Thursday, December 23, 2010

An Irrevocable Right to Benefits?

Lisa Fleisher of the WSJ reports, New Jersey Pension Gap Grows:

New Jersey's pension gap grew to $53.9 billion in the last fiscal year, up from $45.8 billion, thanks to market losses and a lack of state funding, according to figures released Thursday by the state.

The looming pension burden, largely ignored by the state for the past decade, has ballooned into a nearly unmanageable problem that will push state and local finances into a corner in coming years, dropping large bills in the laps of already strained taxpayers.

Gov. Chris Christie's administration said the gap, which reflected the state's investment positions as of June 30, highlighted the need for proposed cuts to current public workers' pensions.

The new calculations mean the state has 62% of the money it needs to pay retirement benefits promised to roughly 720,000 state and local workers over the next decade, down from 66% a year earlier. But the state is using an annual 8.25% rate of return, which critics say masks the problem by being overly optimistic

"As all states, they're getting it wrong," said Eileen Norcross, a George Mason University researcher who has studied New Jersey's budget and pensions. Using a 3.5% rate of return, she had estimated the previous liability at $173 billion.

For most of the past decade, New Jersey politicians from both parties have skipped required payments to the pension fund while giving increases in benefits to workers. Faced with a tight budget, Mr. Christie skipped a $3.1 billion payment this year, which experts said all but guaranteed a higher gap next year.

Mr. Christie, a Republican, wants to reverse a 9% pension bump workers received in 2001 under a Republican administration. A spokesman for Senate President Stephen Sweeney said he would work on changes that would "ensure workers who have been promised a pension get one," adding the governor needed to fund the pensions.

Unions argue their members have an irrevocable right to benefits they have earned, and the governor has said he will meet the unions in court. Public workers pay into their pensions at various rates—8.5% of salary for police officers and firefighters; 5.5% for teachers, state and municipal workers; and 3% for most judges.

"Once again, the Christie administration wants to make middle-class retirees pay the price for the disastrous consequences of reckless speculation and financial malfeasance on Wall Street, and for the legislature's continuing failure to fund the pension," said Bob Master, political director for the New York-area Communications Workers of America.

Mr. Christie in March signed a slew of pension and benefits changes pushed by Democrats but said they didn't go far enough. In September, Mr. Christie unveiled further proposals targeting current workers, including raising the retirement age to 65, requiring all workers to contribute 8.5% of their salaries to pensions, and eliminating cost-of-living increases.

In a statement, state Treasurer Andrew Sidamon-Eristoff said Thursday, "Unchecked, the cost of this impossible burden will fall not just on the taxpayers of today, but on future generations of New Jerseyans."

Average annual pensions for new retirees as of July 2009 were roughly $39,500 for state workers, $46,400 for teachers, $73,500 for police officers and firefighters, and $105,600 for judges.

So who is right, unions or the Christie administration? At this point, it doesn't matter. Yes, Wall Street's elite made off like bandits, squeezing the middle class once again. But Governor Christie, who spoke with 60 Minutes this past Sunday, is right when he says public sector workers and retirees will get little sympathy from private sector workers who saw their 401K plans implode in 2008. Moreover, with state budgets deep in the red, there is no money left to pay for public works projects, let alone generous public pension benefits. All stakeholders need to make concessions or risk deeper cuts down the road.

If I were the unions, I would use this as an opportunity to push for better governance at the large state public plans. And by better governance, I mean make sure that alignment of interests are there. As for state governments, they have little choice but to raise the retirement age, cut benefits, and partially or fully remove inflation protection on public sector pensions. They should also revise their rosy investment assumptions for state plans.

This may seem unfair and unreasonable to public sector workers, but to quote a strategist who I spoke with yesterday, "deleveraging sucks". You can't have pensions apartheid between the private and public sector. And there are no "irrevocable rights to benefits". Just look at the mess Greece and Ireland are in right now. When the money runs out, cuts are guaranteed.

That's one of the reasons why I was disappointed with the meetings at Kananaskis. A lot of people are looking at politicians with gold plated pensions asking themselves why couldn't they expand CPP and provide Canadians with a more secure retirement? I know, the critics will holler: "it's just another payroll tax". They're wrong and shortsighted and I'm embarrassed to say this is the best Canada could come up with -- another giveaway to banks and insurance companies. And who's going to end up bailing out PRPPs when they flop? Who else but Canadian taxpayers!

There was a time when Canada led the way in terms of health, education and social economic policy. Our leaders need to rethink expanding CPP. If you do it right, you'll bolster the private and public sector. But if you do it wrong, or introduce half-baked measures, you're better off not doing anything at all. I'm serious, I'd rather see no change than reforms that are doomed to fail.

***Update***

Read Mish's excellent comment on this subject.