Looking at the Causes of the Public Pension Problem in America

FirefighterSubmitted by Elaine Magliaro, Guest Blogger

In the past couple of years, we’ve heard many reports from the mainstream media about how the pension funds of public sector workers are experiencing shortfalls and how they are bankrupting states and municipalities that may be unable to fulfill their pension obligations. All of the blame for this problem has been laid at the feet of public sector workers and their unions. Have the mainstream media presented the public with a true picture of the “pension crisis”—or have they just been repeating the talking points fed to them by certain politicians, organizations, and think tanks? Are “greedy” public sector workers and their unions truly responsible for the “pension crisis”—or are there other causes that are at the root of the problem?

David Cay Johnston, a Pulitzer Prize winning investigative journalist and book author who is a specialist in economics and tax issues, wrote about the issue of public employee contributions to their pension funds in the state of Wisconsin in March of 2011:

When it comes to improving public understanding of tax policy, nothing has been more troubling than the deeply flawed coverage of the Wisconsin state employees’ fight over collective bargaining.

Economic nonsense is being reported as fact in most of the news reports on the Wisconsin dispute, the product of a breakdown of skepticism among journalists multiplied by their lack of understanding of basic economic principles.

Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to “contribute more” to their pension and health insurance plans.

Accepting 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.

In an appearance on Ed Schultz’s news program, Johnston expounded on the subject:

Everybody who has a job who gets any kind of fringe benefits, that`s part of their compensation. And once you have performed the services, the money is yours.

And how the money is divvied up, whether the workers have it direct from the paycheck or its paid directly on behalf of the employee, which is the language in the labor contracts in Wisconsin — on behalf of the employee — they earned the money. It`s not the taxpayers`. The taxpayers bought their services.

David Cay Johnston on Gov. Scott Walker’s False Claims of Taxpayer Subsidies for Workers’ Pensions

In August 2012, Dave Johnson penned an article for Campaign for America’s Future titled Discover The Network Out To Crush Our Public Workers. In it, he wrote of how he had found it difficult “to read, watch or listen to the news without hearing that public employees are paid too much and get ‘lucrative’ pensions and this is ‘bankrupting’ your state, county or city.” He said people were getting the same story over and over—and it seemed to be coming from “everywhere.” He added that it was all “part of a broad, nationwide attack on public employees and their unions…” He said that the pension reform campaigns that were going on in a number of states across this country were coming at a time when the states were experiencing budget shortfalls and were seeking solutions to them. He claimed that the “storyline” the public was getting was diverting their attention from the “real culprits.”

Johnson wrote that at a time when people in this country should be laying blame on the financial institutions that caused the financial crisis in this country, studies and public relations tactics were laying the blame on public employees and their unions.

He continued:

The fact that this is happening in several states, from organizations linked in many ways, with similar language, similar tactics, quoting the same “studies”, from organizations with similar boards, etc. suggests this is a coordinated strategy, designed to have the appearance of popular uprising.

In 2011, Dean Baker, a macro-economist and co-director of the Center for Economic and Policy Research, wrote an article for Huffington Post titled Public Pensions 101. In it, he provided insight into the attack on public pensions. Baker wrote:

With the recent spate of attacks on climate science and evolution it should not be a surprise that traditional defined benefit pensions in the public sector are now also under attack. There are powerful political actors in this country who are anxious to build a bridge back to the 19th century; taking us to a time where working people enjoyed few protections and could not count on sharing in the gains of economic growth.

The effort to weaken or destroy public sector unions and take away their pensions is the latest battle in this larger war. As usual, the right has been busy making things up to push its agenda, confident that the media will not expose untrue claims.

At the center of the right’s story is the view that governments are somehow being reckless or irresponsible when they provide guaranteed pensions for their workers. They tell us that these guaranteed benefits will bankrupt state and local governments, imposing impossible burdens on future taxpayers.

This story can be easily shown to be untrue. While the right has been scaring the public with talk of a trillion dollars in unfunded liability in state pensions, this sum can also be expressed as about 0.2 percent of state income over the time-frame in which the liabilities will have to be paid.

Baker said it was important to “recognize” the main factor that had contributed to the present problem facing underfunded public pensions—“the collapse of the housing bubble and the subsequent downturn in the economy and the stock market. The plunge in the stock market led to a sharp decline in the value of pension fund assets.” The collapse also led to the budget shortfalls facing state and local governments all across the country. Those shortfalls, in turn, resulted in state and local governments making reduced payments to pension funds.

