In this stunning article in Rolling Stone, Matt Taibbi describes the cool deals that have enriched hedge fund managers while the pensions of public employees are whittled away. His article is based on research conducted by investigative journalist David Sirota for the Institute for America’s Future. Read Sirota’s article in Salon here, with a link to the full report. And here.
A sample:
“A study by noted economist Dean Baker at the Center for Economic Policy and Research….reported that, had public pension funds not been invested in the stock market and exposed to mortgage-backed securities, there would be no shortfall at all. He said state pension managers were of course somewhat to blame, but only “insofar as they exercised poor judgment in buying the [finance] industry’s services.”
“In fact, Baker said, had public funds during the crash years simply earned modest returns equal to 30-year Treasury bonds, then public-pension assets would be $850 billion richer than they were two years after the crash. Baker reported that states were short an additional $80 billion over the same period thanks to the fact that post-crash, cash-strapped states had been paying out that much less of their mandatory ARC payments.
“So even if Pew’s numbers were right, the “unfunded liability” crisis had nothing to do with the systemic unsustainability of public pensions. Thanks to a deadly combination of unscrupulous states illegally borrowing from their pensioners, and unscrupulous banks whose mass sales of fraudulent toxic subprime products crashed the market, these funds were out some $930 billion. Yet the public was being told that the problem was state workers’ benefits were simply too expensive.
“In a way, this was a repeat of a shell game with retirement finance that had been going on at the federal level since the Reagan years. The supposed impending collapse of Social Security, which actually should be running a surplus of trillions of dollars, is now repeated as a simple truth. But Social Security wouldn’t be “collapsing” at all had not three decades of presidents continually burgled the cash in the Social Security trust fund to pay for tax cuts, wars and God knows what else. Same with the alleged insolvencies of state pension programs. The money may not be there, but that’s not because the program is unsustainable: It’s because bankers and politicians stole the money.
“Still, the public mostly bought the line being sold by Arnold, Pew and other anti-pension figures like the Koch brothers. To most, it didn’t matter who was to blame: What mattered is that the money was gone, and there seemed to be only two possible paths forward. One led to bankruptcy, a real-enough threat that had already ravaged places like Vallejo, California; Jefferson County, Alabama; and, this summer, Detroit. In Rhode Island, the tiny town of Central Falls went bust in 2011, and even after a court-ordered plan lifted the town out of bankruptcy in 2012, the “rescue” left pensions slashed as much as 55 percent. “You had guys who were living off $24,000, and now they’re getting $12,000,” says Day. Though Day and his fellow retirees are still fighting reform, he says other union workers might rather settle than file bankruptcy. Holding up an infamous local-newspaper picture of a retired Central Falls policeman in a praying posture, as though begging not to have his whole pension taken away, Day sighs. “Guys take one look at this picture and that’s it. They’re terrified.”
And here is more from the article:
“The bottom line is that the “unfunded liability” crisis is, if not exactly fictional, certainly exaggerated to an outrageous degree. Yes, we live in a new economy and, yes, it may be time to have a discussion about whether certain kinds of public employees should be receiving sizable benefit checks until death. But the idea that these benefit packages are causing the fiscal crises in our states is almost entirely a fabrication crafted by the very people who actually caused the problem. It’s like Voltaire’s maxim about noses having evolved to fit spectacles, so therefore we wear spectacles. In this case, we have an unfunded-pension-liability problem because we’ve been ripping retirees off for decades – but the solution being offered is to rip them off even more.
“Everybody following this story should remember what went on in the immediate aftermath of the crash of 2008, when the federal government was so worried about the sanctity of private contracts that it doled out $182 billion in public money to AIG. That bailout guaranteed that firms like Goldman Sachs and Deutsche Bank could be paid off on their bets against a subprime market they themselves helped overheat, and that AIG executives could be paid the huge bonuses they naturally deserved for having run one of the world’s largest corporations into the ground. When asked why the state was paying those bonuses, Obama economic adviser Larry Summers said, “We are a country of law. . . . The government cannot just abrogate contracts.”
