How Severe is U.S. pension debt?

AUGUST 27, 2010


This piece was originally published on the Nieman Watchdog site.

As the economy boomed, few people worried much about the debt that local and state governments were amassing to pay for increasingly generous pension and health-care benefits for public employees. Now that budgets are tight thanks to a down economy, the issue is big news — made even bigger by the outrageous pay and benefit plans received by officials of the small, working class city of Bell, Calif., where the now-ex-city manager stands to receive a pension valued at $30 million. That news story, uncovered by the Los Angeles Times, put some faces on overall public-employee-pension scandal.

Even bigger news is the size of the pension debt — estimated in California alone at $500 billion, according to a recent Stanford study. The nationwide debt is more than $3 trillion. The state of New Jersey settled this month with the Securities and Exchange Commission. As the Newark Star-Ledger explained: “For years, New Jersey had been cooking its books and neglecting to tell investors it was grossly underfunding pension plans.” Although California and New Jersey have taken the pension-abuse situation to the extreme, it remains a nationwide problem.

The national media have done an excellent job focusing on the expanding pension debt; all one has to do is peruse the Web site to see how widespread and in-depth the coverage of it has become. But in recent weeks, I’ve noticed a counter-offensive from defenders of the status quo, especially from public-sector union officials who are trying to depict public concern as unfair attacks on public employees. Here are some questions journalists should ask as they consider these rebuttals:

Q. Is an unfunded pension liability really that significant?

Although some union officials recognize the problem, the vast majority of the ones that I’ve interviewed, debated and have heard testify in the state Capitol insist that there is no fundamental problem in the current system. In fact, organized labor’s allies in state legislatures continue to gut even the most modest reforms (such as a recent California bill limiting blatant pension-spiking abuses) and even push for retirement and disability expansions. These union officials would like the public to believe that pension funds that are only 70 percent or so funded are in perfectly good shape because the amount of debt is basically a guess — based on assumptions about the rate of investment return in the future. When the rates of return go up, they say, all will be well and the pension systems will be fully funded — which means that legislators won’t have to increase contributions to make the systems whole.

It’s true that financial assumptions are at play here. The retirement systems make investments and if the rate of return is high, then the debt is low and vice versa. But increasingly the systems are making riskier investments to cover up for all the enhanced pension promises made over the years. Politicians have repeatedly made the retirement formulas more generous, and often have done so on a retroactive basis. By “enhancing” the formulas mid-stream, the investment funds have additional pressure to take bigger risks, which explains in part why the California Public Employees’ Retirement System invested in leveraged housing developments at the height of the housing bubble. If such “roll of the dice” investments pay off, then there’s more money for public employees and less political pressure to reform the pension system, and if they don’t, the taxpayers are on the hook. It’s the ultimate privatization of gain and socialization of risk.

The unfunded liabilities have gotten so large, however, that it appears unlikely that a rebounding economy will provide high-enough rates to cover up the problem.

During Senate testimony regarding pension reform, California Gov. Arnold Schwarzenegger’s chief pension adviser, David Crane, explained: “When the state makes a pension promise to a state employee, it is simply promising to pay money to the employee at points in the future. Thus, state pension obligations are no different than state debt obligations, which also are promises to pay amounts in the future. But they differ in two important respects: (1) voter approval is not required for pension obligations — governors and legislators have all the responsibility in that regard, and (2) pension costs, unlike debt service costs, are neither capped nor precisely quantifiable in advance.”

So while the amount of debt is not “precisely quantifiable in advance,” these pension obligations are real debt that must be paid by taxpayers. Furthermore, as Crane noted, “Pension payments are senior obligations of the state to its employees and accordingly have priority over every other expenditure except Proposition 98 (i.e., K-14) expenditures and arguably even before debt service.”

I’ll deal with the significance of that point in the following question.

Q. Pension contributions only comprise a small percentage of any state’s budget, so why is this debt such a major problem?

