State and local fiscal policy and pensions

by on March 4, 2016 at 2:21 am in Current Affairs, Economics | Permalink

In short, the reason why the unfunded liabilities of state and local pension funds are so much higher in 2016 than 30 years ago isn’t because the overall stock market performed poorly. Instead, it’s a grim story of mistiming the moves in the market (rather than just being steadily invested throughout), trying out alternative investments that didn’t pan out, not putting enough money aside in the first place, and overpromising what benefits could be paid. I have a lot of sympathy for the retirees and soon-to-be retirees who were depending on a pension from a state or local government, and are now finding that the money isn’t there to pay for the promises. But when blame gets assessed for this grim situation, it’s worth remembering that those who have been making the decisions about state and local pensions had a very favorable situation 30 years ago–that is, unfunded liabilities near zero, with a period of strong stock market growth over the next three decades coming up–and they messed it up.

That is from Timothy Taylor.  I would add that those decisions too are fiscal policy.  One reason many of us are often skeptical of government fiscal policy is because we see it being messed up so much, not because we are “aggregate demand denialists.”  I would note that automatic stabilizers often do not have these problems to the same degree.

Similarly, I have seen highly intelligent people calling for fiscal stimulus for Brazil.  I would (rather desperately) favor some new infrastructure spending for Brazil, but overall I see a country whose government has been spending far beyond its means for decades.  Brazil is a middle-income country, yet in terms of a percentage of gdp it basically spends as does the United States, and not very effectively.  They need less government spending, not more, and clearly their problems are structural and long-run in nature and closely related to the low quality of governance.

1 Larry Siegel March 4, 2016 at 2:34 am

Also, long-term interest rates – which are the discount rates used to calculate how much money a pension fund needs to have in order to pay off the pension liability – decreased from 15% thirty-five years ago to under 3% now. This is the biggest factor in the underfunding crisis.

2 Brian Donohue March 4, 2016 at 8:02 am

Yes, but this is completely ignored by most state and local pension funds, which favor hand-waving actuarial gobbledygook over straightforward financial economics in measuring pension obligations.

Which means that the purported underfunding is way lower than the reality.

Josh Rauh at Stanford is all over this.

The scary thing is that these low rates portend a period of much more modest returns ahead of us, yet governments breezily plow ahead, driving the car by peering just over the hood.

Low rates and longer lifespans have more basically tripled the cost of any given pension over the past generation.

3 Vivian Darkbloom March 4, 2016 at 9:06 am

Yes, but isn’t this mitigated to some extent if there is lower real wage growth? It strikes me that the problem arises when real wage growth is higher than real interest rates. Real wage growth also affects the total amount needed to be funded (this would be a factor to be considered along with longer life spans and lower rates). If real wages rise faster than real interest rates, you’ve got a problem if there is no adjustment on the funding side. Just musing out loud here, but if workers earning higher real wages, this may not necessarily translate into higher real interest rates that would be needed to grow contributions to that higher level. What, if anything, is the correlation between higher real wages and higher real interest rates? How many of these pensions are inflation-adjusted (post-retirement)?

Also, as an aside, I’ve had recent discussions with a friend who is a federal government employee who has worked in various locations throughout her career. The friend informs me that she is jockeying for a final job location for the year prior to retirement date at a high cost location because the retirement pay is based off that higher cost location (irrespective of whether one later moves to a lower cost location post retirement). Lot’s of games appear to be going on here, I’m afraid, that are reproduced at all levels of government employment. The prevalence of basing retirement pay on one’s final pay, highest three years, etc. etc.,rather than average pay seems to be driving some of the funding problems. Due to these games, the total amount needed to fund the retirement is much higher than may have been apparent throughout the employee’s career; indeed right up to the final year.

4 brad March 4, 2016 at 9:57 am

I understood the vast majority of the non-uniformed federal workforce to now be on defined contribution plans. If only state and local governments had followed suit.

5 Vivian Darkbloom March 4, 2016 at 10:09 am

My brief research suggests that post-1986 federal hires are covered by FERS. Hires before that are still covered by CSRS. So, you are likely correct. Which is good.

6 Brian Donohue March 4, 2016 at 10:26 am

CSRS is a skinnier pension plan than FERS, but still a pension plan.

The federal employees pension system is in lousy shape too.

7 RecklessMillenial March 4, 2016 at 10:23 am

The federal retirement system for employees who started in the last 30 or so years is based on three components, only one of which is a pension. Every employee contributes fully to SS and has an option to participate in a personal 401k-type plan that the agency will partially match up to 5% of salary. The employee is also required to contribute to the federal pension plan.

Anyway, even in expensive areas, the locality pay is only a small share of an employee’s total salary. It seems rather extreme for a person to move somewhere to get only slightly higher salary simply because it may slightly increase one of three roughly equal parts of his total retirement package. I am guessing almost nobody pursues this particular game, but would love to know if there is any evidence of it happening on a significant scale.

Where there does seem to be a huge amount of game playing ultimately screws the taxpayer is police and fire department pensions, particularly its overlap with “disability” and rehiring retirees.

Disclosure: not a federal employee, but have family who is.

8 Vivian Darkbloom March 4, 2016 at 10:27 am

See above response to Brad re: CSRS and FERS. Apparently, under CSRS final COLA factors in to overall retirement pay. Depending on locale, it is not insignificant. Benefits are for life.

9 Brian Donohue March 4, 2016 at 10:29 am

I don’t find the anecdote surprising. It’s quite impressive how creative and focused people can become when there is so much riding on it.

The lack of transparency in pension compensation is very helpful in obscuring what is going on.

I’m not saying these folks are any worse than anyone else, just that incentives matter. Public choice 101.

10 Vivian Darkbloom March 4, 2016 at 10:41 am

“I’m not saying these folks are any worse than anyone else, just that incentives matter. Public choice 101.”

Those were exactly my thoughts. Alongside “Incentives matter” as public policy rule number one should be the corollary “humans will be humans”.