Read more: http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926page=5#ixzz2gLniZOKv
Follow us: @rollingstone on Twitter | RollingStone on Facebook

You have people commenting on this very blog that scam 401(k)s should be forced on teachers in lieu of pensions (never mind teachers have 403(b)s which are the same thing on top of the pensions) and states be forced into the Social Security system, which they can’t be constitutionally speaking.
It is insanity for anybody to suggest that because private employees were too ignorant of what defined contribution plans REALLY were all about, that public employees should be equally poor.
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Sirota’s piece is really good and required reading. What a situation to have an Enron crook trying to rob public pensions.
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Contracts are sacrosanct when favoring the investing class; contracts for working people are apparently just another budget-busting entitlement.
One of the incredible details of Detroit’s bankruptcy is that public employee pensions are guaranteed by the Michigan state constitution – as are those in New York, for teachers who might be feeling complacent here – yet Kevin Orr, the bankruptcy administrator in Detroit, is trying to use federal bankruptcy law to override that constitutional protection.
Step to the back of the creditor line, proles…
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“One of the incredible details of Detroit’s bankruptcy is that public employee pensions are guaranteed by the Michigan state constitution – as are those in New York, for teachers who might be feeling complacent here – yet Kevin Orr, the bankruptcy administrator in Detroit, is trying to use federal bankruptcy law to override that constitutional protection.”
I wouldn’t call it incredible, but in my view it’s easily the most interesting and important aspect of the bankruptcy to watch.
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No, not incredible that Finance would try to grab the pension money, though at one time it might have been. I guess I just dated myself.
It’s also quaint to wonder why more isn’t made of how some contracts are more sanctified than others, as well as some constitutional protections.
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I saw him the other night on Democracy Now. I’m surprised he hasn’t taken on the $500 billion cash cow of school privatization. Perhaps we can reach out and contact him. Rolling Stone still packs a punch.
http://www.democracynow.org/appearances/matt_taibbi
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The Sirota piece is naïve to say the least. This pension crisis has been developing for years, well before the 2008 financial meltdown and is largely driven by unrealistic negotiations and promises and “kicking the can down the road.” You can Google “unfunded public pension liabilities 2005” and there were folks raising the issue then.
Defined benefit plans, which include most Public Pension plans, have for years made assumptions about rates of returns on pension plan assets that are way too high. These assumed rates of return are the basis for determining employee and employer contributions. A drop from the standard assumed 8% return on assets to a more realistic 5% return on assets would require a doubling of combined employer and employee contributions in order to generate the same level of benefits 25 years out. You can Google a pension calculator and work it out for yourselves.
Pointing the finger at one group in this mess is intellectually dishonest. Unions, States, Local Districts, Pension Fund managers and actuaries, individual employees and voters all share responsibility unless they spoke up early and often about these unfunded liabilities.
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Arguments about pensions have basically become like arguments about whether humans evolved through natural selection. There’s just no point.
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I still think some posters here are ignoring some of the benefits of defined contribution plans. Many teachers leave the profession before becoming vested in the defined benefit plans, others are claimed to be hounded out just before qualifying. Neither would be an issue with defined contribution. The contribution from he state can be as generous as the union can negotiate.
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But they understand the main benefit of defined benefit plans, which is that they guarantee a return without any risk. Risk is risky.
They also understand that it’s a lot easier to negotiate with the state when the public has no idea how much money’s involved.
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I agree, but I think the locals are becoming more aware of the costs of promises made.
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Does your comment apply to the Sirota and Taibbi pieces?
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TE, in a pilot study in Florida, when given a choice, about 35% of new hires opted for a defined contribution 403b-style plan over the defined benefit options. Interestingly, math and science teachers were disproportionately overrepresented in the defined contribution group. I think it would greatly expand the teaching talent pool if more states gave their hires this option.
