My mom is retired and part of the Kentucky Retirement System.
Fun fact most people don't know about some of these- you forfeit your social security benefits when you participate. Because of this my mom cannot draw my dead fathers benefits.
No, they don't. To most of Kentucky's ruling class, public schools are evil. They'd love to see them all fail, so they can shift school funds to vouchers for Christian schools.[1][2]
Belgium here. That story is one more issue that makes me literally think : "America is so broken". And most of the time republicans seem to have a big stake in it.
I thought Belgium had the equivalent of school vouchers: public funding that can be used for any school of the parent's choice. That's what Republicans want here.
Instead, in America, public school students are told which school they will attend. Usually, but not always, the closest. The Democrats are responsible for that.
You sure about that? Grant and Blaine were Republicans.[1] Blaine Amendments were created as anti-Catholic measures. Protestant Americans are all for religious freedom, as long as it's their own flavor of Christianity.
The reason Kentucky teachers don't get Social Security dates back to 1935 when the Social Security law was enacted, leaving out state and municipal employees, said Beau Barnes, deputy executive director of the Kentucky Teachers' Retirement System, or KTRS...Teachers do not pay into Social Security but pay into their state retirement systems.
It sounds like that was a conscious choice. It's not like it was taken away from them.
Kentucky isn't the only state like this. California and other states have the same policy with teachers not being able to collect SS benefits. Although our pensions here for teachers are really nice.
Why appalling? You also don't have to pay the SS taxes under such schemes and they typically give a better return because they're not effectively invested 100% in government bonds.
(The problem, of course, is when someone raids the fund itself.)
Ah, misunderstood that people were reacting to the second sentence ("because of this ..."). That part is definitely stupid. The "spousal benefit" should be considered as attached to the earner and should be unaffected the spouse's waiver of her own accrued SS benefits.
Would you be interested in speaking with a Congressional legislator to have this edge case addressed? While your mother waived her own social security benefits, public policy should allow her to collect her spouse's spousal benefit.
I've read stories of retired employees in your mom's situation who starved to death when their city pension went bankrupt. This is a thing... I've had to correct a lot of people's notions that when people bitch about public pensions, the people who worked under those public pensions have no fallback. At this point, the person says "what about SS?" Me, "um no, they aren't eligible."
I'll try to find the story and post. I came across the story shortly after the 2008 crisis.
Kentucky's pension is screwed for all of the same reasons many other public pensions are (in order of importance):
- Overpromising of benefits
- Underfunding mechanisms that allow deferral of contributions
- General mismanagement (I can assure you the best and brightest investors and fiduciaries don't work at public pensions)
- Corruption (ie related party deals)
The idea that "evil hedge funds" are responsible is silly. This might make for more clicks but the investment committee made the decisions to invest, so blame them. This isn't about hedge funds.
I've long argued that public pensions should be illegal. There are too many areas of interest misalignment. Things that can be abused, will, and public pensions are perfectly designed to facilitate these kinds of shenanigans. Anyone looking for what the next great crisis will be, this is it.
Well the direct mechanism in this case is hedge funds paying "placement agents" which fund the corruption, so they do have responsibility, even if they are not solely responsible.
The placement agent would be powerless if not for the pension board's incompetence and corruption, otherwise it wouldn't matter if the pension was being pitched by the marketer or the fund manager itself. Don't get me wrong, it's a game that hedge funds are playing and I despise it, but the disease is what goes on in the board room of the pension.
All of this is a sideshow to the egregious overpromising of benefits and underfunding mechanisms.
>General mismanagement (I can assure you the best and brightest investors and fiduciaries don't work at public pensions)
You don't really need "the best of the best" to run a public pension; you're not trying to outsmart the markets with some super-clever arbitrage. You just need to invest in the right balance of index funds.
If you need the very best people not to raid the pension because it had one good year when the markets were up, we're all screwed.
>There are too many areas of interest misalignment. Things that can be abused, will, and public pensions are perfectly designed to facilitate these kinds of shenanigans.
probably hedge funds, banks, loans, short selling, maybe even stock markets in general should also be illegal then for those same reasons?
