STUMP » Articles » The Moral Case for Pension Reform » 24 February 2020, 20:30

Where Stu & MP spout off about everything.

The Moral Case for Pension Reform  


24 February 2020, 20:30

Elizabeth Bauer wrote: The Bottom Line: Illinois’ Public Pension Debt Is A Moral Issue

I will pull out a small bit:

And it is no mere coincidence that a state with such a legacy of corruption is so severely in debt. Remember, Illinois is ranked second-worst according to Truth in Accounting, with a pension debt of $139 billion (by its reckoning) and a further $56 billion in unfunded retiree healthcare promises. Only New Jersey is worse, because of the state’s smaller size. And Chicago is second-worst of the 75 largest cities; New York City is worse only because its finances include the liabilities for its school system, which is a separate entity financially in Chicago.
Corrupt state and local government officials who rationalize skimming a little for themselves, and voters who overlook this if they think their interest group (neighborhood, union, ethnic group, etc.) benefits from the state or city’s spending — it’s an attitude that led columnist Mike Royko to pen his proposed new motto for the city, back in 1967: rather than Urbs in Horto (city in a garden), it should be Ubi Est Mea, “Where’s mine?”

And this is the very same mindset that accepts unfunded/underfunded pensions, in which the costs are not placed on other taxpayers in the here-and-now, but rather the people on whom the burden is being placed is the next generation.

Read the whole thing.

I have a somewhat different take, and yes, it’s a moral issue.


One can concentrate on the effect on the taxpayer paying for services done decades before, which is what Elizabeth Bauer writes about. Current services get cut in order to pay for prior generations’ operational costs.

The equivalent is passing on your credit card debts to your kids when you die. You know, those credit card debts accrued from living too high on the hog. [note: credit card debts aren’t passed onto your kids. Yes, it may wipe out an estate’s assets, but it doesn’t go to the next person in line once those are exhausted.]

One can talk about the bondholders, even, and no, they’re not all vulture hedge fund folks. A lot of the people hurt in Puerto Rico’s de facto bankruptcy are (non-government) retirees within PR itself, or retirees elsewhere.

Because you need to realize: all cash flows will get squeezed as assets in the pension funds run out — the notorious asset death spiral:

Let me explain the asset death spiral, which is when balance sheet weakness manifests itself in something really serious: a lack of cash flow to cover promised benefits.

Having to liquidate assets to cover cash flows is not necessarily a bad sign — if one has a decreasing liability (which means decreasing cash flow needs in the future).

This is not the case for Chicago. Nor Illinois.

One has to sell off assets when investment returns and pension contributions are too low to cover current cash flow needs. This reduces the asset amount for the pension funds…and if cash flow needs are increasing, you find that one has to liquidate more and more assets… until the fund is exhausted.

I’ve been able to project such exhaustion of funds, and we’ve seen that occur with a few pension funds already.

We can see a few pension plans currently in the asset death spiral:

Most aren’t at this extremity, but a large market drop? And pension payments can’t be adjusted in response?

Some are not in a good place to recover from such a setback.


As the money runs out, and other sources of cash are tapped out, this can end a couple of ways.

One way is official municipal bankruptcy.

In bankruptcy, pension benefits can get cut. They have gotten cut for current retirees in Detroit.

A retired widow, Debra Westbrook spends most of her time caring for her bedridden adult son.

But it’s become more challenging, she said, after the city’s 2013 bankruptcy dealt a blow to her pension and health care that “threw everything into chaos.”

These days, the 64-year-old former Detroit water department worker said she’s struggling to cover more than $1,400 in monthly costs for her son’s care, her mortgage, insurance and other bills.

“It’s eating me up alive,” said Westbrook, who has seen her monthly pension drop from about $2,400 to $1,900 and is paying $788 a month for medical coverage. “Every month I’m robbing Peter to pay Paul.”

Westbrook worked for the city of Detroit for 33 years before retiring in 2010 as the city struggled with its finances.

Ms. Westbrook had retired when she was about 58 years old, after 33 years of service [this article was from 2018]. That is quite young to retire, but I am sure that it was within the promises made by Detroit.

A promise Detroit had no business making.