11 Jeffrey Deutsch March 4, 2016 at 12:37 pm

I’ve never understood the hue and cry about “pension double dipping” when a retired public servant takes another public job. The way I see it, if a pension isn’t explicitly a disability pension, it’s simply back-end pay for long and loyal service.

Why shouldn’t a retiree enjoy the rest of his/her pay for having done a good job all these years and offer his/her services again for compensation the government itself obviously feels is fair? Why are we robbing retirees for wanting to work more? (Not to mention a retiree in a related line of work may be the best qualified person for the job!)

12 RecklessMillenial March 4, 2016 at 1:07 pm

1) Viv, the local COLA is only approaches significant (>10%) if the person is moving from a very low cost of living area to a very high one. (Think Oklahoma to San Francisco). I seriously, doubt this applies to more than a handful of people every year. Show me data. Also, if someone does happen to live in a higher-cost area toward the end of her career, and has also actually worked, I don’t see why their pension (which is only a small share of her retirement) should be cut.

2) Brian, the federal retirement system is extremely transparent. Just google it–the precise formulas used are there for all to see. The employee himself has no more access to information about how it is calculate than than you do.

13 Vivian Darkbloom March 4, 2016 at 1:44 pm

OK, Reckless, here’s the “locality pay” differentials for the US, starting with the base table. Workers in SF get 35% locality pay boost (I understand that counts for retirement, so long as that’s your last post). No incentive there?

Now, you show me your data.

14 Brian Donohue March 4, 2016 at 1:47 pm

@Reckless, pensions are instrinsically non-transparent. You work for me today, I pay you $1 per month starting at age 65 for as long as you live. Or 85 cents a month if you commence at 62.

What’s that worth? And that’s as simple as it can get. Pension plan documents run hundreds of pages describing the benefits/rules.

Pensions evolved organically and ad hoc. Old Joe over there can’t work anymore, but he’s been a loyal employee for 40 years, let’s take care of him.

Only much later were they formalized.

It’s how Rube Goldberg would compensate people.

15 RecklessMillenial March 4, 2016 at 1:54 pm

Viv, did you also notice that Buffalo (Buffalo!) gets a 17% local adjustment? Huntsville, AL gets 16%. As Garrison Keillor would say, all the metros are above average.

I’d like to know which locality your friend is in now, and which she is trying to move to for a year or two of work.

But my larger point–and here is where I was asking for some data–is that I don’t think more than a handful of people are actually doing this. Is there any evidence this is an actual problem?

16 RecklessMillenial March 4, 2016 at 2:02 pm


I think I get what you’re saying. There is no way to know 100% for sure how much a pension is worth? I think that isn’t so much lack of transparency, but rather the pension administrator (owner/taxpayer/whatever) choosing to shoulder that risk, as opposed to the employee doing it for himself.

Or are you saying that pensions don’t even try to track what their future liabilities are, and they were explicitly designed to not do so?

17 Vivian Darkbloom March 4, 2016 at 2:02 pm


Yes, I noticed that a number of localities get a significant boost in excess of 10 percent. Rather than supporting your claim that this would potentially affect only a handful of people and not more than a 10 percent differential, this seems to counter it. Retirement location shopping is real. But, a few million here, a few million there, what’s the big deal?

Let me say this: I hope you never come close to a public budget. You need to be a bit more skeptical. Your moniker seems well-chosen, though.

18 RecklessMillenial March 4, 2016 at 2:14 pm

Given the fact that almost all metros are already receiving a local payment adjustment, there are very few locality to locality moves that would result in a pay bump of greater than 10 percent. (Huntsville, AL to San Francisco is an example of this rare combination of very low and very high cost of living areas). How many >10% pay differential combinations can you find among the metros listed? I stand by my original statement, because the chart you linked to actually supports it.

Implicit in your assumption that this happening on a large scale and significantly affecting public budgets is that a lot of people are 1) already living in low cost of living areas and 2) able to find another federal job in a high cost of living area and 3) willing to move there for at least one of their last three years of work.

“A few million here, a few million there” doesn’t seem to make a lot of sense. Can you work out an actual calculation whereby a federal employee’s move to a higher cost location will boost his pension by millions of dollars? Even if we assume the person lives 35 years after retirement and was making on the high end of the federal payscale?

19 Brian Donohue March 4, 2016 at 2:19 pm

@Reckless, It’s funny that you mention risk, because people pay a lot of money to reduce risk. Lower risk is itself a form of compensation. By shouldering the risk, pension administrators (taxpayers, actually) are providing a valuable source of compensation to pension recipients.

Then we use an 8% discount rate to value such a promise. You know, there is actually a market for these things, which incorporates risk compensation. Insurers underwriting annuities value these promise at more like a 3% rate in today’s environment. In the private sector and real world financial accounting — you know, rules issued by government bodies like Congress and the SEC — these low rates are required to value these promises. Only when it comes to public sector pensions do people forget there is such a thing as risk.

As long as we’re talking about risk, what is the risk of involuntary termination in the public sector? Hint- wayyyy lower than in the private sector. What’s that worth?

20 Vivian Darkbloom March 4, 2016 at 2:27 pm


Do you think all moves are from Metro getting location pay to other Metro areas?

Don’t you think that there is an incentive to retire in a location with even a 10 percent differential? Would you make such a move if it meant, say, an additional annual $6,000 retirement benefit over your lifetime. Let’s say for 20 years ($120K). Here’s $120K on the sidewalk and Reckless walks right past—no big deal.

It is ludicrous to compare my statement “a million here a million there” to one potential case.

Is this is a big problem? I cited it in the context of a lot of other cases where the public retirement rules are getting gamed. It’s a big enough problem that it should have your attention. That’s why I don’t want you anywhere near taxpayer money.

21 RecklessMillenial March 4, 2016 at 2:34 pm

Brian, I am all for adjusting the discount rate pensions use to reflect the market. It is my understanding a number of states have done so.

