Connecting the public-pension dots

Chris Cassidy reports in the Salem News that the state has appointed a replacement for Essex Regional Retirement Board chairman Timothy Bassett, whose reign of error may finally be drawing to a close — although Bassett, naturally, is fighting it in court. (Here’s just a small taste from the archives.)

Andrea Estes reports in the Boston Globe that Bristol County Sheriff Thomas Hodgson is passing out enabling taxpayer-funded pensions as if they were bags of popcorn, in one case awarding greasing the skids for a nearly $47,000 annual pension for someone who’d worked full-time for only three years.

And Mary Williams Walsh reports in the New York Times that states across the country are taking enormous risks with their public-pension funds, gambling that junk bonds and other dubious investments will help them catch up with their ballooning liabilities.

The question that doesn’t get asked often enough: Why are public employees still receiving pension benefits when virtually everyone hired in the private sector for the past 10 or 15 years has been diverted to a defined-contribution plan such as a 401(k)?

20 thoughts on “Connecting the public-pension dots

  1. L.K. Collins

    “Why are public employees still receiving pension benefits when virtually everyone hired in the private sector for the past 10 or 15 years has been diverted to a defined-contribution plan such as a 401(k)?”

    Hmmm…A liberal application of a Liberal agenda?

  2. Steve Stein

    @LK (and Dan) – is this problem limited to liberal states and localities or does it extend to conservative ones as well? If it does (and I think it does), then the answer to LK’s question must be “no”.

  3. Michael Pahre

    Estes has a good article today, but I think you misrepresent what Estes reported that Hodgson has done.

    As sheriff, Hodgson has no authority for “awarding a nearly $47,000 annual pension” to anybody, as you wrote that he did; that authority rests with the retirement board. Instead, Hodgson gave people jobs that entitled them, sooner or later, to be awarded bigger pensions by the board.

    Even though she doesn’t flat out report it, Estes implies that Hodgson is deliberately giving people short-term jobs that, under existing law, will result in the retirement board to massively up their pensions. The game is now on: can the Globe dig around enough to prove, not just imply, that Hodgson was intentionally helping people game the system to maximum financial benefit? Or will we be left with only a really bad taste in our mouths?

  4. BP Myers

    @Michael said: Hodgson has no authority for “awarding a nearly $47,000 annual pension” to anybody . . . Hodgson gave people jobs that entitled them, sooner or later, to be awarded bigger pensions by the board.

    A distinction without a difference.

  5. Rich Carreiro

    The question that doesn’t get asked often enough: Why are public employees still receiving pension benefits when virtually everyone hired in the private sector for the past 10 or 15 years has been diverted to a defined-contribution plan such as a 401(k)?

    Good question! Especially since civilian federal employees hired since 1986 have been “diverted to a defined-contribution plan” (fed workers hired since 1986 pay into Social Security in full, have a DCB available (called the Thrift Savings Plan), and while they are given a small annuity on top of that, it is miniscule compared to the classic “80% of your high 3” (or whatever the test period is) federal civil service pension for pre-1986 hires.

    That switchover is something MA (and all the states) should have done. And should still do.

  6. Aaron Read

    “Why are public employees still receiving pension benefits when virtually everyone hired in the private sector for the past 10 or 15 years has been diverted to a defined-contribution plan such as a 401(k)?”

    Hmmm…A liberal application of a Liberal agenda?

    Eh, nothing so sinister. It’s just union bargaining power, plain and simple. Strong unions get their members the best deal they can. The reason we only see it in the public sector is because that’s one of the very few places left where “management” hasn’t managed to screw over their employees by roping them all into a 401k (or equivalent) that usually requires you buy it all in company stock.

    A better question might be: why is it that the bedrock of the concept of The American Worker (that being that you do honest work for a company and expect them to take care of you) has eroded so far that we look at public pensions as an evil aberration that must be eradicated?

    I don’t argue that the system is now thoroughly corrupt and arguably anachronistic…but I challenge anyone here: if you had access to it, wouldn’t you take full advantage of it? I sure as hell would.

  7. Steve Stein

    Aaron, I agree with you, and therein lies the connection between this item and the next one (“Ordinary people work hard for short money while the folks at the top reward themselves”).

    I suspect that this is exactly what LK was talking about:

    “A liberal application of a Liberal agenda” equals “union bargaining power, plain and simple”.

    But perhaps my mind-reading skills are weak.

  8. Michael Pahre

    @Dan: thanks for making the clarification.

    @BP Meyers: I don’t agree with your argument that it is a distinction without a difference.

