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.
The greatest impact on the pension crisis is not the returns of the funds but the excessive benefits and the liberal disability laws. This was created primarily in Sacramento when the safety unions started their massive efforts to influence the legislature by creating huge campaign war chests. These were used to change disability and pension benefits for their members by contributing heavily to Democratic party members who carried the water for the unionized safety groups. Secondly, the local BOS started catering to the local safety unions for their endorsement and their contributions. The unions in San Bernardino County have contributed millions to the supervisors campaigns. The supervisors in turn have voted in excessive benefits and now are blaming the pension system for their mistakes. The change for safety switching to “three at fifty” not only cost the County Hundreds of millions of dollars but also suddenly changed the whole mortality tables because now safety personnel are living much longer which stresses the pension fund. A good thing for the members, a bad thing financially that no one wants to admit. The actuarial studies show that safety members cost 300-400% more than general members. The safety unions are the driving force toward the pension crisis. Just look at the City of San Bernardino and see how they’ve BKed that city. The politicians need to address the issue they created and reduce the benefits!