Also, I think it is widely acknowledged that this risk premium is built into the lower (all things equal) salaries of workers with pensions. We can argue about whether that is properly calibrated to attract qualified employees without adding unneeded gravy, but it is clearly part of the calculus on both sides. And, yes part of this is also lower potential for termination, but believe it or not public employees get fired all the time.

22 RecklessMillenial March 4, 2016 at 2:48 pm

Viv, there is no evidence that this is a problem. Sometimes I wish people that are skeptical of public programs would focus a little more on how we can get more high qualified people to make those programs better, rather than trying to find any possible way to undermine those programs and the employees who support them. If there are real problems let’s fix them. Better than just theorizing.

23 mavery March 4, 2016 at 3:47 pm

I think its fair to say there’s cleary an incentive to shop for a different place to live in your final years but how big an incentive that is and whether it actually induces many people to take the option is a different question.

Moving requires:
1) Buying/selling a house or renting another house. There are not insubstantial costs. Even if you rent in your new locale and rent your old place out, that’s a lot of hassle to be endured. Is it worth it? How many public sector workers are willing to inconvenience themselves that much for a marginal improvement in retirement? If you’re willing to go through all that extra work, why not just go private and get a regular salary for the extra hours you’re working?
2) Living someplace new. Most people don’t like doing this late in life, especially if they’re moving away from family/friends.
3) Actually finding a job at an acceptable location with higher wages. Most Federal jobs don’t have locations all over the country. Some probably do, but they’re the exception.

All of these can be ameliorated in some cases. Perhaps you’re moving somewhere that you have existing family. Maybe you weren’t going to retire to that home anyway and want to move to the bigger city permanently. Perhaps that larger metro area really wants to hire you and is thus willing to create a position for you. In all of these cases, there’s definitely a distorting effect from the pension structure on decisions. But also in these cases, the move may have happened anyway. Bottom line is, it’s not clear that this actually matters that much. It’d be better to clean up it, but I’m sure you could find many larger problems with the federal pension structure (laid out in this comment thread!) than this.

24 mulp March 4, 2016 at 2:57 am

“But when blame gets assessed for this grim situation, it’s worth remembering that those who have been making the decisions about state and local pensions had a very favorable situation 30 years ago–that is, unfunded liabilities near zero, with a period of strong stock market growth over the next three decades coming up–and they messed it up.”

30 years ago, cutting taxes and giving huge tax dodges for “saving for retirement” was promised to absolutely create so much higher gdp growth and so much more wealth that even the poorest would end up richer in 30 years than the rich in 1980.

I’m still waiting for the Bush tax cuts to create jobs, the at least half dozen tax cuts to create jobs Bush signed over his 8 years as president. Why did the Bush tax cuts fail to create more jobs than the tax hikes in the 30s and 40s or even the HW Bush and Clinton tax hikes at the beginning of the 90s?

And why is it that it was only war that ended to depression and created jobs in the 30s and 40s, but 15 years of wars has failed to create any significant jobs.

While, as Cheney noted, Reagan proved deficits don’t matter politically if you are cutting taxes, it seems that deficits from cutting taxes do matter a lot in terms of ever increasing drags on the economy. Pensions are deferred wages for work in the past, so government pensions that are not paid are wage cuts and destroyed savings from the past that destroy gdp today.

Zero sum: confiscate the labor wages from the past that were going to be spent today and you cut gdp by that amount.

1) older workers are not able to labor to earn money to pay you for gdp, and gdp does not get produced to give it away for free
2) screw me on wages for 30 years, and only a fool believes they won’t get screwed again and thus won’t work hard.

25 dan1111 March 4, 2016 at 4:02 am

Many, probably most, conservatives agree with you that Republicans have been fiscally irresponsible and should have cared more about the deficit. But given the numbers, Obama should at least get a mention in any post about the evils of deficits. Otherwise you run the risk of looking blatantly tendentious.

Here is some (slightly outdated) info about pension plan liabilities by state:

There is no obvious correlation with a state’s partisan leaning. Some of the states with the most unfunded liability per capita are liberal (Illinois, Hawaii, Connecticut, New Jersey) and some are conservative (Alaska, Kentucky, Mississippi).

Fiscal irresponsibility is a general government problem, not a partisan problem. Politicians on both sides are quite willing to spend money we don’t have, and ultimately this is driven by the short-term thinking of voters. Given the number of Americans who have no savings, credit card debt, etc., it is no surprise that this is the kind of governance we have.

26 Nathan W March 4, 2016 at 4:57 am

I am similarly disinclined to hold Canadian Conservatives’ or American Democrats’ feet to the fire for the size of deficits post-2008. GWB’s trillions in tax cuts and war spending, however, seem a rather unambiguous target for criticism, in my mind.

27 dan1111 March 4, 2016 at 5:25 am

War spending made up only a small percentage of the deficits during the Obama presidency (plus some of this spending was off-budget under both Bush and Obama and doesn’t show up in the budget deficit numbers). And the Democrats could have just let the Bush tax cuts expire completely, but they negotiated a deal with Republicans because they were desperate for this not to happen. I don’t a serious case for pinning the Obama-era deficits all or mostly on Bush.

Admittedly, the national story is a small sample size, and it is hard to assign blame because of inherited policies and divided control of the federal government. The state-level budgets provide a lot more data points, and I don’t see either party being vindicated there (though I haven’t studied it in depth).

28 Jan March 4, 2016 at 6:30 am

Yeah, Obama deficits aren’t all Bush. The changes were mostly due to lower revenues attributable to the crash and spending on cyclical things that kicked in automatically.

Though I’m not sure how you can say what share of the deficit specifically is due to war spending. If it’s a lot of our budget and non-mandatory, unlike Medicare say, isn’t it a big factor in the deficit?

29 Nathan W March 4, 2016 at 9:30 am

No, I don’t blame Obama’s deficits on Bush at all. I just feel that Bush is to blame for the Bush deficits, and that Obama’s can be rationalized away to a greater degree (namely, the fact of the Great Recession).

