees away from pension sustainability.
as with all social problems the solution lies in getting rich people to pay more - tax proceeds on the top fractional percent of wealth could cover the demographic gaps and provide solvency. a less extreme proposal would be to means test existing pension programs and restrict the amount of benefits provided to enrolees who dont "need" them.
posted by Exceptional_Hubris at 8:22 AM on December 10, 2018 [1 favorite]
thats still not going to be enough to overcome the demographic shifts (there are just many more older former workers now than at the time all of these pension systems took off) which have turned the ratio of workers to retirees away from pension sustainability.
as with all social problems the solution lies in getting rich people to pay more - tax proceeds on the top fractional percent of wealth could cover the demographic gaps and provide solvency. a less extreme proposal would be to means test existing pension programs and restrict the amount of benefits provided to enrolees who dont "need" them.
posted by Exceptional_Hubris at 8:22 AM on December 10, 2018 [1 favorite]
Not a state/municipal pension but: Pay at my company has been stagnant for years, and HR and executives tout the pension as a great legacy benefit we have that so many other companies no longer have, as a counterbalance to the fact that people's real wages are declining. I am as progressive as they come but I've seen what happens to pensions after people are no longer of use to the organization and I would rather have my money now thank you very much.
posted by headnsouth at 8:41 AM on December 10, 2018 [2 favorites]
posted by headnsouth at 8:41 AM on December 10, 2018 [2 favorites]
Pensions being an earned benefit of the workers isn’t so much the progressive view as it is the straightforward legal situation — in most cases they were negotiated as part of a contract. Reneging on the deal isn’t a regrettable policy choice, so much as managing to get legal sanction to break a contract after the work that has been paid for was performed.
There’s no fundamental problem with paying for pensions — you just have to have invested a reasonable amount at the outset. The problems come from employers knowingly underfunding pensions in the hopes that by the time the obligations come due, it will be someone else’s problem.
posted by LizardBreath at 8:58 AM on December 10, 2018 [24 favorites]
There’s no fundamental problem with paying for pensions — you just have to have invested a reasonable amount at the outset. The problems come from employers knowingly underfunding pensions in the hopes that by the time the obligations come due, it will be someone else’s problem.
posted by LizardBreath at 8:58 AM on December 10, 2018 [24 favorites]
Pensions being an earned benefit of the workers isn’t so much the progressive view as it is the straightforward legal situation — in most cases they were negotiated as part of a contract. Reneging on the deal isn’t a regrettable policy choice, so much as managing to get legal sanction to break a contract after the work that has been paid for was performed.
This is important.
I have a pension. It's not something that my employer provides because they're nice, or because they had some extra money one year and needed some place to put it. It's a benefit which my union negotiated as a condition of work and which appears in our contract, a document ratified by the union, my employer and the state legislature.
Pension benefits aren't the equivalent of free bagels once a month or the freedom to bring your dog to work - something that the employer giveth and the employer taketh away strictly on an "immediately practical and affordable" basis.
When people say that it's progressive to believe that pension benefits are an earned benefit, or that this is a good feeling to have, that's the equivalent of saying that it's great to feel that a twelve year old can't join the army, or that it's progressive to believe that women can own property. I mean, yes, it is progressive to have this moral commitment, but it's also the law.
In some parts of the world and eras of history , children fight in wars and women can't own property. Creating a society without child soldiers in which women are not financially dependent on fathers and husbands is a great work and a matter of law. And making it not the law requires social and sometimes actual violence. Labor law doesn't just bind workers; it binds employers. Emphasizing that pensions are just a nice thought is a way of attacking the idea that any labor law binds employers at all, ever.
posted by Frowner at 9:10 AM on December 10, 2018 [32 favorites]
This is important.
I have a pension. It's not something that my employer provides because they're nice, or because they had some extra money one year and needed some place to put it. It's a benefit which my union negotiated as a condition of work and which appears in our contract, a document ratified by the union, my employer and the state legislature.
Pension benefits aren't the equivalent of free bagels once a month or the freedom to bring your dog to work - something that the employer giveth and the employer taketh away strictly on an "immediately practical and affordable" basis.
When people say that it's progressive to believe that pension benefits are an earned benefit, or that this is a good feeling to have, that's the equivalent of saying that it's great to feel that a twelve year old can't join the army, or that it's progressive to believe that women can own property. I mean, yes, it is progressive to have this moral commitment, but it's also the law.
