Apply honest accounting to public pensions and they go from “seriously underfunded to catastrophically underfunded,” which may be why actuaries are backing away from applying honest accounting. From Walter Russell Mead at the-american-interest-com:
America’s slow-motion public pension train-wreck (by some estimates, the shortfall currently exceeds $3 trillion) has been kept in motion for years by deeply dishonest accounting practices employed by state and local governments, which presume unrealistically that pension funds can consistently earn white-hot annual returns approaching eight percent. So it’s disappointing, but not particularly surprising, that the actuarial establishment moved to suppress a report pointing this out. Pensions and Investments reports:
The American Academy of Actuaries and the Society of Actuaries Monday abruptly disbanded its longtime joint Pension Finance Task Force, objecting to a task force paper challenging the standard actuarial practice of valuing public pension plan liabilities.
“This paper (is) being censored by the AAA” and SOA, said Edward Bartholomew, who was a member of the former task force, in an interview. “They didn’t want it to get out.”
Others who were members of the task force also said in interviews the two actuarial groups are trying to suppress publication of the paper.
There are powerful interests that don’t want public pensions to be governed by the same kinds of accounting principles used in the private sector because… well, because if they were, public pensions would go from seriously underfunded to catastrophically underfunded.
Union officials and state legislators (in both parties) seem to believe that it makes more sense to allow public pension funds to play “let’s pretend” with public money. To be sure, the sudden imposition of a tougher standards would cripple business as usual in many state and local governments, so there can and should be some reasonable accommodations made to allow the adjustment to take place in a less disruptive fashion. Governing by catastrophe is almost never a good idea, and a series of small and incremental changes is usually (though not always) a better way to manage public affairs.
In the long run, shifting to a more portable system of public pensions—defined contribution, rather than defined-benefit—wouldn’t just help save states and municipalities from fiscal ruin. It would also do much to improve the performance of the civil service. The current system creates a jobs-for-life mentality in public employment because workers need to stay at their positions for decades to collect the full value of their pensions. Somebody who was a good teacher at 30 but wants to leave and should leave at 40 is currently trapped.
Also, one of the reasons the unions fight quality evaluations so fiercely is that the loss of job and pension is so much more draconian than simply losing a job.
The report from dissident actuaries might have helped push state and local pension systems down a more sustainable path. And the conduct of American actuarial leaders—disbanding a reputable task force that had prepared a report that the bureaucracies didn’t like, and then hinting at legal action if the report is published—is irresponsible at best and corrupt at worst. Is it any wonder that Americans are fed up with experts and the institutions they manage?
This issue is near and dear.
My wife is nearing the end of her teaching career. She doesn’t have decades of eligibility, having taken a 15 year sabatical to raise our kids, but the monthly pension currently promised would be a very important component of our pay-the-bills income during the non-working years of our lives.
The job of teaching has been destroyed by the practice now of putting all kids, even if severely handicapped, in the regular classroom. Now every teacher has to deal with “special ed” students all the way to kids with <60 IQ's or who throw screaming tantrums or poop/pee in their pants (and then sit in it.) My wife's health is jeopardized by such a stressful working condition. It's imperative she bail out within 2-3 years. The question of whether to begin taking the pension or demand her refundable contributions may be difficult.
Plan A, that things go on just as they have before, seems impossible…yet this was my conclusion 20 years ago and here we are. When the pension plans blow sky high, will they be able to stiff her to the point of stealing the "refundable contributions" pulled dollar for dollar from her paychecks? If the system is that broke, I fear so.
Unlike 99% of people, we have saved by living massively below our means and can probably do okay even if both she and I are totally stiffed on our pensions & "my" Social Security. I do not know what others will do, given their complete dependence on their Plan A. Our Plan B (or Plan C) can handle almost every development short of the Zombie Apocalypse, but even then, our living standard would likely be crushed.
Hard times ahead, I fear.
PS: the largest wildcard for us remains medical "insurance." Obamacare's massive uncertainty & massive ramp in medical & hospitalization costs are huge and getting worse.
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