30 Thomas March 4, 2016 at 2:45 pm

“[Bad things about my politics] can be rationalized away” – Shorter Nate

31 Nathan W March 4, 2016 at 10:52 pm

Right, I’m rationalizing away “my politics” after saying I am not critical of either left or right ends of the political spectrum for doing so.

Do you want to discuss the merits of creative destruction by letting the economy crash and burn in 2008? Or did you just see a cheap point on the horizon?

32 mm March 4, 2016 at 9:49 am

except prior to the recession Bush’s deficits where a sustainable per cent of GDP(not optimal percent- note i said sustainable)- Obama has never gotten them back to that level- how long can you blame Bush for that? Aren’t we out of the recession? Obama has done almost nothing to right the fiscal ship- rather he has made the situation worse-by increasing expenditures, new unsustainable entitlements, and kicking the can down the road.

33 anon March 4, 2016 at 11:51 am

Removing personalities, we had the dot com boom. Many governments, state and federal, were happy with the revenue and expanded spending. The dot com crash took away the revenue and expanded costs. It required stimulus, but only generated a weak (and arguably malformed) boom before crashing again. The new crash took away the revenue and expanded costs. We needed much more stimulus. We are winding off that to another period of weak (and possibly malformed) growth.

I think it’s very wrong to simplify that as one President did this, one President did that.

If monetary policy was overburdened and fiscal policy was underused since 2008 (as Bernanke believes), would that be a President’s choice?

34 The Original D March 4, 2016 at 12:27 pm

After spiking for the Great Recession, government spending as percentage of GDP is back where it was under Bush.

However, government revenues as a percentage of GDP were well below Bush until the last couple years. In 2010 they were the lowest they’d been since Eisenhower.

35 Cooper March 4, 2016 at 2:24 pm

The annual deficit was just over 3% of GDP in 2003 and 2004. In 02, 05, 06 and 07 it averaged 2% or less.

That’s not a great track record but it’s not disastrous.

The huge increases in debt and deficits didn’t come until the Great Recession. Now maybe we can argue that Bush’s deficit were lower than they otherwise would have been because the pre-2008 economy was a bubble but in 2007 the forecasts called for balanced budgets in the near future.

None of the current budget forecasts anticipate balancing the budget, ever. They don’t even call for stabilizing debt as a share of GDP.

36 Nathan W March 4, 2016 at 10:54 pm

Running anything more than miniscule deficits in boom times is a recipe for fiscal disaster, unless you’re onto some unambiguously genius investment plan.

37 kevin March 4, 2016 at 9:15 am

I don’t think he’s contending that defecits themselves are bad. If you borrow money and invest smartly in infrastructure, R&D, education, etc this pays off down the road in higher GDP. If you borrow money just so you don’t need to fund programs today, you risk hurting GDP in the future. The same principles apply on the individual level. If you borrow money to go to college or buy assets, you’ve likely increased future earnings, but if you borrow money just to pay bills today, that’s going to cut into how much you can spend in the future, which is what the GDP measures on the national scale.

38 dan1111 March 4, 2016 at 10:41 am

Well, money that is not collected from citizens in taxes can also go to useful stuff that pays off down the road. It’s not at all clear that deficits from tax cuts are a black hole of waste, but deficits from government spending are building for the future.

But mulp’s argument is that deficits leading to unfunded pensions are “wage cuts and destroyed savings from the past that destroy gdp today.” That argument seemingly would apply to deficits for any reason.

39 Mike March 4, 2016 at 7:12 am

I think you are right that conservatives were wrong about cutting taxes. That said, a lot of other things changed over those 30 years, so we don’t know what growth and revenue would have looked like without them. It would be nice if you feigned even a little curiosity about that.

In any event, your entire rant is rather orthogonal to the OP, which was about state and local governments.

40 derek March 4, 2016 at 10:11 am

Why? Taxes are an overhead imposed upon an economy, for the most part dead weight loss. The US faces a real nasty situation where about 15-25% of the economy is competitive in a global market, the rest characterized by chasing down market consumers who have hit their debt limit. Zero interest rates! Makes spending more than you can afford possible for another couple years!

Anyone in their right mind designs something in the US and makes it somewhere else. The costs are too high; taxation, regulation, labor, legal risk, etc.

I’m certain that higher taxes would fix that. Sure.

41 Nathan W March 4, 2016 at 11:56 am

Taxes do not go into an abyss, never to be seen again. Even wasteful spending enters into the economy.

42 Roy LC March 4, 2016 at 4:17 am

Some states are pretty good a spending money on investments, but most are terrible. And I do not think a large and powerful state has ever been any good at this at all. I see all sorts of explanation for this but they are looking at the wrong thing.

Let’s assume a nice modern state of Western Europeans/East Asians/etc… Without too much gross corruption.

So here are some groups:
actually good at this: Singapore, Switzerland, Norway
a lot better than average: Canada, Finland, Sweden, Taiwan
So So: France, Germany on a good day, Australia, Netherlands, Denmark
Not good: Belgium, South Korea (on occassion), New Zealand, Austria
Don’t even try: US, Japan

So what can we say about these groupings. In the top two categories are countries that really try for neutrality have distant relations even with formal allies, small size and better than average economies
And for Canada, Sweden, Finland, all had a very traumatic economic catastrophe in the 1990s years that had a heavy component of clueless fecklessness until it was almost too late. And all of them realized that nobody was going to bail them out. Then Taiwan & Singapore. Singapore almost died in the early 60s and they didn’t know if Malaysia or Sukarno was going to eliminate them. This focused a lot of attention, and Taiwan is a country that if it ever finds itself over extended can start adopting simplified characters now.

The middle categories are well integrated with allies, are all important and theur larger friends can not afford to see them collapse, they are invested in them. These countries are theoretically vulnerable but not only are they too big to fail, they also gain tangible influence by guaranteeing less reliable clients and

And then you have the US and Japan that have no risk at all because nobody can touch them, the minute they have security fears on the scale of modern Singapore building bunkers is probably a good place for investment. In ither words these countries are not just too big to fail they live in their own fantasy world that functions as a major component of reality for everyone else on earth. There are no immediate consequences for screwing everything of compketely for decades.

