FIDUCIARY FAILURE
| FIDUCIARY FAILURE |
| 2015 - FIDUCIARY FAILURE |
2015 |
THESIS 2015 |
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2015 - FIDUCIARY FAILURE
Exploding Public Pension Costs Hit Public Employee Wages 04-21-15
In the past, the Manhattan Institute has effectively highlighted how rising California public pension costs are cutting into “basic infrastructure maintenance, public safety, education, and quality-of-life services such as parks and libraries.” But in the newest report, “Pension Costs are Crowding Out Salaries,” by Senior Fellow Stephen D. Eide, the Manhattan Institute reveals how California public employees themselves are suffering. In a decade where pension costs rose by 135 percent and healthcare premiums by 85 percent, public sector wages grew 4.6 percent slower than private sector workers’ salaries.
Public pensions in California are among the richest in the nation, and union resistance to shifting more costs to deductibles and co-pays has caused government employers’ insurance premium expenses to climb faster than in the private sector.
Local government staffing levels in California also “remained eight percent below where they were in December 2007,” according to the report, while “private-sector job levels…were 2.4 percent higher.” But current employee salaries are being trimmed and their benefits have been lowered to subsidize the cost of retirees and older public workers’ benefits.
Thanks to California’s Public Employees’ Pension Reform Act of 2013, state, county and municipal government entities have found themselves forced to divert revenues to backfill pension promises made to prior generations of employees.
Pension reformers’ claims that they are not anti-worker are starting to resonate with younger public employees. The Manhattan Institute suggests a reformed pension system should be one better-positioned to make good on its promises. They point out that legal guarantees have amounted to little when there was no money left in bankrupt Rhode Island, Central Falls, Pritchard, Alabama and Detroit.
California public employees claim they have some of the “strongest legal prohibitions against pension changes in the nation.” But when governments can’t touch pensions, they have been hitting younger workers with furloughs, lay-offs and reduced pay grades. The Manhattan Institute concludes that “guaranteed “retirement security” for some is only possible at a cost of job and wage insecurity for others.
Public employees have already lost the “the public’s hearts and minds.” The most recent Reason-Rupe Public Opinion Poll found that “private sector workers—who largely fund government workers’ defined benefit pensions—strongly favor shifting current employees to 401k style accounts by a margin of 65 to 31 percent.”
Interestingly, a slimmer majority of government workers “would also favor such a reform if it only applied to future government workers, and not themselves” by 54 percent in favor to 43 percent opposed. Younger government workers are painfully aware that they are paying a steep price to subsidize retirees and older workers who have substantially better benefits than they will ever achieve.
When the Reason-Rupe survey asked respondents if they would favor 401k-style accounts for government workers if it meant “benefits were not guaranteed and would depend on how well the employees and government save and invest,” 57 percent of private sector workers continue to favor such a transition. But 61 percent of public employees would oppose this move.
The Manhattan Institute adds:
“The most persuasive case for pension reform remains the effect on services and government budgets more generally. Perhaps union leadership and members will never come around, but the facts remain. Unchecked growth in pension costs means lower wages for government employees.”
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2015 |
THESIS 2015 |
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2015 - FIDUCIARY FAILURE
Government Admits It Can't Fully Guarantee 51% Of Insolvent Pension Plans
Earlier this month we outlined why it is a bad time to be a pensioner. Among the issues we identified were the 18% increase in EU corporate pension deficits occasioned by the use of a lower discount rate in the calculation of the present value of liabilities (thank you Mario Draghi), US public sector pension plans’ shift away from fixed income and towards more risky investments due to an express unwillingness to adopt more realistic investment rate assumptions (because that would mean lowering the liability discount rate), and a rumor (which just today was confirmed as fact) that Greece will indeed look to plunder pensions in order to stay afloat.
In the most recent example of why pensioners in the US should perhaps be a bit concerned about the security of their benefits, a new report suggests that the government agency in charge of backstopping private-sector pension plans (the Pension Benefit Guaranty Corporation) isn’t entirely optimistic about its own ability to provide an effective safety net for multiemployer plans.
Via Pensions and Investments:
More than half of multiemployer plan participants will have their benefits reduced if their plans become insolvent and rely on government guarantees in the near future, said a study released Wednesday by the Pension Benefit Guaranty Corp.
That compares to 21% of participants now in plans that have already run out of money and rely on PBGC guarantees.
As the following chart shows, the agency is doing a fairly decent job when it comes to participants in plans that are currently insolvent and receiving assistance, but when it comes to backing up plans that are “likely to need assistance in the future,” the outlook is not good, with more than half of participants suffering a reduction in benefits...
