Get ready for the bankruptcy of Puerto Rico:
Ultimately, bankrupt blue cities and states and their pension funds will troop to Washington with their hands out, begging for bailouts. Already we’ve seen a leading New Jersey state Democrat call for a $1 trillion federal bailout fund for pensions. The political pressures around the issue will be intense. Some (mostly Republicans) won’t want to give a single dime to the improvident fools and crooks who created this mess. Others (mostly Democrats) will insist on no-fault bailouts, arguing that social justice demands nothing less than an infinite willingness to pour money down ratholes, so long as those ratholes are Democrat-run.
What the country needs is something in between: relief for reform. Cities, counties, and states (or, as in the case of Puerto Rico, commonwealths) who can’t manage their debts anymore can qualify for limited help—but only if they undergo serious, life-changing reform. That may well mean the end of public unions, drastic changes in governance, haircuts all around, tax reforms, and other substantive changes. Forward-looking people in Congress should be thinking now about the legislation that would be needed to set up a framework of some kind to handle these cases. The legal issues are complex; courts have been upholding, for example, the inviolability of employee pensions under state constitutional provisions. It’s hard to see how federal bailouts would let those pensions go unchallenged.
As I’ve written before, a California bailout by the federal government should come only with the condition that it revert to territory status, and not be allowed back in as a single state. Individual regions (like Draper’s South California, or Central California) that get their act together could petition for readmission.
Necessary Amendments for re-admission/bailout:
1) No benefits for any employees at any level of government shall be “defined benefits” as opposed to “defined contributions”.
2) All of those ‘defined contributions’ shall be ‘current year’ contributions – any ‘future year’ contributions need to be bonded/secured -this- year.
My wordings are probably insufficient. But the first one is “Stop promising that $100 of ‘retirement savings’ today will return $5000 and other silly math games like that!”
The second is: “Yes! This includes silly games like ‘we promise to pay you $20,000 in 2100’. If we’re really going to pay them $20,000 in 2100, then you need to go buy an annuity or something that promises precisely that from within the current year budget.”
The government still has plenty of ways to raise money to -effectively- do these sorts of things, but the strictures presented attempt to make the -current- politicos responsible for the spending. Need to bribe the union? Fine, do it with the cash on hand. Don’t make a promise that comes due 20 years from now.
“Don’t make a promise that comes due 20 years from now.”
But those are the best kinds of promises.
My wordings are probably insufficient. But the first one is “Stop promising that $100 of ‘retirement savings’ today will return $5000 and other silly math games like that!”
That silly math is called compound interest. Well actually it isn’t because much of it isn’t stored. But the number is computed taking into account factors like population growth rate and inflation i.e. estimated future GDP.
There are plenty of easy ways to solve the problem. It’s a non-issue. Just tax retirees. That’s it. Problem solved. You still pay them the required amount by law but the state gets to keep the money anyway.
Yes, I grok compound interest.
But the way it actually works in a long, long list of cities, counties, and states that everyone makes assumptions about every single aspect you mentioned. And they most always make the rosiest estimation when make the promise because they know, -know- that they won’t be here when any bill comes due.
There is a difference between:
A) “I will take $100 dollars, invest it in your name, on your behalf, right now, via a third party agent and return every dime of that principal, accrued interest, and interest on the re-invested interest in twenty years. We can -estimate- that, but we dunno what it will be, precisely.”
and
B) “I will take your $100 now. I predict the future interest rate for the term of your pension to be 5%±2% at two sigma, so let’s call it 7%. The cost of living is estimated to increase 2%±1% at two sigma for the term, so we’ll call it 3% and adjust the payout on that, again. So, we’re pretty sure that’ll add up to $20,000 in year X! But the money is -gone- right now. And the payout isn’t sitting in -any- bank anywhere, because we put it into the light-rail project with the promise to reimburse ourselves somehow. Later.”
This (B) isn’t an idle example, this is pretty much precisely Seattle’s approach.
I actually screwed up point B as written.
The key line:
So, we’re pretty sure that’ll add up to $20,000 in year X!
Should include:
So, we’re pretty sure that’ll add up to $20,000 in year X, so we promise you -will- receive -$20,000- in year X!
Rosiest possible compounding -> -amazing- rate-of-returns … if there’s actually any money left to -pay- it.
Happier offering -$200- up front under Plan A than guaranteeing that your $100-will-be-$20,000 under plan B.
There are plenty of easy ways to solve the problem.
But allowing money to be invested and belong to the individual isn’t one of them… because it gives back power over lives.
Yeah, so it is called compound interest, do you know how it works?
