The truth about pensions

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David Cay Johnston, the Pulitzer-Prize-winning former New York Times reporter, has a brilliant piece on his blog about public-employee pensions. His basic point: the mainstream media, including his own former paper, have utterly missed the point about how pensions work:

[Wisconsin] Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to "contribute more" to their pension and health insurance plans.

Accepting Gov. Walker' s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.

Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.

Public employees (like the few employees in the private sector who still get pensions) bargain collectively for compensation packages. Some of that compensation comes in the form of deferred pay, which the employer puts aside into a pension fund. In San Francisco, some city employees several years ago, through negotiations, agreed to forego a pay raise and instead accept more deferred compensation; that is, the money they would have received in wages now goes into their pension fund.

When you say that those employees "contribute nothing" to their pensions, you're not telling the truth:

The fact is that all of the money going into these plans belongs to the workers because it is part of the compensation of the state workers. The fact is that the state workers negotiate their total compensation, which they then divvy up between cash wages, paid vacations, health insurance and, yes, pensions. Since the Wisconsin government workers collectively bargained for their compensation, all of the compensation they have bargained for is part of their pay and thus only the workers contribute to the pension plan. This is an indisputable fact.  

More:

Thus, state workers are not being asked to simply "contribute more" to Wisconsin' s retirement system (or as the argument goes, "pay their fair share" of retirement costs as do employees in Wisconsin' s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.

At the time that San Francisco officials agreed to use deferred compensation as a way to avoid pay raises, it was a politically easy decision: The stock market was booming, and the pension fund was making so much money from its investments that the city could in effect keep that money (the pay raises that would have gone to the employees) and use it to avoid tax increases or cuts somewhere else. Unless they were fools, the city officials who signed off on this deal knew, or should have known, that at some point the stock market would come back to Earth, and the city would have to pay the deferred compensation out of the General Fund.

Now: You can argue that those contracts were overly generous and should be renegotiated. You can argue that the city can't afford to pay its workers as well as it once did and that they should take further pay cuts (beyond the half-billion or so they've already given back). I don't entirely agree, but at least that's an honest argument.

But to say that city workers aren't contributing to their pension fund, or need to contribute more, is dishonest. For the newspapers to report that as fact is bad journalism.

 

 

Comments

this proves that Public Workers are vastly overpaid even if they have slightly more education than private sector

Earlier claim that Education gap made up difference
http://host.madison.com/wsj/news/local/govt-and-politics/article_d409384...

USA Today - Federal Employees paid double Private sector
http://host.madison.com/wsj/news/local/govt-and-politics/article_d409384...

Any one who spends time in SF City Hall knows the common example of overpaid underworked city servants. Most who have contracted in City Government have experienced that they do work while city staff does not.

Posted by ok then on Feb. 24, 2011 @ 2:50 pm

Firstly, why do you think you are doing City employees a favor by fighting increased contributions for pensions and health care (the increases the folks in Wisconsin already agreed to)? Increased contributions = fewer layoffs. Your advocacy would cost some their jobs. So Lee, O'Connor, Avalos, Hellman, Adachi, Elsbernd etc. (meaning the entire political spectrum) have all been quoted as saying employees need to contribute more - but for some reason you're still holding out. Are all these folks "attacking" the City's employees too? You should heed O'Connor's advice: "We need to pull our head out of the sand."

It appears you want your readers to somehow believe that City employees have been foregoing wage increases in lieu of pension contributions. (Who knows what has been going on in Wisconsin.) This is not serious. Police and Fire have been taking large wage increases over the last five years and are still taking them - police 8% last year, Fire 6% over this fiscal year and next. The City's own survey showed fire wages are 30% higher than other comparable CA cities.

The average CIty employee wage is now $100,000- it's pretty tough to make a case that this is a product of foregoing wage increases. This would also mean for example, that the wages of the City's gardeners and janitors are less than that of private sector gardeners and janitors. This is far from true.

Please pull your head out of the sand.

(You keep citing "half a billion" in permanent concessions City employees have made. Please document this in detail in a future article.)

Posted by Guest on Feb. 24, 2011 @ 3:15 pm

Reality?

Tim Redmond is led around on a nose ring by Gabriel Haaland who uses the Guardian as his own personal blog (Way to go, Gabriel!). All the crap in this piece and in every other post the Guardian staff has put forward for the last couple of weeks has been an attempt to divert the readership from the fact that Gabriel is now selling out his membership to the tune of 300-400 million a year in added costs to their mortgages and grocery bills.

Gabriel Haaland refused to make the tough calls on pensions and health care.

