STUMP » Articles » Around the Pension-o-Sphere: an Old Tale of Pension Fraud, Illinois Spiking, Russian Revolts, and More » 6 August 2018, 18:09

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Around the Pension-o-Sphere: an Old Tale of Pension Fraud, Illinois Spiking, Russian Revolts, and More  

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6 August 2018, 18:09

Yeah, I’ve been a bit poky lately. You can read this, if you want an idea. Basically, I spent the weekend lying down and chilling as much as I could.

Memory Monday is on hiatus for now, partly because the newspaper website I use is down. I emailed the folks there, and they told me their server went pffft, and it being summer and all (and this is some sort of library non-profit project), who knows when it will get back up. I assume it will eventually, but I’m guessing after Labor Day.

Which is perfect timing for the outbreak of Spanish flu back in 1918, but I do have a historical tale to tide you over for today.

STEALING A CIVIL WAR PENSION

It’s interesting what pops up due to my pension news alert.

A Pension Goes Astray, from a 1946 publication. I assume it just got added to the Iowa collection, which is why my search alert had it in there. I’m glad I took a look at it, though it looked very different from most of the pension stories I link.

You can read the whole thing here, but here’s the basic set-up: a Civil War veteran, Mr. Robbins, refused to file for an army pension til about 20 years after the war (he saw the pension as charity for poor people), and it wasn’t til he was getting old that friends convinced him to file for the pension…at which point the government said they’d been paying him the pension for 20 years already.

Here’s the end:

The investigator later found that the pension
checks which had supposedly been going to Mr.
Robbins were being received and cashed by a
man in a small town in Colorado. From the investigator’s
description, Mr. Robbins identified
him as a man named Harrison who had lived on a
neighboring farm more than two decades earlier.

This former neighbor, having learned of Mr. Robbins’
attitude toward pensions, had collected sufficient
data to make an acceptable application,
moved to Colorado, applied for the pension, and
had drawn it for a full twenty years.

After discovering the fraud and settling with
Harrison, the investigator returned and told Mr.
Robbins about it. Harrison, he said, had carried
his deception to an exceptional degree. He ran a
hotel in Colorado, had joined the local G. A. R.
post there, and shortly before the investigator arrived
had been elected post commander. His
hotel was headquarters for the post.

Harrison met the trains to get business for his
hostelry and so met the investigator when he arrived.
They went to the hotel together and when
the investigator told him that he wished to see
him privately they went upstairs to a bedroom.
There the investigator confronted him with evidence
of the fraud and Harrison confessed.

Meanwhile Harrison’s wife heard the men talking
in the room, joined them, and was informed of
her husband s deceit. She was evidently a woman
of direct action, for she at once accused her husband
of “two-timing” her and then assaulted him
with her fists with such violence that the man was
well battered before the investigator could separate
them. Then the investigator took Harrison
down to the lobby of the hotel and introduced him
to a group of old soldiers there, his former comrades
in the G. A. R. post, as a fraud and a
scoundrel.

The government, oddly enough, preferred no
criminal charges against Harrison and when Mr.
Robbins asked the investigator about this he replied:
After what the old lady did to him and
what the old soldiers said to him, I thought he
had about punishment enough.”

Sounds like one of those just-so stories (the government didn’t prosecute?), but it’s still a bit amusing.

ILLINOIS SPIKING

I’ve got a hyuuuuge backload of Illinois stories, one related to Chicago that I’m putting off til another time. Because Chicago deserves its own post.

As a reminder, pension spiking is:

“Pension spiking” means “goosing” either final average salary or service credit in order to boost pension benefits in an artificial way.

Some ways this is done: extremely large raise the year before retirement; Sick days not taken added to service credit;a lot of overtime unusually logged before retirement… which is used to calculate the base pension amount.

As spiking does boost pension costs right before retirement, and thus is usually not baked into valuation assumptions, this can be a source of pension underfundedness. Some states have tried to put in anti-spiking measures, but sometimes it doesn’t work.