In some parts of the world and eras of history , children fight in wars and women can't own property. Creating a society without child soldiers in which women are not financially dependent on fathers and husbands is a great work and a matter of law. And making it not the law requires social and sometimes actual violence. Labor law doesn't just bind workers; it binds employers. Emphasizing that pensions are just a nice thought is a way of attacking the idea that any labor law binds employers at all, ever.
posted by Frowner at 9:10 AM on December 10, 2018 [32 favorites]
Warren Buffet has warned in the past about the overly optimistic predicted returns companies use for pension forecasting to reduce their on paper liabilities / under funding. Here's an excerpt from his consistently excellent letters to shareholders with full details and maths.
posted by JonB at 9:50 AM on December 10, 2018 [2 favorites]
posted by JonB at 9:50 AM on December 10, 2018 [2 favorites]
That many pensions are in crisis is a view held by people across the political spectrum. Because of smaller than necessary contributions, and lower than expected investment returns, many pensions have less money than needed to pay future benefits. Views of what to do about it differ across the political spectrum.
On the left, you hear people arguing that taxes need to go up to help fill some or all of the underfunding. The pensions are a contractual obligation of the government, and if the government chose to underfund or mismanage the pension, it's not on the workers to make sacrifices to make up for decisions made by the states.
On the right, you hear people argue that state workers' unions have too much power and forced governments into unreasonable and unaffordable pension promises. There's often a suggestion that the unions knew these pensions were too generous anyway, and therefore workers weren't really expecting them. (These arguments seem hollow to me, since nearly all states have cut taxes over the time these pension deficits were building up.)
The reason is that for many years state and local governments underfunded pensions. One easy way to do this is to assume investment returns will be very high in the future. If investment returns will be high, the amount of money you need to save now is relatively low. If those high investment returns don't come, the pension will be very underfunded. That's essentially what has happened.
Another reason is the governance structure of the pensions. In the private sector, the asset or pension management business is very well paid, and states did not want to hire needed talent at the salaries they would command. This is ironic to me since in several states, a football coach is the state's highest paid employee. Instead, pension boards would contract out the management of pension assets to hedge funds and pension consultants. Those people got paid more, and their advice and investment performance was worse, than if the money was run by state employees. No one really had skin in the game since they were all going to be elsewhere in a few years, whether the pension was successful or not.
Here in Canada, around the same time as some state government were making those decisions, a number of large Canadian pensions were working out a different model. Large pension funds were broken out into independent funds jointly overseen by the government and the unions. A long term plan was created to obligate both the workers and the government to make contributions. The risk of shortfall is borne mostly by workers, but this is offset by the fact that the long term plan forbids the government to underfund the pension, and truly independent parties set all the assumptions of returns, actuarial tables, etc, so everything is realistic. The majority of the pension monies are managed by the pension itself, and not contracted out. This makes costs lower, and develops expertise in-house. There is no pressure from the government to invest in pet projects. (A possible exception is Quebec's Provincial Pension.) Salaries within the pension manager are competitive with the private sector, so the talent stays in house. (Because the time horizons are so long term, these pensions have a reputation for having a better work-life balance, and less short term pressure, so they are desirable places to work)
The results are that the Canadian model are that the investment returns have been exceptionally high, and the the funding status has been quite good. Any funding deficiencies have been identified long in advance, and so the changes required have been smaller.
In the US at this point, some of the pension shortfalls are so large that there is no choice but a significant cut to benefits. Certainly contributions from the government need to go up as well. I think the unions need to own some of what's gone on too. If the pension is hugely underfunded with no plan in place to fill the gap, the union cannot go into negotiation with any goal other than getting that fixed. The failure of leadership is on both sides. I can see why they might have been happier kicking the can down the road instead. They would be negotiating to save benefits for retirees likely at the expense of salary and benefit improvements for current workers, who are the ones paying dues and walking the picket lines.
posted by thenormshow at 10:17 AM on December 10, 2018 [7 favorites]
On the left, you hear people arguing that taxes need to go up to help fill some or all of the underfunding. The pensions are a contractual obligation of the government, and if the government chose to underfund or mismanage the pension, it's not on the workers to make sacrifices to make up for decisions made by the states.
