Citizen Economists » pensions http://www.citizeneconomists.com/blogs Citizen Economists is an online economics magazine written by citizen journalists. These ordinary citizens provide reports and commentary on the current events affecting the economics of the fields they work in. Fri, 10 Feb 2012 20:10:41 +0000 http://wordpress.org/?v=2.8.4 en hourly 1 Risk of depletion: the vacation from pension angst is over before it began http://www.citizeneconomists.com/blogs/2011/12/15/risk-of-depletion-the-vacation-from-pension-angst-is-over-before-it-began/ http://www.citizeneconomists.com/blogs/2011/12/15/risk-of-depletion-the-vacation-from-pension-angst-is-over-before-it-began/#comments Thu, 15 Dec 2011 14:50:13 +0000 Christopher Briem http://www.citizeneconomists.com/blogs/?p=10147 Yunz thought I forgot.  That or lost interest?  Boiler has been building up steam is all.  That and there seems to be quite a confluence of news in the nexus here: pensions, assessments, redistricting even migration. Damage Control teams being spread thin just trying to keep up. But let’s poke in on pensions for a minute.

. . . → Read More: Risk of depletion: the vacation from pension angst is over before it began]]> Yunz thought I forgot.  That or lost interest?  Boiler has been building up steam is all.  That and there seems to be quite a confluence of news in the nexus here: pensions, assessments, redistricting even migration. Damage Control teams being spread thin just trying to keep up. But let’s poke in on pensions for a minute.

Let’s recap:  we all declared victory just a few months ago it seemed.  We ’solved this for the city’ was one quote.


So last week we learn that the city pension funding is down to 54%,  Note that is 54% with the notional asset of pledged future parking revenues that is still hard to define and as council is learning even harder yet to extract from the Pittsburgh Parking Authority.  Let’s just agree that it is not cash on hand in any form, nor fungible in any extant market.  I still want to know what the real cash horizon is for the pension fund.  You think others would care as well.


What really ups my distemper over the whole notional asset is how if confused the public.  Maybe the asset makes sense, maybe it doesn’t.  But read the news coverage and tell me if you walk away with any appreciation for how much in $$ is really there to pay pension bills? No real appreciation that a large part (soon to be the majority) of all pension assets are no more than a promise from the city to itself to pay money in the future to the pension account.  It is a promise that I am pretty sure existed long before last December mind you.


So it is conincidence that Governning had a column last week on the public pension problems everywhere to a degree. Will pension plans run out of money? It talks of the “risk of depletion” for pension funds.  “depletion” isn’t quite a euphemism, but sure sounds a lot tamer than the what it would mean if it were to come true.


So what does it all mean here?   Here is what we know as to the state of the city’s collective pension fund. Forgive me for any errors in the decimal points, the city does not mail me the detailed pension accounting.

Total liability Jan 1, 2011 $1,012,027,241
Funding as of Jan 1, 2011 said to be 62% which gives me   $627 mil
Funding as of Sept 30, 2011 said to be 54%  so $549 mil
Value of notional asset said to be valued at $239 million which gives a net value of $307 mil
That in itself would give you 30% funding ratio.  It has been worse.    Still,, after all the extra $$ piled in and all the other machinations, in reality we are in my calculation below the 32% we were just about two years ago. No thanks to some big losses due to massive market timing bets.  I really wonder if they have really gotten all the cash back into the market in a portfolio that make sense.  Something tugging at me makes me wonder what is up with the investment. Anyone know more?
If this is how we define success, you have to wonder what failure looks like?  The only thing different today than a year ago is that an IOU was passed from one part of city government to another.  The truth is that IOU existed legally, morally, and in the accounting long before the latest accounting trick.  So what really is any different?
It really is worse than that. Realize also that there was what by definition was a one time transfer of the cash that was sitting in the not so locked ‘lock box’ built up from past budget surpluses. So just before the end of the year.. or so everyone is agreeing to even if the banks were closed, was the transfer of $45 million I believe it was to the pension fund. When thinking about trends, you really have to think about that as the one-time opportunity it was. No such surplus will be there for a long time again.  If you were to net that out the city would most likely have been at ~$262 mil or less, or just under 26% funding ratio.
I won’t pile on and say another year has gone by and while the rate of increase in the calculated total liability has slowed a bit, it would still seem an obvious projection that the total liability is higher as well which would push that % lower. That or that parts of the system are less well funded than these cumulative averages would imply.  But success.. keep saying it.. it all succeeded last year.
]]> http://www.citizeneconomists.com/blogs/2011/12/15/risk-of-depletion-the-vacation-from-pension-angst-is-over-before-it-began/feed/ 0 The reversal of reforms on the New Pension System? http://www.citizeneconomists.com/blogs/2011/09/07/the-reversal-of-reforms-on-the-new-pension-system/ http://www.citizeneconomists.com/blogs/2011/09/07/the-reversal-of-reforms-on-the-new-pension-system/#comments Wed, 07 Sep 2011 16:05:09 +0000 Ajay Shah http://www.citizeneconomists.com/blogs/?p=9040 . . . → Read More: The reversal of reforms on the New Pension System?]]> In December 2002, the NDA made a very big move in pension reforms. They decided that from 1/1/2004 onwards, all new staff recruited into the government would be switched out of the traditional defined-benefit pension and instead placed into a new individual-account defined contribution pension system. This was one of the major achievements of the economic reforms of that period. For a conceptual picture of the New Pension System (NPS), see this article, and for a story of that period, see this article.