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Tim:
Nice find. Do you have a link?
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Here’s a link to the study (this opens immediately to a PDF):
Click to access 20130219-When-Teachers-Choose-Pension-Plans-FINAL.pdf
I misstated the percentage of teachers who opted for the DC plan: it was between 25 and 33 percent, not 35 percent (and I don’t recall why the study couldn’t pin down a more exact figure).
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Oh snap! ;
“Generous support for this project came from the Laura and John Arnold Foundation”
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Sure, it is probably a bit suspicious that a study on teacher retirement options was funded by a foundation whose goal is to promote “substantial, widespread and lasting changes to society that will maximize opportunity and minimize injustice.”
But if you’re like me and you have the occasion to hire and work with so-called “Millennials”, it’s easy to see that a fundamental shift has occurred. The concept of working in one place for 25-40 years is simply alien to a lot of extremely bright younger people. I’m skeptical of the motivation behind the study, but it does align with what I see in the ‘real world.’
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Hey, it’s alien to me, too, and I’m not even bright.
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Not necessarily naive. Here in Michigan, we’ve had governor’s raid public pension funds on 4 occasions and never replace the money.
I’m not interested in pointing fingers. Just want to know where the money has gone. And it hasn’t been the middle class. In my state,we granted $1.8 billion in business tax breaks over two years ago. We sacrificed many public funds to do so(schools and roads) coming to the forefront. All with the promise of more businesses moving to Michigan and the current ones hiring more people.
My small business friends laughed all the way to the bank. They hired no one and pocketed the extra savings. Our governor recently sent his weekly email newsletter in which he joyously proclaimed a net gain of 8,000 jobs in a state with 4,100,000,000 jobs. A net gain of 0.002% Not much return on investment over two years.
Perhaps you’re right about pensions,Bernie. Or maybe not. But there can be little doubt that current economic policies dramatically favor the already wealthy more than anyone else.
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Michigan has 4.1 billion jobs?
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Million. Typo on my part. But thanks for responding to the main point of my post. And at 4.1 million, the .002 increase still applies.
Your response to the idea that ARCs were not made though mandated by law? Or that withdrawals from public pension funds were made to cover budget shortfalls?
I won’t deny that the levels of pensions were unsustainable but there that these funds were intentionally underfunded or that the money was used to cover for other purposes.
Also remember that the thrust of the Sirota article is that corporate subsidies have increased while political leaders scream about pension shortfalls. It’sobvious that the rich are getting a good return on their campaign donations.
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Steve:
I don’t know the details of what public bodies can and cannot do. Public Corporations with pension obligations can legally move funds out of their pensions if they are overfunded – due to rates of return that are above the expected rate of return. However, with that comes the obligation to increase funding when the rates of return are below expectations. I fear that pension funds in the public sector operate with less discipline – since the tax payer becomes a potential backstop. The Detroit and Michigan case are going to have huge consequences for other public bodies. Whatever it is, the easy target of hedge fund folks is missing the underlying issues.
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You refute your own argument in the first paragraph: “unfunded public pension liabilities.”
In other words, the money was never allocated to the funds, or it was skimmed into the general operating fund, or both.
Thus the “unfunded” part, which is used as is an “intellectually dishonest” pretext to override a constitutional provision and redirect those funds to creditors higher up the financial food chain.
And, yes, many players have contributed to this, but not the public sector retirees of Detroit, whose pensions average $19,000 dollars a year.
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Whoops: the above was directed to bernie1815.
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Michael, I’m not following your first point — specifically, what is the argument that’s refuted by the fact that public employee pension funds have been under-funded?
On your second point, I’m not a fan of blaming individual people for policy failures, especially when those people weren’t making the decisions and weren’t very informed about them. But it’s worth noting (to understate it) that Detroit’s public employee pension funds have been run by boards of trustees controlled by union representatives (to be more precise, elected members of the applicable retirement systems). So it would be pretty off the wall to argue that the public employee *unions* have not contributed to the problem.