Why do American politicians allow their people to be conned into thinking that there will be some "automatic" growth somewhere in their state/country that will automatically yield benefits in their pensions?
That lie, that something in the US will ALWAYS lead to gdp growth is the root of all yield chasing fiascos of American pension underfunding. There is no way that gdp will increase without a rise in working age population (especially with no immigrants) or a dramatic increase in automation which can be taxed.
FYI for any youngsters who don't realize what a con job this is: The recent tax cuts have created massive deficits which will collapse debt availability and thus economic growth and thus tax revenues and thus social security payments when you get unemployed (or old).
When it comes to pension funds, investing in anything volatile like hedge funds is an incredibly irresponsible thing to do. I’m kind of flabbergasted it’s even allowed in the first place.
Pension funds should have steady, modest gains year over year and minimize risk of dips as much as possible.
I believe they are actually so named because the instruments they originally invested in (primarily derivatives) had previously been for hedging positions in cash markets (ie markets on the underlyers) and "hedge funds" were the first funds that just used these "hedge instruments". They always used them primarily for speculation though, not primarily hedging.
What? No. Hedge funds are named for making highly risky investments. The short term risk of doing this is offset by hedging across markets and by using specific investment products. Works great until events like the housing market cause a market wide collapse and kill your hedgefund.
Whoever concentrated the money in such funds was likely corrupt, otherwise grossly incompetent.
Mostly unions graciously award over time work, and other benefits to people about to retire in the last years. Since the pension benefits are based on the benefits and pay in the last years, You now have retirees drawing millions in benefits and pay.
I guess in California a lot of tax dollars already go to pay pensions then help build schools and roads.
You can't exactly pay all that big money pensions by just investing in bonds alone.
The thing the galls me the most about that article is it doesn't once stop to try to say or find out how much the guy is working to bring in that much, spoiler it's going to be a lot of hours given it's overtime and his base compensation is only 50k.
Pensions are a fine tool but they have to be funded responsibly, states liked to use them as an incentive but then refused to properly fund them banking instead on large returns. Companies did the same thing for a long time but they've been allowed to cut benefits to retirees when they run dry and have since moved on to 401ks if they offer any thing at all.
I don't think the problem is compensation. The problem is awarding overtime only in the last year, so that your pay and benefits can go up forever till you are entitled to pensions. This creates a situation where your pension + benefits can be in the ballpark of half a million dollars all life.
No one, no investment, no taxation can pay for something like that.
> And who is going to fund them? As of now California tax payers are paying for pensions. Surely this is not a sustainable way of running things?
Why not the rest of public sector employees compensation comes out of tax revenues. The only reason pensions are unsustainable now is because in order to hide the cost of pensions the budgets underfuneded pensions years ago and the funds they did allocate they assumed extremely high returns on.
>The thing the galls me the most about that article is it doesn't once stop to try to say or find out how much the guy is working to bring in that much, spoiler it's going to be a lot of hours given it's overtime and his base compensation is only 50k.
You're right, it deceptively leaves out such vital information.
It also leaves out:
- how productive he actually was for each of those 80 hours
- how many workers "only" at 1.5x time were willing to take those shifts but denied because of seniority
- how much of the compensation came from the non-standard practice of letting him redeem PTO for 2x its value by applying it to week where he already worked overtime
- whether those long, hard hours actually translated into clean BART stations, or were just roundabout compensation for being physically present but ineffective
Once you have that full picture, I'm pretty sure the typical person's initial reaction will be closer to right than wrong.
In all seriousness though, large pension plans have very diverse portfolios. Ontario teachers used to own 80% of the Toronto Maple Leafs. Ontario Municipal Employees Retirement System owns Oxford Properties, which owns and manages the office building I work in (and many others).
Major League Sports teams are generally pretty solid investments. Also, the Ontario Teachers didn't just own the Leafs, they owned MLSE which includes the Leafs, Raptors, Argos, Toronto FC, the Marlies plus the arenas at which those teams play.