The “sometimes it doesn’t work” related to spiking of Illinois (non-Chicago) teacher pensions… the way the teachers fund in Illinois (outside Chicago) works is that there are certain percentages from the teachers that are supposed to be contributed (though some school districts pay it, instead of the teachers), a certain percentage of payroll that the state contributes (not the school district, iirc), and there are penalties for spiking via large end-of-career salary increases. These penalties weren’t large enough to prevent spiking.

The piece on Illinois Teachers spiking was from 2015.

Let’s see what’s up now.

I’ll have Mark Glennon set the scene:

Some background: In 2005, Illinois took a small step towards reducing spiking. Under the law passed then, any school district that spiked a teacher’s salary more than six percent in any of the near-retirement years on which pensions are calculated would have to bear the increased pension cost of exceeding that limit. The cost to the pension of some of the spiking, in other words, wouldn’t get passed along to state taxpayers.

That’s not much. Pension spiking was still allowed. It was just that the pension impact of exceeding a six percent salary increase was shifted to the school districts. And a six percent annual salary increase is very high.

Predictably, spiking reduced somewhat but remained prevalent. Details on that appeared in an Illinois News Network report just last week.

So, earlier this year, the state acted to tighten the law a bit. It reduced the six percent threshold to three percent. That’s still not very tough because school districts are still free to spike near-retirement salaries as much as they want, though they must bear the increased pension cost of exceeding the three percent cap.

But now there’s a movement to roll that back. Newly proposed Senate Bill 3622 would undo that change by taking the threshold back to the six percent. In other words, the state would revert to a spiking control mechanism that didn’t really work.

So, same old, same old.

The ratcheting back to a 6% threshold is sponsored by two Republican politicians seeking re-election (who/whom, y’all), and the Illinois teachers union is pleased as punch.

The union press release: IEA urges support of SB 3622, looks to reinstate 6 percent, end-of-career retirement benefit cap for educators

The Illinois Education Association (IEA) today encourages the Illinois General Assembly to consider SB 3622, a bill introduced by State Sen Dale Fowler (R-Harrisburg) that will revert the end-of-career retirement benefit for educators in the Teachers’ Retirement System (TRS) and State Universities System (SURS) from three percent back to six percent.

“Governor Rauner and the Illinois General Assembly did a disservice to our educators by capping end-of-career benefits at three percent,” said IEA President Kathi Griffin. “Passing SB 3622 is one step to address the issue. We encourage lawmakers to stand with Senator Fowler in support of our teachers’ and our students’ futures.”

The TRS and SURS shift to three percent was hidden on page 741 of the BIMP bill (HB 4332) and passed along with the budget back in May sparking immediate outcry from teachers across the state. Because educators can qualify for retirement benefits after five years of employment, the three percent cap encourages school districts to limit all educator salary increases to three percent. The cap limits financial compensation and deters teachers from furthering their education and taking on additional coaching or tutoring roles. All of this makes the teaching profession a less desirable career choice and ultimately lowers the quality of education our students receive.

“Many parts of Illinois are in the midst of a teacher shortage crisis – and I believe lowering the cap will only make that worse,” said State Sen. Dale Fowler (R-Harrisburg). “This is why I’m sponsoring this legislation.”

Glennon goes through the press release, detailing the outright lies and deceptions.

First, the benefits weren’t capped at 3% at all! Even when the cap was 6% in final year increase, lots of school districts blew through that. Obviously, the prior bill (and the current one) merely has the school districts pay for these bumps… and given the relatively high valuation rate, they’re not really paying for the full cost of that final year spike.

Here’s one of Glennon’s points that shows the weakness of many such state-based pension plans when the state is responsible for the pension funding, but local governments set pay:

• Cash strapped school districts can’t afford to be burdened with the cost of pension spiking, so state taxpayers must, according to the IEA.

