Public Pension Solvency Requires Asset Bubbles

The title of this post expresses what is probably the greatest example of a monstrous hypocrisy – that public employee unions, and the pension funds they control, are supposedly helping the American economy, and protecting the American people from “the bankers.” Overpriced “bubble” assets caused by banks offering low interest rates hurt ordinary working people in two ways – they cannot afford to buy homes, and they are denied any sort of viable low risk investment opportunity. But without an endlessly appreciating asset bubble, every public employee pension fund in the United States would go broke.

The inspiration for this post is a guest column published on April 27th in the Huffington Post entitled “The Real Retirement Crisis,” authored by Randi Weingarten, the president of the American Federation of Teachers. The totality of Weingarten’s column, a depressing plethora of misleading statistics and questionable assertions, compels a response:

Weingarten writes: “America has a retirement crisis, but it’s not what some people want you to believe it is. It’s not the defined benefit pension plans that public employees pay into over a lifetime of work, which provide retirees an average of $23,400 annually…”

Here we go again. This claim is one of the biggest distortions coming out of the public sector union PR machine, and despite repeated clarification even in the mainstream press, they keep using it, faithfully counting on low-information voters to believe them. “An average of $23,400 annually.” Not in California. In the golden state, public employee pensions average well over $60,000 annually (ref. “How Much Do CalSTRS Retirees Really Make?“), if you adjust for a 30 year career working in public service. And in most cases public employees also receive supplemental retirement health benefits worth additional thousands each year.

With respect to the causes of the 2007-2008 financial crisis, Weingarten continues: “It’s not the cost of such [defined benefit] plans, which may ultimately cost taxpayers far less than risky, inadequate and increasingly prevalent 401(k) plans.”

What! Exactly how can 401K plans ever cost taxpayers more than defined benefit plans? This is absurd. Public sector defined benefit plans represent fixed payment obligations regardless of levels of funding. When they’re underfunded, the taxpayer makes up the difference. A 401K plan that is underfunded creates no lingering obligation to the taxpayer. If someone from the public sector has an underfunded 401K plan, then they will get whatever government assistance or lack of assistance that someone from the private sector might get. That’s tough, but fair. It is hypocritical to pretend to care about workers, but put the welfare of public sector workers above the welfare of private sector workers. If we are to spend taxes on government administered retirement programs, then everyone should earn benefits according to the same formulas and incentives – whatever they are.

Weingarten then suggests we expand Social Security:  “Social Security, which is the healthiest part of our retirement system, keeps tens of millions of seniors out of poverty and could help even more if it were expanded.”

This is a great idea. Why not give every public employee Social Security? Why not insist on this? Social Security is progressive, meaning that high income people get far less back than low income people. Since the public sector workers make far more, on average, than private sector workers, their participation in Social Security will have a significant positive impact on the solvency of Social Security (ref. “Add ALL Public Workers to Social Security“). Why aren’t public sector unions insisting they participate? Don’t they value the progressive benefit formulas? Don’t they want to expand the system? Could it be they are hypocrites?

Here’s a macroeconomic “big picture” quote from Weingarten:  “And while the stock market and many pension investments have rebounded, for numerous Americans the lingering economic downturn, soaring student debt, diminished home values, the responsibility of caring for aging parents and other financial demands have made it hard, if not impossible, to save for retirement.”

What Weingarten doesn’t acknowledge is the shared agenda that public sector unions and union controlled pension funds have to perpetuate the asset bubble that’s killing middle class families (ref. “Pension Funds and the “Asset” Economy“). California’s artificially inflated home prices are driving young families out of the state where they were born, preventing them from living near their aging parents, depriving their children of a relationship with their grandparents. But pension fund solvency requires ongoing appreciation of real estate and publicly traded stock even if they are already overpriced. As for student debt – if middle class families didn’t have built into their tuition payments the costs for overpaid, over-pensioned, and under-worked unionized faculty, a bloated workforce of unionized college administrators, and subsidies that make college virtually free for low income students, their “student debt” would be manageable because their rates of tuition would be far lower. Does Weingarten care about the “middle class,” or might hypocrisy be at work here?

Here’s another Weingarten quote that invites a rebuttal:  “Defined benefit plans not only help keep retirees out of poverty, every $1 in pension benefits generates $2.37 in economic activity in communities.”