An essential feature of the NPS was that it was a defined contribution system. India has a long history with getting into trouble with guaranteed returns. UTI’s assured return schemes turned into a problem for the exchequer. EPS, run by EPFO, is bankrupt. When pension promises are made, they require peering into many decades into the future and arriving at estimates of longevity and asset returns. In the best of times, it is hard to make such estimates; honest mistakes are possible. In addition, when governance is weak, there are political pressures to make extravagant promises, which will look popular right now but generate staggering costs for the government in the future. As an example, rough calculations show that the implicit pension debt on account of the traditional civil servants pension in India (the one which was replaced by the NPS) stand at roughly 70% of GDP. This is a very big price to pay, for a tiny sliver of the workforce.

The NDA did the unpopular work of switching new recruits out of the defined benefit pensions. But the UPA did not follow through appropriately. At first, many years were lost in hoping that the CPI(M) would come on board the reform. After that, the legal engineering was put into place in order to get an NPS up and running without requiring the legislation. This process was slower than what one might have desired, but it has been making inexorable progress.

But now, a new existential threat seems to have come up : the Parliamentary Standing Committee on Finance seems to be saying that the fundamental idea of the NPS — defined contributions — should be scrapped. This would amount to a major reversal of India’s economic reforms.

On this subject, see:

Join the forum discussion on this post - (1) Posts]]> http://www.citizeneconomists.com/blogs/2011/09/07/the-reversal-of-reforms-on-the-new-pension-system/feed/ 0 A Random Walk in Pension Accounting http://www.citizeneconomists.com/blogs/2011/08/29/a-random-walk-in-pension-accounting/ http://www.citizeneconomists.com/blogs/2011/08/29/a-random-walk-in-pension-accounting/#comments Mon, 29 Aug 2011 13:50:11 +0000 Christopher Briem http://www.citizeneconomists.com/blogs/?p=8939 PBT Today: Pittsburgh Pension Loses Out on Millions.

Personally I am going to send each member of the pension board a copy of a book just about everyone who invests in the market should have anyway:

Beyond that… there is a companion story with that: Lamb seeks answers to pension plan delay. Something does . . . → Read More: A Random Walk in Pension Accounting]]> PBT Today: Pittsburgh Pension Loses Out on Millions.

Personally I am going to send each member of the pension board a copy of a book just about everyone who invests in the market should have anyway:

Beyond that… there is a companion story with that: Lamb seeks answers to pension plan delay. Something does not add up to me.  If you were to dig into it, it sure sounded to me like the pension assets were not exactly converted to cash.. which is implied in the ‘delay’ in reinvesting into a more normal portfolio.. but it sure sounded like the intention as to buy some form of option which effectively created the same investment return as cash for precisely the 3 months in the fall the pension board was worried about.   If that is what they did, then once the option ran out, the portfolio would immediately begin to have the investment returns it should.  This option strategy should also give some advantages in not incurring the costs of moving several hundred $million out and then back into the market.  Apparently that isn’t what happened which raises its own questions.

The net result however it happened is really pretty sad.   Pension fund cashes out in fall 2010 which turns out to be quite a big run up in the market.  Delays getting back into the market in first quarter of 2011 which continued to be a great quarter for the market.  Assuming they finally got cash reinvested by April, it was just in time for the horrific returns from the market since then.  There you go.

]]> http://www.citizeneconomists.com/blogs/2011/08/29/a-random-walk-in-pension-accounting/feed/ 0 The 20 Million Dollar Decision http://www.citizeneconomists.com/blogs/2011/04/27/the-20-million-dollar-decision/ http://www.citizeneconomists.com/blogs/2011/04/27/the-20-million-dollar-decision/#comments Wed, 27 Apr 2011 19:50:13 +0000 Christopher Briem http://www.citizeneconomists.com/blogs/?p=7453 Speaking of pensions ever again. The last post on the vast ambiguity in the value of the City of Pittsburgh pension fund was mostly a reflection of the lack of hard numbers in this story from February. It all sounds like accounting by Ouija Board.

