Question to the astute Master Minds who post in Economy

[truedelphi]

First a sincere thanks to everyone here who has contributed to my financial knowledge over the last two years.

Now I have a question and I am thinking one or several here might know the answer:

Since yesterday, a rash of headlines has appeared stating that some 2.1+ Trillion dollars held in pension funds for state workers might be monies for which Tax Payers are liable.

This confuses me. One of the things that the Bernanke/Geithner Wall Street economy has done, in large part due to the thirteen to fourteen trillion bucks that Bernanke has offered to Wall Street, is that the Market has re-established itself, and it hovers and ever occassionally shoots over the 10,000 mark on the Dow.

So doesn't that market recovery offer some assurance that those pension funds are in good shape? The only pension fund I ever follow is CalPers because so many people I know are having their pension funds sitting there (Through no choice of their own -if you work in certain jobs in California then your paycheck is deducted for retirement and that is where those funds end up. Though you can, of course, if affluent enough, put your remaining money elsewhere.)

Or did all those in the financial manager jobs overseeing these funds pull the funds out of the market when the economic collapse hit in Fall of 2008?


Any answers appreciated.

[Yupster]

1. A couple of points

that are tangental to your question, but anyway ...

The vast majority of pension money would be in bonds, not stocks so it wouldn't be very much effected by the stock market.

The Lehman Brothers catastrophe, CIT Group, and especially the illegal way GM was bankrupted however were true disasters to pension funds everywhere. If you remember, it was the Indiana Teacher Pension Fund which took the government to the Supreme Court over the GM bankrupcy. Unfortunately the Supremes declined to hear the case.

BTW, that Lehman and GM bond disaster isn't coming back. Lehman bondholders may eventually recover 15 % of their money but the way class action lawsuits are being filed, there may be nothing left for the bondholders who are supposedly the first to recover anything left after a bankrupcy.

______________________________________________________________

The stockmarket has recovered to 10,000 Dow. The bad news is that it was up to 14,000 so it's still a long way from back top where it was.

Also, just some fun with math. If you have 10,000 chickens opr anything else and they go down 50 %, now you have 5,000 chickens. If next year you go up 50 % chickens you'd think you'd be back at 10,000 but you wouldn't as 50 % of 5,000 is 2,500 so you'd only be back up to 7,500.

On paper it would say down 50 %, then up 50 %, but in real life you'd have gone from 10,000 to only 7,500.

[truedelphi]

15. All very good points, and I am glad I

Brought my question here.

The suggestion you made regarding chickens was spot on also. I think I am guilty of
forgetting that one - and the TV announcers are fond of saying that the DOW has gone up 50% since Blank Blank blank.

I have been much better about catching the ads when Campbells or whoever says "We now have 33% more chicken in our chicken noodle soup." (A one third increase in a nine percent base means the newly formulated soup now has only twelve percent chicken, not the thirty three percent figure they are trying to trick you with. But then, you knew that.)

[TreasonousBastard]

2. Underfunded pension liabilities...

doesn't mean the money was lost or stolen. It means that it wasn't there in the first place because the states, counties, or whatever never made the "deposits."

Lots of private companies have been doing the same thing, btw.

Lessay you have "X" employees, and you expect a certain number of them to retire at some point. Your experts have calculated that you have to put 1 million a year to cover those retirements. For one reason or another, usually balancing the local budgets is the excuse, you put off putting in a half million for this year. then, next year instead of putting in the full million and a half, you put in only a half million again. Eventually, you are going to be so far behind you'll never find your way out. And the banks and fund managers have nothing to do with this-- it's all politicians afraid to cut spending or raise taxes and then raiding the pension funds for quick cash.

That's pretty much what a number of states have been doing for years, essentially hoping that "something" would happen to bail them out. Federal bailouts, fewer employees retiring, or winning their own lotteries are possibilities. Prudent fiscal management does not appear to be an option.

[jtuck004]

3. I'm not one of the brains you mentioned, but

From a press release in May of 2000, and this is just an example:

"The California Public Employees' Retirement System...huge portfolio with an array of assets ranging from stocks and bonds to office buildings, shopping centers and housing..."

In addition to watching the value of their bonds based on higher-yield (i.e. risky) loans and derivatives drop off, and in addition to the underfunding also mentioned above, tax revenues have decreased markedly - so now they don't even have the money to pay the partial funding for the pensions that were promised.