Jeff Adachi took up the slack.

Ergo, Haaland is jealous of Adachi and attacks him, even tho ...

Haaland is asking his membership to give back triple what Adachi suggested.

Because Gabriel's billionaire/master/boss (that would be Warren Hellman) says:

"I'm sorry that it has to come out of the hides of union workers."

And, Gabriel Haaland is trying to sell that to his union.

And, demonize Adachi and Gonzalez at the same time.

Gabe, love you man, but you've always been a slime ball.

Go Giants!

h.

Posted by Guest h. brown on Feb. 24, 2011 @ 3:41 pm

Huge taxpayer payments are required into CALPERS and equivalents to maintain their solvency. There is now ay that money would otherwise be paid as salaries to PS workers, and calling it "money they would have gotten otherwise" is totally false and misleading.

The amount paid in depends on the solvency of the fund at that point, future projections of investment returns and of course the schedule of estimated payouts. As such it varies every year - not something you can say about PS pay.

Moreover, municipalities often issue bonds to make the contributions, i.e. borrow.

The current situation is horrendous and people are finally waking up to that. You do the truth a huge disservice here.

Posted by Wally on Feb. 24, 2011 @ 4:13 pm

This article rests on an unreasonable premise.

A person receiving a pension of $50,000 would, in the private sector, need to buy an annuity of nearly $1,000,000 to be paid $50,000 a year starting at the retirement age of a city worker. So, these folks actually just deferred compensation of $1 million during their tenure?

Heather Fong's pension is what--$250,000? There has to be over $4,300,000 set aside to cover that $250,000 income stream starting at her retirement age. So the premise is that she deferred $4.3 million? Even if she had 30 years of service that means that she deferred $143,000 a year each and every year.

And, if memory serves, in the latest negotiations, the SEIU agreed to start paying 7.5% toward their pensions starting in July 2011, but they required a 6% raise for that "concession." So is the premise that they actually got a 13.5% raise--6% now and 7.5% later?

Posted by The Commish on Feb. 24, 2011 @ 4:45 pm

As David Cay Johnston points out, "the mainstream press is not even getting basic labor economics right," much less 'the arcane rules underlying the important tax debates and controversies that affect corporate and individual taxpayers." So it's truly refreshing to come across a journalist who knows his stuff.

Btw, I highly recommend Johnston's book, "Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill)"

Thank you for doing a stellar job of reporting on this issue.

Posted by Lisa Pelletier on Feb. 24, 2011 @ 7:16 pm

Lisa, I'm happy you found someone to feed you your Kool-Aid.

What is your plan to come up with a $470 million pension payment this year? What is your plan to address a $4,400,000,000 unfunded healthcare liability?

If I were presently a public employee, I would start looking for new work if I were more than 10 years from retirement. The pension won't be there unless the system changes dramatically. And if anyone is presently a teacher, I would take a deep look at your pension fund. It's apparently close to insolvent.

Posted by The Commish on Feb. 26, 2011 @ 10:16 pm

H,
I think you are great, but you are smoking something if you think I'm trashing Matt Gonzalez. Never happened. Despite my difference of opinion with him on a few matters, by and large, I still like and respect him.
As for Jeff, I admit to being initially very surprised that he went in this direction and maybe felt like he was completely wrong, but I never personally attacked him.
Nor have I personally attacked you, and despite your remarks, I will continue to like and enjoy your company when I see you.
That all being said, I can call out an initiative as right wing, and we can debate the issues on the merits without personalizing this, and the next time I see you, I'm happy to engage with you on the topic.
I'm leaving tomorrow afternoon after work for three days but when I get back I will try and look you up and we can have that debate.
Good luck to you and I share your enthusiasm for the Giants.
Peace,
Gabriel

Posted by Guest Gabriel on Feb. 24, 2011 @ 10:55 pm

Just to clarify, I supported Matt for D.A. in 1999, Supervisor in 2000, and for Mayor in the run-off in 2003, despite my vigorous objections to him entering the race so late. I supported him out of a deep respect and while over the years there were some disagreements, I continue to respect and honor his legacy and good works.

Posted by Guest Gabriel on Feb. 24, 2011 @ 11:16 pm

The first new rule says you HAVE to have insurance. Both my husband and I have pre-existing conditions, and although the new bill says we can't be denied coverage because of it. So far, the cheapest health insurance we've been able to find is called "Wise Health Insurance" search for it online if you are pre-existing conditions.