So look at Brazil, a country that has no enemies who would dare touch it, a massive crappy underperforming economy and first world delusions and no prospectof the money actually running out. So they are a lit closer to say the US or Japan than they are to normal countries.

Fiscal discipline is hard because it involves telling people they can’t have stuff because you aren’t made of money. It is upsetting and it makes people mad at you, and you might lose your job. So the incentive for fuscal responsibility is actually reversed in these large very secure states.

43 dan1111 March 4, 2016 at 4:29 am

+1 nice analysis.

44 Jeffrey Deutsch March 4, 2016 at 1:14 pm

What about Israel?

45 Moreno Klaus March 4, 2016 at 5:36 am

I dont think Brazil is spending too much. The keyword here is : ” low quality of governance”. Also don’t forget the almost insane level of inequality. Of course they should spend more money on infrastructure, but with the corruption level that they have, you already know beforehand it will turnout to be a disaster…

46 Jan March 4, 2016 at 5:43 am

I wonder which countries Tyler believes don’t spend enough. Hmm.

47 Mike March 4, 2016 at 7:16 am

He admitted he is *often* skeptical of government fiscal policy. There is no law that the median level of spending is the optimal level. In fact it seems obvious that democracies with access to debt markets will overspend. At least if you think secular increase in debt as % of gdp constitutes overspending.

48 anon March 4, 2016 at 7:33 am

Sure.California blew through the tax revenue of the Dot Com boom and was caught flat footed by the crash. Bad management. But as I say below, I don’t think this really leads to “so let’s not manage.”

Is giving up on hard stuff becoming an American value?

49 derek March 4, 2016 at 10:13 am

The hard stuff is accountability. And yes, not being accountable is an American value.

50 Jan March 4, 2016 at 10:28 am

I thought it was innovation and exceptionalism? 🙁

51 The Original D March 4, 2016 at 12:35 pm

It’s hard to believe now but during the Dot Com boom many were arguing that this environment was the new normal. Some of them even wrote books that were excerpted in Very Serious publications.

52 Thomas March 4, 2016 at 3:50 pm

‘I don’t think this really leads to “so let’s not manage.”’ – Is an argument made by liars against people who intend to manage spending.

53 anon March 4, 2016 at 6:31 am

You can try to not have pensions to solve this problem, and we are trying that.

But can you really not have fiscal policy?

54 Brian Donohue March 4, 2016 at 1:55 pm

We still have pensions. 1 in 4 retired Americans derives at least 90% of their income from Social Security, and poverty among the elderly is lower than the general population.

Pensions are a good idea. One giant country-sized pool is the best way to deliver them.

55 rayward March 4, 2016 at 7:19 am

Tim Taylor’s observations usually provide a balanced view, but his account of public pensions is ahistorical. First, public pensions helped offset lower wages (as compared to wages in the private sector) and served a an incentive for recruitment of qualified employees. That wages in the private sector have since fallen relative to wages in the public sector says more about the private sector than the public sector. Second, public finance has been hit with a double whammy: repeated tax cuts and erosion of the tax base. I’d say that Republicans are responsible for the former and Democrats are responsible for the latter, so a pox on both their houses. Third, what’s an investment officer for a public pension to do, invest in bonds bearing a very small return or follow the lead of David Swensen, the much praised chief investment officer at Yale. If the investment officer for the public pension is an idiot, thank the idiot at Yale for being a role model. Finally, it’s true that investment officers “had a very favorable situation 30 years ago”, and who knew that the ascent of Republican control at both the federal and local government level would result in the worst financial and economic crisis in generations.

56 kevin March 4, 2016 at 9:21 am

How has the public sector been hit with an erosion of its tax base? I’m sure some individual states have, but the population of the U.S, as well as real GDP have been steadily growing

57 brad March 4, 2016 at 10:06 am

Low and medium skilled public sector workers are clearly overpaid relative to the private sector. The story generally flips with highly educated workers except that: the analysis doesn’t include ironclad job security or unheard of fringe benefits. It also doesn’t take into account that there’s graduate degrees and there’s graduate degrees. A masters in financial engineering from Columbia isn’t exactly the same as a masters in public administration from the university of phoenix online.

58 GU March 4, 2016 at 10:56 am


59 Heorogar March 4, 2016 at 12:02 pm


You were doing “okay” until “who knew that the ascent of Republican control at both the federal and local government level would result in the worst financial and economic crisis in generations.” Which is correlation. Is it causation?

You’re correct to the extent the Bush administration not only didn’t stop it, but increased, the Democrats’ subprime home loan putsches, begun under Clinton’s HUD, et al.

Clinton was not a Republican. Dodd and Frank were not Republicans. HUD chiefs H. Cisneros (35% of FNM/FRE volume to CRA/low-to-moderate income/subprime borrowers) and A. Cuomo (50% of FNM/FRE volume to CRA/low-to-moderate income/subprime) were not Republicans. FNMA diluted underwriting standards and inflated house prices by annual, excessively large increases in conforming loan maximums. Nearly all of FNMA’s $200 million in political contributions went to Democrats. The GOP controlled Congress (what) three years of the Clinton misrule, and didn’t reverse any of it

Similarly, the contemporary GOP-controlled Congress will be found guilty because they’ve (folded like cheap camera) given Obama everything he wanted, including funding for illegal amnesty for illegal immigrants.

60 The Original D March 4, 2016 at 12:40 pm

Which is correlation. Is it causation?

There were a lot of people arguing against the Bush tax cuts. Politics is always hyperbolic so you can discount those folks somewhat, but Alan Greenspan’s arguing against debt reduction because of how “harmful” less debt might be is inexcusable.

61 Heorogar March 4, 2016 at 1:48 pm

I thought (and so does Ben Bernanke) the subprime crisis caused the financial crisis that led to the Great Recession. I didn’t realize the Bush tax cuts caused it.