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Michael:
In what way did I refute my own argument. The issue is with the Sirota and Taibbi pieces. The pension issue is longstanding. The unfunded part is driven largely by rate of return assumptions.
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As I stated, they were “unfunded” in that the money was either never allocated to the funds, or was “borrowed” and diverted into the state’s general fund.
That union reps on the Board were unaware/captive/complicit in the process does not change the class war dimensions of it. As I’ve written elsewhere, pension funds are treated like rubes by Wall Street, which dumps many of its most toxic investment vehicles on them.
Many private equity investments that strip assets and harm workers receive backing from union pension funds; that may supeficially complicate matters, but it doesn’t change the fundamental, cui bono, reality of them.
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I understand that I was required by law to contribute 9.4% of my salary to the pension fund. I understand that my pension was considered to be deferred income for accepting below market salaries. I understand that that any social security I might have earned outside of teaching is substantially reduced because of that pension. I understand that I receive no social security for teaching. I understand that Illinois has chosen to neglect its responsibility to its public service pensions and has used that money to keep taxes down and to fund other programs. I understand that members have paid their full share with no “holidays.” I understand that some people have abused the system, usually fat cats who knew which fat cats could help them abuse the system. ( I dare you to find a hoard of kindergarten teachers who are living the high life on their pensions.) I understand that the pension funds here have historically produced good returns. I understand that now I am being asked to pay for the sins of others. Nobody is going to give me a big bonus for crashing the economy. I don’t see anyone rushing to bail me out. I just see greedy bankers and financial experts waiting to get their hands on pension fund assets.
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Excellent comment , 2 old.
Agree.
In my part of the world, we understand ( in my district) that there is no social security.
Someone (?) opted us out , I am told, in the early 70’s.
And yet the district has somehow underfunded our retirements.
Court case pending.
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2old2tch:
A number of points.
If contractual obligations were not met then the union has legal recourse which I assume it is pursuing.
As for Social Security, I would be far better off if I had opted out of Social Security. The decision to opt out of SS was a rational financial decision.
Who are the fat cats in Illinois who have benefited by somehow shortchanging your pension plan? How could they operate without the agreement of those in charge of the pension plan?
I went looking for info on Illinois pensions and found an article by the head of the CTPF, Kevin Huber.
http://www.catalyst-chicago.org/news/2013/08/06/22524/set-record-straight-teachers-pension-fund-problems
Though informative, I found the article incomplete and slanted, especially around the all important issues of funding levels and assumed rates of return. Others commenting on the article detected the same and added more concrete information that supports the primary point I made above. Specifically, commenter McGuest wrote:
Informative but slightly misleading
Informative article but there is something missing and, somewhat, misleading I feel. You note that the funding ratio was over 100% as of 1995 and through 2001; there is no need for the state/city to make funding payments when the liability matches, or is over, the available assets. However, the 100% funding ratio is misleading because current actuarial pension analysis, as used by governmental entities, assumes a rate of return of 7-8% when actual returns, especially considering the previous 10 year, has been much lower than that. The actual funding ratio, if we use a more realistic rate of return, such as 4-5% (being that pensions are, essentially debt, this is appropriate and ballparks current bond rates) would indicate that they are less funded than current accounting for pension funds would lead us to believe. This would also relate back to the time period of 1995-2001 when it was assumed to be 100% funded. In reality, it was much less funded than that, but this is a problem of pension accounting rules as defined by governmental accounting standards; private company accounting standards require more realistic rates of return, which are around 4-6%. Yes the city contributions weren’t made, but based on misguided return assumptions, it didn’t have to. When the market tanked twice during the aughts and asset values plummeted they were required to make up the difference when returns did not equal the expected 8%, and make contributions to make up for any shortfalls. If we modify our actuarial analysis it’ll require a larger contribution from employees and employers and a reduction in promises but at least it’ll be sustainable. Lets not fool ourselves that the pension funds were adequately funded at any point in time though.