The problem here is that ALL investments generate economic activity. You don’t have to run it through a pension fund. If taxpayers get to keep the money they would have paid to fund a public employee’s pension, they’ll invest it or spend it too. In California’s case, as is proudly proclaimed in, for example, CalPERS press releases, “9.5% of CalPERS investment portfolio is reinvested in California.” Nine-point-five percent. The other more than ninety percent goes to other states and countries, presumably places with business climates that aren’t poisoned by the policy agenda of public sector unions. How does that help California’s economy?

Finally, Weingarten alludes to a new initiative being advocated by public sector unions to provide enhanced retirement security to private sector workers. She writes:  “The AFT is engaged in a broad-based effort with a bipartisan group of state treasurers, other unions, asset managers and even some large Wall Street firms to vastly expand retirement security through pooled, professional asset management.”

Here is shameful hypocrisy disguised, once again, as altruism. Because these private sector defined benefit plans will not guarantee participants a 7.5% return on investment. They will have to conform to ERISA, meaning the future retirement liabilities that will be offset by invested assets will have their present value calculated at conservative rates. This double standard guarantees the “normal contribution” for public employees in order to generate a given defined benefit will be remain far less than that required of private citizens. Some observers have even suggested these private defined benefit plans, where the assets will be co-mingled with public sector defined benefit plans, will be used as piggy banks to shore up the public sector plans. After all, if the assets are co-invested and earn a rate of return that exceeds the discount rate used to value the future liabilities for the private retirees, but falls short of the discount rate used to value the future liabilities for the public sector retirees, then the surplus from the private sector’s fund will be applied to the deficit in the public sector fund. Why not? It is easy to be diabolical, and hypocritical, when your critics have to dive so far into the weeds to challenge your logic or your morality.

Weingarten doesn’t have to deal with weeds, however, or wonks, or the tough realizations that are the reward of complex analyses. She just has to say things that are emotionally resonant, then let her multi-million dollar PR machine feed it to the masses.

When interest rates were lowered in the 1990’s, stock prices soared, forming what was later called the internet bubble. When that bubble popped in 2000, interest rates – and credit criteria – were lowered even further, forming the real estate bubble. Through it all, pension funds banked profits on artificially inflated asset values, ordinary citizens went into debt to their eyeballs to buy homes and pay tuition for their children, and the unions that controlled the pension funds negotiated massive increases to pay and pension benefits as if these bubbles could last forever. When reality finally returned in 2008, the government unions and their banker allies handed struggling taxpayers the bill, holding onto their excessive pay, benefits, bonuses and pensions, and engaged in quantitative easing and other fiscal shenanigans calculated to perennially inflate new asset bubbles, and the pensions that depend on them.

That is the real story, Ms. Weingarten.

*   *   *

Ed Ring is the executive director of the California Policy Center

5 replies
  1. Avatar
    S & P 500 says:

    Ms. Weingarten deserves some slack, not because she is totally deluded but because this might simply be the only thing she can come up with as the public’s opinion of unionized K-12 teachers deteriorates with each passing day. Here are just a few of the mud pies that teachers have to deal with:

    (1) Charter schools are here to stay. They can do it better for less money. Gov. Cuomo is a big supporter of them.
    (2) Even some education websites (like have decided to tell the truth to teachers about CalSTRS–that it’s broke and you can’t depend on it for your retirement.
    (3) As Cate Long of Reuters has said, voters no longer automatically approve school bonds and tax hikes for education which is something they used to do in the past.
    (4) A few teachers may have figured out that db pensions entail budget cuts if the state is short of money to send out the pension checks. If the pension fund managers can’t make the fund grow at a Madoff 8%, then there will be budget cuts to schools. That sound reasonable but crumbling schools with restrooms that the students don’t want to use must make for a stressful day at work.

    Ms. Weingarten isn’t the worst spokesperson for unionzed teachers. That honor would have to go to Karen Lewis of the Chicago teachers union, who asserts that the city has the money for pensions hidden somewhere and that closing 50 schools didn’t save the city any money.

  2. Avatar
    YEEEHAAA says:

    Where to begin…?

    First on the ONE point that you are right on – pension systems need the market to continually go up to stay solvent. Put another way, pension systems need INFLATION, which (along with other things) results in the stock market going up. This has been the case since not long after the federal reserve was created. However, when you say ‘public employee pension systems’ need this market inflation, you are misdirecting the vast majority of people. The fact is that the federal government needs inflation (thus markets) to go up, the government needs a continual rise in inflation (devaluing retirees dollars), the government needs low interest rates. The interplay of large scale financial matters is not something that most people spend hours pondering, so when you lay the blame at public employees feet – the vast majority of people buy it. It is a shame that your ‘articles’ contain a tint of yellow in them.

