Free Markets, Free People

The teacher’s rotten apple

Another in a long line of reasons I don’t want government running anything that has to do with pensions, health care, railroads, post offices, etc. When it comes to running something properly and to fulfill the purpose for which it is formed, any examples which exist can most likely be counted on one hand. Public teacher’s pensions aren’t one of them:

The crux of the problem is the gap between assets and liabilities affecting the fifty-nine pension funds that cover most public school teachers in America. Some of these are general state-employee pension funds, while others cover only teachers. Among the findings of our study of these funds:
* All fifty-nine pension funds studied face shortfalls.
* California, the most populous state, has the largest unfunded teacher pension liability: almost $100 billion.
* The worst-funded plan in our sample is West Virginia’s, which we estimate to be only 31 percent funded.
* Five plans are 75 percent funded or better: teacher-dedicated plans in the District of Columbia, New York State and Washington State and state employee retirement systems in North Carolina and Tennessee that include teachers.

The general picture is not a good one. According to the fifty-nine funds’ own financial statements:

– Total unfunded liabilities to teachers—i.e., the gap between existing plan assets and the present value of benefits accrued by plan participants—are $332 billion.
According to our more conservative calculations:
* These plans’ unfunded liabilities total about $933 billion.

And for those who would like to blame this all on the beating the stock market took, huh uh:

* Only $116 billion, or less than one quarter, of this $600 billion discrepancy is attributable to the stock market drop precipitated by the 2007 financial crisis.
* The Dow Jones Industrial Average would have to nearly double overnight to make up for the present underfunding of these plans.

Instead it is another example of “what is law for me is not for me” governance:

Under current guidances, which are prepared by separate bodies, state pension funds are able to set aside fewer assets than their counterparts in private companies to cover equal liabilities. Private pension plans may invest in stocks and other higher-risk assets, but those plans may not reduce their pension funding on the basis of the superior performance expected of these types of assets. This is because those higher returns are accompanied by greater risk that returns will fall short of expectations. Yet pension funds’ obligation to retirees present and future does not diminish accordingly.
By contrast, public pension plans are permitted to base the amount of money they need today to meet their future obligations on the higher expected performance of stocks, allowing sponsors to cut their contribution rates and hope the markets perform as anticipated.

And when the markets don’t “perform as anticipated”, you, dear taxpayer, are left holding the empty bag while government, which feels bound to keep its promises, reaches for your wallet. Either that, or teachers don’t get the pensions promised.

So we have Social Security in a deep, deep hole, state pension funds in a deep hole and teacher’s pension funds right there beside them. Add to that the unfunded liabilities of Medicare and Medicaid.

Something’s got to give.



14 Responses to The teacher’s rotten apple

  • In the private sector, the solution would be straight-forward (but I wouldn’t call it easy).
    Merely divert monies that would go to existing teachers to retired teachers by use of a “pay freeze”.  The monies that would normally go to pay increases going to the retirement funds.
    There is no plethora of money laying about, so the money at hand would have to be spread around.  Sort of the idea of “spreading around the wealth” … I’ve heard that somewhere before … hmm.

  • “Something’s got to give.”

    More like ‘Who’s got to give’ ;That’s what us taxpayers are for.

    • There aren’t enough taxpayers to fund this and the many other pension plans that are underfunded.

      • Anybody have a guess at how much the Federal pensions are going to cost over the next 10-20 years?

  • to play devil’s advocate… isn’t the common private sector solution to just say “your pension was underfunded, so too bad, you get no pension”?
    That’s not really the private sector doing better than the government.  I can see pensions as a concept being a bad idea, whether public or private, but this really doesn’t seem to be an example of government being notably worse.

    • I think it’s worse in the long run.  Instead of admitting that the fund is failing and forcing participants to go through the pain that results, the failure is dragged out until it is much larger, and more and more good money is sucked in and effectively wiped out.  As with any other accounting procedure, the private sector does not have the luxury of being allowed to bend the rules flagrantly and openly, the way the government does.

    • Tito,

      If the company goes out of buisness you are not going to get a pension.

      The problem with the public pensions is that they will drive the country out of buisness. The public pensions are a reward to the public employee unions and are used to buy votes from public workers. The government will do what it can to pay these pensions, and the unions will sue if they don’t. Nevermind that fire and police service is cut, military is cut, taxes go through the roof (depressing the economy), the national debt soars, and the government prints more money to cover everything.

      Private pensions, particularly those negotiated by a union, are likely in the same boat. In theory, the company will agree to a pension that it can afford. When you start adding in unions and bailouts to the mix, perhaps not so much.

      This is a moral hazzard issue. The worst case is the government case, since in the end we will all pay for the government failure. If GM went off the cliff because it negotiated poorly with the union, GM would have been largely at fault. Now that GM stands for Government Motors, and isn’t going over any cliff due to our tax money, the unions can sue for more money to cover their pensions and the Democrats will at least attempt to once again bail out GM.

    • Pensions are a bad idea – but unless you feel like paying for underfunded pensions for teachers (you’re not asked to pay for underfunded pensions in the private sector), then which is worse? Because unless I miss my guess, you are going to be hit up to pay for the poor management of teacher’s pension funds by government.

  • The Colorado PERA (Pub Emply Retirement Act) is predicated on growing something like 8.5% a year, which is the growth rate that Warren Buffet generates.
    So just who are the masters, and who are the servants?

  • The only stable pension is the one  you control yourself, directly.
    (And re. the Post Office, at least that’s within the Federal government’s Constitutional mandate. Even if they screw it up, at least it’s a legitimate power. The monopoly, not as legitimate.)

  • Look to Ireland. It has to be pay and benefit cuts. I would include some pension cuts in there as well. They make these progressive, so nobody is hurt too much.
    0-40,000 – Cut 7.5%
    40,0000+  – Cut 10%
    80,000+ – Cut 15%
    Over 50,000+ Cut 5%
    Note this also means you don’t “cut” services. These people still show up for their jobs, just at more reasonable pay grades…or they can go look for work in the private sector.

  • Oh, I would love to see the protests by the fire chiefs and school district administrators in California who have 200K pensions and refuse to take a 10,000 dollar hair cut.