“The ‘recovery’ is largely an illusion created by the effects of zero percent interest rates, quantitative easing, and deficit spending. The asset bubbles that have been created as a result of these policies have primarily benefited the owners of stocks, bonds, and real estate (the rich), while simultaneously deterring the savings and capital investment that is needed to actually create good paying jobs and increased purchasing power.”
–  Peter Schiff, EuroPacific Weekly, November 6, 2014

The question everyone should be asking, especially the managers of public employee pension funds, is how much longer can our economy run on zero percent (adj. for inflation) interest rates, quantitative easing, and deficit spending.

When asked how we unwind all of this debt and deficits in a manner that doesn’t trigger a collapse of collateral and potentially catastrophic deflation, i.e., how do we create the preconditions for sustainable economic growth, respected economics blogger Charles Hugh Smith emailed back this answer:

“Those who foisted the debt off as safe have to absorb the losses, as did those who were conned. As it stands now, the hapless taxpayers are having to make the perps and their marks whole—that is wrong, morally and financially. The US has about $90 trillion in net worth. If $10 T were wiped off the books, it would be bad for the banks and those who trusted them, but it would not sink the country.”

Which brings us to the topic of this post.

As reported on November 16th in the Sacramento Bee:

This year, UC will pay about $1.3 billion to the pension fund, about 5 percent of its overall operating budget. UC officials want the state’s general fund to pick up nearly a third of the payment, which would cover the university’s portion of pension contributions for faculty and other employees who are paid from state funds. ‘Frankly, if the state were to pay that, we would not be proposing a tuition increase,’ said Nathan Brostrom, UC’s chief financial officer. ‘That is money that could go to other resources.'”

Like nearly every public employee pension fund in the U.S., the University of California’s pension system is underfunded. According to the Sacramento Bee, the system is 79% funded, which equates to a $7.2 billion unfunded liability.

What is going to happen to the UC System’s pension fund when these asset bubbles deflate?

The precariously low funded ratio challenging America’s public employee pension systems is itself based on the dangerous assumption that we are not experiencing unsustainable asset inflation. A healthy correction would lower asset values, making the basic necessities of life – housing and energy – affordable again. But a healthy correction in asset values would render pension systems insolvent because the value of their investments – already on the brink of inadequacy – would decline further.

In the public debate over this issue, there is another assumption at work, pernicious and misleading. That assumption is that faculty on the various UC campuses are making common cause with the students by insisting that state taxpayers pick up the tab for these pensions. But there is no common cause. Beneficiaries of public sector pensions are shareholders. From funds that control nearly $4.0 trillion in investments, this privileged class of state and local government workers collect pensions that – at least in California – average four times (or more) what someone with similar compensation (and similar withholding) can expect to receive from Social Security. And unlike ordinary shareholders, when the shares held by their pension funds decline, they are empowered to force taxpayers to cover their losses.

The faculty that populate the campuses of the University of California, and by extension, every public employee who collects a pension at taxpayer – and tuition payer – expense, have interests that coincide with the one percent of the one percent, and the biggest banks, and the hedge funds, and the Wall Street firms they love to demonize. They benefit from the asset bubble that is destroying the economic aspirations of the rest of America. When financial policymakers encouraged cheap interest rates so ordinary people could borrow more than they could ever hope to pay back, just so they could own a home, shareholders – including the biggest shareholder class in the U.S., pension funds – profited from the debt-fueled economic growth. When asset bubbles rendered a middle class lifestyle unattainable to most Americans, the public sector exempted themselves through automatic cost-of-living increases and enhanced pension benefits.

The solution to the University of California’s money crunch is to suspend cost-of-living increases, increase payroll withholding for pension benefits, and lower pension benefit formulas. Only then will the people who teach California’s youth truly be making common cause with their students.

As it is, the roadblocks to sustainable economic growth are those who benefit from debt fueled asset bubbles – super rich shareholders and their fully co-opted partners, government workers.

*   *   *

Ed Ring is the executive director of the California Policy Center.