I was going to follow up with yet another rant . . . → Read More: The 20 Million Dollar Decision]]> Speaking of pensions ever again. The last post on the vast ambiguity in the value of the City of Pittsburgh pension fund was mostly a reflection of the lack of hard numbers in this story from February. It all sounds like accounting by Ouija Board.

I was going to follow up with yet another rant on the lack of useful information made available by the City’s pension fund.  For the longest time the only interesting information there was a newsletter from 2007.   Yet, low and behold, there is all of a sudden real and recent news including the detailed performance of the pension plan for the 4th quarter of 2010.  It is indeed a brave new world.

Would be quite a step forward, except for what that report says. Be careful what you ask for may be the lesson learned.  Ignorance in indeed bliss. The report has a comparative metric of how the city’s pension fund did in the quarter compared to a large benchmark of other investment funds.  The answer is that the city’s pension plan came in at the 96th percentile.

So I would really love to know what were the 4% of funds out there that did worse. Give those folks bonuses.

The reason for such a pitiful performance, as clearly noted by the investment managers, was that the pension board’s decision to remove virtually all equity risk from the fund earlier in the year.  Take away the risk, you also take away the reward and it turns out the 4th quarter of 2010 was a pretty good period for investment return…  if you had exposure that is.
To remove all equity risk at a single point in time would be what is called a massive bet based on market timing.  Go ask your own financial advisor if they would ever recommend such a course of action.

So how much did that decision cost is the real interesting question?  A million or two?   Again according to the same report, the median return as 6% over the quarter, while the city came in at 0.3%.  Given an assumption that the average asset value was around $300 million, the counterfactual loss of 6% is nearly $18 million.

That decision could become quite a massive irony if the actuarial calculation of where the pension fund is with the notionally dedicated parking revenue comes in short by an amount less than $18 million.  Hold that thought for a future blog post I guess.

There are some real questions I would love to be in a position to get answers for.  The primary one is whether they are still lacking equity exposure.  At the end of 2010 it says they were 57% cash (I’d put that into that annoying html flashing tag if it was not just so annoying).  That’s what it says, really… I didn’t make it up. 57% cash and 29% fixed income.  You wonder how much in fees it took to get a few hundred million in equities liquidated to cash.. and how much it will cost to get back into the market assuming they did so.  Those fees could easily push up that notional $18 million ‘loss’ even further as a result of the decision last fall.

I really do wonder if they have remained out of equity markets.  Given that the Mercer contract is winding down, you could see the logic in holding the cash to turn over to the new fund manager to invest… but I have no idea.  If the new paradigm of data disclosure continues next quarter, then maybe we will see if and when they rebuilt an equity portfolio.  One would hope they did buy back into equity markets because the 1st quarter of 2011 had a pretty good return.  If they stayed in cash, that notional loss might be a fair bit larger still.

]]> http://www.citizeneconomists.com/blogs/2011/04/27/the-20-million-dollar-decision/feed/ 0 Pension Singularities http://www.citizeneconomists.com/blogs/2011/02/14/pension-singularities/ http://www.citizeneconomists.com/blogs/2011/02/14/pension-singularities/#comments Mon, 14 Feb 2011 20:51:30 +0000 Christopher Briem http://www.citizeneconomists.com/blogs/?p=6554 You know, just reading your quarterly investment statement is not supposed to be an exercise in Bayesian statistics.

I don’t quite understand the story today with the latest quarterly information on the assets of the Pittsburgh Pension Fund. Should be a boring straightforward story as these things go, but it confused me more than it clarifies anything. . . . → Read More: Pension Singularities]]> You know, just reading your quarterly investment statement is not supposed to be an exercise in Bayesian statistics.

I don’t quite understand the story today with the latest quarterly information on the assets of the Pittsburgh Pension Fund. Should be a boring straightforward story as these things go, but it confused me more than it clarifies anything.  It seems to say they just don’t know how the investments did last quarter.  How can that be?  Certainly someone knows exactly what the quarterly statement from the investment advisor says for assets on hand, even if there is this odd question of how to value the promise of future tax revenues.. that does not mean it should confuse the reporting.

