Trillion Dollar Public Pension Shortfall
I have been posting and commenting for months that public pensions are the next shoe to drop. That shoe just dropped rather loudly. An article in the New York Times (via Yahoo Finance) stated that there is a $1 Trillion dollar public pension shortfall. This is according to the Pew Center and it follows similar projections from economists at Stanford University and the University of Chicago. Despite repeated denials from PERS and public employee unions, public pensions are in big trouble.
Pension Problems
The public pension system was hit by a tsunami of excesses that were easy to predict. Public employees and military personnel often retire at a younger age and and enjoy a longer retirement. Public salaries have risen faster than comparable private employees and this has caused retirees to take home larger pensions. Finally, public sector hiring has exploded the number of employees, putting a huge strain on the pension system.
The guaranteed nature of public pensions creates a huge liability for state governments. Even though some employees have paid into the pension program, their contributions cannot support the total number of retirees and their pensions. This places the states in a precarious position of paying for unfunded pension benefits, at the expense of public services. In an economy where people are losing their jobs and homes and government revenue is down, there is not enough money to subsidize the public pension system.
Fraud & Abuse
Another huge factor in the pension insolvency is the amount of fraud and abuse that occurs. Many public employees are double-dipping on their pensions. They put in twenty years in one agency, quit and switch to another agency and then collect pensions from both. Another sneaky trick that happens with a wink and a nod is that public employees are sometimes given massive overtime in their last year of employment, qualifying them for a much larger pension.
Nothing is more symbolic of abuse than the massive salaries of employees of the City of Bell, CA. The City Manager was receiving $787,637 per year in a city where 20% of the residents live below the poverty level. Even though he has been forced to resign, he will still take home a pension of over $600,000 per year, in addition to Social Security. Even more telling is that the City of Bell illegally overcharged residents nearly $3 Million in property taxes, just to cover their pension liabilities.
Another prime example of abuse is the city of Vernon, CA, which has a total of 32 houses and apartments. Basically, two families own everything in the town and all new building permits are denied. The former mayor was making over $600,000 when he quickly resigned in 2005 and is now taking home an annual pension of just under $500,000. Right now, there are 5,115 retirees in California alone, taking home pensions of over $100,000. And, this number will skyrocket in coming years, as high income employees retire and automatic cost of living raises kick in.
Potential Solutions
In order to secure the future retirements of hard-working public employees, something drastic has to be done. And, it has to be done quickly. Colorado has already cut its cost of living allowances on pensions to match the rate of inflation, instead of the guaranteed 3.8% that existed previously. California has recently negotiated higher contributions from public employees. I expect other states to quickly follow suit on these types of changes.
My opinion is that public retirees should be limited to a single pension (no double-dipping) and those pensions should have a cap, somewhere well under $100,000. I would much rather see 10 school teachers or fire fighters get a $50,000 pension than one mayor getting $500,000. They will need to change the 80% benefit to somewhere closer to 60%. And, they should calculate the pension amount from an average of the last five years, to prevent employees from end-loading their last year of salary.
The Bottom Line
The bottom line is that a pension was designed to keep the employees from becoming destitute in their old age. It was never expected to become a golden windfall for scheming city managers and crooked politicians.
“Capital formation is shifting from the entrepreneur who invests in the future to the pension trustee who invests in the past”
Peter Drucker – Management Expert
Recommended Reading
Check out Retirement Pitfalls over at LiveRichley.com.
This post was featured on the Carnival of Personal Finance over at Provident Planning. If you aren’t familiar with the Carnival of Personal Finance, you ned to check it out. It’s the premiere carnival for Finance Blogs.
“Another prime example of abuse is the city of Vernon, CA, which has a total of 32 houses and apartments. Basically, two families own everything in the town and all new building permits are denied. The former mayor was making over $600,000 when he quickly resigned in 2005 and is now taking home an annual pension of just under $500,000.”
I’m not sure I get it; if two families own everything in the town, aren’t they just paying the salary to themselves? Or, does the mayor’s salary come from general state or county revenues?
What can they do about the shortfall? Raise taxes on the private sector in order to maintain the benefits? Government has become a means for one group to rob another blind…
Kevin,
Despite the fact that there are only 91 residents, there is a lot industry, which is where all of the tax revenue comes from. According to the page in Wikipedia, the city actually owns the housing. The mayor was investigated for election fraud, because he was found to reside outside of the city, instead of in the cabin he listed as his address in the election. So, he resigned, his son is now the mayor and he collects the biggest pension in California.
It’s one of the most bizarre stories I have ever read and I can’t believe it could even happen in America.
Hi Bret, nice to see more attention to this problem. I just posted something at my blog about not counting on your pension. This is another Ponzi scheme and we know how those end!
In the meantime, taxpayers shouldn’t let their officials take home these massive salaries. I just checked and the mayor of Dallas (pop. over 1 million) makes $60,000 a year. He’s a rich guy so he gave the money to charity. In some towns, it’s a volunteer position. The salaries you list are more than the President earns.
Jennifer,
I read your article and I couldn’t believe you beat me to the punch. I linked back to your Retirement Pitfalls article, since it’s a great read.
These salaries and pensions are an outrage. Our state is $19 Billion in the red and municipalities are bankrupt because of this. The good news is that they are suddenly becoming public and taxpayers are furious. Cities are now posting salaries on their websites to avoid angry calls.
