California

Gov. Brown's Pension Reform Plan Won't Defuse the Bomb

Plan for California will help fight fraud and pension spiking, but doesn't deal with the reality of the system's unsustainability.

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You're going to have to cut some of the wires to stop the ticking.

Gov. Jerry Brown flew from Sacramento to Los Angeles today – God knows why—to announce his pension reform plan that everybody has been waiting for. It's a lot of fanfare for something so lackluster. It's not nothing, but the outcome is just slowing the growth of the pension disaster. This plan is a long, long way from getting California's personnel expenses under control. The Sacramento Bee's state worker blog provides the basics:

The salary of future hires that will be considered for pension purposes will be capped. The ceilings: $110,000 for employees who participate in Social Security and $130,000 for those who don't, such as fire fighters, police and teachers.

Brown's proposal to put new hires in hybrid pension plans won't happen. Instead, the pension formulas for new hires—both safety workers such as police and firefighters and miscellaneous employees—will be rolled back.

New employees will pay half of their normal pension costs. Employers would still have to bargain contribution rates for current employees.

Miscellaneous employees—the largest category of workers—would have to wait until their 67th birthday for maximum retirement benefits, compared with age 62 for most current workers. Future safety employees—including police, firefighters and prison officers—would would have to wait until age 57 to qualify for maximum benefits. Depending on their employer and contract, current employees in those jobs can retire as early as 50 years old and receive maximum benefits, although that happens relatively little.

Lawmakers embraced several proposals Brown made earlier this year, including:

Pensions will be figured using a three-year salary average that includes only regular recurring pay.

Retirees can work a maximum 960 hours per year.

Felons will lose their pensions.

No more retroactive pension enhancements.

No more "pension holidays" that allow employers and employees to skip contributions when pension funds are flush.

Additional service credit purchases will be eliminated.

These are not bad ideas, but a lot of what it does is prevent future abuses of the system and reduces the growth of the pension commitment moving forward. It doesn't do anything to deal with the crisis as it stands now. Employees will not be pushed into a 401(k)-type system to reduce the state's liability.

Jon Fleischman at conservative California site FlashReport dismisses the reform, pointing to two major components that must be addressed:

1) Meaningful impact on the one number that matters — the unfunded pension liability.  A study out of Stanford University pegs that number as north of $500 billion dollars.  The word is that this "big reform" that will be announced by Brown may provide about $20 billion in savings.  Needless to say this hardly moves the needle at all.  And without seeing the details of the proposal, one can assume that this plan is very light on requiring current employees to pay more towards their retirement — I suspect it actually has no impact on current employees for remaining years of service.

2) None of the reforms, however insignificant compared to lack of meaningfully bringing down the unfunded liability, are safeguarded from being repealed or ratcheted down by future legislative action.  We already have seen this legislature retroactively increase benefits for public employees.  The only realistic way to ensure that pension reforms are secure is by placing them on the ballot, so that the voters of California can lock them in place.  This has been a key demand of Republicans throughout the legislative process, one that has been ignored by Democrats.  When the deadline passed earlier this summer for the legislature to place a measure before November voters, that effectively closed the door on permanent pension reforms.

The first concern is obvious to anybody who follows pensions – or at least to God I hope so. I expect editorial boards across the state to ding Brown on this, even the Los Angeles Times. The second issue is a bit more subtle, but it's really just as important. There's nothing in these proposals that can't be undone easily. In the event that California recovers from this economic freefall somehow (just don't ask how), there's nothing stopping these numbers from being quietly changed back to ridiculously high amounts the next time California has a boom that will last forever and ever, just like the last one. Changing the system to a 401(k)-style contribution program would be much harder to undo, and no doubt that contributes a hell of a lot to the resistance.

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  1. “…there’s nothing stopping these numbers from being quietly changed back to ridiculously high amounts the next time California has a boom…”

    They didn’t even bother to bury round-the-back on page 10

  2. I don’t think defined contribution will work.

    I’m 47 years old and have been contributing since 25 and have a little under $700k saved up in the 401k. It was well over $1mm.