On the right, you hear people argue that state workers' unions have too much power and forced governments into unreasonable and unaffordable pension promises. There's often a suggestion that the unions knew these pensions were too generous anyway, and therefore workers weren't really expecting them. (These arguments seem hollow to me, since nearly all states have cut taxes over the time these pension deficits were building up.)
The reason is that for many years state and local governments underfunded pensions. One easy way to do this is to assume investment returns will be very high in the future. If investment returns will be high, the amount of money you need to save now is relatively low. If those high investment returns don't come, the pension will be very underfunded. That's essentially what has happened.
Another reason is the governance structure of the pensions. In the private sector, the asset or pension management business is very well paid, and states did not want to hire needed talent at the salaries they would command. This is ironic to me since in several states, a football coach is the state's highest paid employee. Instead, pension boards would contract out the management of pension assets to hedge funds and pension consultants. Those people got paid more, and their advice and investment performance was worse, than if the money was run by state employees. No one really had skin in the game since they were all going to be elsewhere in a few years, whether the pension was successful or not.
Here in Canada, around the same time as some state government were making those decisions, a number of large Canadian pensions were working out a different model. Large pension funds were broken out into independent funds jointly overseen by the government and the unions. A long term plan was created to obligate both the workers and the government to make contributions. The risk of shortfall is borne mostly by workers, but this is offset by the fact that the long term plan forbids the government to underfund the pension, and truly independent parties set all the assumptions of returns, actuarial tables, etc, so everything is realistic. The majority of the pension monies are managed by the pension itself, and not contracted out. This makes costs lower, and develops expertise in-house. There is no pressure from the government to invest in pet projects. (A possible exception is Quebec's Provincial Pension.) Salaries within the pension manager are competitive with the private sector, so the talent stays in house. (Because the time horizons are so long term, these pensions have a reputation for having a better work-life balance, and less short term pressure, so they are desirable places to work)
The results are that the Canadian model are that the investment returns have been exceptionally high, and the the funding status has been quite good. Any funding deficiencies have been identified long in advance, and so the changes required have been smaller.
In the US at this point, some of the pension shortfalls are so large that there is no choice but a significant cut to benefits. Certainly contributions from the government need to go up as well. I think the unions need to own some of what's gone on too. If the pension is hugely underfunded with no plan in place to fill the gap, the union cannot go into negotiation with any goal other than getting that fixed. The failure of leadership is on both sides. I can see why they might have been happier kicking the can down the road instead. They would be negotiating to save benefits for retirees likely at the expense of salary and benefit improvements for current workers, who are the ones paying dues and walking the picket lines.
posted by thenormshow at 10:17 AM on December 10, 2018 [7 favorites]
And yes, I think it's pretty sad that "honor your contacts" and "don't lie" count as the progressive side of things, but here we are.
posted by Candleman at 10:22 AM on December 10, 2018 [1 favorite]
posted by Candleman at 10:22 AM on December 10, 2018 [1 favorite]
Many of the answers above include great detailed explanations, but to concisely answer your specific question:
Can someone explain or point me to good lay person explanations of the progressive view of how to fund public pensions?
The progressive view is "fund public pensions by raising taxes, preferably on the wealthy," against the conservative position, which is "cut public pensions."
posted by Joey Buttafoucault at 10:26 AM on December 10, 2018 [3 favorites]
Can someone explain or point me to good lay person explanations of the progressive view of how to fund public pensions?
The progressive view is "fund public pensions by raising taxes, preferably on the wealthy," against the conservative position, which is "cut public pensions."
posted by Joey Buttafoucault at 10:26 AM on December 10, 2018 [3 favorites]
Here is a fairly recent, peer-reviewed summary of the magnitude of the problem in the US as a whole:
We calculate increases in contributions required to achieve full funding of state and local pension systems in the United States over 30 years. Without policy changes, contributions would have to increase by 2.5 times, reaching 14.1 percent of the total own revenue generated by state and local governments.posted by shothotbot at 12:03 PM on December 10, 2018 [1 favorite]
It's a common misconception that pensions are expensive. They are actually the cheapest way of financing retirement, but of course retirement is extremely expensive. The problem is always that the assets built up by properly funded pensions (which only consume about 10-15% of salary for a full retirement) are irresistable when fiscal crises come around. Social Security would be in great shape if the funds were invested in stocks instead of being used to pay current expenses. This is not unique to the U.S. federal government, pension funds large and small all over the world have the same problem. The U.S. may have the worst of both worlds, with a small "pension" (that still provides essentially all income for 23% of seniors) that's poorly funded, and 401(k) accounts that are safe from raiding but 70% of the tax benefits go to high-income people.