Agree about Greenspan’s fallibility, but not for your reason. He was wrong in his views on the run-up to the S&L Crisis (see his Congressional testimony) and again in his long, active reign at the Fed in the run-up to the Great Recession.

62 rayward March 4, 2016 at 2:16 pm

Republicans have spent the past seven years trying to convince Americans that George W. Bush became president on 09/12/01 and Obama became president on 01/20/08. And they have done remarkably well doing so. I did not write that Republican control “caused” the crisis, rather that the ascension of Republicans gave many Americans a sense of security, both economic and militarily, and optimism. That things turned out so badly may have “caused” Republicans to reinvent the calendar; better to reinvent the calendar than to admit responsibility. What we have learned is that the Republican Party isn’t the responsible party, it’s the irresponsible party. And I am deeply disappointed by it.

63 Cooper March 4, 2016 at 2:29 pm

The only way the federal government could run surpluses was to force the private sector to run deficits. That’s exactly what happened in the late 1990s. Household savings rate collapsed even as the economy boomed and wages grew.

64 gab March 4, 2016 at 6:00 pm

Dodd-Frank (signed into law 7/2010) contributed to the economic downturn of 2008-09?

65 Rich Berger March 5, 2016 at 8:54 am

Dodd and Frank were Democrat congressman who helped enable the sub-prime crisis, before they supposedly fixed things.

66 chuck martel March 4, 2016 at 6:30 pm

Government employees at any level are supplying labor to a monopsony. They should have to bid for their jobs on an annual basis, just as the suppliers of gasoline, paper clips, airplanes and office furniture do. If a person is willing to work without retirement benefits they should receive the position instead of one who demands them.

67 MOFO. March 4, 2016 at 8:23 am

“what’s an investment officer for a public pension to do”

Easy, invest in whatever is politically fashionable at that moment. Buy local, divest in evil Tobacco and Oil companies, etc, etc.

68 Jan March 4, 2016 at 9:54 am

I think only universities do that, right? Any state actually followed that advice, with concrete examples?

69 MOFO. March 4, 2016 at 10:59 am

Calpers comes to mind right away:

Their site’s search reveals a number of docs related to divestment. At a glance, a lot of them seem to be about Iran, but i see weapon manufacture in there, ill bet some digging would yield more:

70 anon March 4, 2016 at 12:40 pm

Thermal coal is losing though, so maybe it’s a smart sell.

71 Thomas March 4, 2016 at 3:54 pm

The intent is moral. Pondering whether the policy will be smart economically is politcally motivated dishonesty.

72 Nathan W March 4, 2016 at 11:01 pm

Even pondering it is politically motivated dishonesty? Does the future not enter into our preferences? I ponder.

73 Cooper March 4, 2016 at 2:30 pm

Norway’s public pension fund is another famous example of this.

74 Joe B. March 4, 2016 at 8:24 am

It is not PC to even talk about it, but the Department of Veterans Affairs is a gigantic pension program totally unfunded, and financed by taxing income and capital-gains taxpayers on a pay as you go basis.

The health-care component is a communist program in which former federal employees receive medical care in federally owned facilities staffed by other federal employees. Actually, it is distilled communism. No voucher talk!

Last I checked, a $161 billion program, and oh, btw, more than 4 million veterans receive monthly “disability” checks.

As of a couple years ago, a U.S. Civil war benefit was still being paid.

But no one will ever take on the VA. The vets are voters and organized by Congressional district. Right-wing sacred cow, and Dems have been trying to swing them into the D column.

Good luck taxpayers.

75 Jan March 4, 2016 at 9:21 am

Veterans are like farmers in many ways. The goodies don’t stop.

One caveat is that the VA is one of the most cost effective health care organizations in this country. Despite its recent issues, it has actually provided pretty good care over the decades. The massive surge in demand in for VA services in recent years thanks to our many wars has been part of but by no means the only factor leading to its decline in quality of care.

76 JB March 4, 2016 at 10:55 am

So the DVA is
“a gigantic pension program totally unfunded, and financed by taxing income and capital-gains taxpayers on a pay as you go basis”
“a communist program in which former federal employees receive medical care in federally owned facilities staffed by other federal employees”
“one of the most cost effective health care organizations in this country”

Interesting set of true statements. I wonder what conclusions we can draw about the rest of the health care sector.

77 Nathan W March 4, 2016 at 9:39 am

Veterans are also highly over-represented among the homeless …

78 Cooper March 4, 2016 at 2:36 pm

There are two kinds of veterans.

There are the three tours of duty then discharged without a pension veterans. And then there are the retire as a lieutenant colonel after 25 years of service with a $65K/year for life pension veterans.

The career military officers enjoy incredible perks that aren’t available to the grunts who wash out after a few years.

79 Art Deco March 5, 2016 at 10:39 am

Sez who? The vagrant population is amply studded with schizophrenics and dements who are not recruited by the military. The U.S. military also does not accept anyone whose IQ is below the 14th percentile or anyone with a notable criminal record. Per the VA, 7% of the population of the United States are veterans. Per HUD, 8% of the vagrant population are veterans. How many of these are veterans like Dan Rather who washed out after a period of weeks?

80 Ed March 5, 2016 at 12:24 pm

“To hazard a guess as to Art Deco’s profession, I say actuary or maybe accountant. It would fit his faculty for statistics and stratospheric level of anal retentive fussiness. Given his intense hatred of educators, I also suspect a stint working in a university or school system, probably Catholic.

Deco strikes me as one of those guys who had the intellectual horsepower for the Ivy League, but comes from the white working or lower-middle class and so didn’t have the pedigree, connections, or demographic diversity to get in. So, he ended up going to a middle-class college or university and landing in a bland middle-class, white-collar job in the region he grew up in. On the surface, he wears this as a badge of pride, hence his persistent and vocal loathing of anything and anyone “cosmopolitan”. Deep down, though, he resents it, and that’s the reason for his overly flowery vocabulary and snotty attitude.”

81 BenK March 4, 2016 at 8:27 am

If the issue is the quality of governance; one must address a basic question – is there ever high quality governance with high rates of spending for very long (i.e. the length of two peoples’ careers, one after another)?