The pension system is already regressive because it allows wealthy school districts to push far larger pension burdens onto the state than poorer ones. See our report on that linked here. Rolling back current law will make that worse because poorer districts don’t have the cash to pay the salary increases for spiking. Wealthy districts, flush with cash, will continue to do as they please.

And the state just gave schools an additional $350 million. Under the new school funding formula, that will increase by another $350 million each year. By year ten, schools will be getting another $3.5 billion per year from the state.

It’s unclear whether Senate Bill 3622 will get real traction. Perhaps it’s just an election year stunt for lawmakers like Anderson and Fowler.

One who apparently won’t hesitate to stand up to the IEA is Rep. Allen Skillicorn (R-Crystal Lake). He emailed me this on the bill, which should be unanimous in Springfield:

“SB3622 is an example of the shameful special interest greed in Springfield that is bankrupting our state. In 2018 we changed the law to discourage school districts from spiking pensions. Now the IEA wants to change it back just weeks after it went into effect.

“I will be a HELL NO on this bill or anything like it! Anyone that publicly supports spiking pensions is out of touch with mainstream Illinoisans. [His caps.]”

I have a compromise to offer.

If it’s really too expensive for the school districts to pay for these end-of-year pension spikes, then clearly the right thing to do is for the teachers themselves to pay the full freight for their spike.

If they really want it that badly.

A few more on spiking in Illinois:

Given the fundedness (or lack thereof) of the Illinois TRS, they might not want to encourage their members getting piggy.

This is what the Public Plans Database show through fiscal year 2017 for amounts that were supposed to be paid into the fund:

That’s as PERCENTAGE OF PAYROLL.

Holy crap, most police and fire funds I’ve looked at aren’t that high, and those guys tend to retire young.

RUSSIANS REVOLT OVER RETIREMENT AGE

I noted that the Russian people weren’t too happy with a plan to raise their retirement ages, and I explained that, no, setting the retirement age at 65 didn’t put it past death, not even for most Russian men.

But it’s still going on, apparently. Poor poor Putin.

For amusement purposes, I will quote an actual strong man:

Alexander Shlemenko speaks out against Kremlin policy to raise retirement age in Russia

The former Bellator middleweight champion expressed his discontent with the Kremlin’s new bill to raise Russia’s retirement age.

On the opening day of the 2018 World Cup, Russia’s State Duma (lower legislative house) approved a bill that would raise the retirement age in Russia from 60 to 65 years for men and from 55 to 63 years for women.

The bill, which was buried amidst a euphoric month of World Cup celebrations, has since led to a wave of demonstrations across 30 Russian cities. Rallies were held in Moscow, where protestors waved banners and signs questioning the government’s decision. The ruling United Russia party has also seen its approval ratings drop to levels reminiscent of the anti-Kremlin protests in 2011. At the time, protestors rallied against Russian president Vladimir Putin’s third term as president.

Among those who disapprove of the Kremlin’s latest policy shift is MMA fighter Alexander Shlemenko, who spoke out against the State Duma’s pension plan.

“I do not support [the bill]. I think this is a bad initiative,” said Shlemenko. “Such a reform will cause discontent among the citizens of our country. In fact, people work so much, but pensions are small. And if you raise the retirement age, then what will it lead to?”

Yes, but I have a feeling that currently fairly low retirement ages, when Russia’s finances are hit by relatively low oil prices, strain the country’s budget a bit too much.

Maybe Putin can pay the pensions in vodka and cigarettes.

I don’t want to be too flip: here is a story about 6 specific Russians:

Russia’s rising retirement age: six real stories

….
Viktor Moshkin: “Who will need me if I fail the medical examination?”
I live in Ekaterinburg, and I will soon be 55. I work as an engineer in the Sverdlovsk Regional Radio and Television Broadcast Centre, a telecommunications service provider. My duties include working with electrical installations and devices, servicing the radio and TV broadcasting equipment, and working in increased risk environments. I work under considerable pressure and I am now experiencing certain health problems. I was hoping to retire at 60.