Posted by velmacarol123 on Feb. 25, 2011 @ 12:20 am

Both Adachi and Labor are pretty clueless. Adachi first off should have realized that the wind in his pension sails came from the libertarian billionaire political class and cut his losses then. But as an adversarial attorney, apparently a good one at that, he does not realize that "getting your dick in it" does not cut it in what has to be a collaborative political process. Refusing to "pull his dick out of it" deciding to double down on medieval instead, Jeff has backed himself into a corner politically.

Prop B is a wake up call to Labor, one on which they've hit the snooze alarm again. So long as the spread between organized workers compensation and security and unorganized workers grows, there will be fertile fields of legitimate resentment for the billionaires to work. Appeals to liberal guilt, to the politically and economically tenuous notion that if organized public workers lose their good deal that will impact the unorganized workforce don't cut it. Labor has to offer up a partnership with unorganized workers on how we're going to unite to pull us all up as pertains to workplace, healthcare and retirement security.

As far as pension financing goes, who was running CalPERS, who was running the SF retirement plan, what Controllers were making ballot handbook analysis that kept on promising that everything was rosy until it suddenly wasn't? Is there going to be any criminal accountability for this thievery, or is the fiduciary class absolved of any accountability for their fiscal irresponsibility?

Willie Brown was at CalPERS as the ship hit the reef, Willie Brown and Gavin Newsom's appointees to Controller and the Retirement Board are the ones who piloted the ship like drunken sailors. These people have names and addresses and frittered away our money.

I mean seriously, if I was able to foresee the mortgage crash and refinance our home at a 30 year fixed in 2004, and if I was able to foresee the stock market crash and yank my money out of the stock market in Sept of 2008, the finance incompetent that I am, then there is no excuse for the professional appointees misleading and missing the boat on this. Where is the accountability?

-marc

Posted by marcos on Feb. 25, 2011 @ 8:45 am

Gabe,

Thanks for the kind words and I'd love to see you at lunch at Daly's Dive today. Noon to 3pm. On the matter of Jeff, I watched you stand screaming at a D Triple C meeting last year calling him a "traitor". All he asked for was some fiscal responsibility to the tune of 120 million. He neither insulted you nor your rank and file.

Warren Hellman on the other hand (your billionaire buddy) says he's going to take between 300 and 400 million a year, "Out of your hides." and you haven't attacked him. I'd say that's pretty hypocritical.

I've followed your career for many years, guy and I definitely respect and am wary of you but you've always played dirty (take the Malia Cohen face pasted over Chris Jackson's last year). Remember the DCCC literature where you completely left off a candidate endorsed by the DCCC? The D-8 mailers a few years back? All just innocent mistakes? It's the way you've always done business and every political insider in town knows it. You're the Progs equivalent of Ryan Chamberlain.

But, we do agree on the Giants and perhaps that can be a kind of 'Ping Pong' diplomacy to keep a dialogue going.

Watched all 22 hours of Ken Burns', 'Baseball' this week.

Very respectfully yours,

h.

Posted by Guest h. brown on Feb. 25, 2011 @ 9:41 am

Dude,
You see things that I don't see or that are even in the realm of reality.
I'm sure Malia and many others would be completely surprised to hear your allegation, especially given that she kind of read me the riot act for not being support enough of her... Your allegations have no basis in fact. None.
As for the DCCC literature where I left a candidate off, you assume I had control when I didn't. I don't even know which you are talking about but I haven't been on the committee that does the slate card ever. Ask Aaron Peskin or Chris Daly. Didn't happen.
I have not participated in design or creation of the slate card since I have been on the committee. So show me the evidence of your theory or your allegation. Any evidence whatsover beyond throwing mud on the wall and seeing what sticks. ;) It's a tactic that I have seen you use before well, and while I respect your courage in standing up for justice, you are completely missing the mark.

I'm impressed that you have given me so much power though. I'm sure that in some alternate universe I have more power, but in this one, not so much. Thanks for your kind words.
All the best,
Gabriel

Posted by Guest Gabriel on Feb. 25, 2011 @ 10:01 am

Dude,
You see things that I don't see or that are even in the realm of reality.
I'm sure Malia and many others would be completely surprised to hear your allegation, especially given that she kind of read me the riot act for not being support enough of her... Your allegations have no basis in fact. None.
As for the DCCC literature where I left a candidate off, you assume I had control when I didn't. I don't even know which you are talking about but I haven't been on the committee that does the slate card ever. Ask Aaron Peskin or Chris Daly. Didn't happen.
I have not participated in design or creation of the slate card since I have been on the committee. So show me the evidence of your theory or your allegation. Any evidence whatsover beyond throwing mud on the wall and seeing what sticks. ;) It's a tactic that I have seen you use well, and while I respect your courage in standing up for justice, you are completely missing the mark.