It's not a bad investment to own all but one (they don't own the Jays) pro sports team in a city.
There are many hedge funds with much lower volatility than the average mutual fund. Hedge funds are not inherently more or less risky than mutual funds, they are just actively managed instead of passively managed.
It reminds me a story in rare no-nonsense books on stock trading about 90% people losing money or doing less than stock index because of trading fees while activelly managing it. The ability to make good money in stock markets is a rare talent and hedge funds only make hedge fund managers rich, most of the time.
Mutual funds can be actively managed also. Hedge funds are a riskier investment: they are more opaque, can do more exotic things. But pension funds are sophisticated investors and should be able to make intelligent decisions about using them as part of a portfolio.
Maybe not over (specific) very short periods, but it depends on the mutual and it depends on the hedge fund. If you're saying pension funds should be locked in then you can't invest in anything that has exposure to equities, see: 2008, 1974, 1930.
I was just trying to nudge the post I was replying to into realisation that you either accept burning significant money to avoid risk or accept the chance of burning more money. This kind of "pensions should invest in the good guys who don't take risks..." well that's only govt bonds, and one day those will pop also.
This article was a sad, and infuriating read. The knee-jerk-response part of me would want these pension funds to be set up as an allocation of 'dumb'/passive index funds based on an individual's retirement date to not have to deal with greed on the part of human decision-makers, but there might be catastrophic issues with that too.
Edit/Follow-up: I guess there are two more sane alternatives:
1) Let public-sector workers manage their retirements privately e.g. 401k-style .
2) Let state and municipal public-sector workers opt-in to the federal pension system for federal public sector workers.
The difficulty with moving to a defined contribution scheme, which makes a tremendous amount of sense, is that the employer-governments actually have to pay the costs of their promises instead of kicking the can down the road.
Taxpayers don’t like that because they’d rather pretend to believe that investment returns will fix everything while really just saddling the next generations. Government employees don’t like that because they’d rather have the extravagant promises they can extract, figuring that future governments will find a way to pay them.
If both employees and taxpayers prefer to keep pretending that the Emperor is wearing clothes how many politicians are going to fall on the sword of good government?
Seems like there is a conflict of interest. Governments are dependent on investment returns or the whole house of cards falls down. Yet they are given the responsibility of regulating the investment markets and controlling the money supply. Quantitative easing led to a massive bull market. What's the downside of a government dependent on increasing asset prices?
From my reading of the article, the pension contributions were already being made in this case (it wasn't clear to me if it was directly made by the teachers or the state). Your concern is a valid one, but I didn't see the state repurposing the pension contributions for something else in this case.
They make contributions but not nearly large enough contributions as would be required if they used accounting best practices, as for example those that the insurance industry is required to use when calculating reserves for annuities.
Pension contributions have been made. In the best case they are large enough to cover everything. However in all the likely cases they won't have enough money to pay out their promises. If more money went in there would be enough returns with reasonable investments. Or you can chase risky investments and hope that better than average returns pay you back.
There’s no reason government employees should get taxpayer guaranteed annuities. If the government employee unions want annuities upon retirement, they should be purchased from insurance companies. That way taxpayers can be certain there were no shenanigans in underfunding or mispricing or malinvesting. It would also create more transparency in how much people should be paid in government vs non government jobs.
It would also make government budgets a lot easier to understand and harder to fool taxpayers.
I can see your point from a policy level. However, once you have generations of government employees on this scheme such that their retirement planning is based around it, then it becomes much harder for everyone involved to adjust.
From the article, it seems that teachers don't have Social Security withheld, so they don't have that as a fallback either:
Teachers, like any other public employees who don’t have Social Security withheld, are not eligible for Social Security benefits; even if they earn Social Security by working a side job, those benefits are adjusted downward based on their pension income.
Private companies have to overcome the complaining of the unions (if applicable) and justify their actions to the shareholders. Politicians have to overcome a complaining police/teachers/whatever union that is plastering voters (analogous to shareholders in the private example) eyeballs with negative adds about how politician X "doesn't care about the teachers" or whatever. It's much easier to just go with the flow and blame it on the prior set of politicians since that doesn't make as many people hate you as attempting to change things would.