Many people were hurt by Detroit’s bankruptcy: bondholders (and, again, many of those bondholders would have been just as sympathetic as Ms. Westbrook), taxpayers, residents, retirees, employees.

Donald-Ray Smith worked 38 years for Detroit, starting as a bus driver in the 1980s. He went on to earn a bachelor’s and master’s degrees, ascending the ranks from a junior transit planner to a principal city planner.

When he retired in 2012, he was looking forward to a “great pension.” But the base cut coupled with the annuity recoupment amounts to a loss of $714.39 per month for Smith.

He was among a number of retirees involved in a lawsuit against the city, arguing they deserved the pension that was promised before the bankruptcy filing.

A federal appeals court ultimately ruled 2-1 in the city’s favor, saying the emergence from bankruptcy in 2014 was the result of a series of major settlements between the city and its creditors and must not be disturbed.

That’s a cut of about $8,600 per year. We’re not told what percentage cut that was, but let us not worry about that. That is a substantial amount of money for many individuals.

The judge on the Detroit bankruptcy case said this:

“I’m not underestimating the pain, not just financial pain but the broken promise that was there. But there were decades of broken promises,” Rosen told The Detroit News. “The nature of bankruptcies is contracts get impaired. It’s a sad but true fact.”

When there’s not enough money to go around, everybody can get hit.

Public employees are delusional if they think that the promises made to them will always be made good if there wasn’t money paid in at the time of the original service adequate to cover that promise.

That next generation needed to pay for the old promises doesn’t always show up.


The Detroit situation was pretty bad for retirees.

At least the Detroit retirees had a pension fund with some assets in it. Assets that neither city nor bondholders could grab.

It can be even worse.

In Prichard, Alabama, the assets completely ran out.

Prichard, Alabama, which experienced a population decline of approximately 50 percent over the past 50 years, filed for bankruptcy in 1999 after it was unable to pay approximately $3.9 million in delinquent bills. In addition to the unpaid bills, Prichard also admitted to not making payments to its employees’ pension funds and, even though the city had withheld taxes from employees’ paychecks, the city failed to submit such withholdings to the state and federal governments.
While in bankruptcy, the city successfully revised its budget so that it no longer operated at a deficit. However, Prichard was still unable to meet its pension obligations. In 2009, Prichard filed for bankruptcy for the second time in order to stay a pending suit brought by its pensioners after it failed to make pension payments for six months. In its chapter 9 petition, the city claimed that during the previous year it had operated a $600,000 deficit on its $10.7 million budget. Further, Prichard had failed to make a $16.5 million payment to its pension fund under its previous plan of adjustment.

That piece was from 2013.

And by “failed to make pension payments”, they don’t mean that the sponsor didn’t make contributions to add to the pension fund.

It’s that the retirees did not get any payments at all.

That lasted longer than 6 months, by the way.

From 2009, there’s this: Life without Prichard pension: Couple’s savings could be gone by Christmas

The life Alfred and Jacqueline Arnold spent their careers planning together could be gone by Christmas.

They met on the streets of Prichard about 30 years ago. He, the city’s first black firefighter, was driving a truck to a blaze. She, the city’s first female police officer, was directing traffic.

He put in 35 years of service, and she put in 40 years.

“We worked there for a long, long time,” Alfred Arnold said. “The city never paid any big salaries, but we always knew that one day we could retire on this money and kind of live halfway comfortably. That’s what we depended on all these years.”

From October 2010: Some pensioners still waiting to get paid

After not getting paid for almost a year, do Prichard pensioners believe a court ruling Tuesday will help them get some money?
When asked how hopeful she was that she will ever see any money, Berg said, “I’m very hopeful, extremely. I know there’s money in the pension fund. I know there’s at least $600,000.”

It was about 150 workers. $600K split evenly is only $4K per retiree.

That’s not a lot to retire on.


Ten years ago, this is what I wrote:

Guys. I mentioned the Pritchard thing back in 2009 when it started happening [there was a funny asset-side thing, too, so it also appears in my “Harvard bet the milk money” thread]

And fancy that. The money isn’t magically appearing.

I bring up Pritchard every time someone wants to be blase about the government fulfilling its promises. Guess what? Once the money runs out of the pension fund, these pensioners may very well end up with =nothing=, as opposed to the haircut PBGC-covered pensions do. People seem to think that the money will get sued into existence. Or that the generation not receiving the services of those already retired are at all interested in paying for them and current public employees.