That said, I'm not aware of a coherent progressive message on pensions. Is anyone really advocating them, at a state or federal level? I've seen efforts to make retirement savings available to all, and subsidize it, but that's about the limit.
posted by wnissen at 5:44 PM on December 10, 2018
That said, I'm not aware of a coherent progressive message on pensions. Is anyone really advocating them, at a state or federal level? I've seen efforts to make retirement savings available to all, and subsidize it, but that's about the limit.
posted by wnissen at 5:44 PM on December 10, 2018
Social Security would be in great shape if the funds were invested in stocks instead of being used to pay current expenses.
This is completely incorrect. A detailed explanation is here, but I'll try to explain briefly. 1) Social Security is basically a "pay-as-you-go" system, in which current workers pay taxes, and retirees receive benefits. In general, retirees get more than they paid in because total wages in the economy is growing, so there's a larger tax base to draw upon when they are retired than when they worked. If you wanted to invest your money in stocks or other assets, you'd still have to borrow money to pay the benefits for current retirees, and the net effect of your saving and then repaying that loan is the same as if you just kept the current system. 2) Stocks come with higher average returns and higher risks. The appropriate comparison is to bonds, which are less risky but also come with lower expected returns.
posted by Mr.Know-it-some at 6:18 AM on December 11, 2018
This is completely incorrect. A detailed explanation is here, but I'll try to explain briefly. 1) Social Security is basically a "pay-as-you-go" system, in which current workers pay taxes, and retirees receive benefits. In general, retirees get more than they paid in because total wages in the economy is growing, so there's a larger tax base to draw upon when they are retired than when they worked. If you wanted to invest your money in stocks or other assets, you'd still have to borrow money to pay the benefits for current retirees, and the net effect of your saving and then repaying that loan is the same as if you just kept the current system. 2) Stocks come with higher average returns and higher risks. The appropriate comparison is to bonds, which are less risky but also come with lower expected returns.
posted by Mr.Know-it-some at 6:18 AM on December 11, 2018
Governments have long had pretty decent pension offerings. State, federal, local governments do not have to participate in Social Security, so most have separate pension plans. Of course, they promised the pensions to workers, but didn't necessarily set aside the funds to pay them. It gets expensive, and they'd prefer to not pay out all this money. Republicans and Conservatives want cheap government, but those obligations should be honored.
For a number of reasons, I think everybody should be in Social Security, and then employers can and should add 401K funds.
posted by theora55 at 3:43 PM on December 11, 2018 [1 favorite]
For a number of reasons, I think everybody should be in Social Security, and then employers can and should add 401K funds.
posted by theora55 at 3:43 PM on December 11, 2018 [1 favorite]
I got a lot out of Daniel Davies's pension explainers: on defined benefit versus defined contribution versus 401(k), comparing "the legal rights and protections afforded" to people owed pensions as opposed to people owed other money, and "the attempt to load risks on to the working class which have historically been borne by the owner class". The last one does get at some of the political framing we might use if we wanted to persuade more voters to support the full funding of public pensions.
posted by brainwane at 12:21 PM on December 15, 2018 [1 favorite]
posted by brainwane at 12:21 PM on December 15, 2018 [1 favorite]
This thread is closed to new comments.
The short form is very boring - if we save and invest as a group, without unnecessary fees, weird products or attempting to game the market, and if we adjust how much we're investing in response to changes in world events, and if that money gets sequestered rather than dumped into the general fund, we can pay out more or less as promised. And because we pool our risk and can make large-scale adjustments over time, loss is less of a risk - if you individually invest and the market tanks as you're retiring, you're screwed because you only have your money. A large, well-run pension program has other options because of shared contributions and risk.
Conservatives and capitalists who are against pensions are being extremely inconsistent - what they're saying is that in every other instance (401Ks with dishonest fee structures, etc) investment works - if you just invest as an individual, the market will take care of you - but if you invest as a group, with planning and oversight, everything will go wrong.
Pensions are basically capitalism with risk minimalization. The only reasons capitalists oppose them is that they provide security for workers (meaning fewer people desperate for money and work) and they're harder for their good buddies down at the bank to loot for fees.
posted by Frowner at 7:58 AM on December 10, 2018 [44 favorites]