I'm impressed that you have given me so much power though. I'm sure that in some alternate universe I have more power, but in this one, not so much. Thanks for your kind words.
All the best,
Gabriel

Posted by Guest Gabriel on Feb. 25, 2011 @ 10:05 am

On a final note, I have never met Warren Hellman in my life. I find it hard to believe that he is my billionaire buddy when I haven't met him. Ever. Not once.

I know we disagree on pensions. That part is not in dispute. That all being said, I agree with most everything else you believe it, so why not take a step back, reflect on the fact that perhaps there is a misunderstanding, and be open to the possibility that we share beliefs than we disagree on?

I truly respect and honor your willingness to stand up for justice. You are very courageous, and that has never been lost on me. You are willing to take on those in power in a way that few are. I do not want to suggest that you shouldn't take me on. You should. That said, the accuracy of your suggestions are problematic and some fact-checking would bear me out here. That doesn't mean I don't think you should continue to throw mud on the wall. It's an effective tactic in the fight for justice.
Take care, my friend.
Gabriel

Posted by Guest Gabriel on Feb. 25, 2011 @ 10:34 am

On a final note, I have never met Warren Hellman in my life. I find it hard to believe that he is my billionaire buddy when I haven't met him. Ever. Not once.

I know we disagree on pensions. That part is not in dispute. That all being said, I agree with most everything else you believe in, so why not take a step back, reflect on the fact that perhaps there is a misunderstanding, and be open to the possibility that we share more beliefs than we disagree on?

I truly respect and honor your willingness to stand up for justice. You are very courageous, and that has never been lost on me. You are willing to take on those in power in a way that few are. I do not want to suggest that you shouldn't take me on. You should. That said, the accuracy of your suggestions are problematic and some fact-checking would bear me out here. That doesn't mean I don't think you should continue to throw mud on the wall. It's an effective tactic in the fight for justice.
Take care, my friend.
Gabriel

Posted by Guest Gabriel on Feb. 25, 2011 @ 10:40 am

The real truth about pensions is that the deal that was struck between the public employee unions and those in political office was based upon interest rate and earnings assumptions that were unreasonable. One can talk all you want about how much the employer or the employee funds, but in most pensions the bulk of the annuitized payments are made up of earnings.

During the late 90's it was convenient to assume that double digit stock market returns would continue indefinitely. Any sane person (or anyone who merely looked at history) would think otherwise. Nevertheless, as part of the pact between politicians and public employee unions, benefits were increased to levels that were only sustainable if earnings continued at these levels. Now, as everyone knows, that was unrealistic and most public pensions are underfunded even at ludicrously high levels of assumed interest.

At this point we need to look at some sort of shared sacrifice. Protect certain lower level pension promises (and raise taxes if necessary to do so), while making the higher pension payments subject to the attainment of certain rates of return on the accumulated assets. We can't have a situation where the taxpayer is on the hook for the failure to meet unrealistic earnings rates.

Posted by Guest666 on Feb. 25, 2011 @ 4:06 pm

Why can't public sector pensions be defined contribution, funded solely by employee contributions and some kind of employer matching, in the same way as the private sector?

Why should I contribute for your pension AND mine, while you contribute to neither?

Posted by Wally on Feb. 25, 2011 @ 7:01 pm

The unions lobby to get their own people into office, these people once in office pay them off with these ridiculous deals, and then the rest of us are on the hook for it.

The Wisconsin Gov should not stoop to these same tactics. The public employee unions and their apologist screaming about it, and spinning conspiracy theories, after getting over in the first place?

Comical.

Posted by matlock on Feb. 25, 2011 @ 9:10 pm

Thanks for posting the link to David Johnson's blog where he takes some of us to task who don’t see economic reality through his eyes. I've enjoyed and learned much from his books and NY Times articles over the years, but in this case I think it's he who is a little confused.

He writes, "Out of every dollar that funds Wisconsin’s pension and health insurance plans for state workers, 100 cents comes from the state workers. How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan."

His article implies that future pension pay-outs are fully paid based on these employee contributions, when the real issue is that the combined contributions by employees and government employers will be inadequate – are inadequate - to meet the promised pay-off amounts over the next decades.

In order to afford to pay the ever increasing pension benefits, most cities, counties, school districts, states and other governmental bodies will either have to slash the current government workforce or raise taxes. And if voters don’t agree to increase taxes, a few government bodies may rationally decide that the bankruptcy courts are a better place to renegotiate existing pension and healthcare contracts.

