is this really the case, or is it more about the pension funds were stolen by union administration and politicians?
I don't know of states or municipalities where the union or politicians literally stole the money. What mostly happened was that the Unions demanded more and more and the politicians gave in and there just isn't enough money to pay the pensions.
Huge problem in Illinois, and nobody wants to tackle it, other than to raise taxes. It's the main reason why I moved.
The union has too much control in government. All public sector unions. Not just teachers. I don't begrudge the pensions - they are owed. But the practice needs to stop, just as it did in the private sector - 40 years ago.
My understanding is that in Illinois the public sector unions got some kind of State Constitutional Amendment passed stipulating that benefits cannot be cut. That is a catastrophe.
My understanding is that California and Illinois are in the worst shape as far as states go. Detroit was the tip of the iceberg as far as Municipalities.
Here in Ohio the municipalities do not really have an issue. With the exception of Cincinnati, all of Ohio's public sector employees are covered by statewide systems not municipal systems like in Michigan.
Detroit and Cleveland are in a similar situation:
- Maximum population: ~2M in roughly 1950 for Detroit and ~1M in roughly 1950 for Cleveland
- Population today: <700k for Detroit and <400k for Cleveland
Both have lost approximately 2/3 of their population over the last ~70 years and most of the people still in Detroit/Cleveland are not working (either retired or unemployed). Median household income in Detroit is ~$31k compared to $57k for Michigan as a whole and in Cleveland it is $27k.
Both cities, in 1950 were busy industrial cities with massive Municipal income. Today both are shells of their former selves.
That said, Detroit went Bankrupt recently while Cleveland had a default long ago but is in relatively stable financial shape. The difference is pensions. In Ohio Municipal employees are covered by statewide systems. Therefore, Cleveland has zero pension debt (Accounting rules require them to report a proportional share of the statewide system debt on their books but they aren't actually responsible for it). Detroit's employees and former employees are covered by Municipal pensions and Detroit has nowhere near the money to pay them.
The underlying problem is that up until the 1950's both towns were growing rapidly. Cleveland's population roughly tripled from 1900-1950 while Detroit's increased nearly 10-fold in the same timeframe as the auto-boom centered there took off. Politicians of that era never anticipated that that 70 years later the populations of the two cities would be back to what they had been in the early 1900's.
So long as the cities were growing it was easy to simply kick the pension debt problem down the road. Growth effectively solved the problem. When the growth stopped it became a problem and when the growth reversed it became a nightmare. Less and less people are responsible for the pensions of more and more retirees.
Growth as a solution:Growth solves the pension problem because it spreads the pension obligation around a larger and larger number of workers. Imagine that you own a business with two employees and you promise them pensions. Then your business grows by 2x every ten years (for simplicity I'm assuming the growth happens at the end of the five years):
- In 5 years you have 2 5-year employees, 2 new employees, and no retirees.
- In 10 years you have 2 10-year employees, 2 5-year employees, 4 new employees, and no retirees.
- In 15 years you have 2 15-year employees, 2 10-year employees, 4 5-year employees, 8 new employees, and no retirees.
- In 20 years you have 2 20-year employees, 2 15-year employees, 4 10-year employees, 8 5-year employees, 16 new employees, and no retirees.
- In 25 years you have 2 25-year employees, 2 20-year employees, 4 15-year employees, 8 10-year employees, 16 5-year employees, 32 new employees, and no retirees.