A long time horizon is supposed to be what governments are good at. No reasonable employee would trust a private insurance company to still be in business by the time they come to require, absent a governmental guarantee - and if something is both paid for by the government-as-employer and guaranteed by the government-as-regulator, what is bringing in a private company supposed to add to the mix other than taking profits?
It adds transparency and accountability. And it’s up to the government employees if they want to bring in a private company. As a taxpayer, and employer of government employees, I would like a clear accounting of how much payroll is.
I don’t want politicians buying union votes with unsustainable promises that get kicked down the road 20 years later, and I don’t want to hear “my predecessors didn’t properly fund the pensions”. You create a system loopholes and bad incentives, of course they are going to be used.
The solution is simple, time saving, and efficient. If a private entity can’t afford to offer annuities without the power to increase taxes, then they are obviously a very, very expensive benefit, so why should only government employees get them?
> If a private entity can’t afford to offer annuities without the power to increase taxes, then they are obviously a very, very expensive benefit, so why should only government employees get them?
Because the government can provide them more cheaply than a private entity by its very nature - shouldn't it make use of that competitive advantage? Better pension schemes are one of the ways government are able to offer a competitive employee compensation package despite substantially below-market headline salaries; if you replaced the guaranteed annuities with their market dollar value that would mean costing the government more to be able to hire the same people, offering government employees less value overall and so getting lower-quality employees, or both.
The government can't provide them more cheaply. There is an unaccounted cost of corruption, vote buying, erroneous assumptions (intentionally and unintentionally), that we are seeing play out now.
If governments could provide it more cheaply, then we wouldn't be hearing about this massive problem in the first place. The very existence of this extremely widespread problem proves that taxpayer provided defined benefit pensions are not cost efficient and allow for the fleecing of taxpayers.
The point is the government is already "too important to fail" and already bearing the costs of having to still exist in hundreds of years' time (in terms of plans, processes, backstops and all that).
> Public sector is not known for it's low overhead of efficiency.
True enough, but neither are large private financial institutions.
For a private company to offer an annuity that an employee can have the same level of confidence in, the private company would have to do those too-important-to-fail things, and would have to include the costs of them in the cost of the annuity, which the government does not.
I'm not intentionally being dense, but I legitimately do not understand why the government would not need to wrap those costs into the annuity. They still need to get paid for, no?
They're costs that the government already has because it already has to continue to exist, have failovers to the failovers and so on. Whereas the defining characteristic of a private company is that it can, ultimately, go bankrupt and be wound up with little recourse.
Well in reality the insurance industry is highly regulated and ultimately backed by the promise of government bailouts.
(Of course some companies from a pre-government-guarantee era are still in business, but "some" isn't enough when we're talking about your retirement savings)
> There’s no reason government employees should get taxpayer guaranteed annuities
There is. In Germany, the Prussians back in the 18th century formed the "Berufsbeamtentum", basically civil servants. The idea is that the state guarantees that the Beamten be permanently employed by the state (basically, short of committing serious crimes > 12mo jail time, there is no way for the state to fire one), have their (first class) healthcare taken care of and that they will have decent pensions. For this, the Beamten bind their work life to the state.
The downside, of course, is that there are several limits for Beamte: most notably they must be absolutely loyal to the state, restrict themselves/their speech in the public (e.g. memberships in "extremist" parties are a no-go), they are forbidden from strikes, and their pay schedules are fixed (so, no individual contract agreements, everyone on the same step of the career ladder gets the same salary). Also (mostly valid for police officers and judges) the state may decide to reassign you to a different post... which may even be at the other end of the country, for those who are with the federal government.
I don’t see what the benefit of that system is as opposed to paying someone market price for their labor. If anything, it just allows an avenue for taxpayers (mostly in the future) to be stolen from.
> I don’t see what the benefit of that system is as opposed to paying someone market price for their labor.