Baker provided numbers to show the comparison in payments made to state and local pensions before and after the financial meltdown:

In the period since the beginning of the recession, annual payments into state and local pension funds have averaged $6.9 billion less than withdrawals. By contrast, in the three years prior to the downturn, payments averaged $18.4 billion more than withdrawals.1

In the executive summary of his report titled The Origins and Severity of the Public Pension Crisis (Center for Economic Policy Research, 2001), Baker wrote that there have been cases where pensions were underfunded prior to the plunge in the stock market in the years 2007-2009. Still, that underfunding, he said, is not the main reason why pensions are facing difficulties today. According to Baker, “$80 billion of the shortfall is the result of the fact that states have cut back their contributions as a result of the downturn.”

Matt Taibbi, in his recent Rolling Stone article titled Looting the Pension Funds, takes us back even further than the financial crisis of 2007-2009—to 1974, when Congress passed the Employee Retirement Income Security Act (ERISA). Taibbi says that the purpose of the ERISA legislation was to “protect the retirement money of workers with pension plans. ERISA forces employers to provide information about where pension money is being invested, gives employees the right to sue for breaches of fiduciary duty, and imposes a conservative ‘prudent man’ rule on the managers of retiree funds, dictating that they must make sensible investments and seek to minimize loss.” Unfortunately, this law that was supposed to protect workers had a big loophole: “It didn’t cover public pensions. Some states were balking at federal oversight, and lawmakers, naively perhaps, simply never contemplated the possibility of local governments robbing their own workers.”

Taibbi claims that politicians started taking liberties with pension money. Some began borrowing cash from the public pension funds “to finance other budget needs.” Some officials also shirked their responsibility to public employees by failing to make their Annual Required Contributions (ARC)—even though they were required to by law.

Taibbi continued:

Here’s what this game comes down to. Politicians run for office, promising to deliver law and order, safe and clean streets, and good schools. Then they get elected, and instead of paying for the cops, garbagemen, teachers and firefighters they only just 10 minutes ago promised voters, they intercept taxpayer money allocated for those workers and blow it on other stuff. It’s the governmental equivalent of stealing from your kids’ college fund to buy lap dances. In Rhode Island, some cities have underfunded pensions for decades. In certain years zero required dollars were contributed to the municipal pension fund. “We’d be fine if they had made all of their contributions,” says Stephen T. Day, retired president of the Providence firefighters union. “Instead, after they took all that money, they’re saying we’re broke. Are you f*cking kidding me?”

David Sirota wrote a report titled The Plot against Pensions for the Institute for America’s Future that was published recently. His report evaluated the general state of the current debate taking place over public pensions as well as the “specific effects of the partnership between the Pew Charitable Trusts’ Public Sector Retirement Systems Project and the Laura and John Arnold Foundation.”

Sirota’s Findings:

  • Conservative activists are manufacturing the perception of a public pension crisis in order to both slash modest retiree benefits and preserve expensive corporate subsidies and tax breaks.
  • The amount states and cities spend on corporate subsidies and so-called tax expenditures is far more than the pension shortfalls they face. Yet, conservative activists and lawmakers are citing the pension shortfalls and not the subsidies as the cause of budget squeezes. They are then claiming that cutting retiree benefits is the solution rather than simply rolling back the more expensive tax breaks and subsidies.
  • The pension “reforms” being pushed by conservative activists would slash retirement income for many pensioners who are not part of the Social Security system. Additionally, the specific reforms they are pushing are often more expensive and risky for taxpayers than existing pension plans.
  • The Pew Charitable Trusts and the Laura and John Arnold Foundation are working together in states across the country to focus the debate over pensions primarily on slashing retiree benefits rather than on raising public revenues.
  • The Laura and John Arnold Foundation is run by conservative political operatives and funded by an Enron billionaire.
  • The techniques used by conservative activists to gain public support to privatize the public pensions that public workers have instead of Social Security are, if successful, likely to be used in efforts to privatize Social Security in the future.

NOTE: I plan to write another post on the pension problem. It will focus on the efforts to reform public pensions and the organizations that are behind the campaign.

