Comments for More Public Pension Scare Stories at the Post at http://www.cepr.net , comment 1 to 14 out of 14 comments http://www.cepr.net Thu, 23 May 2013 18:23:37 +0100 FeedCreator 1.7.3 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15868 The article contains two separate points: 1) The excellent point that the US could afford social security if it wishes to do so. 2) A nonsensical forward projection. Dividend yields on US equities are currently 2% . Investors receive dividends not the earnings yield. Let us assume that dividends grow with GDP at 3% (in practice there is a risk of smaller GDP growth and the share of profits in GDP declining from its current high but on the other hand companies may start paying out a higher per centage of earnings by way of dividends e.g Apple ) . You arrive at a projected rate of return of 5%. A reasonable projection for returns (ignoring costs) is therefore 5% real or 7 % nominal (given 2% inflation). Some people might argue that I am being optimistic. See for instance GMO projections for next seven years. Clearly, with a 7 % nominal return on equities and substantial bond holdings, pension funds are unlikely to achieve 8%. Indeed, the projection creates its own dangers as trustees are pushed into allocations into ever higher risk assets (equities, hedge funds, private equity) to make 8% nominal reasonable. A lower target would encourage responsible investing. Yet all is not lost. 1) Higher inflation may well generate the 8% return although it obviously also impacts the liability number. 2) The taxpayer can pick up the difference. Rather than trying to justify a 8% target, surely the debate should be over the pros and cons of taxpayer subsidy? - Spinoza500 Thu, 12 Apr 2012 21:59:14 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15774 bkroasting, I made my statement on pension returns on arithmetic -- I suggest you try some. here's a calculator to help guide your thinking http://www.cepr.net/calculators/pecalc.html Economists and economic policymakers tend to be scared of arithmetic. This is unfortunate. It helps hugely in the understanding of economic policy. Those who learned arithmetic could both the recognize the housing bubble and know that its collapse would be a problem. The same is true for the stock bubble. - dean Sun, 08 Apr 2012 08:45:43 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15772 @tew: Saying that the reason many state and local employees aren't covered by SS is because we don't want to contribute is ridiculous--our employment contract (even if we are non-union employees and simply employees at will) dictates the terms of our SS contribution. And maybe most workers pay less of their salary towards pensions than SS contributions, but not me (nor the 10,000+ employees in my single branch of government. I pay 8% (mandatory) and have not seen any of the benefits of the payroll tax reduction (which I think is bad public policy anyway with the potential to erode support for SS long term--but that's another debate). Working for the state is going to cost me, since I will not accrue enough earnings in my SS "replacement" account to replace the reduction in SS payments to me because I am a state employee not covered by SS. I will have to work until full retirement age, and that to get about 90% of what I would have received if I'd been in the SS system. - annb Sun, 08 Apr 2012 03:15:40 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15767 This is a memorable quote from Dean. I will keep it and remind him: "It is almost impossible to construct a scenario in which pesnion fund returns will be substantially worse than what the pension funds are now assuming." It takes balls to make statements like this. That, or the person is misinformed. A more appropriate rate of discount for pension obligations is the the prevailing return on ten-year Treasury Bonds plus 50BP. That would come to 3%, or less. At that discount rate every private pension fund in the country would be bust. So who's kidding whom? - bkrasting Sat, 07 Apr 2012 04:24:46 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15766 How come we NEVER hear about TERRIBLE PROBLEMS with the Department of Defense benefit plan? It's JUST PEACHY! It doesn't matter what it (or the defined benefit plan for retired legislators and government executives) costs ... we're not worried about that. Just those HOPELESS pensions for the little guys! - Marty Heyman Sat, 07 Apr 2012 02:10:18 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15756 If public workers get SS it is because they PAID into the system, just like every else, and they PAY into their pension as well. If a worker is dependent on their pension they have the privilege of paying for health insurance as well --they do not get Medicare. - Jennifer Fri, 06 Apr 2012 04:28:56 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15748 very good job! - vlasti Thu, 05 Apr 2012 22:49:32 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15746 Pauleytel, Thank you for clarifying what I was saying w.r.t. public sector employee pensions and social security participation. However, not all who collect public pensions forfeit their entire claim to social security benefits if they'd worked enough to reach the threshold for qualifying. I have to say that this one was a howler though: "The general economy benefits from these retirees spending at likely greater levels than pensionless retirees or those who have saved the meager rate" Oh man, that's good stuff. That's the same justification the more crass defenders of wealth use! "Hey, it's goooooood that they have so much money, since when they spend it the economy benefits!" Anyway, I've followed some of Dean's