    Before august 2000 I was heavily invested in equities in probably the best time in history to be in equities. I took a 15% hit that year and have been in the most conservative funds earning NOTHING ever since. Still took more hits.

    If i retire at 65 and live to 85, I’ll have about $50k or so a year.

    Had that boom not happened, I would have been fucked. People 10 years younger than me are all fucked.

    1. Well then I guess you should have been saving more. If people cannot save enough individually, then how do expect that they can pay enough in taxes collectively to fund these retirement levels (and please don’t tell me it’s going to come from the rich)?

      1. your question comes with the built-in presumption of one group being entitled the the money of others: the taxes from group A to fund retirement of group B. What could possibly go wrong with such a system, particularly when elected officials habitually use the money for all sorts of other things?

        1. I don’t think I’m presuming any such thing.

          1. intentionally or not, you have to be because that’s how the system operates. In an ideal setting – even for a program like this – the money taken from you would be set aside for your retirement. But the setting is the opposite of ideal.

            What you contribute now is being used now to pay beneficiaries. The system is broken and getting worse since the ratio of contributors to beneficiaries is far smaller than it used to be. Plus, folks are living longer. There has been talk of privatization so that contributors actually have a claim on the money taken from them, but it never gets anywhere.

            1. It is not a good idea to privatize.

              You should let citizens save their own money but FICA should remain a pyramid scheme. It’s the best Idea.

              1. if the best idea is a system that is bankrupt, then continuing it seems foolish. A Ponzi scheme, which is FICA in a nutshell, does not work when the number of people putting in is about equal to those taking out, and it surely is not sustainable in the long run.

            2. Yes, and my question was pointing out the inherent flaw in the current system. So I wasn’t presuming any such thing.

              1. could be I misread your question.

    2. Don’t be foolish enough to think your 401k won’t be confiscated.

    3. You are a little too conservative there. Even if you stop contributing, the amount you’ve already saved should be about 1.7M in 18 years, so, enough to provide about 50k per year past when you turn 55. Keep is up but relax. If there is ever a recovery, then people younger than you who invested in equities during the bust will do fine, even better than you.

    4. I don’t think defined contribution will work.

      Define “work”.

  3. The table below assumes I’m using the current FICA cap and no employer contribution and a 5% return. That is, the person with the exception of the first two years of their work career over 22 years earned less than the CAP.

    Yes, contribution would make the results higher. However, the cap is twice the median income and doesn’t represent most americans. Plus, who’s getting 5% return. Even if u did get 5% return, what is inflation?

    Define contribution won’t work!

    Year Salary Contrib Balance
    1990 65000 9750 9750
    1991 70000 10500 20738
    1992 110000 16500 38274
    1993 110000 16500 56688
    1994 110000 16500 76022
    1995 110000 16500 96324
    1996 110000 16500 117640
    1997 110000 16500 140022
    1998 110000 16500 163523
    1999 110000 16500 188199
    2000 110000 16500 214109
    2001 110000 16500 241314
    2002 110000 16500 269880
    2003 110000 16500 299874
    2004 110000 16500 331368
    2005 110000 16500 364436
    2006 110000 16500 399158
    2007 110000 16500 435616
    2008 110000 16500 473897
    2009 110000 16500 514092
    2010 110000 16500 556296
    2011 110000 16500 600611

    Total Contribution $350,250
    Balance after 22 years $630,642

    1. Great. I’m glad to see you’re making conservative estimates (probably a bit too conversative).

      So where do you think the money is going to come from for defined benefit plans?

    2. The contributions being made to the public employee pension funds are much greater than this. For older employees, close to 50% of pay. We had a table in a recent article.

    3. That’s a newer policy. And remember, that’s assuming that they make at or above the FICA Cap…which some 90% of americans do not.

      It’s also not as conservative as you think.

      This total balance of $630k for 22 years is not much different than mine with the big Boom and Bust.

      And remember, I ignored inflation !!!

      1. And you’ve got another 18 years until you’re 65. Add that in and you’ll be well over a million. I won’t be crying for you.

        1. trust me, I’m not someone you should cry for. That is my entire point. I’m a 1%er.

          The average Joe is fucked with the define contribution model.