Lots of that in "the Google".

[truedelphi]

16. Thank you. I will add those factors int the equation. n/t

[westerebus]

4. It may be tied into the Regan Social Security Compromise.

Back in 1980 when the Raygun and Congress decided to "save" Social Security, part of that grand bargain was to end civil service retirement defined pension plans for both Federal and State workers. Some states retained a modified form of State Pension plans although everyone entering Federal service was put under Social Security from that point on. I think 1982 was the cut off date.

That's when the US opened its' huge 401k for Federal employees called the Thrift Savings Plan. The other acronym is FERS. Federal Employee Retirement System.

Please bear with me, all this is from memory. So some where there may be a liability clause to underwrite states who opted for the full 401k version. Many states jumped on this as a quick fix to budget problems they saw coming in future years.

It may be a place to start the Google.

I deny providing any information that wasn't entirely accidental on advice of counsel.

*spelling, dammit*

[damyank913]

8. I believe you've got this right...

I distinctly remember that even the repubs in civil service were'nt crazy about this. That's also about the time he increased the deduction threshhold for medical and dental expenses from 5% to 7.5% of AGI.

[westerebus]

11. Buy outs came in 1990.

That was the first wave to reduce the rolls in Federal civil service. The government reduced the time in and age requirement and allowed an offset by a percent point for those willing to go.

I think that was the same time frame FICA was raised. The National Labor Relations Board was packed with pro business conservatives and contract negations went to arbitration. Good faith bargaining went out the door and contracting services "out" was the new and improved "in".

The amount of dollars put into the Thrift Savings Plan has pushed the market higher. That is a major back stop no one talks about. In particular the Repubs. The dumb asses keep bitting the hand that feeds them.

[jtuck004]

5. A link that shows the effect in NY TImes story today

Ran across this tonight

Eight States Have Shortchanged Pensions, Pew Study Finds

http://www.nytimes.com/2010/02/18/business/economy/18pew.html

[permabear1]

6. A rising stock market helps, but....

A lot of pension funds are invested in the stock market. And the stock market rebound clearly helps the balance sheets of the pension funds. But as others have noted, pension as well as other major institutional investors have been invested in much more than the stock market. Many had mortgaged back securities, real estate, sovereign debt bonds, etc. All of these assets have taken a haircut lately. Many more paranoid economic types believe that the stock market is rigged. That there is a Plunge Protection Team (aka Working Group- Google it) that is manipulating the markets. I don't know if this is true, but I do believe that the powers that be believe the stock market is essential to the health of the larger economy and I wouldn't put it past them to help it along.

But the stock market cannot thrive over a long period of time without economic fundamentals. There is no question that the economy has improved since the government stimulus and massive Fed printing press has been running in overdrive. But none of this is sustainable. In time we are going to have to balance our books. On the national level that means chopping the entitlements and defense and raising taxes. On the state and local level that means chopping services and raising revenues as well.

One of the biggest sources of unfunded liabilities at all levels of government is government workers pay and benefits. I don't think there is any question that government employees have had a pretty good deal especially when it comes to pensions and benefits. I mean why should a government worker, even police or fire, be able to retire in their 50s with 90 percent of their income in pension for the rest of their lives. It is bankrupting all levels of government. Personally I think government employees, especially at the state and local levels, are being extremely selfish. I think the unions do have too much clout and that everyone needs to learn to sacrifice for the greater good. I don't think governments can afford defined benefit plans any longer. I think government workers need to transition to defined contribution plans just as the private sector has. We are all in this together. We all have to sacrifice if our country is going to survive in any form that we are now familiar with.

[upi402]

7. No unions I know let you retire at 50 years at 90% pay

I'm guessing that's Fire and Police unions you're referring to. A tiny minority of unions.

[damyank913]

9. More like 55 with 30 years at 1/2 pay.

And federal unions are toothless tigers.

[pokercat999]

10. In 1976 I interviewed with the Fort Lauderdale PD. The

Lt I interviewed with told me their retirement after 25 years service and 55 years old was 104% of your last years salary. I moved away before they made their hiring decision and thank the lucky stars I never became a cop. I have no real idea how their pension program faired, but if I had gone with them I would have retired four years ago.

[westerebus]

12. So you want to cut off the taxes retirees pay?

And get your numbers correct. Federal employees excluding military, law and fire have a minimum of 30 years service and 55 years of age at retirement which will get 50% of base pay. From which you get to deduct federal taxes and state taxes with some exceptions and health insurance and a spousal survivor benefit reduction.