Naturally, being the one asking the question, I think the answer is probably no. The best examples of long term good governance are those in which the interests of graft and the general welfare align. Even those systems fall apart.

82 anon March 4, 2016 at 8:43 am

Search framing that’s the problem insurmountable. No one is eating the elephant one bite at a time

83 anon March 4, 2016 at 8:46 am

Bah. Watching the voice input more carefully.

“Such framing imakes the problem insurmountable. No one is eating the elephant one bite at a time.”

I swear sometimes the voice input has it right and then jumps to make it wrong after I look away.

84 middyfeek March 4, 2016 at 9:20 am

@ Brian Donohue – “the purported underfunding is way lower than the reality”.

Don’t see how you can say that. Not only are state governments deliberating underfunding they sometimes don’t even make the payments they say they will. Hell, sometimes they simply don’t make any payments at all. In NJ (one of the worst offenders) the governor who started this snowball rolling down a hill (Christine Whitman) was told emphatically at the time that her projections and reduced payments would not work.

Now Mrs. Whitman, who was only a dilettante to begin with, is long gone but the problem remains.

85 Vivian Darkbloom March 4, 2016 at 9:52 am

I think you may need to re-consider the meaning of this: “the purported underfunding is way lower than the reality”. –

Translate: There is a bigger shortfall in funding than states are admitting there is. (I had to re-read it, too).

86 Brian Donohue March 4, 2016 at 1:57 pm

Yeah, awful word choice by me. Sorry and thanks.

87 asdf March 4, 2016 at 9:21 am

If we import more Brazilian voters they will bring their good governance institutions with them. That should help solve for our fiscal issues.

Pension liabilities used to be one of my big concerns. They still are. I remember it being a big part of my wanting to be a libertarian. Maybe everyone else wasn’t disciplined enough to save for retirement, but I was, so please give me a 401k instead of Social Security or any kind of pension I don’t control. That control thing again, as long as the government didn’t get in the way I would bootstrap my way to security with my bootstrap brothers.

Of course if they cut Social Security today I’d probably just end up spending more of my own money to support my parents. And who knows where the money they cut would go anyway, right now it looks like subsidies for minorities via Obamacare, that’s a downgrade of my position.

Anyway. The way to balance budgets and get good governance is to have high human capital citizens with high trust and high conscientiousness. Then poof, in most instances they form good institutions that make good choices. Our real problem is that we don’t have enough of such people, they just won’t have children, and if they don’t start having children there is no way to make the retirement numbers work out no matter how many blog posts and policy papers get made.

88 Ray Lopez March 4, 2016 at 9:21 am

Some private fund managers did OK however, for example Yale University’s alumni fund, so it can’t be that bad. How did Calpers do? Probably average.

Also keep in mind there’s no legal remedy if the government cuts your pension–it’s just tough luck, suck it up and either move on or go on welfare.

89 brad March 4, 2016 at 10:09 am

“I have a lot of sympathy for the retirees and soon-to-be retirees who were depending on a pension from a state or local government, and are now finding that the money isn’t there to pay for the promises.”

On the one hand they were promised a pony. On the other hand they were old enough to look around notice they were living in a two bedroom walkup apartment with a 30″ CRT TV and that Daddy was working two jobs and still fought with Mommy over money three times a week.

90 BillD March 4, 2016 at 10:27 am

There’s a reason that there are fewer and fewer DB plans in the private sector. There are just way too many variables that different sides can argue about and tweak to get the “right” answer.

Then add public choice issues to the public sector and what would one expect to be the outcome? In Chicago, amidst a real estate boom, a fund oiginally managed by the former mayor’s nephew lost significant money on RE investments while taking several million in management fees.

DB plans are bad for taxpayers and public employees. Neither the pols nor the union leaders bear the burden of their fanciful agreements. Plus it keeps good employees from moving to better jobs and keeps bad employees from quitting or being fired.

The only entity that can reliably provide DB is the federal government.

91 JB March 4, 2016 at 10:59 am

That is how the crisis will end–Federal buyout of existing pension obligations (folded into social security), and conversion of everything else to defined contribution.

My favored solution is to automatically cut pensions by the unfunded %. So if you get a $1000/month pension, and the fund is 47% funded, you receive $470. That would get people paying attention to funding gaps, and excessive promises, pdq.

92 GoneWithTheWind March 4, 2016 at 10:35 am

The three biggest factors in Oregon’s underfunding of the ggoverment workers pensions are:
1. When the law implementing it was written the employer HAD to fund it monthly (that is their 6% was taken from their pay and placed in the fund) but the employer could put off funding it indefinitely. Imagine what that unfunded portion of the employees retirement grew to in 35-40 years. What is worse is that every state public entity had to budget their 6% contribution yearly as part of the cost of an employee so the money was there but simply misused.
2. The police and firemen were allowed to retire at a much younger age at full pension. I’m not debating if this was fair or appropriate (or simply the result of a powerful union) but the point is there were no additional fundings provided to do this so the system had to take from the rest of the employees pension to give to the police and firemen. This created a very real deficit in the system.
3. The legislature in their infinite wisdom provided as one of the pension calculations that an employee could at retirement choose a formula based on their wage rate in the last 3 years. This formulation means little to the rank and file employees whose wages raise at very modest rates over time. But it meant a lot to political appointees who often were mere “staff” to a legislator but were appointed to commissioner or managerial jobs as rewards for their service. They then went on to work for three years and retired with cushy retirements which were funded on the backs of the rank and file workers.

The system is in trouble because it was designed that way. The politicians and special interests would like you to believe that it is in trouble because it was too generous but yet it is based on the 6% funding from the employee and the matching 6% from the employer. If both live up to their mandate the system would not be in trouble.

93 GU March 4, 2016 at 11:04 am

Yes, we should blame the politicians and the money managers, but we also need to point the finger at the public sector unions themselves, whose unrealistic greed knows no bounds. We could also blame public for being too soft on the outrageous pension abuse that is routine for police and firemen.