Previously I worked at high altitudes, however I had to stop because of the health issues – there are younger people who can do this. Of course, I would have liked to retire after working five more years. However, it turns out that I will now have to wait twice as long. The main problem is that each year the company employees have to undergo a medical examination. With age, it becomes increasingly difficult to keep up with the health requirements. Who will want me if I fail the examination? Finding a job at 55 is impossible. They keep telling us that workers are wanted everywhere. But what kind of workers? Guards, janitors? You need to have your health for those jobs too.

…..
Marina Tsai: “Despair – that’s what I’m feeling at the moment”

I’m 51 and I live in St Petersburg. I am a designer in a small company. I was planning to retire in four years. I find it difficult to move around because of arthritis in my knees, and one of my eyes is very short-sighted. However, I haven’t been categorised as having a disability. Despair – that’s what I’m feeling at the moment.
…..
Ekaterina Denina: “My father will not live to see his pension”

Our whole family will suffer because of this reform. We live in Bryansk, my father Sergey turned 55 this March, and my mother Valentina is now 54. On 1 July, our whole family went out to join the strike against raising the retirement age. I also wrote a letter to the Presidential Administration. We understand that our father will not live to see his pension. He constantly has to be hospitalised because of his condition and his job, and we are praying for him to still be alive by the time he’s 60. My mother had to start working as a janitor, but her joint pain is so strong that she can barely sleep at night. And the government is asking them to keep working.
…..
Yuliya Voyevskaya: “We were waiting for Moscow to stand up”
This is a blow straight to the heart. This government is the same age as us. We don’t need to explain to our children how we lived during the 1990s, they know it all too well: our pensions will be very limited because we all have gaps in our employment records. We were living in the conditions of a wild market. We were hoping that we will receive fixed pensions because each of us lost 10-odd years of our work experience.

Our generation is experiencing never-ending reforms which are never to our advantage. In the 1990s we found ourselves in a state of constant learning because the new market economy was emerging. Forty years later we are no longer needed anywhere. They are now telling us that our knowledge is obsolete, and that they are looking for the young ones with contemporary education. In order to remain employable, me and my husband got ourselves three majors each. I’m now 50, and I work as a distribution operator for the post office in the city of Balashikha.

I am not planning to retire in five years, but I was hoping for my pension payments. I had two difficult operations over the last two years, for which I received around 200,000 rubles. And so, we’ll just keep on killing ourselves.

We were all waiting for Moscow to stand up, and we would all have gone to protest without hesitation. People are seriously discussing this everywhere I go, but nothing is happening. We are no longer sure if we should expect any protests anymore. People are trying to come up with some ideas, but what should we do next?

In some of these cases, people are very ill and really can’t work. In a few others, these people just wished they could have retired younger… but I see nothing about saving money to that end. I don’t necessarily blame them — I’m not sure how much I would have trusted the Russian financial sector, if I had lived through the 90s there.

But let me bring this back to somewhere I know a lot better: the U.S.

Nothing wrong if you want to retire at age 55… IF YOU SAVE FOR IT. And it can cost a lot to retire that young, depending on what sort of lifestyle you want to lead.

The issue is that no, you don’t drop dead at your life expectancy. You life expectancy can be 82 (just making this up) based on your current info… but non-neglible percentages make it to 87, 92, 97….even 102.

And that’s just one source of uncertainty. What if you end up getting disabled and need help at home? Do you have that contingency planned for? It need not be explicit insurance, necessarily, but if you have no family/friends nearby who you can rely on (or if you have way too small a support base), then what?

But back to Russia: a big problem was that these reforms had been put off for way too long. And there are some rather drastic increases. With respect to the women – sorry, the new retirement age was moving up from 55 to 63, and the 55 retirement age was always absurd for women:

Come on. Russian women have mortality patterns similar to other European women. If anything, the men’s retirement age should be at 63, and women at 65… or even higher.