At the state level, the contribution is relatively low, but it’s growing and should be much higher. CalPERS and other retirement systems nationwide have engaged in a process known as “smoothing,” whereby they spread out the risks further into the future — sort of like refinancing that Ford Focus for 20 years to keep the payment low. Their goal is to hide the amount of debt in order to avoid calls for pension reform, given that legislators will howl if they need to funnel additional billions of dollars in general fund revenue into the state pension systems.

Because pensions are senior obligations, as Crane noted, they must be funded before other programs: “All of the consequences of rising pension costs fall on the budgets for programs such as higher education, health and human services, parks and recreation and environmental protection that are junior in priority and therefore have their funding reduced whenever more money is needed to pay for pension costs. Thus those who should be most concerned about pension costs are families and businesses concerned about California’s colleges and universities, recipients of the state’s health and human services, users of state parks, citizens interested in environmental protection, and current and future state employees concerned about the potential for pay increases.”

Hence, Crane and some other of California’s progressive Democrats, such as San Francisco Public Defender Jeff Adachi, have joined fiscal conservatives in calling for reduced pensions or increased pension contributions by public employees. The progressives realize that rising pension costs are sucking the life out of the government programs they so strongly support.

Furthermore, the portion of the budget that goes to servicing pensions does not count the full cost of public employee pensions to the taxpayers — the dollars that taxpayers put into the system in the form of compensation. It also doesn’t consider the harsh effect of public pensions and pay packages on local governments. In the bankrupt city of Vallejo, Calif., approximately 75 percent of the city’s budget went to police and fire, which left little room for anything else. Because the union-dominated City Council would not reduce current pensions even in the face of bankruptcy, the city was left with slashed police and fire budgets – even as police captains earned $300,000 compensation packages. Pension debt is indeed crippling local governments’ ability to provide other services. The Sacramento Bee recently opined that “this year, the city of Roseville will spend as much to fund its pension plan as it does on parks and recreation. San Luis Obispo will spend six times as much on pensions as it does prosecuting criminals.”

The Bee also opined: “County government is becoming a pension provider that provides government services on the side.”

Cities across the country, such as Evanston, Ill., are having to drop more money into their pension funds to keep them afloat. That means less money for public services or higher tax rates.

Q. Police and firefighters put their lives on the line and they die soon after retirement, so why are critics giving them such a hard time for their generous pensions? And they have a high disability rate, making them more deserving, right?

Public safety and firefighter unions argue that they deserve their “3 percent at 50” (3 percent of their final year’s pay times the number of years worked, available at age 50) pensions because they die shortly after retirement — some claim that the typical cop or firefighter only lives five to eight years after retiring. CalPERS has debunked this myth (as has the Oregon retirement system) and finds that the longest living categories of public sector employees are police, followed by firefighters. They live on average into the low- to mid-80s. According to the Bureau of Labor Statistics, neither police nor firefighting are in the top-10 most-dangerous jobs. And the high disability rate is evidence mainly of abuses in the system. The Sacramento Bee reported a few years back that 82 percent of manager level officers in the California Highway Patrol retired on disability — a number that spiked after CHP shut down its fraud division.

Q. The average public employee pension is less than $30,000 a year. So aren’t critics only “scapegoating” public employees because of the current tough times?

These averages are misleading given that they include all the many people who have worked in the public employee system over the years, many of whom worked for short periods of time. The massive pension increases have taken place over the last decade, so that amount is higher for newer employees. The average new CHP employee has a pension of almost $90,000 a year. Even the lowest number is far higher than the average pension for private-sector workers. And the number of $100,000 Pension Club members in California is at 15,000 and growing by 40 percent a year. The formulas are the formulas. If a person starts work in an agency that offers “2.7 percent at 55,” that person will retire with 81 percent of their final year’s pay after 30 years, period. That’s far more generous than what’s available to most private-sector workers. Reporters need to do more comparisons between private-sector and public-sector benefits.