bad pension math in the past. Remember the piece he did showing that because the market was trading at a forward P/E below 15x that very high future returns were certain? He "proved" it by including past bull market cycles that began at single digit multiples and just said that a market P/E of 14x was in the same bucket as one with 8x - same expected future returns! Oh, such great entertainment if it weren't swallowed whole by so many people. (And, yes, I'm saying that the VSPs / WSJ readers aren't the only ones telling themselves fairy tales.) - tew Thu, 05 Apr 2012 17:22:14 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15745 As a senior with lifetime savings that earn me no interest, I have no other way of deriving income from them but to gamble on the stock market. Barack Obama, Tim Geithner and Ben Bernanke keep interest rates artificially low in order to assist the fraudulent banks that are responsible for our current difficulties. This policy does not put money into circulation, because the banks prefer putting their cash into questionable financial assets rather than lend it. They get my deposits for nothing, and invest them. - Innocent Victim Thu, 05 Apr 2012 16:08:37 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15744 @ tew - the benefits paid by some state and local public pension programs replace SS benefits partially or in their entirety for their member retirees - e.g. retired teachers under California's CALSTERS forfeit ALL claim to prior SS credit earned through other jobs; CALPERS's state and local public employee members lose about half of non-CALPERS SS credits. Public employees' defined benefit contributions vary by agency and/or agreements relative to their employer's, which also do not pay into the SS trust. However, their benefits upon retirement, are taxed as ordinary income while the SS trust is largely or entirely relieved of supporting them. The general economy benefits from these retirees spending at likely greater levels than pensionless retirees or those who have saved the meager rate Dean notes above: "financial wealth for the median household between the ages of 55-64 was only around $50,000, including all 401(k) assets." Incidentally, such SS-exempt people receive none of the current payroll tax cut and so are not party to that tax relief. - Pauleytel Thu, 05 Apr 2012 15:41:46 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15742 For some scaling, Social Security outlays for the one year 2011, which are unfunded (paid out of current revenue), were almost $750B. I would guess that for state and local retirement programs to be exempted from SS, they would have to be similar, that is mostly not funded - is that true? If not the state and local retirees could not have been getting benefits equivalent to SS in the early days. Or has there been some kind of gradual conversion from unfunded to funded? - skeptonomist Thu, 05 Apr 2012 12:40:34 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15741 The use of a 30 year undiscounted GDP aggregate against a current pension deficit is misleading. (My guess is that the author is deliberately misleading the readers.) If the current pension deficit were fixed and would be resolved in equal proportion to the next 30 years' GDP, then this comparison would be less misleading. However, we should note that government employment tends to grow with GDP. Thus, those larger future GDPs will be associated with larger public sector employee bases which increase the demands on the pension funds. So if the root causes of the pension deficit are not solved, future deficits will grow along with employment. - tew Thu, 05 Apr 2012 11:33:50 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15740 The reason "a third of state and local employees are not covered by Social Security" is because they don't want to contribute to social security. This allows them to evade the embedded income distribution feature of social security. Anyone familiar with the basics of how social security benefits are calculated knows that the curve of benefits vs. lifetime contributions is strongly concave - some of the lifetime contributions of high earners are shifted to benefits for the lower earners. (This is not a disputable fact and it easy information to vet.) In exchange for opting out of social security most of these workers pay less of their salary towards their pensions than they would contribute to social security. In return for this lower contribution, they receive pensions that are usually substantially larger than social security benefits and which start at an earlier age. - tew Thu, 05 Apr 2012 11:28:23 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/more-public-pension-scare-stories-at-the-post#comment-15739 I agree with the gist of Dean's argument, but I have a question about his statement toward the end that it is "entirely reasonable" to assume an 8% return on stocks going forward. Why is this so reasonable? If I'm reading him right, Dean considers any return less than 8% "almost impossible." But isn't this 8% figure based on the past performance of the U.S. stock market? And the past performance of the U.S. stock market took place within the context of very usual and very favorable circumstances. These circumstances -- particularly World War II and its aftermath -- saw the emergence of the U.S. as the preeminent global superpower. These conditions are not likely to obtain in the future. So why should we believe so confidently that the U.S. stock market's future performance will be so stellar? On a side note, does this 8% return take into account both inflation and fees? Any clarifications are appreciated. - matthew Thu, 05 Apr 2012 10:38:19 +0100