Our Governor, Arnold Schwarzenegger, doesn’t accept his salary. He works free for the people of California. He predicted these problems and took on the public unions years ago. They poured millions into negative ads attacking him, to preserve the status quo. Unfortunately, the voters didn’t support Arnie’s initiatives, which may have avoided our current fiscal problems. I hope it changes this election.
Hi Bret, thanks for the link back to my blog! I actually wrote that piece in February but forgot to put it up on my website.
I know CA is in bad shape. Did they issue IOUs again? I’m glad people are finally waking up. I think they really believed they could have a “free lunch” forever, but the bursting of the housing bubble has shown that the overspending can’t last.
Jennifer,
California is past the 20th day without a budget and we are 19 Billion dollars in the red. Our Governor is starting to furlough state workers to try and break the log jam.
I sure hope we vote a lot of these people out in November. They are no longer serving the public interests.
I’ve been following this topic in the media (from a distance), and the really scary part is that most people either assume the problem will be fixed by a stronger economy, or they’re completely oblivious because they don’t think it will affect them personally. But the operative word is “public” which means one way or another, we’ll all be affected.
So many looming train wrecks, so little time…
Kevin,
I think the Government (and special interest, like public unions) operate like this on purpose. They don’t have the political will or voter backing to fix these problems. So, they wait for the inevitable crisis and then voters have no reasonable options. It’s very similar to what happened during the 2008 financial crisis.
The scary part is that these pensions are guaranteed by our government, so we are on the hook for them. I am glad these events like Bell, Mayfield and Vernon are happening, because the coming crisis is getting harder to deny.
There is a way out of the state public pension mess, but it requires the states to declare bankruptcy, which will cancel these outrageous public employee pay and pension contracts.
The rub is, I am not certain states can legally take advantage of the bankruptcy process – the municipalities can, however.
Still that leaves us with the problem of paying all the absurd state employee pensions.
All the best,
Len
Len Penzo dot Com
Len,
Are you kidding me? The State of Californina is already bankrupt. They just won’t admit it yet. We need to immediately cut off all paychecks to politicians, until a balanced budget is passed.
Seriously, I don’t know the legal ramifications of such an action. I do know that declaring bankrupty would be very negative for all of the municipal bonds and I doubt Wall Street would allow it. The ripples from defaulting on our trillions in bonds would affect the whole country.
Something like the PBGC will be created by the feds for the states.
Going to be tough on those who retired at 55 when they realize their maximum benefits under such a bailout are less than $40,000 annually.
Bill,
There are a lot of people working their butts off and raising families on less than $40,000 right now. I would sure love to receive a $40K pension.
You brought up a great point about the PBGC. Private pensions are always in trouble and underfunded. So, I wonder about the legality of the public guarantee. Shouldn’t PERS and the public unions be guaranteeing these pensions instead of taxpayers? After all, they are the ones (mis)managing them, not the states.
You are out of your mind if you think its a good idea to just go bankrupt to get out of paying the pensions.
I won’t be getting a huge pension like the ones mentioned here, but i will need it (ALL of it) to survive retirement. if you bankrupt the pension plan, then EVERYONE’s pension will go away. you can’t just take away the larger ones. and what if you do and mine is $45,000, and i need all $45,000 for medical bills, and you decide the cut off is $40,000? i’m screwed. and especially if you do this while i’m retired or just before. I won’t have a chance to make up the difference!
That is in no way fair. I took a lower salary because of the pension and i work for 20 years and then you go and take it away from me? No way. If you promised me the pension, then you should deliver. As soon as you start saying only “some” people get the pension, then you put all of us in jeopardy. In other words, if you cut out the pensions of the higher salaried folks, then you open the door to do the same for the lower salaried folks. Future politicians WILL cut the lower salaried folks’ pensions if you do that. Then everyone will say, well, it was never meant to provide for your retirement, just put food on the table. YES it was! that’s why it’s a pension. It is meant to provide a retirement. If you tell me that my pension will be 80% of my take home and my social security will be 20%, then that allows me to take the lower paying pension job b/c I won’t need to save for retirement. If you can’t deliver something, then don’t promise it.
“No way. If you promised me the pension, then you should deliver.”
Laura,
I hate to tell you this, but we (taxpayers) didn’t promise you the pension. PERS and your unions are the ones who promised you a pension they know they can’t deliver. And, they are hoping to dump it on taxpayers when it all blows up. But, most of the state and local governments are also insolvent. That’s the facts, like it or not.
That was the whole point of my post. Unless changes are made right now, I wouldn’t count on receiving your full pension. The pension funds will become insolvent and the shortages can’t be made up with public funds. Pension fees must be raised and benefits cut. We should start by cutting the obvious excesses, while there is still time.
Poor arnie is getting old :d
He is definitely getting old. But, I still wouldn’t want to tangle with him.
I’m glad we have the Governator. I wish he could have gotten more done with Congress. California is really suffering because of all the partisan politics and irresponsible spending. Companies and jobs are fleeing in droves.
from bodybuilder to governer, it would be awesome to see the bodybuilder as a president of the united states of america 🙂 whoa..
You have to be born in America to become President, so Arnie wouldn’t qualify. But, I thought he did a pretty good job as governor. The next governor isn’t going to work for the people, like Arnold did.
i like Mr Arnold, no matter what he is creating, he is showing us perfectly the american way of life…