Q. Everyone who was anyone said it was OK to increase pensions for public employees, so shouldn’t we just blame the economy?

The bad economy has reduced revenues and forced governments to deal with a problem they have created over many years. Now people are saying, “Everyone said it was OK.” But that’s not true. There were many voices warning against the massive pension increases that took place over the past decade. In California, the SB400 legislation that allowed and encouraged municipalities to adopt “3 percent at 50” was rammed through the Legislature without full analysis and oversight — given that almost everyone involved stood to gain under the enhanced formula.

During the debate over SB400, CalPERS did not reveal its own internal memo showing the mess that the enhancement could cause if the economic scenarios were not so rosy. Here is blogger Ed Mendell, who covers pension issues:

“As CalPERS publicly said a decade ago that a major pension increase, now targeted for rollbacks, could be paid for with investment earnings rather than higher state costs, its actuaries made a startlingly accurate forecast of the impact if earnings fell short. The actuaries said the annual state payment to CalPERS, $159 million in 1999, could soar to $3.954 billion in fiscal 2010-11 — a long-range forecast that scored a near bull’s-eye on the $3.888 billion state payment for the fiscal year that began this month.

“Legislators were told in a 17-page CalPERS brochure that the pension increase, SB 400 in 1999, would not increase state costs. And as critics have pointed out, the brochure did not mention the state would have to pay if investments faltered.”

Q. Aren’t public employees’ leaders working on a solution? Can’t these matters be fixed at the negotiating table rather than through state-imposed reforms?

Many public employee unions are claiming that they want reform even as their lobbyists and legislative supporters stifle every modest reform — even reforms that would leave current retirement benefits untouched while instituting a second-tier retirement formula for new workers, and reforms that help cities get out from under crushing pension obligations. When unions squelched a recent proposal in the California Senate, the Democratic and union mantra was that these matters can be fixed at the negotiating table. But it’s at the negotiating table, where those who negotiate on behalf of the taxpayer often stand to benefit from any pension increase, that the unions are the strongest. No serious reform will come from there.


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  1. dhg2
    dhg2 27 August, 2010, 07:49

    Why would the public employee’s leaders want to work on a solution? The union workers are paid twice the private workers. They have jobs for life, Cadillac healthcare for life and pension for life. What more can anyone ask for. Life is great!

    Reply this comment
  2. Art Pedroza
    Art Pedroza 27 August, 2010, 08:55

    SAUSD Trustee Audrey Yamagata-Noji is going to make somewhere between $200K and $300K a year as a double dipper. She is a VP at Mt. San Antonio College and has been on our School Board for 20 years!

    Reply this comment
  3. Wayne Martin
    Wayne Martin 27 August, 2010, 10:39

    In California, public safety retirees (at 90% of high salary) receive the following payouts, based on their actual retirement salaries and lifetimes:

    Total Pension Payouts
    $100K–10-Years: $1.1M | 20-Years: $2.5M | 30-Years: $4.1M
    $150K–10-Years: $1.7M | 20-Years: $3.4M | 30-Years: $6.2M
    $200K–10-Years: $2.2M | 20-Years: $5.0M | 30-Years: $8.3M

    Police and Fire Department employees are routinely drawing over $100K-$150K in the larger California cities. In another decade, or so, the public sector will totally bankrupt the private sector with their pension demands. Non-public safety employees can retire at 75%-80+% and teachers at 72% (at 30 years of employment).

    When CalPERS fails to produce these lavish payouts, the taxpayers are required to fund them through higher taxes/fees/fines. Pensions of this magnitude are simply unsustainable to the taxpayers.