Worse still, of the 51% who will have their benefits cut, 54% will see cuts of 10% or more…
Importantly, the PBGC only looked at currently insolvent plans or terminated plans. It did not take into account plans which it believes will be insolvent sometime within the next decade. Were those numbers included, the agency says that “the risk and magnitude of benefit loss increases dramatically [and] the gap between promised benefits and guarantees widens further.”
Here’s why (via Pension Investments again):
Many of the plans headed toward insolvency or projected to do so within 10 years represent plans with larger populations or more generous benefits. “That by implication suggests that as the benefit amounts get bigger, the current level of the guarantee will cut a lot more participants and the cuts will be a lot higher,” said a PBGC official involved with the study who declined to be identified. “Future insolvencies are going to be generally less well protected than the current system.”
* * *
We’ll leave you with the following from the PBGC’s 2014 annual report:
The multiemployer program’s net position declined by $34,176 million, increasing its deficit to $42,434 million, an all-time record high for the multiemployer program…
Some plans, even an improving economy will not be sufficient to maintain their solvency...
The FY 2013 Projections Report found that, at current premium levels, PBGC’s multiemployer program is itself on course to become insolvent with a significant risk of running out of money in as little as five years. The risk of insolvency rises rapidly, exceeding 50 percent in 2022 and reaching 90 percent by 2025. When the program becomes insolvent, PBGC will be unable to provide financial assistance to pay guaranteed benefits for insolvent plans.
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2015 |
THESIS 2015 |
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2015 - FIDUCIARY FAILURE
Government Admits It Can't Fully Guarantee 51% Of Insolvent Pension Plans 03-13-15
Earlier this month we outlined why it is a bad time to be a pensioner. Among the issues we identified were the 18% increase in EU corporate pension deficits occasioned by the use of a lower discount rate in the calculation of the present value of liabilities (thank you Mario Draghi), US public sector pension plans’ shift away from fixed income and towards more risky investments due to an express unwillingness to adopt more realistic investment rate assumptions (because that would mean lowering the liability discount rate), and a rumor (which just today was confirmed as fact) that Greece will indeed look to plunder pensions in order to stay afloat.
In the most recent example of why pensioners in the US should perhaps be a bit concerned about the security of their benefits, a new report suggests that the government agency in charge of backstopping private-sector pension plans (the Pension Benefit Guaranty Corporation) isn’t entirely optimistic about its own ability to provide an effective safety net for multiemployer plans.
Via Pensions and Investments:
More than half of multiemployer plan participants will have their benefits reduced if their plans become insolvent and rely on government guarantees in the near future, said a study released Wednesday by the Pension Benefit Guaranty Corp.
That compares to 21% of participants now in plans that have already run out of money and rely on PBGC guarantees.
As the following chart shows, the agency is doing a fairly decent job when it comes to participants in plans that are currently insolvent and receiving assistance, but when it comes to backing up plans that are “likely to need assistance in the future,” the outlook is not good, with more than half of participants suffering a reduction in benefits...
Worse still, of the 51% who will have their benefits cut, 54% will see cuts of 10% or more…
Importantly, the PBGC only looked at currently insolvent plans or terminated plans. It did not take into account plans which it believes will be insolvent sometime within the next decade. Were those numbers included, the agency says that “the risk and magnitude of benefit loss increases dramatically [and] the gap between promised benefits and guarantees widens further.”
Here’s why (via Pension Investments again):
Many of the plans headed toward insolvency or projected to do so within 10 years represent plans with larger populations or more generous benefits. “That by implication suggests that as the benefit amounts get bigger, the current level of the guarantee will cut a lot more participants and the cuts will be a lot higher,” said a PBGC official involved with the study who declined to be identified. “Future insolvencies are going to be generally less well protected than the current system.”
* * *
We’ll leave you with the following from the PBGC’s 2014 annual report:
The multiemployer program’s net position declined by $34,176 million, increasing its deficit to $42,434 million, an all-time record high for the multiemployer program…
Some plans, even an improving economy will not be sufficient to maintain their solvency...
The FY 2013 Projections Report found that, at current premium levels, PBGC’s multiemployer program is itself on course to become insolvent with a significant risk of running out of money in as little as five years. The risk of insolvency rises rapidly, exceeding 50 percent in 2022 and reaching 90 percent by 2025. When the program becomes insolvent, PBGC will be unable to provide financial assistance to pay guaranteed benefits for insolvent plans.
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2015 |
THESIS 2015 |
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