I would add one final point. Any pension plan that bases its payout on the highest years earnings has to be an actuarial nightmare and contains the seeds of its own demise.
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Very eloquently put.
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Bernie,
That information is about Chicago not Illinois. Chicago has its own teachers’ pension fund. I will let them deal with the reasons for their engineered underfunding. I would suggest that you look up Ralph Martire and The Center for Tax and Budget Accountability.
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2old2tch:
Thanks for the reference. I will look him up.
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“The Sirota piece is naïve to say the least. ”
Wow, Bernie.
Based on your comments to threads on this blog alone you… know more about educational statistics than Gerald Bracey. Are better informed about human evolution than Stephen Gould, can comment on and critique human genetic inheritance patterns, are very well versed in public pensions, and the list goes on.
You really must have incredibly impressive credentials .
Now remind us, you work in the testing industry?
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Ang:
How rude and uncivil. I have no connection with the test industry at all. Among other things, I spent 35 years designing surveys and analyzing large data sets. So yes, I do know more than a bit about statistics – at least as much as Stephen Gould by all accounts. Anybody responsible for a company’s 401K plan and who regularly reads the business press should understand the issues about defined benefits programs. However, I have no idea as to the relevance of human evolution or why you brought Stephen Gould into a discussion on pension plans.
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@Bernie: Perhaps you failed to read the Taibbi and Sirota articles….the problem is twofold:
1. Pensions have NOT been adequately funded over the years, primarily because politicians used the pension funds on other things, including tax cuts for corporations and the wealthy (by the way, the “thinking” here was that these tax cuts would “stimulate” investment and create jobs…so, what happened?);
2. Hedge-funders and Wall Streeters and conservative Republicans want to strip pension funding even more, and they want to tap into that money. So, as Taibbi points out, in the latest scam, government employees would fund the very same people who pushed for disastrous supply-side policies, who caused the Great Recession, and who accuse them of being greedy.
The scammers have absolutely no shame whatsoever.
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democracy:
I read both. I stand by my assertions.
Any asset manager wants to increase the amount of money he or she wants to manage. There is nothing surprising about that. Pension fund managers have a fiduciary responsibility to select the asset managers who can best meet the explicit and implicit goals of the fund – which normally involves maximizing the long run rate of return.
The issue of the size of public pensions, IMHO, is threefold. First, the true lifetime costs of funding these pensions are never readily visible. Generous terms are agreed to without a full accounting. Second, the contribution levels are based on unrealistic rate of return assumptions. Third, the rules are open to gaming the system with beneficiaries receiving benefits that are way out of line with what was contributed in their name.
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So bottom line is we should assume that the state government will steal our pensions, so we should go with defined contribution so the stealing can be more direct? The returns on our pension fund have been realistic, and just the teacher contributions would have kept the funding healthy without the financial crash (caused by the people we are supposed to let manage our money directly). The state of Illinois has failed to fund their share and now wants us to take benefit cuts that will do nothing to pay off the current debt. They have no plan for dealing with that because the solutions would impact the state power brokers and their allegiance to bogus trickle down economics. I am really tired of coddling big money at the expense of working class people. Obviously, as we watch more and more people fight to keep from sliding into poverty, our continued worship of those who control big money has not benefited the vast majority of Americans.
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2old2tch:
Where do you see any endorsement on my part for the State or school district or anyone else not living up to their contractual obligations?
The causes of the financial crash are complex and many own a share of responsibility. At the same time there is a real issue in the assumptions regarding RoR on assets. It follows that assumptions about the level of funding are also wrong.
Let me ask a question, if you had the opportunity would you take your pension as a lump sum that accurately reflect the full current value of your account assuming all funding obligations are met or would you leave it with your current pension fund?
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I’m sorry, Bernie. I did not intend to imply that you were suggesting that the state not meet its contractual obligations. We happen to have it written into the state constitution, but that is not stopping the legislature from trying to diminish our pensions.