    Reply this comment
  4. Jeff Gallagher
    Jeff Gallagher 27 August, 2010, 17:00

    I don’t know where you get your figures from, but the vast majority of public employees, even public safety, will make far less than 100k a year on their pensions. Even figuring the average salary of $60k, That is far less than what your figures are. Consider that an average retired LEO will draw his pension for 15 years, you still come up far short. Further, you conveniently forget that the “seed” money remains int he system. Whether Greenhut or you, Wayne, want to admit it or not, the economy will get better and the investments will take hold again. If that were not the case, no one would invest in the stock market and the entire world economy would completely collapse. Open your eyes and don’t drink Greenhut’s koolaid.

    Reply this comment
  5. egoist
    egoist 28 August, 2010, 14:55

    It’s gonna crash. Living high on the hog like they do will make the fall that much more painful for them.

    IL borrowed $s from their pension fund to make the payment to the pension fund. It’s like they think they’re the fed or something.

    Reply this comment
  6. Foobarista
    Foobarista 28 August, 2010, 15:32

    One can argue about laws, contracts, etc, and the unions act as if monster pensions are something written by the finger of God on stone tablets. But the state is increasingly poor as “the rich” go elsewhere, they don’t have pensions, and they aren’t interested in paying taxes to top up six-figure pensions collected by people in their fifties.

    The unions better start thinking about damage control or they’ll simply cease to exist – along with their pensions.

    Reply this comment
  7. BBC
    BBC 28 August, 2010, 15:37

    I believe all the states except Vermont have legislation stipulating that the budget must be in balance each year. How do those laws fit into the scenario? How will pension problems effect the municipal bond market? Rolling defaults?

    Reply this comment
  8. Jeffersonian
    Jeffersonian 28 August, 2010, 16:35

    I’d say “unbelievable,” but really this is all too believable. Unscrupulous politicians have been trading their constituencies’ dollars for votes for decades. Now the tab has to be paid, and most of the politicans have successfully insulated themselves from the effects of these irresponsible policies.

    The unions now demand that states and localities commit fiscal seppuku so they can feast on the corpses of those jurisdictions.

    Reply this comment
  9. Al Fin
    Al Fin 28 August, 2010, 16:39

    Cities and states are forced to lay off public safety workers to pay the pensions of those who are retired. People will start to wonder why they’re paying taxes when they have no fire, police, ambulance, or highway safety personnel on the job.

    Reply this comment
  10. John
    John 28 August, 2010, 18:09

    I wonder how extensive Phil Angelides involvement was as CALPERS and other state pensions got out of control.

    This is the California politician who ran for governor. He chaired the financial reform committee that did a review of the financial crisis.

    This is a guy who quietly slimes the taxpayer IMO.

    Reply this comment
  11. Steve Adams
    Steve Adams 28 August, 2010, 18:21

    For alot of people in those communities it sounds like it’s either time to move, get out the tar and feathers, or become a serf to the state.

    Reply this comment
  12. Alberto Gore
    Alberto Gore 28 August, 2010, 19:06

    The dire situation will accelerate as working people, and companies, flee California. I certainly wouldn’t continue to live in a state that will have to take all of my income in order to pay for government employees (public servants – ha!… right). Let the illegals have the state. Good luck!

    Reply this comment
  13. Ann Mere
    Ann Mere 28 August, 2010, 19:27

    As a Los Angeles Unified School District teacher, after 10 or more years of work, I will only receive $1,800 a month according to CALSTRS. This is hardly a huge pension. I started to work for LAUSD when I was 58 and will retire when I am 74 to get that huge pension. Any social security I paid into for 29 years is reduced by 60% because I will get that huge pension of $1,800 from CALSTRS even though my employer and I paid $100,000 into Social Security over 29 yrs.

    I am saving as much money as I can.

    Reply this comment
  14. Bob Elkind
    Bob Elkind 28 August, 2010, 20:46

    Don’t forget the gold lining in the ‘ “3 percent at 50” (3 percent of their final year’s pay times the number of years worked ‘ plan! If you rack up overtime hours in your final year, your pension for life ratchets up forever!