The number of baby boomers retiring in the next 10 years - including tens of thousands who work in one government agency or another - will begin to have significant effects on the economy and government budgets. Relatively high income earners will be retiring, with some earning 50-90% of their current salary. That's a lot of budget cash. Many will move from California to other states where their pension income isn't taxed, further reducing the amount of taxes collected by government.

Unlike most places, San Francisco voters can be rather generous with targeted tax increases. It's possible some of the devastating cuts to public services may be avoided here compared to other cities and counties throughout the state that will be looking at 20-30% reductions in police, fire, healthcaree, parks and library services in order to pay for increasing pension and healthcare benefits.

I wish David Cay Johnson would turn his superior investigative skills to tackle the question of just how much all of the various tax loopholes cost us since we can’t rely on Congress or the state government to provide this information.

Robert

Posted by Guest on Feb. 26, 2011 @ 2:29 pm

I agree with this comment. I can see Redmond's desire for what he terms the more 'honest' argument - but unfortunately, I doubt very few people would disagree with him that -- given the current economics of the City budget and what is practical and real -- that many city government employees are over paid -- and that their pensions, particularly compared to the benefits OR pay enjoyed by the great majority of tax payers in SF.

There's a very good guest opinion in the NY Times: http://www.nytimes.com/2011/02/28/opinion/28mayor.html?src=me&ref=general

Although it's not on point, but frankly Tim Redmond is taking the tack that the only solution is something that's unlikely to happen -- no matter how much Warren Buffett or Warren Hellman believe they are underpaid. However, if Redmond wants to propose an initiative to tax the wealthiest 1% of individuals or corporations in SF an extra 10% (or whatever numbers he wants to put forth to the voters) and Hellman wants to fund the signature gathers, I'd vote for that. Do you think a majority would? The supervisors aren't going to put that on the ballot, neither is Bill Lee.

Posted by Guest on Feb. 28, 2011 @ 7:27 pm

The best line from Bloomberg's opinion piece:

"These are problems that mayors around the country also face. In New York City, taxpayers will be forced to pay $8.3 billion in pension costs this year, up from $1.5 billion 10 years ago."

This reinforces the comment I made earlier - the baby boomers are beginning to retire en masse and the pension and healthcare costs at all levels of government will be astronomical. Some towns could lay off their entire city workforce and likely still not have enough revenue to pay for all of the accumulated pension liaiblities. Municipal finance is going to be ugly for at least the next 10 years.

Here is another article I read last weekfrom the NY Times (you may need to create an account on their website to read it.)

http://www.nytimes.com/2011/02/24/nyregion/24taxes.html?ref=todayspaper

It highlights the myriad of problems of enacting a city income tax. The wealthy usually have more than one residence and it's very easy to change where one "lives." Change your driver's license address; reregister to vote; have your mail rerouted. Pretty simple things and the tax savings could be tens of thousands of dollars.

Wealth taxes are even more impossible to enforce. If my biggest asset is a 50 unit apartment building in Hong Kong, and most of my cash is in a Swiss bank account and the gold bullion I own is safely locked up in a Canada mining oepration, how is San Francisco supposed to find that wealth? Do they think I'll tell the truth on my city wealth tax form? Are they going to send out hundreds of tax auditors to look in my sock drawer for hidden assets?

Over the years the Guardian has promoted a number of tax schemes, and vitually all of them have been terrible ideas. In fact, worse than terrible ideas since the amount of enforcement resources needed to audit their tax schemes would likely cost more than the revenue raised.

Finally you start to hear the Guardian columnists begrudingly talk about how maybe a gross receipts tax might not be so bad. Or that maybe a 5-10% tax on gross rents might make sense. After all, it's pretty hard to move an apartment building outside the city and it's difficult to avoid selling goods and services in the city when the profits can be so high here. And it's a good bet no landlord or businessperson wants to go to jail for avoiding taxes, so they are usually more than willing to pay whatever is owed and just tack it onto the cost of doing business, assuming they have the pricing power to do so.

The Guardian has been a tremendous boost to the city's "progressive" faction, but when it comes to their positions on taxes and even housing policy (No, I and many others don't want to be tenants in some building owned by a Non-Profit CORPORATION), the Guardian esposes policies that are generally wrongheaded and counterproductive. They need to take some of the blame for the fiscal mess San Francisco currently faces.

Robert

Posted by Guest on Feb. 28, 2011 @ 11:04 pm