RELATED POSTS

The Amazing, Obscure, Complicated and Gigantic Pension Loophole, November 18, 2014

Two Tales of a City – How Detroit Transcended Ideology to Reform Pensions, July 22, 2014

Public Pension Solvency Requires Asset Bubbles, April 29, 2014

Add ALL Public Workers to Social Security, March 25, 2014

Pension Funds and the “Asset” Economy, February 18, 2014

Middle Class Private Sector Workers Are NOT “Ripping Off the Next Generation”, December 17, 2013

Unions and Bankers Work Together to Protect Unsustainable Defined Benefits, November 26, 2013

A Member of the Unionized Government Elite Attacks the CPC, November 19, 2013

Adjustable Pension Plans, April 16, 2013

4 Responses to More Taxes and Tuition Buy Time for the Pension Bubble

  1. Pension Ponzi says:

    The good news is that the pension money-grab machine is breaking down. Retirees in Detroit and Stockton lost their COLA’s and health benefits, as they should have. They will soon find out how expensive Obamacare is. Some of those pensioners may be paying for their kid’s college education, so they now will be paying 25% more if their kid is going to UC. And now a judge in Stockton said that pensions can be reduced in a bankruptcy. The next city to go BK may take him up on that offer.

  2. Al says:

    UC is only raising the tuition 5% a year….this is comparable to private schools. Well it is actually quite a bit less when you are talking actual dollars since private school tuition is often double UC tuition. http://www.naicu.edu/news_room/page/private-college-tuition-increases-at-lowest-rate-in-four-decades
    So you want to blame pensions for the UC schools tuition but where does the blame for rising tuition fall on private institutions since they don’t have the scapegoat of employee pensions.

  3. Ed Ring says:

    Al – Before suggesting we are “scapegoating” pensions for causing the financial problems in the UC system, please reconsider this quote in the Sacramento Bee from the CFO of the University of California:

    As reported on November 16th in the Sacramento Bee:

    This year, UC will pay about $1.3 billion to the pension fund, about 5 percent of its overall operating budget. UC officials want the state’s general fund to pick up nearly a third of the payment, which would cover the university’s portion of pension contributions for faculty and other employees who are paid from state funds. “Frankly, if the state were to pay that, we would not be proposing a tuition increase,” said Nathan Brostrom, UC’s chief financial officer. “That is money that could go to other resources.”

    Got that? Here is the relevant excerpt:

    “Frankly, if the state were to pay that [i.e., dump over $400 million into the UC pension fund], we would not be proposing a tuition increase,”

    We may disagree as to whether or not it is fair to charge public employees scarcely more in withholding than Social Security participants have to pay, yet award them a pension that is about four times better than Social Security, commencing about ten years earlier.

    We may disagree as to whether or not it is realistic to expect 7.0% annual rates of return for pension funds (4.0% after adjusting for inflation) to go on forever.

    But even if we disagree on the above, you will have to acknowledge that even the CFO of the University of California is saying it is the pensions that are causing the need for this tuition increase.

    We can speculate all day long regarding the intricacies of private university finance. But they’re different animals. Nobody here is questioning the virtues of government subsidized public universities, which obviously results in lower tuition. We are questioning raising tuition for pension funds that award government retirees obscenely generous benefits relative to the taxpayers who have to live with Social Security. Funds that depend on asset bubbles to survive.

  4. Douglas47 says:

    Comparing Social Security to University pensions is a red herring. Social Security is a tax.

    University pensions are deferred compensation. There need not be any employee contribution at all. What is the difference if you pay a professor $100,000 a year and deduct $8,000, or just pay him $92,000 and have his pension entirely funded by the employer, as most private sector DB plans do?

    We can speculate all day long regarding the intricacies of private university finance, but before we call government retiree benefits “extremely generous”, we should do a careful comparison of public vs private faculty compensation.

    “For a full professor, the average salary at a private university this year is $139,620, a notable hike over the average $110,143 at public colleges”

    According to the source, total compensation for private university faculty is also higher.

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