    There are lots of stories (sorry, can’t quote studies) of public employees given carte blanche by their managers for overtime pay during their last year before retiring. It’s a system where one hand washes the other, and vice versa. I’ve never worked for a private employer which offered such a retirement benefit, and they would be crazy to do so. It’s an outright invitation to fraud.

    Reply this comment
  15. moorllach sucks
    moorllach sucks 29 August, 2010, 06:55

    Mr. Greenhut, it’s funny to see how you have made a career out of this pension issue. Some reform will be necessary, but ultimately the taxpayer must pay the obligation negotiated, including retroactive benefits.

    Moorlach sucks.

    Reply this comment
  16. stevefromsacto
    stevefromsacto 29 August, 2010, 10:09

    It’s time for a class war over public union pensions. So says Ron Lieber, writing in the New York Times. Okay, let’s rumble. What’s the score, so far?

    Despite defined benefit (DB) pensions, like the ones public employees get, being more economically efficient [pdf] and offering better returns, private employers have mostly switched to 401(k) plans, or defined contribution (DC) plans [pdf], because they’re cheaper. Between 1979 and 2001, the portion of the workforce covered by defined benefit pensions dropped by half. By 2008, only 20 percent of private workers had such a pension.

    Businesses saved a lot of money by either switching to low cost 401(k) plans or dumping their pension obligations on the government [pdf]. Did they use their savings to create jobs? Not lately. These days, businesses are firing more people than they need to and sitting on the cash.

    If recent history is any guide, those business savings still won’t go to average employee wages, which have been stagnant since the 1970s when union membership started declining to its current 12.3 percent of the labor force. Since 1979, extra savings have gone to the richest 1% of Americans who’ve seen their income go up 281 percent, with CEO pay going up 298 percent as the value of the minimum wage dropped 9.3 percent in value, and the pay of manufacturing and maintenance workers had gone up by only 4.3 percent, as of 2005.

    Clearly, the investor class won that round.

    The rich were positioned to get richer, even during this recession. It isn’t that there’s no money, it’s that money has been steadily taken out of circulation to be uselessly hoarded by the top one percent of income earners. And now, with government revenues starved by tax cuts for the rich and wage declines for most everyone else, the proposed solution is to break pension obligations to the few people who still have them.

    Funny how big a threat pensions are supposed to be, now that they’re so rare. Ha ha.

    “Who took our pensions and what do we have to do to get them back?” – Rep. Alan Grayson at Netroots Nation, July 24, 2010

    You can see how it would have been harder 50 years ago to attack pensions, as Lieber does, as an unjustified, “terrifying” and “titanic” waste of resources. More people would have agreed with Rep. Grayson’s statement last month that, “everyone who works in America for 30 years should have a pension,” because more of them had decent pensions of their own.

    Now, pensions are almost surprising. And about that, Jonathan Cohn had the best next question, emphasis mine:

    But ask yourself the same question you should have been asking [during the debate about auto worker pensions]: To what extent is the problem that the retirement benefits for unionized public sector workers have become too generous? And to what extent is the problem that retirement benefits for everybody else have become too stingy?

    For their age and education level, public employees receiving pensions make less than comparable private sector workers. They may even be excluded from Social Security benefits, as Dean Baker points out, adding that they tend to make no more than $40,000 to $50,000 per year and that the shortfall in their pension funds comes to less than two percent of government spending over the next 30 years.

    One thing that about half of all public employees do for their not-very-princely salaries is educate children. On that score, it’s hard to argue with Paul Krugman’s statement that, “Everything we know about economic growth says that a well-educated population and high-quality infrastructure are crucial.” Not crucial enough to get them 281 percent pay raises, but crucial.

    At present, 62 percent of US jobs now require some sort of special training beyond high school and in a decade, that might go up to 75 percent of jobs. Maybe some of these requirements are excessive, but it’s weird to hear anyone say we need less education.