Looting the Pension Funds: All across America, Wall Street is grabbing money meant for public workers (Rolling Stone)

The Origins and Severity of the Public Pension Crisis (Center for Economic and Policy Research)

The Plot against Pensions; How Pew and the Arnold Foundation Plan to Undermine America’s Retirement Security (Institute for America’s Future)

Pew’s pension reform activism drawing critics: Some concerned over recent advocacy role in public pension reform (Pensions & Investments)

Public Pensions 101 (Huffington Post)

Promise Breakers: How Pew Trusts Is Helping to Gut Public Employee Pensions (Frying Pan News/Huffington Post)

The “Liberal Press” Continues Its Assault on Unions, Pensions, and Public Employees (Huffington Post)

Note To Gov. Walker: Wisconsin Pension Plan Is 97 % Funded, Could Pay Benefits For More Than 18 Years (ThinkProgress)

Matt Taibbi on How Wall Street Hedge Funds Are Looting the Pension Funds of Public Workers (Democracy Now!)

A Hedge-Fund Billionare From Texas is Waging War On California Pensions: The Arnold Foundation is clearly in the forefront of nationwide efforts to scale back pensions for state and municipal workers. (AlterNet)

Exposed: Enron billionaire’s diabolical plot to loot worker pensions: How an Enron billionaire, Wall Street and a major “nonpartisan” foundation are quietly robbing American workers (Salon)

Why Does a Texas Billionaire Care So Much About Our Pension? (Oklahoma Education Association)

Rhode Island Treasurer Misleading Public Is Worse Than Withholding Hedge Fund Information (Forbes)

The Wisconsin Lie Exposed – Taxpayers Actually Contribute Nothing To Public Employee Pensions (Forbes)

Enron Billionaire and Pew Trusts Looting Public Pensions (Occupy.com)

 Matt Taibbi on Wall Street’s Campaign to Loot Public Pensions (Bill Moyers)

Report Exposes the Right-Wing Tag Team Plotting Against Pensions (Truth-Out)

David Cay Johnston: Wisconsin Public Workers Earned Their Pensions — It’s Not the Taxpayers’ (Crooks and Liars)

117 thoughts on “Looking at the Causes of the Public Pension Problem in America”

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    Rhode Island Public Pension ‘Reform’ Looks More Like Wall Street Feeding Frenzy
    By Edward “Ted” Siedle

    According to Institutional Investor , Rhode Island Treasurer, Gina Raimondo is at work solving the nation’s retirement dilemma, showing how tough public pension reforms can pay fiscal and political dividends.

    Don’t believe a word of it.

    A look behind the curtain reveals her changes to the investment portfolio of the $7 billion Employee Retirement System of the State of Rhode Island will inevitably dramatically increase both risk and fees paid to alternative investment managers, such as hedge funds and private equity firms.

    There’s no prudent, disciplined investment program at work here—just a blatant Wall Street gorging, while simultaneously pruning state workers’ pension benefits. It’s no surprise that some of Wall Street’s wildest gamblers have backed her so-called pension reform efforts in the state legislature. Former Enron energy trader emerges as a leading advocate for prudent management of state worker pensions? That’s more than a little ironic.

    What’s happened to date in Rhode Island is unprecedented in public pension history and, given the myriad risks involved, should be setting off alarms: A little-known money manager hired by the state’s pension to manage a paltry $5 million succeeded in getting herself elected as state Treasurer. That means she’s now responsible for overseeing the entire $7 billion.

    Essentially, there has been a coup—the foxes (money managers) have taken over management of the henhouse (the pension). To make matters worse, she’s an unproven veteran of the “alternative” investment industry—the hallmark of which is a profound lack of transparency.

  6. The biggest culprits in raiding pensions are non profits/xhurches. There are no oversights. Next worst are pols stealing pension funds because they write the laws. The best policed pension funds are private pensions. There are ERISA laws and people go to jail all the time for breaking them. Denny McClain, the last pitcher to win 30 in a season, did serious time.

  7. “Private pensions” are now mostly 401ks. The screwing is done through the fund’s fees. Watch out if the Republicans take over. This is what they want to do with Social Security.

    As for the villians of the union pensions…..the greatest loss was due to the crash of the markets and the crimes of the financial markets. Not the union bosses.

    Next largest villian is the state legislatures – aka – politicians, who did not make their annual payments and, in fact, borrowed from the pensions. Not the union bosses.

    The people who were without fault, are the union members, who dutifully paid into their pensions and were screwed by the banks and hedge funds and politicians.

    These people are now having their COMPENSATION taken from them. A number one example is the villianous governor of Wisconsin – Scott Walker.

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