94 8 March 4, 2016 at 11:16 am

I have seen it at the local level. The public unions work hand in glove with the government and between the teachers, police and public unions, they are able to swing elections in small towns. It’s the voters’ fault for not coming out and stopping corruption, but the fact that these unions are corrupt, influencing elections, and have access to the policy makers leaves them no excuse. They can see what is happening with inflated pension benefits and they do nothing about it because getting realistic about spending will lead to job cuts. Many governments have been spending too much money on labor and neglecting public infrastructure. They were able to continue hiring and spending because of inflated pension benefits. They think the public is going to agree to massive tax increases to pay for underfunded pensions, while teachers and police are fired and infrastructure is even more neglected. It’s sad, but they’ll still end up better off than people who only have SS to fall back on.

95 anon March 4, 2016 at 11:23 am

Well, those who have gone to 2-tier pensions have a partial (rude) solution.

96 Brian Donohue March 4, 2016 at 2:08 pm

You know what the real solution is? Fewer government employees.

I bet you didn’t know that the proportion of government employees in this country peaked in July of 1975, more than 40 years ago, at 19.4%. Between September of 1947 and July of 1975, fully 29% of “new” jobs were government jobs.

Based on today’s BLS report, the proportion of government employees in this country is down to 15.4%. Between July of 1975 and today, only 11% of “new” jobs were government jobs.

The cost of government hasn’t slowed down, but work is increasingly being outsourced. Government employees, over the very long haul, are pricing themselves out of the market. And their long-tailed compensation is going away with them.

I think this is a very hopeful trend. I agree with Churchill’s comment that:

“Some regard private enterprise as if it were a predatory tiger to be shot. Others look upon it as a cow that they can milk. Only a handful see it for what it really is–the strong horse that pulls the whole cart.”

97 gab March 4, 2016 at 6:08 pm

The unions are corrupt for advocating for their members? Or for other reasons unrelated to the topic at hand?

98 GU March 4, 2016 at 7:16 pm

I find the idea of public sector unions fundamentally unjust (so you’re organizing against the general public?), but I see your point.

99 Nathan W March 4, 2016 at 11:12 pm

They help to prevent wholescale politically motivated firing, among other things. It would be nice if they were a little more altruistic with respect to the public purse though.

100 TheNumeraire March 4, 2016 at 6:02 pm

Public pension plans were not able to shore up their unfunded liabilities over the very favorable period of 30 years for very simple reasons. As the stock boom progressed steadily though the 1980’s and 1990’s with minimal interruption of high returns, burgeoning pension revenues were used to increase benefits (health insurances, COLAs etc.), lower age/service requirements for full pensions and increase payout ratios relative to final salaries for employees. Public pensions are far more generous from the days when they were initially established with far higher retirement/working pay ratios — for instance, when CalPERS was established in the 1930’s, an employee qualifying for full pension would expect only 55 percent of final salary.

Even more perversely, a trend developed whereby states and cities felt so confident that they would continue to earn large returns, that rather than contributing tax revenue to the pension funds, states and cities like NJ, Illinois, Detroit sold bonds and invested the proceeds through the pension system. The belief being that the returns generated from holding more stocks would easily cover the interest costs. More than $50 billion in pension bonds were issue from 1990-2009, the majority issued after the best performing market years had already occurred.

Trying to claim that unfunded state and local pension liabilities are primarily caused by federal deficits or lower marginal tax rates is beyond ridiculous. Tax rates were cut, but tax revenues (relative to GDP) hardly budged. Decisions to raise public pension benefits or issue pensions bonds were done at the state and local level, a policy with no clear affiliation to Republicans or Democrats.

101 GoneWithTheWind March 5, 2016 at 11:44 am

Reading your post I found your comments to seem to be heartfelt. That is I think you are saying exactly what you believe is true. For that reason I would hope you would be open minded enough to consider another possibility:
“Public pension plans were not able to shore up their unfunded liabilities over the very favorable period of 30 years for very simple reasons.” That reason is that while the employees contribution was immediately invested in those favorable years and over the 30-35 year work life of the employee easily doubled, tripled and quadrupled in value. But the employers contribution never happened. So while a simple secretary earning a mere $20 k a year contributed $1200 to her retirement on year one of her employment that mere $1200 35 years later was worth perhaps $10,000. Now that’s in real money, i.e. that is exactly what her investment grew to over 35 years in a good stock market. That means that when she retired the state had to come up with $10,000 to match that $1200 they refused to contribute 35 years ago. Multiply this by the thousands of workers and the 30-35 years of contributions and THAT is why the unfunded liabilities grew so much and so fast.

Most state government pensions are set by a system called “money match”. That is the amount of money in the retirees account (all of it their money which grew because of investments) AND the state’s matching amount (which if the state had contributed their 6% in a timely manner would be identical) is pooled and a calculation is applied based on age, dollar amount, life expectancy and the ability of the fund managers to invest over time and a monthly dollar amount is generated. It isn’t magic or due to union interference (I am not pro-union). It is simply based on what the ending balance(s) are and what that can generate over time when invested. It doesn’t grow based on union contracts or backroom deals. It is a straight computation subject to review and appraisal by politicians and auditors. The problem for the state and thus for the taxpayers is simply that since they failed to contribute the 6% when they should have they now have to make up the difference and that is considerably more than 6%.

102 Tim March 5, 2016 at 11:43 am

If the non-visceralists on both sides aren’t in denial about either macroeconomics or the human ability to perfectly tame complex systems, is there room for a compromise that uses “automatic stabilizer”-type mechanisms? Say, certain events trigger highway spending (or some other high multiplier stimulus) or food stamp/unemployment extensions, and certain metrics trigger pullbacks. Etc.

I’m sure there is a statesman-like gang of eight in that giant Congress somewhere!

OK, back to reality. But thanks, Tyler!

103 Floccina March 8, 2016 at 11:37 am

They should only invest in cash and equivalents. If the people want to take on more risk for a chance at a better return they should have an IRA.

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