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Glenn Cook
Coming soon: Pension apocalypse
You're stuffed with turkey. You're preoccupied with how you're going to get through your holiday obligations and shopping lists. You're already trying to ignore the presidential election that's 11 months away.
With the economy in the crapper and Congress making drunken sailors downright respectable, you really don't want to ponder the coming pension apocalypse.
You just want a mug of eggnog. The spiked kind.
I get that. So I won't bombard you with all the big, scary numbers behind Andrew Biggs' excellent analysis of Nevada's teetering state pension plan, or put you to sleep with paragraph after paragraph on the nuances of accounting standards.
Rather, I'll just highlight a few of the most relevant and alarming observations the American Enterprise Institute scholar made in his review for the Nevada Policy Research Institute, presented earlier this month at a Las Vegas luncheon.
The crisis: The Nevada Public Employees' Retirement System, like public-sector pensions across the country, has promised far more in retirement benefits to current and former government workers than it can possibly pay without a massive, prolonged infusion of new tax dollars. PERS pegs that unfunded liability at about $10 billion. Biggs says the real figure is almost $41 billion because PERS is too optimistic about its future investment returns and too confident about the safety of its investments.
In less technical terms, that means already-stretched Nevada governments will have to come up with tens of billions of dollars worth of tax increases and service reductions to meet their pension obligations in the coming decades.
You say that's ridiculous. Companies have been released from much of their pension burdens through bankruptcy.
But Biggs says government is not at all like business. For starters, while bankruptcy code allows cities and counties to reorganize, there are no such provisions for states. Second, pensions, along with debt payments, are the highest spending priorities of governments. Education spending, public safety, social services and the justice system can be cut as needed, but pension obligations cannot.
"In New York City in the '70s, Orange County in the '90s and the city of Vallejo, California, this past decade, even through bankruptcy, their pensions were paid in full," Biggs said.
Also consider that Nevada provides among the most generous pension benefits in the country, according to Biggs. The state is on the cusp of a wave of new public-sector retirees who will start collecting six-figure pensions the day they quit. Workers hired in 1985 and before can get up to 90 percent of their highest-earning years. Those hired since can get up to 75 percent of their highest pay.
California has seen six-figure pensioners quadruple in just the past six years because retirement benefits were enhanced while public-sector salaries simultaneously exploded over the past 20 years.
The dam is about to burst.
PERS officials like to boast that their plan is among the best-managed systems in the country.
"If you're only 33 percent funded, you've got some issues to work out," Biggs said. "Saying 'We're really well-run, we're sound,' is like saying you're the best-looking horse in the slaughterhouse."
It's maddening that common taxpayers bear not only all the risk of their own retirements, but of the government workers who make more money than they do in the first place.
Another sobering observation from Biggs: The perception that the United States still has a ways to go before its debt approaches dangerous European levels is wishful thinking. Yes, the federal government has debt equal to about 101 percent of gross domestic product, and Italy and Greece are collapsing at more than 120 percent. But Biggs points out that Italy and Greece have dominant federal structures, while the United States has tens of thousands of state, county and municipal entities with their own debts and liabilities.
"Our debt is actually closer to 135 percent of GDP when you roll in state and local government debt and their unfunded pension obligations," which run in the trillions of dollars, according to Biggs.
Meanwhile, the economic illiterates of the Occupy Wall Street movement have enlisted the help of public-sector unions to demand a crackdown on capitalism and risk-taking by large-scale investors. Biggs reminds us that public-sector pensions are the largest single holders of hedge-fund assets. So why aren't the Occupy slackers carrying signs demanding an end to the pension scam? After all, we, the so-called "99 percent," have to make up the difference if hedge funds don't perform well enough to cover all those golden parachutes.
"Government doesn't bear risks," Biggs said. "It distributes risks to other stakeholders. It's a pass-through entity" as far as pension benefits are concerned. "The typical public-sector pension benefit is worth 50 percent more than a comparable private-sector retiree collects in 401(k) savings and Social Security." And government workers get to retire up to 20 years sooner, to boot.
What's the end game? The bill will come due in installments, starting in several years. Biggs estimates Nevada governments need to increase their annual contributions into PERS from $1.6 billion to $5.8 billion -- starting right now -- to avoid having to write even bigger checks in the future.