The benefit is that Beamte are locked in to the state. It's rare that the private sector snatches Beamte away from the state. This means that, unlike in the private sector, the state does not have to worry that its most competent employees suddenly vanish.
The same can be accomplished by paying them market wages. In addition, it would provide a transparent accounting of expenditures and prevent politicians and union leaders and others from scamming taxpayers like they currently are.
> The same can be accomplished by paying them market wages.
No. Even with paying market wages, there can someone come along and flood the market with cheap money. Then the state has to massively counteract and waste taxpayer money.
Beamtentum is the core of German societal stability, as a result.
I don't know what "flooding with cheap money" means, but by definition, if a buyer is outbid by another buyer for something, then the market price has changed so the previous buyer needs to update to the new market price. I don't understand how this is a waste of taxpayer money, since it properly indicates to people where resources need to be shifted (in order to bring prices down). Without this market mechanism, you actually have a waste of taxpayer money since you don't know what you're overpaying/underpaying for.
The societal stability part should be offered to all taxpayers, not just government employees, so I don't see why that would be tied to an employer at all.
> I don't know what "flooding with cheap money" means, but by definition, if a buyer is outbid by another buyer for something, then the market price has changed so the previous buyer needs to update to the new market price.
Foreign money comes into a city and artificially (= not backed by local growth) drives up the prices, gobbles up the knowledge, then leaves. The city however is stuck with their now inadequately overpaid employees, which of course have every incentive to leave once the city inevitably tries to lower their pay again, thus basically holding the city at gunpoint: pay us or you shut down.
Just imagine how the finances of the Silicon Valley cities would be in that scenario - if they would go with the exorbitant pay rates for IT employees also for city staff, and another dotcom bust/financial crisis hits. The startups fold up, and the government is locked into now-enormous wages for the city employees.
And please don't act as if this wouldn't happen - half of SV economy / wealth is built up on dirt cheap Saudi blood money (as e.g. Uber and many others are finding out in the wake of the Khashoggi murder), and in Europe it's Chinese and Russian money instead of Saudi money. It's not a question of IF a bust happens, just WHEN. London is about to blow up in Brexit, I'm waiting for the chain reactions.
I'm not a fan of many German eccentric policies, but the Beamtentum is something that will keep the government running no matter how colossal the fuck-up. For example, something like the US gov't shutdowns is unimaginable here.
Paying someone more cash and paying someone with a lien on future taxpayer funds for their annuities during retirement is the same thing, except the prior actually gets accounted for. The reason that your scenario can even come to pass is because of the obfuscation of operating costs caused by inaccurate accounting.
If "cheap money" floods into a city and causes salaries to go up and competition to increase, then in the next budget, the city will find that it will have to raise taxes. This will make the city less desirable for the "cheap money", hence reducing it. The reason you even see floods of money is because of arbitrage opportunities, and those are reduced when you have quicker price discovery.
There are two equitable solutions: either allow everyone to opt-out of Social Security, or allow no one to. The second is closer to the system we have now; the first would require major changes (subsidizing retirement for low-income workers from income tax instead of SS tax). It's also possible that the 10th Amendment may prevent the federal government from mandating state/municipal employee participation.
The US federal government previously had a system similar to state pensions (CSRS), but employees hired after 1983 are required to be enrolled in the new system (FERS) which includes Social Security. There's also another difference: the federal government has far better internal controls than most of its states.
If any private company wanted to sell a financial product akin to public sector pensions they would be arrested and charged with fraud. Come to IL -- plenty of pension games to play here
the big story in Illinois is that even with proper management the Chicago pension system will be broke in about two years. however we cannot just vilify Illinois as many public employee pension systems have been built upon promises that are not sustainable and will leave millions with no real retirement as each fund implodes
the big story in illinois is that the state, across both parties and multiple governors, underfunded the pension to a tragic degree and now its at crisis proportions.
The problem isn't with hedge funds, it's with dumb money (or corrupt money). I'm not sure why people are laying the blame on the funds, I'm sure they wanted to produce good returns as much as anyone else.