That’s why I laugh every time people drag out “We’re indebting our children/grandchildren!” rhetoric. You’re making the assumption that the kids will pay the debt. I’m thinking not.

So, what was that about government not going out of business? Even if that were true, they don’t need the services of the already-retired.

And this is what I’m bringing up now. This is why I’m quoting all the stories about the retirees getting hit, with deeply cut or no payments at all.

Given the demographic trajectory of many cities and states, there won’t be enough in taxpayer money to fulfill these promises if you didn’t save up ahead of time.

I blogged about it back in December 2010 [they still weren’t getting paid]: Public Pensions: When the Money Runs Out

Prichard first came on my radar back in October 2009. We first saw Prichard on this blog back in April [2010], and had updated on their status in October:

What I want to know is if there’s any money in the pension funds at all. Pensioners seem to think they’ll get paid, but who knows how long that will last. One quoted said that there’s at least 600K in the fund.

Uh, that’s not a lot of money if you’ve got over 100 pensioners to pay for the rest of their lives.

In any case, the pensioners of NJ, IL, and CA should keep an eye on this. Because their time will be coming, too.

So yeah guys. Those arguments that the government is gonna have to pay all those benefits? If there isn’t anything there to prepare to fulfill that promise, I wouldn’t count on it.

So, for those pension plans that haven’t fallen off the cliff yet (and let me say – not all plans are dire. It just so happens the largest ones are in a very bad place), perhaps there’s still time. But I believe it’s a little late to be waking up to reality.

Ask the pensioners of Prichard. The warnings had been there…. and nothing was done. And now nothing is what they have.

And that is a moral failure.


One person died by suicide.

In May 2011, they came to an agreement. It had been over a year and a half of no pension payments at all. Ultimately, 19 people died in the interim.

We never learned the terms of the settlement. It was done out of court, and the municipal bankruptcy was denied because Prichard had no bonded debt.

Various practices made the money run out faster:

The fund’s rules say that the final benefit was to be calculated according to the average of the worker’s last four years on the job. But instead of simply tallying the last 4 years, the city clerks who executed the fund also included a lump-sum payment for the worker’s unused vacation, sick and compensatory time.

One retiree, whose retirement benefit was hand-figured by a city clerk on a piece of notebook paper, had a lump sum payment of $41,748, the equivalent of another year’s salary added to his retirement calculation.

On average, according to Reibling’s estimate in the report, the inclusion of the lump sum blew up the average pensioner’s benefit by 26 percent.

Reibling said that the long-term effect was devastating, because the inflated monthly payout would eventually far exceed the amount that had been withheld for pension purposes.

Further, he said, nearly half of the personnel records for retirees are missing. For them, there is no way to verify the number of hours that they accrued.
Many pensioners acknowledge that the fund as it was being executed wasn’t sustainable, but they say that nobody was getting rich off of it.

According to pension records, the retiree with the highest pension benefit was receiving $42,260 per year prior to the fund going broke.

These were modest pensions in terms of total amounts. But even relatively modest amounts can drain off funds if not enough was socked away. And if you regularly got pension payments bumped up by 25% due to those lump sums that weren’t even supposed to be included in determining the monthly amount… it’s no surprise that the money ran out.

There were many people who got burned with the settlement. Who knows where they are now? It might be a good idea to revisit the issue, ten years after it occurred.

It would be a valuable reminder to everybody as to how this can end. And perhaps public employee groups will learn that maybe they should make some sustainable deals if their pension funds are currently in an ever-increasing contribution pattern while ever-decreasing funded ratios still result.

Those numbers do have some meaning.


In 2011, I wrote:

The core issue is “the government doesn’t go out of business” — this is the reason that it’s supposedly okay not to hold 100% of the accrued liability, in addition to risk capital on top. This is the reason that when experience deviates from assumption, it’s supposedly okay to amortize that shortfall over a very long period of time.