          The pyramid scheme with a FUND that was not used other other purposes (good and bad) would had worked much better.

          1. Well it was used for other purposes. And the only reason the pyramid scheme worked for some time was that the population was growing quite quickly and people died younger. We have to deal with reality where: 1) the money paid in before is gone; and 2) the population is growing at a very slow rate and aging. No one is entitled to a cushy retirement. Until we accept that, we’re fucked.

          2. Alice Bowie| 8.28.12 @ 6:22PM |#
            “The pyramid scheme with a FUND that was not used other other purposes (good and bad) would had worked much better.”

            “Worked” as what?
            You are familiar with the math of pyramid schemes, aren’t you? The clear fact that later ‘contributors’ loose their shirts?

            1. Sevo, I’m extremely familiar with the math behind the pyramid scheme.

              The fact is, America is a pyramid scheme.
              Life, is a pyramid Scheme.

              The entire ACCOUNTING Assumption that a business is perpetual is the belief in a pyramid scheme.

            2. The pyramid scheme works great for Pensions for old and disabled.

              It worked great for years in America.
              That fact that SSN is going broke is a FARCE.

              During the REAGAN years, the SSN Fund was integrated into the US Treasury as REAGAN wanted to use it for STAR WARS to Beat the Russians, which contrary to what Conservatives say, the Russians are leaner and meaner today and armed to the TEETH with NUKES and MONEY. Reagan didn’t do SHIT but make his california Defense friends richer.

              1. Alice Bowie| 8.28.12 @ 8:13PM |#
                “The pyramid scheme works great for Pensions for old and disabled.”

                Alice Bowie| 8.28.12 @ 8:21PM |#
                As long as people are being born, there is no later contributors losing their shirts.”

                Are you really that stupid?

            3. As long as people are being born, there is no later contributors losing their shirts. It’s not like a AM-WAY or an MLM…which are Pyramid schemes that do FAIL as you pointed out.

              Between 1932 thru 1935, the government collected FICA and paid no Benefits.
              Benefits started being paid out in 1936.

              Do you know where the FICA money went between 1933 thru 1935? It went into the SSN Fund, which was pillaged by REAGAN, Bush, and Clinton for good/bad reasons.

            4. For years, there was a FICA Surplus. The formula looks something like this:

              FICA_SURPLUS= FICA_REVENUE + Interest_of_FUND – BENEFITS_PAID.

              You see, you need the FUND. It still exists…It’s in the Treasury.

              1. Alice Bowie| 8.28.12 @ 8:38PM |#
                “For years, there was a FICA Surplus.”

                Uh, *any* decent pyramid scheme shows a surplus early on; it’s later you have to worry about.
                And your further presumption that those wicked politicos grabbed the dough is touchingly offset by your confidence that government is good and should provide retirement funds.
                Cognitive dissonance is rarely that evident.

                1. The Fund is still there…it’s in the treasury. The claim that there’s no money is a FARCE.

                  The sad part is that the formula above is now missing the Interest_of-the_FUND.

                  During a period where Demographic Diversification occurs (due to baby boomers), the economist that built the SSN Pyramid considered this phenomenon before it happened. Once can chew away at the FICA_FUND principal until the diversification went away…And, it will go away, the Baby Boomers will Die and we haven’t had a Boom since.

                  1. Alice Bowie| 8.28.12 @ 9:05PM |#
                    “The Fund is still there..”
                    No, it isn’t. It never was and your fantasy of government-supplied retirement is laughable.

              2. “You see, you need the FUND. It still exists…It’s in the Treasury.”

                YOu can’t possibly be this ignorant.

    4. It makes no sense for people to retire after 22 years. Woz worked fewer but he could afford it. Most people can’t. It’s just that simple.

    5. 5% annual return? That’s terrible. You need to lean how to invest your money.

      1. I’ve worked in Financial Risk Management on Wall St for 13yrs. Before then, I worked on trading floors for seven.

        There is not so many options for one to invest their 401k unless it is equities.

        The 401k is a SCAM to increase trading volumes by having the regular Joe invest in the street.

