Pension Reform Debate: Painkilling Spin About Fantasies

So the details of pension reform are back in the air.  Well, that’s nice.

Perhaps we’ll all enjoy the next decade of pension re-escalation a bit more if we admit something about it upfront: The Rhode Island Retirement Security Act was exactly like a doctor’s prescribing some painkillers (with heavy side effects and well past the recommended number of refills) because the patient isn’t willing to undergo life-saving surgery.  We just took a big dose of budgetary morphine, and (assuming the law survives lawsuits) we’ve got about nine more years of not feeling as ill as our underlying condition suggests that we should.

Today’s anesthesia-defying spasm comes thanks to an “issue brief” by Robert Hiltonsmith released by the Economic Policy Institute (formerly the Poverty Institute). For an argument that the brief elides some of the more important intents of the law, see Jason Becker.  Personally, I don’t have much patience for debates that take the back-and-forth at face value.  Anybody who understands the lingo can spot the navel gazing.  Here’s Hiltonsmith:

The fund was further weakened by the state’s failure in some years to keep up with required contributions and pay for retroactive benefit increases, and by adopting arguably unrealistic actuarial assumptions that, when adjusted, significantly weakened its financial outlook.

We’re fully in the realm of spin about fantasies, here.  Take the clause about actuarial assumptions.  Translated into plain English, it basically says that part of the pension crisis (by far the largest part, in my estimation) came from the fact that the state built the system on expectations of investment profits that it would never actually reach.  When the pension board adjusted its expectations slightly (and insufficiently) toward reality, everybody gasped.  The adjustment “weakened [the pension fund’s] financial outlook” because it strengthened its clarity.  We replaced a sun-shiny painting with a tinted window, and even though we still aren’t admitting what’s outside, we can tell that it’s much darker than we were told.

Having thus blamed the retirement board for threatening the on-paper-only condition of the fund, Hiltonsmith takes another step in explaining the cause of the crisis:

The shortfall in Rhode Island’s pension plan for public employees is largely due not to overly generous benefits, but to the failure of state and local government employers to pay their required share of pensions’ cost.

The first point to make is that the measurement of “overly generous benefits” depends where one starts.  Pretty much everybody within the government bubble starts from subjective feelings about what a retiree will need in order to maintain his or her lifestyle when he or she is no longer working.  Another way to define “overly generous” would be to ask what the state can afford and what its residents are willing to pay.  In that light, it’s not unreasonable to suggest that retiring years before most people are able to do so with a guaranteed life of no tightened household budgets and, indeed, the opportunity to undertake a second career that makes one positively wealthy is “overly generous.”

The second point to make requires another translation into plain English. When Hiltonsmith writes that government employers failed “to pay their required share of pensions’ cost,” he can only mean that they should have ramped up their payments each year to compensate for investment profits that never happened.  As rational budgeting, that would have been good advice, but everybody around the negotiating table (unions and the people they help elect to public office) has been content to keep the sticker price of benefits down.

Here’s an interesting tidbit I came across while researching the state sales tax.  It’s the rationale that was offered sixty-something years ago when the state determined that it needed a new form of taxation (emphasis added):

The recognition of the state of its obligation to grant pay increases for teachers in the manner provided in chapter 7 of title 16, to assure the maintenance of proper educational standards in the public schools, coupled with the compelling necessity for additional state aid to the several cities and towns now confronted with financial crisis, have created an increased burden on the finances of the state.

Lessons: 1) state and local governments are always in crisis, and 2) voters and taxpayers wouldn’t have tolerated the real payments necessary for the lavish benefits being offered to government employees.  Actually, there’s a third lesson to that quotation that’s even more relevant to the pension debate: Government is always, always looking for new ways to force people to give it more money.  One way that they came up with after imposing the sales tax was to obligate future taxpayers to make up for the eminently predictably shortfalls in promised pension payments.

This brings us back to the spin about fantasies.  Ponder these two paragraphs from Katherine Gregg’s Providence Journal article on the EPI brief, the first being a quotation from the Hiltonsmith brief:

“Furthermore, due to the market risk introduced by the [defined contribuition] plan, many future employees will likely do even worse than this average: For the quarter of future employees who are in the lowest quartile of investment returns on their [defined contribution] plan, the cuts will be 22 percent or higher.” …

J. Michael Downey, president of Rhode Island Council 94, AFSCME, stated, the report and a briefing paper “affirm many of the objections Council 94 made to the 2011 pension changes, including: the rate of return was lowered to exacerbate the unfunded liability, the cuts were draconian, and the arguments supporting the passage of the changes were faulty.”

Hiltonsmith says retirees will not achieve the investment returns predicted. How, then, can Downey imply that lowering the rate of return was a gimmick to create a crisis, if even the lower rate is unlikely to be realized? Well, he can imply that because very few people understand how this whole financial scheme works.  The idea, from the insider point of view, is to make the future payments look painless so taxpayers will have no choice but to cover the real expenses when they materialize too late for anything like a fair compromise to be possible.

As for the only other news in the Hiltonsmith brief — that the hybrid plan is actually more expensive for the state, on paper, than the old plan — I was pointing that out before the law had even passed.  The savvier folks who favored the reform responded to me with exactly the point about risk: that it would shift it to employees, rather than taxpayers.  But then, as I noted, by the time the new hybrid plan actually saves money, compared with the old system, it will be costing taxpayers well beyond the amount that had everybody panicking before the reform.

From October 24, 2011:

If this reform passes, it’ll be years before the panic level rises sufficiently for further action by elected officials, and by that point hundreds of millions of dollars will have been siphoned into untouchable defined-contribution accounts.

The more intellectual folks on the unions’ side have to understand that their members actually got quite a good deal out of the reform, given reality. What we’re seeing right now is just a negotiating stance… a sort of soft singing to complement the painkillers so the patient doesn’t find new bravery for that life-saving surgery.

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