Except government can go out of business or go bankrupt, in reality, no matter what the law says. Taxpayers can move away (ask Detroit), pension funds can run out completely and there can be insufficient tax base to do pensions as pay-as-you-go (ask Prichard, Alabama). Then where is the protection for pensioners? The law can say that the obligation must be fulfilled, but the law doesn’t will money into existence.

I am sure that there are some prudently-run public DB plans out there. They should weather the storm. But places like Rhode Island are looking at cutting the benefits of current pensioners. And places that took way too many contribution holidays (POBs do not count as contributions), such as Illinois and New Jersey, probably won’t take long to follow in RI’s footsteps.

Well, failure takes a long time coming in public finance. Illinois and New Jersey aren’t quite there yet.

2017: Why It’s a Good Idea to Fully Fund Public Pensions


100% funding is the target.

Actually paying promises is the target.

Not 80%.

Not 60%

Not cutting pensions by almost 2/3 when the governments wither away and there are no contributors left.

People talk about protecting taxpayers (who can disappear) and bondholders (who always know there’s a risk), but my primary concern is protecting retirees.

And those retirees of Loyalton, Detroit, Prichard, and now East San Gabriel Valley weren’t protected.

In some of these cases, they made promises that cost way too much.


Signs that the promises being made are too high:

1. Full contributions are never or rarely made, because they’re “too expensive”
2. The funded ratio keeps going down even when making ever-increasing payments
3. Changing the valuation discount rate by 50 bps (aka 0.5 percentage point) moves your funded ratio by a huge amount

Making promises that you can’t pay for is not really a promise at all. “We’ll pay more later!” is not a workable plan.

As I’ve said many time, reality always wins over law.:

Because they thought that pensions could not fail in reality, that gave them incentives to do all sorts of things that actually made the pensions more likely to fail. Because, after all, the taxpayer could always be soaked to make up any losses from insane behavior.

But, no, they can’t be.

Reality wins. Always:

You will not be allowed to change way current retirees’ benefits increase, until total disaster supersedes constitutionality. In which case the law is irrelevant.

Reality always wins over law.

The moral issue is that promises have been made to current employees and retirees. Some places made promises they couldn’t keep (such as the 8.5% guaranteed return for Dallas Police and Fire.) Many could have fulfilled the promises, only if they had behaved well:

What actually threatens the actuarial soundness of public pension plans is behavior like the following:

Not making full contributions.

Investing in insane assets so that you can try to reach target yield. Or even sane assets that have high volatility to try to get high return, forgetting that there are some low volatility liabilities that need to be met.

Boosting benefits when the fund is flush, and always ratcheting benefits upward.

And then there is the mismeasurement of the promises themselves. Which leads to implicit undercontributions.


All of these are setting up the pension funds for failure. This affects people’s lives.

Retirees getting their benefits cut is a moral issue.

Pretending that the benefits will be paid because it’s written somewhere, without actually putting aside enough money to pay for those benefits… well, that’s essentially deliberately setting up retirees to get their benefits whacked.

Some pension funds may be able to retrench via increased taxes, if their holes aren’t too deep. I do recommend switching to a risk-sharing set-up, so that some retirement income is guaranteed and some will go up and down in order to maintain true intergenerational equity.

But many — such as Kentucky, Illinois, New Jersey, Chicago — will have to make substantial cuts to current pension participants in order to avoid fiscal disaster. Their current crop of politicians are in denial.

Making comments such as “The fantasy of a constitutional amendment to cut retirees’ benefits is just that – a fantasy. “ is implicitly stating that you are just fine with the pension money running out and then benefits getting cut. And hoping that you’ll be dead before that happens.

[It’s also deliberately lying by pretending that pensions have not already been cut elsewhere.]

It is better to make adjustments in expectations for all stakeholders before the money runs out.

This is not all pension funds. But the ones that are doing well, in not over-promising, in making full payments, and in setting up systems that adjust when investments don’t do well — those aren’t the ones that make the news. They’re doing what they’re supposed to do.

But it is a moral failure to have set up systems that will inevitably fail due to bad governance, bad benefit design, bad management, and all-around bad policy.

Don’t reform the pensions for the children.

Do it for the retirees themselves.

Related Posts
New York State Climate Investing Goals: Who's On the Hook?
Calpers Craziness: A Performance Review... and an Investigation?
PSERS Update: What if it's just sloppy processes?