More on Russians objecting to the new, higher retirement ages:

I find it grimly amusing that an explicitly Communist politician is decrying this move… though his idea of a fix is to not change anything and run out of money (which kind of sunk the last time Russia tried the Communist thing.)

I can just imagine Stalin having no problem with this issue — when you have millions die for your ideology, what’s a few more to keep pension costs down?

ACTUARIAL QUICKIE

(tee hee)

Remember how I pointed out a call for comments on a new draft exposure actuarial standards of practice on valuation of pensions?

When I posted, I had seen about 30 responses.

There ended up being 62.

I want to point out in the list (and go there, read them yourself) that there are several letters from public pension funds, many from actuaries representing themselves (many of whom have extensive public pension practice, and some with multiemployer pension practice — single employer pension valuations are much more regulated than those other two), some from organizations representing various politicians/bureaucrats, and a few from unions.

I may do a run-down of these letters later, but thought some of you would be interested in reading them for yourselves. I am sure I will have some pungent comments later — just because you submitted a comment letter before I could officially respond (my letter made general response to specific critiques I saw in earlier letters) won’t stop me from responding here.

Heck, given there are 62 letters, I could have that as a regular feature for several weeks to come. Stay tuned!

Here is the discussion thread at the Actuarial Outpost (not much discussion as of yet), and Kenny there linked to this page, which combines letters into single files (mostly).

SMATTERING OF PENSION STORIES

There is ongoing coverage of multiemployer pension bailouts, which we have to look forward to this fall, but let me just pull out a few stories among the dozens I saw last week which may interest you:

While I often give a lot of time to the most obviously screwed-up pension systems of Illinois, New Jersey, California, and Kentucky (as starters), the pain is all over the country.

As per this WSJ piece: The Pension Hole for U.S. Cities and States Is the Size of Germany’s Economy

For the past century, a public pension was an ironclad promise. Whatever else happened, retired policemen and firefighters and teachers would be paid.

That is no longer the case.

Many cities and states can no longer afford the unsustainable retirement promises made to millions of public workers over many years. By one estimate they are short $5 trillion, an amount that is roughly equal to the output of the world’s third-largest economy.

Certain pension funds face the prospect of insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed. It is increasingly likely that retirees, as well as new workers, will be forced to take deeper benefit cuts.

….
The public pension arose from the aftermath of the U.S. Civil War. New York was the first city in the U.S. with a pension fund for injured police officers in 1857 and then for firefighters in 1866. The concept of a public pension plan for government workers became widespread in the early decades of the 20th century. The understanding was employees would accept relatively lower pay in exchange for richer, guaranteed benefits once they retired.

When times were flush, politicians made overly generous promises. Public-employee unions made unrealistic demands. High-profile municipal employees, such as coaches at public universities, have drawn fire for what some consider too-rich retirement benefits, while some first responders scored rich early retirement and disability arrangements.

Extended lifespans caused costs to soar, as did increasingly expensive medical care, which unions put at the center of contract negotiations, among other benefits.
…..
The prospect of lower benefits is particularly daunting for pensioners in their 60s. Those older are likely to die before a large reckoning, while those younger have years left in their careers to make new plans. But many in their 60s have spent four decades assuming a financial promise that is no longer guaranteed.

There are few easy solutions. Cities and states can either raise taxes, cut services or become more aggressive about reducing benefits to retirees. For many years governments were unwilling to take these steps because they weren’t politically palatable, although public appetite to cut public-employee benefits is emerging, in states including Wisconsin. Many governments opted to change benefits for new employees, which in some cases didn’t fully alleviate funding woes.

…..
Retirees in other cash-strapped states said they expect to lose some of what they have been promised. “It may sustain itself before I die,” Len Shepard, 68, a retired teacher in Pennsylvania said of the pension system in his state. “But I don’t see how it can continue to do so.”

It’s sad. I like Elizabeth Bauer’s idea that all public sector employees be in Social Security with the rest of us, but given the 35-highest-paying-years aspect, it would only help as a backstop in the long run, and not the Baby Boomer tsunami run.


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