|
Existing Pensions Also Will Be Cut
By JOHN SEILER It’s obvious that pensions for future government workers are being cut, and will be cut further. But California state and local governments’ unfunded liability for future pensions now is so large, $884 billion, that those already retired will see their pensions cut as well. I’ve been predicting this all along during the almost two years CalWatchDog.com has been on the Internet. Historian and economist Gary North provides a national perspective on that here. Although now located in Arkansas, grew up in California, got his Ph.D. at UC Riverside and long lived in this state. The link is to his Specific Answers site, which you have to pay for. But I’ll provide the gist of his argument. The California Constitution guarantees that pensions cannot be cut for government workers who already have retired. North writes: In a time of major economic crisis, which will be the world after the Federal Reserve stops printing money (either before or after hyperinflation), states will renege. A precedent will be set in some state. Then other states will renege. As to whether California does is a political question. I think it’s obvious California will renege on part of that $884 billion, an amount equal to the entire state general-fund budget for 10 years. In a time of major economic crisis, which will be the world after the Federal Reserve stops printing money (either before or after hyperinflation), states will renege. A precedent will be set in some state. Then other states will renege. As to whether California does is a political question. There will be a deal worked out by unions (weakened) and voters (strengthened). This deal will involve reductions in pension obligations, now coming due. There may not be open bankruptcy and a 100 percent default, although that option is possible. But those retirees who expect full payment will be disappointed. Politics is the art of negotiation. These negotiations will never end. CalWatchDog.com’s Wayne Lusvardi detailed how high pension fund payments will be for many cities. For Fresno, the “best case” is that, in 2019, pension payments will devour “only” 78 percent of the city budget. The “best case” is there’s an economic recovery. But the “worst case” scenario is that, if the economy continues to stagnate, by 2015 the Fresno budget will consist of 142 percent payments to pensions. Obviously, you can’t pay out 142 percent of something, only 100 percent. But even in the “best case” scenario, 78 percent of the Fresno budget still would be devoured by pension payments, leaving just 22 percent for everything else — police, fire, parks, social services, etc. North again: Taxpayers will revolt. If it’s pensioners vs. public schools, public schools will win. If it’s today’s police vs. retired police, voters and today’s police will sacrifice the pensioners. If it’s today’s firemen vs. retired firemen, voters and today’s firemen will burn the pensioners’ contracts. Right. A lot of the pensioners don’t even live in California because it’s so expensive. So they don’t vote here. Pension GuaranteeWhat about the guarantee on pensions in the California Constitution? North: In government, there are no enforceable contracts. There are only negotiations. Pensioners have little political clout. They are dying weight. They bring nothing to the table except moralizing (“It’s a public trust!”) and the threat of lawsuits. The second will have some weight. But judges cannot get blood out of turnips. Who must enforce a judge’s decision? An elected governor. “As much as I respect Judge Bloat’s decision, I have chosen not to enforce it. So, sue me.” Federal courts will wisely stay out of this intra-state cat fight…. These are not obligations. They are merely political promises. They can and will be broken. Like all political promises. Those already living off of government pension should not be surprised that the political promise to them to not cut their pensions will be broken. After all, having been part of the government long enough to grab a pension, they had a front-row seat to witness government failures and broken promises.
Tags: Gary North, John Seiler, pensions, unions Comments(62) |
May 19, 2013
“Keep trying to shove those square pegs into the round holes in your predictions about a default on pensions if you must, but your effort to expand one exceptional political/economic decision during a market panic into a general rule about the application of our laws doesn’t hold water.”
SkippingDog, the pensions will either scale back their extravagant promises (made during a massive equity bubble), or they will go broke. Today’s market may be the new normal; t may not be. The problem is that the payout promises were made back when people thought the business cycle had been eliminated and that the Dow would reach 36,000 in our lifetimes.
There is a wild card: what if states enact massive taxes and “service fees” on defined-benefit pensions (i.e., effectively taxing only government retirees), specifically to fund ailing pensions? Government pension recipients are not a large enough voting bloc to prevent such a thing from happening in states that have ballot initiatives; they may be stymied temporarily, but the argument in favor is so seductive (“You won’t be paying the taxes and fees”) that it will eventually pass.
Poohbah – Retirees who live in states where laws are passed to punitively tax public pension holders will simply move. The federal Pension Source Tax Act of 1996 prohibits interstate taxation of pension benefits by the originating state. That means you’ll see a lot of pension recipients moving to Nevada, Florida, Texas, Wyoming, Hawaii, and probably some other state I’ve missed that don’t levy a state income tax.