After 30 years of work, you decide to retire. Retirement might last a year or two. Some people need to pay for their kids education or hate golf. So you go into the private job market. It's amazing what they will pay you for all those jobs skills and education in the private sector. You pay social security taxes and you're in a higher tax bracket. It gets better.

Your employer's health insurance will not cover you because of a pre existing condition. You will find that out after you make a claim and have paid into that pool for a few years. Good thing you kept your federal health benefits that you are still paying for after 30 years.

So after another ten years of working, you go down to the Social Security office to file your claim. At age 67. Your SS benefit is reduced by 90%. Why? You have a federal pension.

Now the neighbor's stay at home wife will get Social Security thought she never worked outside the home. So according to the " we are all in this together BS " her benefits must be reduced too.

How many people have to be made poor to balance Golum Sacs' books?

[permabear]

13. Perhaps Federal but not state and local

I won't quibble with your numbers on Federal workers. But a more pervasive problem nationwide are state and local government workers, many of whom are able to retire in their 50s with near full income for life pension plans and health insurance. It's all bankrupting many states and local governments around the nation. There are stories nationwide about how pervasive this problem is. It is unsustainable and needs to be changed. It will be changed because we can't afford it any longer.

[westerebus]

18. Welcome to DU.

We can afford it. We need to adjust our priorities.

If you like knowing there's a cop patrolling the business district that you work in, that a fireman is six minutes away from your kids' school, that the teachers in the school do a good job raising your kids and they manage to educate them at the same time, or the EM-Ts called to the nursing home your mom is at saved someone else's mom, that the city code inspector closed a roach infested take out that you were going to try this weekend, or the road crews managed to move a billion tons of snow so you could get to work, or the clerk at the records bureau who knew your dad and would be glad to find his tax files from before you were born, or, well, I think you get the picture.

The State of California has a contractual obligation to pay their employees' pensions.

These people are the middle class. They are your neighbors. They might even be family.

[permabear]

14. Here's an article on the problem

http://latimesblogs.latimes.com/comments_blog/2010/02/california-other-states-face-problem-of-growing-pension-liabilities.html

California, other states face problem of swelling pension liabilities

February 18, 2010

California isn’t alone when it comes to not being able to pay its mounting public pension costs, a Washington think tank says in a report released Thursday.

In all, state governments face a $1-trillion shortfall, the difference between what they owe current and future retirees and what they expect to have available to pay promised benefits. California's two big systems accounted for $122 billion of the deficit as of June 30, 2008. The state's unfunded pension costs totaled $59.5 billion while unfunded healthcare costs were $62.5 billion.

Coming up with the money to cover future obligations is expected to burden state and local governments and school districts and could mean higher taxes and fewer basic services for the next generation of taxpayers.

And pensions are only part of the problem: California's two retirement funds have set aside less than 1% of the $62 billion they need to cover lifetime health insurance benefits for retirees.

Calls for similar changes are growing louder in California. Three proposed initiatives are gathering signatures for the November ballot. The ballot measures, among other things, would limit the amount of pension a retiree could draw. They also would raise the minimum retirement age and reduce benefits for newly hired state and local government workers.

[truedelphi]

17. Some very good points you mention and Welcome

To DU.

BTW, in the state of California, the police can claim that the job stress levels are debilitating and retire with full pension whenever they want to.

This really gets my goat - as a woman, I clearly remember how many women were denied entry to the police force because they were "weak" and couldn't handle the stress.

But now it is common even for suburban cops to state they are stressed out and get that early retirement with pension.

[dkf]

19. In Hawaii, the Government used to take everything over 8% return.

Then use it to fund the regular budget. What a horrid idea. They eventually changed that so the returns would stay in the fund, but since it was raided earlier, and now is underfunded, the Hawaii taxpayer is definitely on the hook to make up the difference.

Yes Hawaii is an egregious example, but when pensions aren't funded properly the Government (aka employer) will have to come up with the extra funds to meet obligations or look at benefits.

I think there is a rule now where depending on how the funding looks, certain pension funds may be constricted in the benefits they offer.

[amborin]

20. did you mean this, by any chance?

http://www.nytimes.com/2010/02/18/business/economy/18pew.html?scp=1&sq=states%20pension%20funds&st=cse