Understanding the world of public pensions can be an arcane and mind-numbing experience. Beyond any basic tutorial, one needs to understand the political pension jargon as certain phrases also require translation. Here are some key points that everyone should know.
The euphemistic term "tapering the pension contribution collars" means to further reduce contributions to already underfunded pension systems. This equates to an individual planning to further unilaterally reduce their monthly mortgage payments while already being in arrears. Their motivation is to spend these "savings" elsewhere in the household budget.
It is evident we have an unsustainable pension system when policy makers can unabashedly project an increase in the current deficit otherwise known as the unfunded liability. How many taxpayers would be content with an increasing future mortgage debt balance in connection with the "savings" strategy outlined above?
Translated, we will continue to spend the "savings" now while transferring these ever-increasing and ever-unaffordable costs onto future generations. This hardly referenced operating premise is simply immoral.
Of note, any financial projections are wholly dependent on the politically influenced 7.5 percent annual asset-return assumption. As a benchmark, a recent Rhode Island actuarial study revealed a 40 percent likelihood of achieving that states 7.5 percent rate. Should our expectations be materially different here in Pennsylvania?
Why does it seem every 30-year funding "reform"plan conveniently schedules significantly higher contributions when the architects are likely out-of-office and well after the "savings" are spent?
Similarly, beware of anyone highlighting "cumulative pension savings" such as $7 billion projected over 30 years. Such assertions are contrary to established pension analytical standards which are expressed in todays dollars or present-value terms. In addition, most pension calculations are based upon the current membership also known as a closed-workforce. To vary from this accepted practice raises questions of political intent. This glaring shortcoming was particularly evident in the transition-cost analysis associated with closing the pension systems to new hires. Many uninformed policymakers continue to view the hyperbole of "transition costs" as a barrier to adopting necessary reforms. Such a mindset simply reinforces the adage of ignorance being a huge cost of government.
A further illustration is found in the already-failed Act 120 of 2010. In connection with benefit reductions for new hires, the modelling projected a combined cumulative 30-year savings of about $3 billion. Unfortunately the impact of a reduction in the assumed rate of return in 2011 and 2012 resulted in an immediate liability increase of $6.7billion or twice the estimated cumulative 30-year savings. Moreover, Act 120 assumed savings based upon aggressive salary assumptions associated with new members. How many business-owners look to save money in their employee-benefit costs by increasing payrolls? In reality, the total member payroll for the states public pension system actually declined last year.
Therefore, when one hears the slogan "let Act 120 work", you should be concerned as you are dealing someone who is either uninformed or in denial.
It would be refreshing for policymakers in Harrisburg to publicly acknowledge that no "reform" scenario exists that actuarially justifies any collared contribution rates.These current collared rates are arbitrarily determined political manifestations resulting in the sequence of bond-downgrades. Such realities were evident in last years debt-downgrades by Fitch Ratings and Moodys Investors Service.
In spite of such clear messages, some continue to promote pension obligation bonds as a means of borrowing our way to prosperity. Unfortunately, numerous states and cities provide case studies illustrating the failures of such a strategy.
Many appear quite content contributing 100 percent of a deficient rate masquerading as a Pennsylvania statute. The end-game of "doing something" just means continuing bi-partisan underfunding to spend these "savings" elsewhere over the next four years.
In short, everyone should be particularly apprehensive of the high likelihood of more pseudo-reforms.
Last year, Don Fuerst, senior fellow of the American Academy of Actuaries commented on Pennsylvanias pension reform efforts: "… they are being used to camouflage what is happening to the unfunded liability. Its hurting the unfunded liability."
All this leads to six basic questions for Pennsylvania policymakers:
1) If underfunding was considered good policy in Act 120, why oppose more underfunding now?
2) If underfunding is now considered poor policy, why did you support this practice in Act 120?
3) If underfunding is now deemed detrimental, do you now favor completely un-collaring the rates as a basic principle of pension reform?
4) If existing collared rates are currently deemed unaffordable, how will higher future uncollared rates ever be affordable?
5) Why is a 30 year deficit-funding horizon appropriate when most current members will likely retire within 15 years?
6) Why are the best-demonstrated practices within the Pennsylvania private-sector continually being ignored?
This political-vacuum continues despite the opinions of independent outside experts. The terms "reform" and "collaring" represent contradictory objectives. Any collared arrangements in private-sector pensions would violate federal laws. Pennsylvania continues to be a case-study in a most unfavorable connotation. Our children and grandchildren deserve better.
Original Source: http://www.buckscountycouriertimes.com/opinion/op-ed/public-pensions-and-politics/article_e22c1d05-0333-5842-b188-7b4632c88f1d.html