The blame solely lies on the incompetent pension fund managers. There are plenty good choices for alternatives in the market that are accepting new money (AQR or 2 Sigma or Bridgewater come to mind).
It's 100% on the pension fund managers that they squandered the money on some no-name fund with no track record.
As a resident of Kentucky, I can state that it has many issues. Of course, nationally, there are also many issues. Most of these issues boil down to "How do we put money in our pockets" at the expense of someone else. Until that stops, the issues won't stop.
So there's a lot going wrong here, pay-to-play, investment in hedge funds that no-one had ever heard of, investment in funds that ended up performing poorly, etc. However that isn't the real problem here - the real issue is decades of under-contribution to these funds by the state government.
I think think there are two separable sets of problems that both important, but can fixed independently of the other:
1) The lack of responsible stewardship in overseeing the pensions and how they were invested.
2) Under-contribution to these funds.
Follow-up:
I think the best way to deal with 1) is to do something like the Ontario Teachers' Pension Plan, which is "jointly sponsored by the Government of Ontario and the Ontario Teachers' Federation" [0] . You can still have greed ruining things, but at least the administration of the plan is totally dominated by a sometimes adversarial entity i.e. the state government.
This article isn't really about under-contribution. It's about corruption. If your response to an article about corruption is to change the subject, then it's unlikely that we'll see improvements.
The corruption is appalling but also easy to fix. The threat to people's retirement is not happening because of the corruption though - if this was a fully funded scheme and the board was taking kick-backs to steer business from one fund to another one it would still be appalling but it wouldn't risk tens of thousands of people spending their old age in dire poverty.
TL;DR: dodgy hedge funds bribe politicians to invest public pension pots with them.
I don't know why they don't just switch to private pensions. In theory public pensions should be less risky because the investment risk is spread between lots of people, but in practice it seems that the risk of management looting the fund is a much bigger concern, and one that you don't have with private pensions.
Colloquially in the US pension fund == defined benefit plan managed by your employer. A public pension would be managed by the government for governmental employees & a private pension would be managed by a private company for its employees.
Defined benefit pensions largely only exist in the public sector in the US because they are phenomenally expensive. The reason public employees don’t want to switch is that these are huge perks.
TLDR: politically appointed trustees of a pension fund systematically invest in somewhat-fraudulent investment schemes, which shock horror had some questionable financial returns (they were in fact quite large, but with a minus in front). This is, obviously, the fault of all bankers on Wall Street, not of the appointed trustees or of the politicians appointing them.
Pensions are Ponzi schemes, plain and simple, with government playing the role of Ponzi.
Buried deep inside the idea of a government pension is the idea that individuals are incapable of saving for their own retirement. That government needs to care for its people in old age because they won't take the necessary steps themselves.
Questionable assumptions aside, this article and many, many more like it demonstrate that government is incapable of caring for people in their old age, making many of the same mistakes with "investing" that individuals will. From the federal government down, officials have shown no reluctance to raid pensions to fund pet project, resulting in chronic underfunding.
Inflation supplies the energy to keep this toxic cauldron bubbling along. It's not enough to simply "put money aside for retirement." Instead, you need "investments" that will at least keep up with inflation. Savings accounts are out.
Enter investment "advisors," all too willing to tell an individual (or government) what to do - for a fee.
Edit: the downvotes are amusing, but a comment explaining why would be more interesting.
Well, you're not wrong. You're just pointing some inconvenient truths.
1. Most people are incapable of saving for their own retirement, because they either lack the discipline or the skill set to do so.
2. Because of (1), people want the government to take care of it. But government does a mediocre job of most things.
3. Elected politicians have an incentive to get in bed with unions of government employees and screw taxpayers by cleverly mis-evaluating the present cost of future retirement payout streams.
4. Bad actors in the world pray on everyone involved: the employees, the pension funds, the government, individuals, etc, to get management fees from the corpus of retirement programs.
Fun fact most people don't know about some of these- you forfeit your social security benefits when you participate. Because of this my mom cannot draw my dead fathers benefits.
https://www.courier-journal.com/story/news/education/2018/03...