Mayoral Tutorial. Our pensions situation is not a crisis.
Me, Don Washington and Chicago Newsroom’s Ken Davis.
From my friend Don Washington, The Mayoral Tutorial:
Our pension situation is not a crisis in the sense that pensions will suddenly run out of money or not be able to pay benefits. – Don Washington – Paul Krugman – Dean Baker – Richard Wolff – Joseph Stiglitz
Good people as the year ends and various bankers, conservatives, libertarians and Sith Lords are saying that public pensions are going broke are in crisis; remember that they are lying. Public pensions have been in a seventy year “crisis”. People, if something has been a crisis for seventy years its a lot of things but one of the things it isn’t is a crisis. If you read no further than the next two paragraphs you can stop but I advise you go further, I have some great one-liners in this thing.
The Cold Hard Truth
Here’s how pensions work and here’s why they are not going to suddenly run out of cash and go broke. In fact here is why they have not run out of cash and gone broke for the seventy year crisis that they have been in. See, all defined benefit pensions pool the savings of people and at any given time the outlays to cover retirees are always a small percentage of the present assets. Still, there is always someone a few IQ points away from needing permanent assistance who will say that the coming glut of Baby Boomers is a demographic timebomb that will destroy pensions. This is a lie. To begin with all the people retire at different times not all once so the fund is never stressed as if there is a run on a bank. So there is always time to find the money to fund pensions. The question is where does that money come from? But let’s indulge the stupid and say that against all odds every year, every Baby Boomer who could retire did so all at once on the same day. Defined benefit plans are “pre-funded” meaning the retirees have already paid into the system. The issue would be what happen to the people retiring AFTER them not them. That is is the issue we are facing now. We have decades to raise the revenue to meet the obligations that we have promised to meet.
Secondly, the only way a pension can die is if the entity responsible for it kills it. They can do so by not making payments to it via pension holidays and other deferments on payment. This underfunds the pension. Then they can shrink the number of public workers paying into the pension, which further underfunds the pension fund. Then the public body engages in risky “alternative investments” i.e. partial privatization for potentially higher returns and of course higher risk like 2008… which is how we got here in the first place. These alternative vehicles also drains assets out of the pension fund due to high fees to various middle men. The governing body can shift from a defined benefit system to defined contribution plans that dilute the stability of the pension pool. Then finally creating a two-tiered pension structure. All of the above DEFUNDS the pension plan and leads to the pension plan collapsing. This is the point where you realize that everything I just wrote are the “solutions” that Mayor Emanuel and his campaign investors have been suggesting we do to meet the fantasyland crisis I referenced before. Now you can stop reading if you want.
Read the entire article here.