    To take on some of the points you made:

    1)Indeed the average retirement IS $23,400. You, and others like you who bash, like to point to a 30 year window. Well, you conveniently leave out the 20-35% of employees who NEVER collect a pension from the work they did as government employees because they quit/got fired prior to vesting (or were just dumb and pulled their money out). I have known many people who fit in those categories. By not including this data set, it shows just how biased your ‘reporting’ is. It shows you as the dishonest yellow journalist you are. The very least you could do is add up all those people who didn’t get retirements into 30 year blocks and then add that number of people to your math…and see where it comes out to. You might just find it comes out to about $23,400/year. Woot!

    2)“It’s not the cost of such [defined benefit] plans, which may ultimately cost taxpayers far less than risky, inadequate and increasingly prevalent 401(k) plans.” —- IF this is too complicated for you, I just don’t know what to say. 401k plans would cost more because all these employees would have to be switched to social security. Of course you know that, but hey, it is convenient to leave out. In addition, there would be additional costs in doing this conversion, and no doubt 10’s of thousands would fall thru the cracks, leaving the federal government (via SS) to solve the problems. That would effect tax payers on a nation-wide scale in the end. All of this is not including the fact that the government (to meet the prevailing standards of the private sector for professionals) would have to off an ’employee match’ up to say 5% of salary as a minimum. Stuff just got real – real expensive.

    3) I could easily continue to pick you apart, but it is akin to a cat playing with a mouse – a blind/deaf mouse that has had severe head trauma. I like you too much to continue to toy with you, so that wraps it up.

    -ps: 16.5 years until CalPERS implodes.

  3. Ed Ring
    Ed Ring says:

    YEEEHAAA – thank you for your comment.

    Where to begin indeed. You raise a lot of good points. Apparently we agree that pension systems need the market to go up to stay solvent. But we disagree that they need inflation, which is useless. They need real growth in value, after inflation, because, as you know, there are “stop loss” provisions in most pensions that remove the cap on COLAs once the pension’s purchasing power drops below 80% of what it was worth in the year of retirement. At most, inflation buys the pension funds about a 20% cushion, because that is the limit to which inflation can erode the liabilities of the fund. Asset bubbles may exceed the rate of consumer price inflation for a while, but then they pop. We are headed down a perilous path.

    Our criticisms have nothing to do with public employees and is not directed at them. It has to do with the pension funds, and the unions, in that order, who are misleading the public employees into thinking their pensions are modest and sustainable when they are neither. To be fair, the pension funds have grievously mislead the unions regarding what constitutes sustainable pension management, and they still are.

    With respect to the average pension, the point we’ve made again and again, along with a lot of very measured and responsible journalists, is that “averages” should not be thrown around without any clarification. Our position is that if you are going to talk about how much public employees are getting via their pension benefits, you need to use full-career averages. Spokespersons who run around acting like someone whose “spent their lifetime in government service” only gets $23,000 per year on average is misleading. As for those who vest nothing because they didn’t stay five or ten years or whatever their vesting threshold was, welcome to the real world. That’s tough, but it’s true in any private sector job. If you move on to a new company you don’t vest your stock in your old company, or maybe even your pension if one was offered, and you lose all your seniority with respect to vacation. Maybe that’s tough, but why should there be a double standard? Fix it for everyone, not just government workers.

    Your point about Social Security is only true if one assumes the pension assets weren’t transferred into the Social Security fund. If we enrolled veteran public employees in Social Security, the most likely presumption would be they would get their pension for the years they had already worked, and they would pay into the Social Security fund and collect that benefit for their remaining years of work – we would waive the 40 quarters of contributions requirement that normally applies for Social Security. If the pensions were completely defunct – which you predict will happen to CalPERS in 16.5 years, then we would transfer whatever is left of their assets into the Social Security fund and calculate their Social Security benefits as if they had been enrolled and contributing all along. Since Social Security does not pay higher income workers very much, the fund would probably incur a net gain in solvency by grandfathering in public sector participants plus the remaining assets of their defunct pension fund. So I’m not convinced such a transition would be terribly expensive.

    Welcome back, YEEEHAAA. Your comments are always interesting.

  4. Avatar
    YEEEEHAAAA says:

    1) Could you expand on the movement of pension plans into social security. That might make a really good article….?

    2) The point of mentioning employees who don’t meet the vesting threshold is that the money contributed by the employer stays with CalPERs. This provides funding for those employees who do meet vesting requirements. So the average # of years worked (when including all vested & non vested employees) really isn’t what it appears to be…if you follow me.

    3) Of all the pensions bashers out there, you are my favorite.


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