How Unions and Bankers Work Together to Protect Unsustainable
Defined Benefits
By Ed Ring On November 26, 2013 · 15 Comments
http://unionwatch.org/how-unions-and-bankers-work-together-to-protect-unsustainable-defined-benefits/
government
workers • public sector pensions • public
sector unions
One of the
biggest unreported, blockbuster stories in modern America is the alliance between
public sector unions and the speculative banking industry. It is a story
saturated in greed, drowning in delusion, smothered and marginalized by an
avalanche of propaganda – paid for by taxpayers who fund both the public sector
unions and the public employee pension funds.
The problem
with public sector defined benefit pensions can be boiled down to two cold
factors: They are too generous, and they rely on rate-of-return assumptions
that are too optimistic. The first is the result of greed, the second of
delusion. To indulge these vices requires corruption, and it is a rot that
joins public sector unions with the most questionable elements of that Wall
Street machine they so readily demonize.
If you
honestly review the numbers, the greed is obvious. The average pension for a
public servant who has worked 30 years or more in public service is more than four
times what the average social security benefit is for someone who has
worked 40 years or more in the private sector. To cite examples – the average CalPERS retiree who
retired in the last five years, after 30 years service, collects a pension of
$67,980, for CalSTRS, the average for recent retirees with 30+ years of service
is $66,828 per year. Most of California’s
independent city and county pension funds are even more generous; Orange County’s
employee retirement system, for example, pays the average recent retiree with
30+ years of service a pension of $81,000.
These
numbers are ridiculously out of step with reality. If every Californian over
the age of 55 got a pension that averaged $65,000 per year, it would cost over
$650 billion per year, one-third of California’s
entire GDP. But the average public employee who works from age 26 through age
55 will easily collect that much. This is impossible to justify, and impossible
to sustain. The average Social Security benefit for a 68 year old new retiree:
$15,000 per year.
Greed is
compounded with corruption and delusion, when in response for calls to bring
public sector pensions into line with what is affordable and fair, unions and
pension bankers claim 7.5% annual rates of return can be sustained forever.
Their first mistake is suggesting that 7.5% rates of return is all they need.
Current levels of underfunding mean either annual contributions go way up, or
returns have to greatly exceed 7.5%. For example, CalSTRS is 67% funded, and to avoid becoming more
underfunded, they must either earn 11.2% per year, or they must make a
supplemental “unfunded contribution” of $4.1 billion per year – last year their
unfunded contribution was only $1.1 billion. We are at the top of another bull
market and in the terminal phases of a long-term credit cycle – anyone want to
bet that CalSTRS is going to earn 11.2% a year for the next 30 years?
In an
attempt to earn in excess of 7.5% per year, pension funds are increasingly
turning to hedge funds, whose charter, essentially, is to earn over-market
returns. To do this, they do all the things that public sector unions are
supposedly opposed to and wishing to protect us from – opaque private equity
deals, currency speculation, high-frequency trading – all those manipulative
tools used by the super-wealthy, super empowered Wall Street players to siphon
billions out of the economy. Except now they’re using tax dollars, channeled to
them via government payroll departments, and cutting the government workers in
on the skim. And if it goes south? Taxpayers pay for the bailout. And even if
these funds can keep the lights on for a few more years before the whole scam
collapses, isn’t it inherently exploitative for a government-ran pension fund,
operated for the benefit of government employees, to aspire to over-market
returns? To the extent the market is manipulated and over-market returns are
extracted for an elite few, value investors with their individual 401Ks are
penalized. That fact is irrefutable, simple algebra.
Which brings
us to sheer abuse of power. Hypocrisy aside – and how much more hypocritical
can it be for union leaders to hurl the word “profit” the way most of us might
utter obscenities, yet ignore the fact that only “profits” can impel pension
funds to appreciate at rates of 7.5% per year or more – it is raw power, sheer
financial and legal might, that enables pension funds, with unions cheering
them on every step of the way, to sue city after bankrupt city to ensure their
“contracts” are inviolable, that the pension money keeps pouring in, even if it
means raising taxes via court order, then selling the parks, selling the
libraries, closing government offices and “furloughing” public servants, and
giving raw deals to newly hired employees. But as courts will eventually
sustain, perhaps out of financial necessity, the moral worth or worthlessness
of a contract supersedes its technical validity. Power is a ship. Financial
reality is a lighthouse.
Public
sector retirement benefits – like all taxpayer funded entitlements – should
provide an austere safety net, like Social Security. Pensions should not enable
a retirement lifestyle of luxury and ongoing leverage, exempting government
workers from the challenges to save and prepare that face every other American
citizen. Nor, in the process, should they impoverish taxpayers, enrich banks,
and flush the social contract into oblivion.
The reason
pension reform doesn’t happen isn’t merely due to the greed and exceptionalism
of public sector unions. Despite their overwhelming power, unions probably
couldn’t stop reforms all by themselves. Public sector unions receive
formidable political, legal and financial support, along with intellectual
cover in the form of delusional financial projections, from their partners in
the financial sector, corrupt, crony capitalists who indeed give capitalism a
bad name.
* * *
Ed Ring is the executive director of the California
Public Policy Center.
http://unionwatch.org/how-unions-and-bankers-work-together-to-protect-unsustainable-defined-benefits/
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