If you want to see which states either have no income tax or don’t tax pensions, just look at where there are concentrations of military retirees. Do you really think people who retire from the military move to Texas or Florida for the weather?
TL – If the GM bondholders indeed had a legally superior position to the UAW pension or any other creditor, why was there no legal challenge to the action? Corporate bondholders, at least those who would qualify as “institutional investors,” aren’t known for being either stupid or timid when it comes to legally protecting their own interests.
“Poohbah – Retirees who live in states where laws are passed to punitively tax public pension holders will simply move. The federal Pension Source Tax Act of 1996 prohibits interstate taxation of pension benefits by the originating state. That means you’ll see a lot of pension recipients moving to Nevada, Florida, Texas, Wyoming, Hawaii, and probably some other state I’ve missed that don’t levy a state income tax.”
1. Well, there’s always the option of imposing a “service fee.” It’s not a tax; as can be clearly observed, it says “service fee” and not “tax” in the enacting legislation. As for why it’s 40% of the pension, well, hey, you were a government employee for 30 years, you know how inefficient and wasteful government is . . .
)
2. Since this is a problem that pretty much hits all 50 states (or 57, if you’re Barack Obama) due to the problems I cited earlier (too many government retirees drawing too much money from too few taxpayers for too long a time), this may turn into a nation-wide solution, where all states tax all defined-benefit pension recipients living in their boundaries.
3. Some folks may decide to go expat; in turn, state treasurers start refusing to send money directly to overseas banks, citing “money laundering” and “organized crime” concerns.
Believe me, government can come up with far more ways of shafting you than you can come up with defenses against being shafted.
“TL – If the GM bondholders indeed had a legally superior position to the UAW pension or any other creditor, why was there no legal challenge to the action? Corporate bondholders, at least those who would qualify as “institutional investors,” aren’t known for being either stupid or timid when it comes to legally protecting their own interests.”
Institutional investors got told very firmly to sit down and shut up.
“Nice investment fund you got there. Be a shame if something happened to it.”
And you know they were told to “sit down and shut up” how?
You’ve probably never read this, Poohbah. It will give you a little better perspective on GM’s problems.
http://www.today.ucla.edu/portal/ut/081015_gm-downfall_sanford-jacoby.aspx
Here’s a complete analysis of the GM and Chrysler bankruptcy cases by the American Bankruptcy Institute. You’ll find that the treatment of bondholders was completely within existing law at the time and the decision of the companies to fund the UAW pension fund was made by them, not the government.
Reality if always more complicated than talking points and sound bites. That’s why it’s good to actually read what people who know the law and practice it as a profession say about these events.
Knowledge is power.
http://www.abiworld.org/committees/newsletters/busreorg/vol8num9/autos.pdf
Knowledge is power.
==
That is why you are powerless torugh feeder, you have no knowledge, all you have is a gov workfare job mentality and the standard “cut and paste”.
Do you ever actually read anything, Rex? It certainly appears that your only “talent” is in posting foolish and preposterous comments on any blog or website that hasn’t already banned your nonsense.
[...] Existing Pensions Also Will Be Cut [...]
Well, the courts have already spoken on this issue:The California Supreme Court long ago established that a promise of a pension made by
a public employer to its employees is a promise the employer must keep. In other words,public employers in California are legally required to honor promises to current and former employees regardless of how much money they have set aside for that purpose. For example, CalPERS is prefunded and is able to pay pension obligations as they come due. But the U.S. Supreme Court has also weighed-in by stating that a defined benefit plan “is one where the
employee, upon retirement, is entitled to a fixed periodic payment. The asset pool [available to pay benefits] may be funded by employer or employee contributions, or a combination of both. But the employer typically bears the entire investment risk and … must cover any underfunding as the result of a shortfall that may occur from the plan’s investments.” So, whether or not the state has the money, is not legally a reason for not paying. CalPERS, Univ of Calif Retirement System and CalSTRS, all recognize that the markets wreaked havoc and reform for FUTURE retirees is needed, UCRS recently completed an extensive overhaul. So, changes going forward will be in effect. But the real costs to California employer retirees is healthcare. There are no guarantees on this benefit. UCRS is moving to a 70% ceiling on funding pre-Medicare health benefits for retirees.