I’ve been trying to come up with a non-dismissive way to address Tom Sgouros’s recent op-ed in the Providence Journal, concerning pensions, but I’ve had no success.  Take a look:

The 2011 reforms took effect in 2012 and 2013. Now that the financial reports for those years are out, it is finally possible to begin a review of the pension reform results. I examined the past 15 years’ reports, and looked at the actual cash coming in the door and going out each year. I compared the contributions from employees, the state and all the school districts, and subtracted the benefits paid to see how much investment income is required to make all the payments each year.

Even without getting into the numbers, it’s enough to know that nobody assesses the health of pension funds this way.  As far as I can tell, this is entirely Sgouros’s innovation, and yet, he doesn’t acknowledge his unique approach, let alone attempt to justify it.  Additionally, in all of his talk about benefits and contributions going down, he doesn’t mention the new hybrid plan, which receives a majority of the contributions from the eligible employees.

The two pie graphs at that last link point to the real deception underlying Sgouros’s analysis.  Note how much the wedge for liability amortization (i.e., catching the pension fund up to where it needs to be) shrinks with the reform.  That’s because of the biggest factor that Sgouros chooses not to acknowledge: The concern isn’t whether investment returns and contributions can meet benefit payments this year, but whether, with a growing base of retirees, who are living longer and collecting compounding cost of living adjustments (COLAs), the fund is speeding toward a cliff.

Sgouros’s propaganda is the equivalent of saying that it was a beautiful day, yesterday, so you really don’t need to find savings in your budget in order to build a roof on your house.  A pension fund isn’t like a retiree’s personal retirement account, which can be considered healthy as long as he or she isn’t withdrawing much more than the account earns each year.   An individual can cut back, in the future, if the deal he’s given himself isn’t supported by his returns.   An individual is not constantly adding new people to the list that must be supported.  An individual will eventually die.

Bringing the numbers into the picture actually makes Sgouros’s case worse.  Looking at the pension fund’s actuarial reports, yes, the expenditures (mostly benefits) amounted to more than double the contributions to the fund, and yes, that’s a 23% increase from 2010.  But in 2010, the expenditures amounted to 167% of contributions, which was an increase of 27% from 2007.   The pension fund was already becoming less and less affordable.

Going to one more level of detail, if you look at the amount of expenditures accounted for by cost of living adjustments (COLAs), you see that they went from 19.6% in 2007 to 20.6% in 2010 to 23.1% in 2013.  That would only continue to grow.

If there is a statement in Sgouros’s essay that isn’t deceptive in some way, I haven’t found it.  Consider this one:

Until the Carcieri wave, the annual growth rate in benefits was under 6 percent and declining, because of three previous rounds of pension reform since 2005. The following year, the rate returned to well below 6 percent, and 2011 (pre-reform) estimates from the treasurer’s office predicted continued easing of that growth over the next 30 years.

It’s true that increases in base benefits were only increasing by around 6% in the years prior to the wave of retirements in 2009, but the cost of COLAs was increasing at around 10%, for overall increases around 7%.  Apart from leaving out COLAs, Sgouros’s trick, here, is to distract the reader from the fact that these are increases.  Readers might wonder whether a modest 3-4% return on investment each year could accommodate a 6-8% annual increase in benefits paid out.

Note, next, that Sgouros merely refers to what happened before the retirement wave, not after it.  Following a one-year jump in benefits paid out (which, after all, consisted of people who were going to retire soon, anyway), the growth in pension payments plummeted.  In 2011, 2012, and 2013, base benefit payments have averaged 2.3%.  COLA growth held above 9% for a few years, but in 2013, it was 2.5%.  Viewed that way, it’s absurd to imply, as Sgouros does, that pension reform took a healthy, sustainable system and made it more “fragile.”

Employees who are looking at a decade or more before they are eligible to retire followed by decades of retirement shouldn’t be taken in by Sgouros’s game of “let’s pretend.”