- In 30 years you have 2 25-year employees, 4 20-year employees, 8 15-year employees, 16 10-year employees, 32 5-year employees, 64 new employees and 2 retirees. You have 126 employees paying the pension for 2 retirees. Key stat: Employees per retiree = 63
- In 35 years you have 4 25-year employees, 8 20 year employees, 16 15-year employees, 32 10-year employees, 64 5-year employees, 128 new employees, and 4 retirees. You have 232 employees paying the pension for 4 retirees. Employees per retiree = 58
- In 40 years you have 8 25-year employees, 16 20-year employees, 32 15-year employees, 64 10-year employees, 128 5-year employees, 256 new employees, and 8 retirees. You have 504 employees paying the pension for 8 retirees. Employees per retiree = 63
- Now lets assume that the growth stops and you only have new hires to replace retirees:
- In 45 years you have 16 25-year employees, 32 20-year employees, 64 15-year employees, 128 10-year employees, 256 5-year employees, 8 new employees, and 16 retirees. You have 504 employees paying the pension for 16 retirees. Employees per retiree = 31.5
- In 50 years you have 32 25-year employees, 64 20-year employees, 128 15-year employees, 256 10-year employees, 8 5-year employees, 16 new employees, and 32 retirees. You have 504 employees paying the pension for 32 retirees. Employees per retiree = 15.75
- In 55 years you have 64 25-year employees, 128 20-year employees, 256 15-year employees, 8 10-year employees, 16 5-year employees, 32 new employees, and 64 retirees. You have 504 employees paying the pension for 64 retirees. Employees per retiree = 7.9
So long as we were doubling every five years we had about 60 employees for each retiree. Even if we had ZERO pension savings, we only had to skim 1/60 of a pension per employee so it was not a big hit. Once we stopped growing the number of employees per retiree ballooned to 31.5, 15.75, and eventually 7.9.
MedinaBuckeye's solution, you heard it here first:
Upthread
@847badgerfan mentioned that pensions stopped in the Private Sector 40 years ago. He is generally right, but it didn't happen without a reason. That reason was a law called ERISA:
ERISA is the acronym for the Employee Retirement Income Security Act of 1974. The origins of the law go back to Studebaker's shut down in 1963. The Studebaker Corporation had woefully insufficient funds in reserve to pay their pensions and their employees got screwed. This happened to multiple steel company employees as well.
I'll explain why:
Prior to ERISA, a pension was simply a promise by the employer to the employee. If you worked for me and I provided a pension that was great for you . . . so long as I remained solvent. However, if I went bankrupt, your pension was a claim against the bankruptcy just like any other claim. Ie, you would get pennies on the dollar if you were lucky.
ERISA changed that dynamic entirely. Private sector pensions today are fiduciary arrangements in which the employer is required to actuarially fund the pension as it is earned. The employer cannot access pension funds and if the employer goes bankrupt the pension assets fund the pension obligations and are NOT part of the bankruptcy.
In addition, ERISA created a monitoring system to ensure that pensions were actuarially funded and a tax which funds an insurance system such that if your company's pension goes bankrupt, you will be covered by the Federal Government.
ERISA compliance is extremely costly so the solution for the majority of private sector employers was to simply eliminate their old "Defined Benefit" Pension plans and replace them with newer "Defined Contribution" Pension plans.
Defined Benefit vs Defined Contribution:
Defined Benefit plans are what most government employees and a few private sector employees have. Generally there is some sort of formula that uses all or some of years of service, age at retirement, salary while working (or final salary or last five years' salary or whatever) to calculate the benefit to the retiree.
Defined Contribution plans are the more common plan in the private sector today. IRA's and 401k plans are prime examples. Instead of promising you a set benefit in retirement, your employer today typically contributes a % of your salary to a 401k plan (or similar) and then that is yours. There is ZERO pension liability because the contributions are made in real time as you earn them. When you leave you take your 401k plan with you regardless of whether you leave for retirement in Florida or for a different job.
The problem is that Public Sector Pensions were exempted from ERISA. The solution, IMHO, is to do one of two things:
- Simply drop the exemption for public sector pensions, or
- Create a new and substantially identical law to cover public sector pensions, perhaps PERISA Public sector Employee Retirement Income Security Act.
In either case, as a practical matter, the implementation would have to be phased in so as to provide public sector plans with sufficient time to comply. Those public sector plans that are not too far underwater could get right during the phase in while those that are hopelessly underwater would finally be forced to admit it and stop making additional promises on top of the promises that they already can't plausibly keep.