The return on our pensions has actually not been at all bad and there would be no “pension crisis” if the state had met their obligations. They still will have to meet their current debt to the funds caused by years of not making payments; cutting our pensions will do nothing to decrease it.
If I knew the politicians could not mess with my pension, I would leave it. From what I have been told 401K plans have not lived up to their sales pitch, and I really don’t think that everyone is equipped to become a financial manager. The financial industry has so damaged their reputation that there is an understandable reluctance to trust them. If I could go back and get paid what was billed as deferred income as income, I might make a different decision. Having everyone left individually to the whims of a financial industry that has no vested interest in protecting our assets, though, does not seem to have served a lot of people who suffered mightily in the financial collapse. We really need to concentrate on consumer protection; the industry has proven themselves unable to police themselves.
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2old2tch:
401Ks work just fine if you have a portfolio managed by a conservative management firm like Vanguard or Fidelity and you pay attention to the portfolio in terms of the general economy. The biggest risk is that the Federal Government will preemptively tax money that is in the 401K or IRAs. This is what the Soviets did on two occasions and the Poles and Cypriots are doing now.
The other issue that few speak about is the massive transfer of income from savers to borrowers in order to protect the level of Federal spending and protect those who bought real estate at inflated prices. Reasonable interest rates would create a huge increase in the Federal deficit that would be impossible to hide. It is also what is depressing the RoR of pension funds and exacerbating the underfunding.
As to the issue of a Constitutional guarantee, the next year or so will show whether or not that means anything.
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Rate of return on pension investments is irrelevant – the money is still owed.
Try this sometime: hire a contractor to do some work on your house. Put 50% down and promise to pay the rest upon completion. At completion, try telling your contractor, “oh dear, I’m sorry, but I invested the money to pay the other 50% and I just haven’t gotten the return I expected. I’m sure you understand.” See how well that works for you.
Better yet, just try telling your contractor that you put the money for the other 50% into other things and, gee, you’re really sorry, but that money is all spent, so you’re not going to be able to pay. Again, I’m sure he’ll be very understanding.
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The rate of return issue is a political problem, not an issue about liability. By using an unrealistically high rate of return, local and state governments made the pension costs appear to be lower than they actually are and moved those costs from current taxpayers to future taxpayers.
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TE:
Agreed. I would add that anyone responsible for the long term viability of a pension fund needs to ensure that the RoR assumptions are valid as well as the assumptions and rules governing payouts.
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Dienne:
In your example, both parties enter into a contract But implicit in the contract is the assumption that the terms of the contract can be legally enforced. Bankruptcy protects both sides in your example..
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The Pension!
For 30 years I drove a fire truck; sometimes it was easy, sometimes it was hard. During the hard times I thought about the pension at the end of the rainbow: it helped.
When I divorced my first wife, it cost me about half that pension; but I was still a relatively new senior citizen, so I went back to school to train for a job in education with hopes of lasting long enough to someday qualify for a small school pension, and actually retire with enough to live on; ten years later that prospect is becoming increasingly uncertain…
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Matt Taibbi is one the best investigative journalists at work today.
Perhaps at some point he’ll delve into the education “reform” mess.
And what a mess it is.
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They looted and gambled away:
Your mortgage
Your private pension
And are trying to loot:
Your public pension
And they would like to loot Social Security too if they could get away with it….
So why do we think they will do anything different with public education?
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This is really sad. Taibbi, who usually does good work, doesn’t really understand how pension rules work and how in the case of teachers they screw beginning teachers to enrich retirees. Unless you hang on until retirement within the same system, you are paying former teachers a guaranteed pension regardless of how dumb the pension fund has been run.
Instead they should pay teachers more money up front. Let them invest it in Treasuries if they think the stock market is a big scam. Meanwhile the less gullible teachers can put their money to work building a nest egg that municipal creditors can’t take away in a bankruptcy proceeding like Detroit’s.
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