Powder Blue Report

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Sunday, October 30, 2005

Orange County And The US's Ticking Time Bombs

Everyone must read todays article on pension reform by Roger Lowenstein. With the debate heating up for Measure D here in Orange County and Governor Schwarzenegger's slate of propositions, everyone needs to understand why it is so important to have pension reform right now.

Here are a couple of good quotes from the article....." America's pension system has been a laboratory demonstration of moral hazard in which the insurance may end up bankrupting the system it was intended to save Given that pension promises do not come due for years, it is hardly surprising that corporate executives and state legislators have found it easier to pay off unions with benefits tomorrow rather than with wages today. Since the benefits were insured, union leaders did not much care if the obligations proved excessive. During the previous decade especially, when it seemed that every pension promise could be fulfilled by a rising stock market, employers either recklessly overpromised or recklessly underprovided - or both - for the commitments they made"......

"In San Diego, pension abuse has effectively bankrupted the city. Thanks to a history of granting sweeter and sweeter pension deals that it has neglected to fund, the city has been forced to allocate $160 million, or 8 percent of the municipal budget, to the San Diego City Employees Retirement System this year, with similar allocations expected for years to come. San Diego has tabled plans for a downtown library, cut back the hours on swimming pools, gutted the parks and recreation budget, canceled needed water and sewer projects and fallen behind on potholes"...

"Because the employer is committed to paying a certain level of benefits, pensions are known as "defined benefit" plans."..."A 401(k), on the other hand, promises nothing. It's merely a license to defer taxes - an individual savings plan. The employer might contribute some money, which is why 401(k)'s are known as "defined contribution" plans. Or it might not. Even if the company does contribute, it offers no assurance that the money will be enough to retire on, nor does it get involved with managing the account; that's up to the worker"

"California is a good example of the political forces that have driven benefits higher. In the 90's, Gov. Gray Davis, a Democrat who was strongly supported by public-employee unions, pushed through numerous bills to increase benefits. One raised the pension of state troopers retiring at age 50 to 3 percent of final salary times the number of years served. (Previously, the formula was 2 percent at age 50, more if you were older.) Thus, a cop hired at age 20 could retire at 50, find another job and get a pension equal to 90 percent of his final salary....According to Barclay's Global Investors, if you use realistic assumptions, the total underfunding in all public plans is on the order of $460 billion. If this figure is even close to true, future taxpayers will be hopelessly in hock to the police, firefighters and teachers of the past"

"Earlier this year, Schwarzenegger tried to move California to a 401(k)-style defined contribution plan (for new employees), but the Legislature refused to go along. Schwarzenegger has vowed to revisit the issue in 2006. This battle is being fought from statehouse to statehouse. Michigan (mimicking Alaska) has closed its pension plan to some new employees, and various states, including Florida, Colorado, South Carolina, Arizona, Ohio and Montana, are taking a partial step of letting employees choose between defined contribution plans and traditional pensions. This compromise does not really change much. Most employees who are given the choice opt, quite naturally, to keep their pensions."


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