Think back to this year's wrangling in the Legislature over the two-year extension of temporary tax rates. Lawmakers brawled over a little more than $300 million per year. Now imagine state lawmakers, county commissioners and city councils doubling tax rates and laying off half their employees -- teachers, police, college professors, corrections officers, social workers -- in order to pay people who aren't working anymore.
Then imagine such decisions playing out in most cities, counties and states in America.
"The money has to come from somewhere," Biggs said. "Already, governments are laying people off because they have to contribute more to their pensions."
I've heard people wonder what might finally send armed Americans into their streets, as we've seen in Greece, rioting and looting in protest of radical public policy changes. It's not going to be Social Security or Medicare reform. And it certainly isn't going to be started by some silly Occupy campout.
No, if there's going to be a revolution, it will be caused by the pension apocalypse. When your taxes go through the roof and your neighborhood school and police substation are closed, all so public employees can keep retiring at age 50 while you work until you drop dead, you're going to be mighty pissed off.
It will be class warfare: underclass vs. ruling class.
Putting future government hires into a defined-contribution, 401(k)-style savings plan does nothing to reduce Nevada's massive unfunded liability. It just keeps it from getting bigger. This bill will never go away.
Enjoy your eggnog.
Glenn Cook (gcook@reviewjournal.com) is a Review-Journal editorial writer.
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@Groucho.. 100K?? I wish!!! Rounded off, 57k is my base salary. I am looking to retire at 43K. Yes it is a decent amount, not your pie in the sky amount. I was working as an electrician 22 years ago. Making far more money than the amount I hired on for at the NDOC. I did not want to go through the highs and lows of the construction business and chose stability and a good retirement instead. I worked my way up through the ranks and earned my current position. There are highly educated people who work for Nevada that will retire at your numbers. How about this for fairness, employees who quit with less than 5 years of service do not get any retirement and loose their contributions to PERS. If they were in a 401K system, that retirement would be theirs to manage as they saw fit. PERS is partly funded on the backs of those who do not stay on with the state for 5 years.
@David.. I am proud of my service to Nevada. I have bled for this state. I am still on the front lines to keep the worst of Nevada from harming you and yours. Zero value? I guess you want the felons running free.
Let's do a little math:
Consider the following inputs:
Rod L makes $100K per year as an annual base salary at retirement.
The PERS system is able to achieve a 7% annual return on its investments in perpetuity.
Rod L will draw on his pension for 25 years.
His annual pension benefit is $75K.
The amount of money PERS needs to have set aside to pay this benefit is $874K.
To reach a value of $874K after 25 years, PERS needs to put (as should be no surprise) $75K each and every year of Rod L working life to fund that benefit.
I am willing to wager that early in his career, Rod L made far less than the $75K necessary to fund his pension let alone meet his personal expenses.
Basing pension benefits on ending salary is not a sustainable financial model. That the taxpayers in Nevada are on the hook funding this insanity should be a crime.
25 years and 75%!? Just for being a welfare queen corrections sergeant that brings zero value to society? We all know who makes up the vast majority of those that are caged by government. Zero value. Rod L should be very ashamed for himself.
I am a corrections sergeant. 21 years in and 51 years old. I planned to be able to retire after 25 years with 75% of my base income (overtime is not included in PERS). If I was told the max would be at 30 years I would stay on. I still may stay on until then. I understand the need for fiscal responsibility and am willing to take a bite out of my pension to help save the budget. My point will be that EVERYONE take a similar bite. When the furloughs were initiated, we took a bite then. Guess who exempted themselves and their staff.. LEGISLATORS! I find it hard to believe some administrative aide to a legislator has a more critical job than me. We need to hire overtime to maintain minimum safe staffing while letting people off on furloughs. Only an idiotic Carson City bean counter could think this makes sense.
Your newspaper is perfect......for cleaning up after my dog and lining my birdcage.
How is the LVRJ going to survive the terrible economy? Answer, laying by off their employees and raising the price of the newspaper 33%.
Dear owner of the LVRJ, I have a suggestion. Make your newspaper out of softer paper. It really chafes my butt when I use it for its intended purpose.
Nice work of fiction! Congrats!
I would never call the gang bangers in blue for anything. Especially if there are armed intruders in my home. Why would I want to invite over another group of armed and violent thugs over at the same time?