    The reason is given in the Globe article: The 2009 pension reform law gives wider latitude to the pension board, for example to assess if the “level 4” job positions were warranted (based on dangerousness of the job duties), and to include or reject those employment characteristics in the pension calculation.

    So, while Hodgson might previously have been giving people jobs that would more directly result in drastically increased pension benefits, his actions now may not have as many direct consequences on subsequent pension benefit awards.

    A distinction with a difference — albeit a modest one.

  9. BP Myers

    Thanks, @Michael. Given their reputation, it will be interesting to see if the Essex board in particular ever has or will exercise that discretion.

  10. Michael Wyatt

    Dan, as an actuary, the Estes example is even worse as she is only focusing on the annual payment. What may be even more eye-opening is if you try and quantify what the expected present value of this additional income stream adds up to. The article doesn’t state the retirement age of the person, but we can determine the approximate lump sum equivalent based on varying retirement ages (using the January 2010 IRS 417 interest and mortality rates) for the extra $3,801 in monthly payments (and I’ll be even more conservative and assume no death benefit or COLA increases – these would only drive present value figures higher):

    If age 65 when started, PV is $542,648.40
    If age 60 when started, PV is $603,734.05
    If age 55 when started, PV is $656,608.07

    So this little gift can’t be looked at as just an extra $3,801 going out a month (who’ll notice that), but instead a gift of well over $500,000. Nice work if you can get it.

    For 22 years, Robert Tweedie served as a part-time, on-call pharmacist for the New Bedford Board of Health, making $2,200 a year.

  11. Michael Wyatt

    And upon reflection, consider the funding implications here with this sudden increase in salary. I’ve seen it posited that the employee contributions fund the pensions (ignoring of course the fact that these plans are grossly underfunded, so whatever they’re contributing isn’t remotely enough to actuarially fund their benefit). Assume an 11% employee contribution rate, then the 22 years contributing off of $2,200 reasonably funded the initial expected payment. But you now have three years at $77,000, so the employee kicked in an extra $24,684 in contributions ($77000 – 2200) * 3 * .11. For this extra sacrifice, they’re rewarded with the aforementioned PV increases in their benefit.

    Don’t know about you, but “sacrificing” $24k to get back over $500-600k looks like a pretty good deal (but a grotesque deal for the taxpayers).

  12. Karin Pisiewski

    Maybe because state employees do not collect social security. 401ks are in addition to social security and public employees who vest in the pension plan (after 10 years of service-one the highest year requirements in the nation) do not pay into it. In fact any benefits you have earned are basically nullified by your pension-so even though you have paid into SS you do not get your benefits.

    The bigger question is why the private sector sacrified pensions and believed the hype on 401ks. Most of the big companies who have branches oversees pay pensions in those nations.

    Maybe instead of trying to bring everyone down; the question should be why do we not bring everyone else up.

    1. Dan Kennedy

      Oh, @Karin. Really, now. No one in the private sector believed the hype on 401(k)s. They were imposed from above, shoved down the employees’ throats. Public employees have uniquely been able to preserve their pensions, because politicians know they’ll only get a little bit of protest from taxpayers. On the other hand, if they ended the pension system, the employees’ unions would do everything they could to vote them out of office.

      Wouldn’t it be nice if we could bring everyone else up? How would you go about doing that? In fact, unless you were to pass a federal law mandating company pensions and specifying benefits — something that is on absolutely no one’s agenda — then the private sector will continue to deal with defined-contribution plans, even as we taxpayers are forced to fund better benefits for public employees than we are able to access for ourselves. It’s unjust and untenable.

  13. Karin Pisiewski

    Yes Dan we can have pensions for everyone and also healthcare if we so wanted as they do in Europe. That people continually vote against their own economic interests is another issue.

    The real issue is you are comparing apples and oranges. Pensions are not 401ks. Social Security is the primary retirement avenue for people, 401ks supplement those. Your question is really pensions vs. social security.

    And since public employees also pay taxes i.e. are taxpayers, it is rather ridiculous to pretend they are not also part of we taxpayers.

  14. Al Fiantaca

    If the state, or any municipality, wants to provide a pension to its employees, that’s fine, but why should that excuse those employees from paying into SS like the rest of us in the private sector do, and why do they provide these dream pensions to those employees under guidelines that would bankrupt most businesses if they tried to do the same? No wonder the privatize SS crowd is crying poverty. There are too many workers not paying into the system. SS is not a personal pension managed by the Federal government. It’s a program paid for by workers to provide subsistence income for retired workers, a fine distinction, but one nonetheless. I’ll gladly sign over my SS to the state if they give me one of those retirement deals, too.

    Oops, rant. That’s what happens when an emotional response is made to a sensitive issue.

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