The cause of the “pension crisis” is the boom/bust cycles that the Fed creates, and the “guaranteed” inflation, as the Fed tries to maintain a ~2% inflation rate, which they call “price stability.” The Fed’s tendency to bail speculators out of their foolish mistakes (the Greenspan/Bernanke put) made investors think that “they” would never let deflation happen, so the investors had no choice but to go all in.
If not for the bubbles, our commitments would be significantly lower. During the bubbles, city and state managers/legislators offered up compensation packages that cannot be sustained in a “normal” economy.
The problem is that our bubble economy has been going on for so long (since the early 80s), that everyone (govt management AND pension fund managers and actuaries) thinks the bubble economy is “normal,” and they plan accordingly. Those who thought it was unsustainable were forced out, as the returns they made were consistently lower than those who chased the bubbles and got the bubble returns. Also, as asset prices rose, unions would (logically) demand compensation increases to keep up.
BTW, in the situations I’m aware of, it’s not the reduced TAX revenue that is causing a problem with the pension plans. It’s the losses they saw during the “financial crisis,” and the lower returns on investments. The large pension funds in California do not rely on taxpayer funding, and taxpayers have not spent a single cent on the “pension crisis” experienced by these large funds (CalPERS and CalSTRS*). The pension funds, at lest the large ones I’m most familiar with (I’m not as familiar with independent municipal pension funds) get their revenue from the pension contributions that are paid by the employees and their employers, as part of their compensation packages. Approximately 70% of the revenue is supposed to come from investments (the link below is from 2005, and it shows investment returns are 75% of projected revenue), and THAT is where the problem lies. It’s not about tax revenue, it’s about investment returns/losses.
The funds were super-funded (over-funded) in the late 90s (a bubble!), which is why they passed the pension boost for public safety personnel. The bubbles that resulted from the actions taken by the Federal Reserve and Wall Street are what have caused them to make such foolish mistakes, and this, along with the eventual bursting of said bubbles, is why there is a “pension crisis.”
From the CalPERS link, who pays into the fund:
Member - $16.8
Employer - $17.0
Investments - $116.1
http://www.law.harvard.edu/programs/lwp/Buenrostro%20(FINAL%20POWER%20POINT).pdf
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*The state pays ~2-3% of the employees’ (teachers’) wages to CalSTRS, from what I can tell. The rest comes from employees, the employers (as part of the compensation package), and investment returns.
http://calstrs.com/About%20CalSTRS/fastf...
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I think this is why I get so frustrated with the anti-union rhetoric. It’s just that so few people actually understand how the system works, and why it’s in trouble right now, yet they are ranting and raving about public sector workers who had nothing to do with the financial crisis.
Again, it is NOT the unions who caused the problems, but the financial industry and the Federal Reserve — by creating bubbles which made fund managers and actuaries think that 7-9% returns were “normal” and sustainable, and then forcing negative rates on us when the funds need ~7-9% in order for the numbers to work out…which force the managers to move further out on the risk curve when rates are held so low for such an extended period of time, and then those risks blow up in their faces when the bubbles burst.
This is why some of us are so infuriated. This is being labeled as “taxpayers vs. unions,” when that’s not the issue here. Why has Wall Street — the ones who caused the crisis — been getting bailouts, record bonuses and tax breaks, which cost taxpayers trillions of dollars…while public sector workers are being blamed in the media for causing the “pension crisis” and told they have to give up everything **they’ve worked for over the years** and were promised in good faith? IMHO, it’s an intentional diversion, and public workers are being made the scapegoats for the financial industry.
Sorry, but it’s B.S.
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