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And Here It Comes: State Pension Systems

And Here It Comes: State Pension Systems

Posted by Karl Denninger

For those who think that the state mess isn’t going to have a big impact, you need to read this bill.  This, incidentally, is from a state (Florida) that is allegedly one of the best in terms of its public-pension status – those of you in Illinois, New York, California and others are in much worse shape.

Let me recap what this bill does:

  • Increases employee contributions for all future hires and many current employees by 1% to the pension plan.
  • Actuarial disclosure (and public posting of same) must be regularly performed and corrective steps identified to halt and reverse any unfunded liabilities.
  • Pensions are now computed based on the average compensation during the employee’s term of employment, not the last five years, and explicitly exclude any and all overtime or other “cramming” attempts.  Further, the pension paid is capped at that average compensation.  All “hazard pay” riders (e.g. additive amounts for police, fire and similar employees) are ended.  Lump sum payments, annual leave payments (for vacation not taken) and similar are excluded.  In short, only your base salary counts, and the average across your entire term of service is used, ending the abuse of playing games in the last couple of years to “goose” pension returns.
  • Retirement ages go up materially.  The minimum retirement age is now typically 60, and with the exception of “special risk classes” (e.g. cops) you now need 33 years of creditable service.  Pension payouts now cannot start before age 62 if retiring before July 1st 2011 and 65 thereafter.  For “special risk” classes the prior 55 year age lifts to 60 as of July 1st, 2011.
  • Municipalities can close their defined benefit plan, choosing instead to offer defined contribution plans (e.g. 401k equivalents.)  An existing employee can transfer out of the pension system to that 401k-style system, but if they do they cannot transfer back to the pension system. 
  • Finally, there is no grandfathering – this applies to all current and future employees, without exception.

The language also appears to bar double-dipping and other forms of abuse, but I have not yet fully analyzed the impact of these provisions – and whether they can be gamed.

Nonetheless this is a dramatic change and the lack of grandfathering means that there will be much screaming from various “special interests”, especially public employee unions.  This bill is being kept VERY quiet around here – I’ve heard basically nothing in the media.

Frankly, I still think this plan is too generous on-balance – but the fact of the matter is that corrections like this have to happen.  The abuses of public employees in this regard are well-known and endemic, and must be ended.  So too much the common lies told about these funds – this bill forces public and accurate disclosure of the status of all of these plans, including their unfunded liabilities and the process to correct that deficiency.

You can bet this will be bitterly-fought by the public employee folks.  Too bad.  To those who are government employees and believe they should be able to abuse the pension system and stick the people with the bill, my view is that you should all be fired – and lose your pension benefits entirely.

I’m frankly tired of the view, held by many of these people, that the private sector should foot the entire bill for the profligacy and outrageous acts of government over the previous 30 years. 

Government is directly responsible for the political policies that have led to this economic mess through the lack of law enforcement, the failure of government to regulate and control financial entities, county and state governments that have embraced “grow to the sky” fiscal policies that are mathematically impossible and public employees who believe they are God’s Gift to the public and that we must provided whatever the demand.

It is time for these “government tit-suckers” to be held to account, and to bear the costs that have come from their actions.  This bill is a good start, but it goes nowhere near far enough to actually address the issues.

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