    Cut teachers’ lifetime compensation and, one way or another, less education is exactly what we’ll get.

    And as for complaining about the pensions of all the other people who make less than their experience and education might be worth, our public police, fire department, emergency, maintenance, construction and engineering workers, you might as well come out in opposition to law and order and in favor of all the trains being late.

    The pension alarmists would have us believe that the debate is about whether the public can afford to honor promises to retirees, which is bad enough. Though what it’s actually about is whether ordinary taxpayers should have to either pay for private schools, private bodyguards and private groundskeepers in private real estate developments, or accept that their cities and towns are going to keep falling apart around them because it isn’t anyone’s job to hold them together anymore.

    Which is nothing less than a threat to price the average taxpayer out of all the benefits of civilization so that the top one percent of income earners won’t have to suffer the return of Clinton-era tax rates.

    Reply this comment
  17. Ms. White
    Ms. White 29 August, 2010, 13:55

    The trades unions will be one of the agencies that will bring upon this earth a time of trouble such as has not been since the world began. {Mar 182.1}

    In all our great cities there will be a binding up in bundles by the confederacies and unions formed. Men will rule other men and demand much of them. The lives of those who refuse to unite with these unions, will be in peril. {Mar 182.2}

    The work of the people of God is to prepare for the events of the future, which will soon come upon them with blinding force. In the world gigantic monopolies will be formed. Men will bind themselves together in unions that will wrap them in the folds of the enemy. A few men will combine to grasp all the means to be obtained in certain lines of business. Trades unions will be formed, and those who refuse to join these unions will be marked men. . . . {Mar 182.3}

    These unions are one of the signs of the last days. Men are binding up in bundles ready to be burned. They may be church members, but while they belong to these unions, they cannot possibly keep the commandments of God; for to belong to these unions means to disregard the entire Decalogue. {Mar 182.4}

    Reply this comment
  18. stevefromsacto
    stevefromsacto 30 August, 2010, 11:16

    Gee, wish I could put { } marks at the back of my insane quotes and make people think they are from the Bible. If the statement about “trades unions” is a direct quote from the Book of Mark, I will eat the King James version for dinner.

    Reply this comment
  19. Dohnal
    Dohnal 30 August, 2010, 16:23

    Why should public employees get better salaries, pensions, benefits, sick days, vacations, healthcare than those who pay their slaires/?

    Reply this comment
  20. DavidfromLosGatos
    DavidfromLosGatos 31 August, 2010, 14:25

    Dohnal asks “Why should public employees get better salaries, pensions, benefits, sick days, vacations, healthcare than those who pay their [salaries]?”

    Answer: because the public employees are smarter than those who pay their salaries. They figured out that the key was to buy the very politicians who have the authority to pay them more and more. Easy enough. Most all politicians are pay-to-play whores when you get down to it. They know the public is stupid and apathetic when it comes to politics, especially at county and city levels. The City of Bell is great example – something like 400 people even bothered to vote to become a “charter city” and now the rest complain that they were robbed. Heck, they left the front door open, the safe unlocked, and went on vacation.

    Think of it as, “servicing” the public.

    Reply this comment
  21. S R Ragland
    S R Ragland 9 September, 2010, 13:09

    Its apparent to me after the economic downturn I have learns how self serving the union leadership really is. After having a construction business for 38 years I have felt the pain for the last 3 years. With a total income of 53K for those years barely getting by. Most of my freinds that can find work are working for half of what they were working for. Everybody wants there job protected and the puplic employee unions mostly state are no exeption, if sizeable cuts are not introduced the only option this state has is bankruptcy. If this state is to servive everybody has to share the pain. We have a hard road ahead, we need all new people in Sacramento. FIRE THEM IN NOVEMBER

    Reply this comment
  22. Nead Digger
    Nead Digger 17 October, 2010, 21:08

    LOL all the complainers who didn’t qualify for a job in the government sector. Losers!

    Reply this comment

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