        It’s a zero-sum-game. The Whales eat up the regular Joe while Wall St collects fees and commissions.

        In fact, many 401ks only allow equities.

        Over 90% of the people my age on Wall St. have ZERO invested in equities as we know better.

        Unless u r an insider or a WHALE, the game works every single time…except once.

        1. this is rubbish

          i’m a futures trader, btw.

          FUTURES are a zero sum game

          the stock market is not

          there has never been any invention in the history of mankind that has been a more consistent wealth builder than the equities market

          commissions and fees are next to negligible.

          they USED to suck

          i have an interactive brokers account, TD ameritrade account, and a couple of others

          trading 100 shares for $1 means that commissions are negligible

          it USED to be a rich man’s game

          with decimilization and the MUCH lower discount broker fees, that is no long true.

          im not disagreeing about some of the stuff you say about 401ks, but in general, the stock market is a wonderful thing, and i thank GOD i took my grandfather’s advice and upon graduating high school i started dollar cost averaging into a basic low expense fund every month, like clockwork

          imo, the smartest thing i ever did, and all this wanking about the crash… hey, few better investment opps than when the dow dropped several thousand points

          1. The fact that you use IB means ur a rookie Dumphry…It’s written in JAVA, too slow for that QUICK TRIGGER TRade.

            Try INFINITY or other products.

            I’m just fucking with you Dumphry. I wish u the best of Luck.

            What are u trading ?

            E-Minis?

            1. i have traded the YM and the corn the grain minis mostly.

              i stay the fuck away from the hang seng (it’s fucking INSANE). learned my lesson there.

              ouch

              i trade QM sometimes, too.

              i appreciate the sentiment.

              i know there is a natural thing to say the stock market is only for the rich, but my grandfather built a substantial amount of wealth with it, and he was your basic street cop. i learned a lot from him (he was a pretty cool guy. ended up founding a travel agency, and rose to the rank of captain as a minority in the NYPD back in the day when it was pretty rare)

        2. Stock picking is for chumps but 401ks mostly don’t allow individual stock choices.

    6. jesus christ you are fucking retarded. And I”m trying to put it gently.

  4. Retirees can work a maximum 960 hours per year.

    My brain hurts.

    Felons will lose their pensions.

    Unless the felony is related to their work, I don’t see why this is applicable.

    Anyway, CA’s fiscal problem will solve itself, as long their is no federal bailout. The State and Cities will just hire fewer cops, firemen, and bureaucrats as time goes on. The pension obligations will make it impossible. It won’t matter how many laws get passed to stem global warming or send your 3yo to preschool. No one will be available to enforce the laws.

    It’ll be like Somalia with bumpy Freeways.

    1. I agree with you on the Felons to an extent.

      I’m pretty liberal and I would say NO ONE SHOULD LOOSE their PENSION/401k/IRA no matter what they do…even job related.

      The only exception I would make is if the money was stolen and dropped into the retirement account and restitution must be made to a private party and not the tax payer or government. Throw them in Jail for a long time for Fraud and let them keep the money.

      1. I’m pretty liberal and I would say NO ONE SHOULD LOOSE their PENSION/401k/IRA no matter what they do…even job related.

        Why not? If it makes potential felons think twice about working in the public sector, it does its job.

        If you want to keep your cushy benefits no matter how many kids you molest, then work in the private sector (which I hear tell pay much higher wages than that public sector sacrifice).

        So it’s win-win. Work in the private sector, get better pay and benefits, and you won’t lose them when you commit your first felony.

        1. i think what they mean is that the felon will lose the defined benefit part. they don’t lose the actual money they put in

          iow, assume they contributed 250 k over the course of a career.

          they won’t get that TAKEN awy from them

          that’s theft.

          they just won’t get the defined benefits. they can just roll it over into a personal plan and/or taken payouts (and a tax penalty depending on age), but their money is still their money

        2. The CA criminal code is so dense that anyone who leaves his home to buy a loaf of bread is committing a felony.

          It’s a felony to fuck up your CA State sales tax allocations. I have little pity for the car salesmen and Chinese grocery store merchants who do this deliberately, but it is commonplace. No one, absolutely no one, understands CA sales tax. It’s a felony not to pay it correctly and it is up to discretion of state and local prosecutors to go after whoever they want, buyer or seller.

