The Tributaries to the Pension Liability Flood

Reviewing Kathy Gregg’s pension reportage from the period around the late ’80s and early ’90s, Ted Nesi makes this critical observation:

At the time, state employees’ and teachers’ salaries were already rising faster than expected, setting them up to get bigger pensions upon retirement – and setting the pension fund up for bigger withdrawals.

Nesi’s article is about the many parties deserving blame for the pension catastrophe, but the subtext has been undeniable for awhile:  the public-sector labor system in Rhode Island is corrupt. It is the whole system’s fault, and it is therefore the fault of all of those who’ve perpetuated it.

• The state and local governments have shirked their responsibility to contribute to the fund.
• The assumption of investment returns was never as low as it should have been.
• Rules about COLAs were too generous.
• Rules about  minimum years of service were too low.
• Assumptions about lifespans were too low.
• Pay went up too much.
• And both unions and politicians have been complicit in using the delayed payout of pensions to drive up total compensation beyond what taxpayers would have accepted if the cost had been accurately stated.

As a general rule — and this goes way beyond pensions — the public-sector unions in this state have put in place a formula that ratchets every gain and prevents any loss.  They’ll set off rockets over any hints of restrictions or changes, but the noise is never more than distant warning shots, because everything is rigged in their favor.  Even the currently controversial pension reform was (A) insufficient to repair the broken system and (B) a clever way to insulate retirees and active employees from the much more draconian changes that loom inevitably in the future.

The Discount Rate Is the Real Zero

Naturally, the method of counting itself is among the scams built into taxpayer-funded defined-benefit pension plans. That’s a subject that came up in a late(ish) night Twitter debate in anticipation of Nesi’s article. Scroll up to the top here to start, and then continuing here.

The relevant part begins where Nesi compliments National Education Association Rhode Island Executive Director Robert Walsh that he probably would have made better pension decisions if he’d been in charge twenty years ago, and I suggested that it was a questionable wager.  My evidence was two Anchor Rising posts to which Walsh commented in 2008, here and here, basically, affirming that a 8.25% discount rate (i.e., anticipated rate of return on investments) was reasonable.

In the Twitter discussion, Walsh insisted that 8.25% really was reasonable, in 2008, but it wasn’t.  At that point, after down years in 2001 through 2003, the ten-year compound annual growth rate (CAGR), which calculates the actual returns as if they had occurred at a constant rate, was 7.36%.

However, the numbers debate isn’t but so important for the general public to understand.  What’s crucial to realize is that when a pension system makes an assumption about the return on investment to project its future payments, that assumption should be considered to be the break even point.

Put differently, if we’re assuming 8.25%, then it’s as if 8.25% is 0% for judging whether we’re on track. If the plan achieves 8.5%, we’re really only 0.25 percentage points ahead of the curve.  If we have an 11% loss, we’re really 19.25 percentage points behind.  That means that an 11% loss is actually the mirror image of a 27.5% gain.

The compounding nature of the investments further skews things.  If a fund loses money one year, there’s less money in the account gaining interest the following year.  A 10% loss one year is not compensated by a 10% profit the next year.

Those two points are why eight years of profits can be thrown off by what look like two or three years of modest losses.

The Power of Guns

Although lacking patience to go through the multiple factual and logical… well… difficulties in the Providence Journal‘s unsigned editorial encouraging gun control, I still find it sufficiently interesting to address this particular argument cliché:

Meanwhile, a reason we have such lax gun laws is the extreme paranoia about governmental tyranny that some gun owners have — as if having a personal arsenal would be enough to fend off government troops.

Such statements are the marker of a writer who has lived way, way too long in the bosom of a like-minded clique that declines to give those with opposing views even enough consideration to pretend, for intellectual exercise, that there might be some substance to their beliefs.

Weaponry — like any tool that amplifies a human being’s ability to do something — raises the cost of attempting to impose one’s will on another.  Sure, a semi-automatic weapon would be inadequate to fend off the entire might of the U.S. military.  But if that much strength is needed to overtake a household, the government would have to have quite a substantial reason to invade it.

Apart from criminals and such, a gun might well create disincentive for government bullying on its more mundane, more typical scale.  A zoning official who’s abusing his power to harass homeowners might not be so abusive in a town with an armed citizenry.

That’s surely an example in the opposite direction from the Projo’s fantasy military attack on 121 Main Street, but it gets the point across.  The more the people can fight back, the less the government will abuse its power as the only entity with authority to use deadly force when not in immediate peril.

Come to think of it, that’s a lot like a principle about taxation that liberals tend not to acknowledge: that if the tax is higher on something, we’ll see less of it.  In a way of looking at it, I guess, the Second Amendment is a mechanism whereby the people can impose a tax incentive on government abuse of their liberties.

It Isn’t “Knowledge” When the Government Knows It

This paragraph from the weekend Steyn brought to mind legislation from the Rhode Island General Assembly’s last session:

But don’t worry, it’s totally secure. Carl Smith Jr. was the first physician in Harlan County, Kentucky to introduce EHR. “Because of this technology,” Dr. Smith says, “we can send the patient’s prescription electronically by secure e-mail to pharmacies.” Wow! “Secure e-mail”: What a concept! It’s a good thing the e-mail is secure at American pharmacies because nothing else is. Last Christmas, while guest-hosting at Fox News in New York, I had a spot of ill health and went to pick up a prescription at Duane Reade on Sixth Avenue. The woman ahead of me was having some difficulties. She was a stylish lady d’un certain age, and she caught my wandering eye. After prolonged consultation with the computer, the “pharmacist” informed her (and the rest of us within earshot) that her insurer had approved her Ortho but denied her Valtrex. I was thinking of asking her for cocktails at the Plaza, when I noticed the other women in line tittering. It seems that Ortho is a birth-control pill, and Valtrex is a herpes medication.

The legislation was S 2763, introduced by Senators Nesselbush, Gallo, Lynch, and Goodwin; although it passed the Senate, it never made it to a House committee hearing.  The relevant portion is the proposed section of the law that would have implicitly authorized a department of health database of electronic prescriptions.

Who could doubt that all of your medical information would remain entirely confidential — between you, your doctor, and your pharmacist?  The good folks who work for government can’t really be counted as having access to it.  Government doesn’t count.  Alternately, if you take Mark Steyn’s view:

So good luck retaining any meaningful doctor-patient confidentiality in a system in which more people — insurers, employers, government commissars, TSA Obergropinführers, federal incentive-program auditors — will be able to access your medical records than in any other nation on earth.