George Rebane
[This is the full length piece the first part of which was published today in the 15jul09 Union under the less dramatic title ‘Public Pensions – a breakdown’, although the latter part could be taken as a double entendre. (updated 16aug09) The full length version appears in the newspaper’s online edition. gjr]
Sophistry - a deliberately invalid argument displaying ingenuity in reasoning in the hope of deceiving someone.
The public pension ponzi is rapidly coming unglued as already pointed out in this newspaper and many others across the land. Only the most glaciated or glazed minds still believe the public sector has not been overpaid and over pensioned. The damage radius of the pension ponzi is much greater and more immediate than Madoff’s, and you are in it whether or not you pay taxes, and especially if you are a government employee.
In this short piece we’ll take a look at a typical pension formula and see how it is ‘used’. Without this basic knowledge, all you can do is react emotionally to the crisis. With it, hopefully, you will be able to direct your efforts productively. California and its pension fund manager Calpers will again be our poster child.
The basic Calpers formula that calculates a government employee’s annual pension is very simple –
Annual Pension = (# of Years Worked) x (Highest Annual Salary) x (Multiplier)
The multiplier is somewhere in the two to three percent range, and is usually set by the jurisdiction (city, county) or agency (CARB, NID). Grass Valley recently raised its multiplier from 2 to 2.5%. The multiplier will also vary for categories of work and retirement age – police and fire usually have higher multipliers.
Important to note right away – any percent change in any of the three factors in the formula becomes the percent change in the annual pension.
To nail it down, let’s use some numbers. Say Sam worked 30 years for Agency37 and maxed his annual salary at $90,000 somewhere along the way (the highest salary doesn’t have to be the one you have at termination or retirement). The current multiplier for Agency37 is 2.5% for retiring at 55. Sam’s annual pension from Agency37 then calculates to
30 x $90,000 x 0.025 = $67,500.
If Sam is expected to live until, say, 83, then Calpers has to have more than $1,062,000 in Sam’s name earning interest at 4.5% per year to throw off 28 yearly pension payments of $67.5K until Sam is expected to die. Calpers will invest this amount in a portfolio with thousands of other retirement accounts, and at retirement, handles Sam’s account as an annuity. An annuity is a fixed amount invested at a given interest rate that starts being drawn down by regular payments made to its owner. At the end of a stipulated number of payments the annuity amount is drained to zero. When Sam retires, this $1,062,000 needs to be in place at Calpers. (And yes, Sam is now a millionaire.)
This ‘given interest rate’ is another big bugaboo and source of a lot of mischief. The higher you assume it is, the less you have to have at the start of Sam’s retirement, and the less Agency37 thinks it must cough up when Sam does retire. For example Agency37’s books cook much better by simply assuming that Calpers investments will appreciate at 7.5% annually instead of the more realistic 4.5% used above. Why? Because with 7.5% Agency37 needs to provide only $781,200 for Sam’s retirement.
But we all understand that this is a game. Agency37 must pay Sam $67,500 a year for life, regardless of what numbers are used to cook the books.
And if somewhere along the way Agency37 decides to ‘upgrade’ its retirement program by increasing the multiplier from, say, 2 to 2.5%, as Grass Valley recently did, then this automatically incurs a huge and instant unfunded liability for the city. The jurisdiction will be underfunded by 20% for increasing the multiplier by ‘only a measly 0.5%’. The uninformed voters, ignorant of the basic formula, will focus on this seemingly insignificant fraction, and go back to their knitting without a clue that their liability just increased 25%. And this has happened thousands of times across California in recent years.
So far this has been pretty simple stuff, but absolutely required if you want to understand and discuss the major cost of government. But this is just the start of where the fun begins on public pensions. We will now see how the future cost of the pension system becomes an unknown to all concerned, how government employees game the system, and how the accountable jurisdictions make it into a ponzi scheme as they hope that the music never stops.
The Great American Labor Squeeze (updated)
George Rebane
[This piece is a continuation of a series that explores the large currents shaking our country and the world. Here we look at the labor shock from which America today has no plan to recover. No one wants to talk about it.]
Let’s start by recalling the fate of John Henry, America’s legendary ‘steel drivin’ man’ when he attempted to save his job by competing with the new steam-driven steel driver.
Before the Berlin Wall came down in 1989, the American worker was competing against about 1,500,000,000 workers in the world economy. The other 1,500,000,000 workers of the world were locked behind heavy gates in the socialist/communist workers’ paradises. Their efforts and output didn’t compete with the workers of America and the free world. Then the wall came down, and over the next three to five years there were ‘suddenly’ three billion workers across the world, all making things and providing services that could be sold across national boundaries.
The economists and sociologists called this The Great Doubling (and here), and it has poured into labor markets hundreds of millions of workers who discovered that they too can find their place in the sun along with the rest of us in the west. Foreign governments immediately saw how they could compete. Just start making things that the comfortable, under-educated, and highly paid western workers made, but make them cheaper and with higher quality. They all learned to skip the learning curve of the post-war Japanese. Every worker in the third world who went from field to factory was a hero to their own family and village. And these eager people went through cutthroat competition to get and keep those jobs while our workers were grousing about not enough benefits and pay for the same output.
We’ve all heard this story, but perhaps, keeping the Great Doubling in mind will give us someplace to hang our hat and reflect as we send our kids off to school to learn skills that are valued primarily in the public sector. Millions from the other billion and a half are spending more time studying math or science books, and then working their tails off to get into the local technical college. In those far off lands all it takes is brains, and a clear recollection that you’ll spend your life staring at the ass-end of a water buffalo in a rice paddy if you ever decide that you ‘don’t do numbers’. All the while the American youngster was taught that s/he had rights – the first of which was to cultivate a totally worthless sense of self-esteem (see update below) – and that the gummint would always come to the rescue.
But the Great Doubling is just one jaw of the pincer that’s putting the squeeze on the 140 million American workers. The other side is made up of accelerating technology in its myriad of forms. Smarter and smarter computers are teeming with nano-technology and genomics to continually stretch the income inequality gap between those who can and will, and those who can’t or won’t. The latter quickly see that their future lies in backing governments that will use the force of arms to provide them with what is not theirs.
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