It seems to say, and again it does not quite add up to me so I will presume I have it wrong, that after the cash infusion of $45 million, the funds assets are $325 million.  Up from $290 million in the previous quarter.  A good thing….  But net of the $45 million that would have been $280 million which means the funds assets would have gone down.  Not sure anyone noticed, but the stock market in the 4th quarter last year had a pretty solid gain..  maybe +7% in the Dow.  7% over a quarter is what… 28% at an annualized rate which would make it an outstanding year as these things go. Those returns do not translate directly to what you would expect of a balanced public portfolio, but if you don’t gain ground in good quarters like that, what will happen in bad quarters?  There will be bad quarters.

So the story seems to be left with the City Controller guestimating what the pension is worth and he says even with the parking promise you get $525-550 million.  Thing is, as of January 1, 2009, the pension liability was already up to $989 million.  That was over 2 years ago and history is awfully clear the total liability is climbing steadily.  I would say it is a decent bet that the current liability is higher and certainly over a billion and close to $1.05 billion wold be my guess.  That would imply $525 million may fall short of providing the 50% funding level already.

So to add to all the paper accounting machinations of last year.. we are now going to be left with this metaphysicial question as to what the state of the pension fund is as of the very last moment of December 31, 2010 vs. the very first moment of January 1, 2011. As of December 31st everyone can play ostrich and pretend the 2 year old actuary numbers are still valid; as of January 1 there should be new actuary numbers used.  The difference will be whether the state takes over the pension system or not.  So it all comes down to a debate as to whether the instant of midnight on New Years is 2400 on December 31, or 0000 on January 1.  This is getting silly.

But I have a real metaphysical question.. This promise of future parking revenues and all.. does it exist in any document.  Is there a counterparty?   If it is a pension asset, does the Pension Board have some piece of paper it could use to say sue the city if the money is not delivered as promised?  Can the pension board sue the city, or is the Pension board itself part of the city?   The state’s argument was that the promise of parking revenues could be considered akin to say investment in a REIT.  OK, but even equity in a REIT would be managed by some form of investment manager.  I just and wondering what ‘asset’ or notional paperwork representing the asset, has been turned over to Mercer.  Could that be causing some of the issues at the moment?

]]> http://www.citizeneconomists.com/blogs/2011/02/14/pension-singularities/feed/ 0 Risk and Pensions http://www.citizeneconomists.com/blogs/2010/12/31/risk-and-pensions/ http://www.citizeneconomists.com/blogs/2010/12/31/risk-and-pensions/#comments Fri, 31 Dec 2010 14:38:02 +0000 Christopher Briem http://www.citizeneconomists.com/blogs/?p=6065 Ha.   you thought this was going to be about the doings downtown today.  Not quite, but everything is related somehow.

Can’t believe I missed this.  From the Detroit Free Press:  Risky bets cost Detroit pension funds $480 million.   and check out their side story: Where the Detroit pension funds went wrong. Note the picture . . . → Read More: Risk and Pensions]]> Ha.   you thought this was going to be about the doings downtown today.  Not quite, but everything is related somehow.

Can’t believe I missed this.  From the Detroit Free Press:  Risky bets cost Detroit pension funds $480 million.   and check out their side story: Where the Detroit pension funds went wrong. Note the picture they have there on the right.  Look familiar?  Their accounting..  a $97 million dollar investment in the casino here is now worth $100,000.   That would be called a high risk and illiquid asset.  Still wondering what specifically makes up our pension fund’s illiquid assets… and what return current (and past!) private equity investments have garnered in a final accounting.   Wonks can dream.

Does make you want to give 200 million working captial to people who make those decision. Doesn’t it.
We all know what one of the ‘bets’ the Detroit pension system made is right? Would be a sure thing casino in Downtown Pittsburgh.  That has turned out real well for them.  Not.  In fact, I really suspect that the bath (euphemistically the restructuring ) the Detoit pension system took on its investment here is why the debt rating of the casino here is considered a “selective default”.

Looks like they have a whole series on the problems the Detroit pension system has. The really really sad thing in all that is that the Detroit public pension system is in far far better financial shape than is the city of Pittsburgh’s pension fund. Really.. by far.  Also much more transparent if you believe that even.  That’s the thing that gets me about all the pension bruhaha here.  Folks on all sides debating over things that are mostly unknown to the public, and even to the folks who are supposed to know what is going on.

Join the forum discussion on this post - (1) Posts]]> http://www.citizeneconomists.com/blogs/2010/12/31/risk-and-pensions/feed/ 0 A Tale of Three Pension Stories http://www.citizeneconomists.com/blogs/2010/12/29/a-tale-of-three-pension-stories/ http://www.citizeneconomists.com/blogs/2010/12/29/a-tale-of-three-pension-stories/#comments Wed, 29 Dec 2010 17:38:48 +0000 Christopher Briem http://www.citizeneconomists.com/blogs/?p=6066 Just fascinating reading the three account of the latest on the pension front. Those from Smydo,  Vidonic and Potter.   You have to wonder what those future archeologists will think of us when they dig this stuff up.