          1. it’s like that book (is it called “3 felonies a day”?) says

            back in the day, a felony meant something

            now-a-days, for example, a kid with a forged driver’s license (to buy beer) is technically committing a felony in most states – forged govt document

            1. I remember a reporter asking a cop on the beat in LA after the Rodney King riots what he thought about King getting 2 (or maybe 3) million bucks in the civil action against the City of LA. The cop was succinct, “That’s more money than the average man makes in a lifetime.”

              It’s 2012. That’s less money than cop earns, retiring at 50.

  5. Felons will lose their pensions.

    Symbolically, this may be the most important provision in the whole package.

    Imagine how many upper level employees will get their livlihood taken away from them, which is poetic justice if nothing to fix the budget.

  6. Imagine how many upper level employees will get their livlihood taken away from them…

    You are naive, Paul.. Go forth, but don’t say anything like that again.

  7. Yeah it definitely will not solve the pension mess, which is why it’s all the more troubling that unions have reacted to reforms with such outrage (http://bit.ly/PrEWLE). This reform would do little to touch current unfunded pension liabilities, estimated in California at as much as a half-trillion dollars. It will help down the road with future employees, but the problem with “future” savings is that they’re just that. But as the article mentions, until a defined-contribution style pension plan gets enacted it seems doubtful any significant progress will be made.

  8. Another reason it won’t work is that California’s leaders continue to cling to the myth that cops and firefighters die earlier than other types of government employees. Actuarial data by CALPERS shows that they live exactly the same length of time as everyone else. Under Brown’s plan, the system will pay benefits for 10 years longer for these “special class” retirees. Further, their “High 3” calculation includes overtime, night differential, holidy and special duty pay overtime and special duty pay, which the “average” state employee doesn’t get included. Even worse, most cops and firefighters wrangle disability ratings at the ends of their careers to have some or all of the their retirement paid under Accidental Disability provisions, thereby avoiding taxes on it until they reach 65 years of age. We must stop believing the myth that cops and firefighters die earlier and deserve earlier retirement. Cops and firefighters are paid for the jobs they do. And they are paid VERY WELL! If they are injured or killed on duty, then that’s why they have insurance. The don’t earn the right or deserve to retire earlier or with greater compensation than everyone else. We simply can’t afford to pay for these fairy tales anymore.

    1. I don’t have to wrangle anything. I have a disability rating based on injuries received in the line of duty. If I was a whiner, I could have a higher disability rating. I choose to work, instead, because I know at 52, when I am broken down and not physically able to do the job, I will be able to retire. This will be cheaper to the citizens I serve than a disability retirement. Most cops ARE disabled when they retire, some don’t file for it, however.

      OT is not figured in to my CalPERS retirement: you are spreading incorrect information. Holiday pay, night differential, and incentives are figured in to the calculation. As they should be. All of those extras increase the member’s contribution to CalPERS throughout their period of service.

      OT spiking is something that occurs at back East departments. I don’t know of any CalPERS agency that allows it.

      Manolo, your post reeks of envy.

  9. The quotes from Fleischman are ridiculous. You can’t reduce pension benefits in California by legislative fiat. Benefits are subject to good faith bargaining. If Brown and the Dems tried to reduce current employee pensions, they would ultimately lose in the courts and NOTHING would get done, except the enrichment of lawyers on both sides. This bill, if passed, will eventually allow local agencies to reduce costs by requiring current employees to contribute more to their pension plans. Just like state agencies got 3@50% first and then local associations bargained with local agencies to get the benefit later on, so will this modification of pensions trickle down and provide some relief to city budgets. My contract is up at the end of 2013 and if this is in place, I believe the City will start off asking for 25% of salary for the member’s contribution. That would result in a 15% pay cut for me, but it’s better than losing a job or having more employee positions unfilled.

    I’m a conservative, registered (R), but I can’t understand why those Orange County wankers want a quick, dirty, legally expensive and futile solution to a problem that has taken decades to create.

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