Sunday, August 12, 2012 – 10:30 a.m.
The “Head-in-sand” approach to denial of escalating pension costs isn’t working any longer.
Existing retirees, the vast majority of which only receive modest retirement checks, are becoming concerned as local governments and labor unions trade blame and refuse to see the writing on the wall.
With two large California cities bankrupt, and more likely to follow, one would think the message was being received.
Well it’s not!
In San Bernardino, the latest bankrupt city, unions believe the past deals they struck are fair, and they shouldn’t have to pay any additional money into the system. Even though the city can’t afford it.
San Bernardino County is approaching its growing pension problem like some sort of play-at-home board game. Rather than adopting uniform changes, the county, via some sort of power trip, is taking some “poker game-style” approach to dealing with the situation with its own unions.
Well, how about no pensions at all?
It may come to that if all the posturing and game playing doesn’t stop.
There are several problems in play here.
1.) All of the state’s pension systems currently estimate they’ll earn at least an average of 7.5% each and every year into the foreseeable future. Reducing this assumption rate usually faces huge resistance because it places more pressure on the particular governmental entity guaranteeing the pension to increase their annual contribution into the system. You can blame the 2008 financial collapse on this one.
2.) The average life expectancy of pensioners and their beneficiaries is increasing due to advances in medical care. A factor that plagues the nations social security and medicare programs.
3.) Depending on the retirement system, a retiree’s surviving beneficiary can receive from 50% to 100% of a decedent’s pension.
4.) All systems provide for cost-of-living adjustments (upward only) linked to the consumer price index.
5.) Many systems allow for some form of artificial spiking used to inflate final earnings used to calculate pensions.
6.) For systems that have to pay guaranteed health insurance premiums, the situation is even far more worse.
One or two consecutive good years for the stock market, which hasn’t came close to its all-time high in more than five years, isn’t going to solve this plethora of problems.
Reduced assumption rates are on the horizon and it’s going to take more money from all sides, combined with reduced benefit formulas, to keep these plans viable for the long term.
The future solvency of many of these systems is on the line.
Hopefully the stakeholders involved can open their collective eyes in time.
But, at this point, it seems people are too blind, ignorant, stubborn, or greedy to care.