For $100 to become $5000, the $100 has to double between 5 to 6 times. We will use the 5 times, which actually makes the $100 = $3200 at retirement. So let’s say the government pension puts aside that $100 for the 18 year old’s retirement at age 68, which gives 50 years for the magic of compound interest to do its job. So to double every 10 years the interest growth has to be an average rate between 6.9 and 7.2 for those 50 years. But the annual GDP is only 2-3% for the entirety of the US, and Puerto Rico isn’t the one raising the GDP higher. Even accepting a 4% growth each year for those 50 years, the government pension falls short of the promised $3200 by $2500. Hence Puerto Rico is in default, because they know the term compound interest, but don’t understand how it works.
Math is hard, but not nearly as hard as not doing the math upfront.
Looks like it’s time to elect a spend and tax even more Republican to “fix” the issues passed by the Dems and get things back on a sound footing. Another “Read my lips” Bush is just what the econ doctor ordered. I expect either a VAT, “death tax” or both will be next on the list.
VAT is surely going to arrive. It’s becoming too hard to tax companies in the modern globalized economic environment. So individuals must be taxed more to compensate.
…that it revert to territory status…
California was never a territory so it can’t revert to that status.
But I nitpick.
OK, fine. “Convert to territory status.”
That means they would no longer have Senators or Representatives in Washington, nor would residents be able to vote in national elections, correct? That’d be hilarious, but it’s never going to happen. It would require someone in Washington on the Right to be capable of some real audacity, instead of their usual go-along-to-get-along non-action.
I find your ideas intriguing and would like to subscribe to your newsletter.
That means they would no longer have Senators or Representatives in Washington, nor would residents be able to vote in national elections, correct?
Yes, that is correct.
the haircut idea is logical, but it will never happen. the GOP, aka the Washington Generals, is a bunch of gutless and ballless wimps who knuckle under to the DemonRAT Party.
Haircut is unavoidable… magic assets to cover liabilities are not on any radar.
Just freeze the transfers at a given level and let them handle their own problem themselves… I think it’s a bad idea to dictate what local government should do from the top on if its a local problem. If its a local problem the locals can handle it better.
“If stupidity got us into this mess, then why can’t it get us out?”-Will Rogers
I got everything about the article except how “haircuts all around” would help anything. Even at Super Cuts, those are $16. That’s probably $4 billion worth of haircuts. And what would it get us?
Bald women. Lots of bald women.
Well I’m old enough to remember the Sunday comic strip “Henry”. Speaking of bald…
I’m old enough to remember Peanuts.
I like the idea of a surtax on public employee pensions. Esp. for those characters in the State of Illinois who magically get to claim extreme salaries on their state funded pensions while working in the employ solely of their public unions. Can you say sliding scale? Very good. I knew you could!
That’d be hilarious and I woujld be in favor of it, but taxing pensions, anyone’s pensions, doesn’t go down well.
In Michigan they have a wishy-washy, squishy, go-along-to-get-along Republican Governor currently. I believe his name is Snyder. One of his actions upon taking office was to sign legislation passed by the legislature to bring Michigan taxes on certain types of pension income into harmony with those of other states. Oh, how the usual suspects screeched and squealed. “Governor Snyder wants to kill Grandma!” That was in 2011 and they’re all STILL whining about it, even though even with the changes Michigan is still one of the most generous towards retirees when it comes to taxes, and wealthy retirees in Michigan are still paying a tiny fraction of the taxes that the young workers who support them pay.
Taxing pension income is the sort of thing that gets a predictable response. This is not to say I wouldn’t find it entertaining.
The only real long-term solution to this mess is my modest proposal:
1) Restore the illegality of government employee unions as was the case from the founding of the Republic until 1960.
2) Every current government employee pays Social Security taxes and gets a Social Security pension on the same terms as private sector employees. This is specifically to include officeholders at all levels of government. No “30 and out” deals, no “retire at 55” stuff, no “double-dipping,” etc. Supplemental pension plans would be on an individual basis and available on the same terms as for private sector workers.
3) All current ex-government retirees on non-Social
Security government pensions will, henceforward, be paid a pension at Social Security rates based on their salary histories.
4) All current government employee pension funds, such as CalPers and CalStrs, will be liquidated in an orderly fashion over a period of 20 years with the proceeds used to supplement the Social Security Trust Fund.
Consider this my little contribution to the sacred left-wing cause of improving income equality.
The railroads seemed to understand pension funding. Is there anyone left in their offices who can help the government pension planners all figure it out?
Of course, the public unions have a lot to do with it, too, as someone else mentioned. “Negotiations” between union reps and the pro-union elected officials on the other side of the table usually amount to little more than a strategy session over how to properly “frame the issue in the media” when the public catches on to the generous raises that they’re going to hand out in the next contract.