However, I have to give the award of the day to Vidonic though because once you dug through . . . → Read More: A Tale of Three Pension Stories]]> Just fascinating reading the three account of the latest on the pension front. Those from Smydo,  Vidonic and Potter.   You have to wonder what those future archeologists will think of us when they dig this stuff up.

However, I have to give the award of the day to Vidonic though because once you dug through the chaff that was yesterday, the center of gravity all traced back to what the state has to say on all of this.  As best I can tell only he got a hold of the person who both enabled yesterday’s soap opera and will determine the end game to all of this.. PERC(the Pennsylvania Employee Retirement Commission)’s Jim McAneny.   Per the Trib’s version of all of this:

“It’s too late,” said James McAneny, executive director of the Pennsylvania Public Employee Retirement Commission. “Even if they got $500 million next year, it wouldn’t change the takeover, unless the General Assembly changes the law.”

There you have it.  Given that quote in itself, I am at a loss to figure what yesterday was all about.  I am actually kind of befuddled how he even enabled this latest little spat.  Did he really give hope to folks in Council that there was some alternative path, and if he did why?   My only guess is that he, like many in Harrisburg, are generally befuddled by city politics and whatever comments he made were never intended to enable a scene like yesterday (see above stories, but for the painfil details of yesterday see Potter’s).   So in learning of all that I bet he was a bit shocked, which probably is what lead to that quote in the Trib. Just a guess.

and with all that..  there is still that hanging conditional he left out there…  unless the General Assembly changes the law.  Only beginning to go down the rabbit hole on this.  You really have to wonder why the fear of having the state manage the investments of the pension fund is so extreme.

Join the forum discussion on this post - (1) Posts]]> http://www.citizeneconomists.com/blogs/2010/12/29/a-tale-of-three-pension-stories/feed/ 0 On High Risk Investments http://www.citizeneconomists.com/blogs/2010/11/24/on-high-risk-investments/ http://www.citizeneconomists.com/blogs/2010/11/24/on-high-risk-investments/#comments Wed, 24 Nov 2010 15:58:17 +0000 Christopher Briem http://www.citizeneconomists.com/blogs/?p=5749 So in reading the WDUQ snippet on the otherwise boring and esoteric machinations of public finance: 2 Votes move Bond Plan Forward, is a awfully important factoid.  In it there is a mention of the size and scale of the ‘illiquid assets’ held by the City of Pittsburgh combined municipal pension fund.  The line . . . → Read More: On High Risk Investments]]> So in reading the WDUQ snippet on the otherwise boring and esoteric machinations of public finance: 2 Votes move Bond Plan Forward, is a awfully important factoid.  In it there is a mention of the size and scale of the ‘illiquid assets’ held by the City of Pittsburgh combined municipal pension fund.  The line I note is ” some $50 million already in the pension fund in high risk investments that the PMRS did not use in previous calculations“.

So we have a $50 million number in the record now.  Progress is progress.

So the pension fund which is as woefully underfunded as a pension fund can be, that is at risk to need all of its remaining cash in the very near future, somehow has roughly a fifth of it’s assets invested in what are as kindly as possible characterized as “high risk”.   Can anyone think of a justification for that?  Can anyone figure why these assets are not being identified?  Can anyone verify that these $50 million in assets are actually worth $50 million currently??

So let’s be clear.  High risk and illiquid investments are not only not illegal, they are common enough that the GFOA has guidance on their use in pension fund investments.  So the existance of illiquid assets is not the issue, yet the magnitude of these investments in such a vastly underfunded pension fund is arguably malfeasance and I would be glad to argue the point.  That roughly $50 million of such assets exist in a pension fund holding give or take $270 million is a huge proportion for a fund as distressed as it is.

The GFOA guidance has what may be the most understated advice for these assets.  Footnote 5 in the previous linked reference is:

Due to the increased risk of misstatement inherent with these investments resulting from incorrect valuation, part of the increased due diligence could be to obtain a reasonable understanding of the procedures that may be applied to them during the independent audit of the financial statements.
There it all is in a nutshell.  “risk of misstatement”…  “incorrect valuation”… anyone have a warm fuzzy that the numbers being cited represent valid valutions of the assets involved?   If you read through to the end you get GFOA’s admittedly broad guidance on use of such investments which is that they should: “exercise extreme prudence and appropriate due diligenge.”  You can read the document to see the specifics of what that appropriate due dilligence should involve.  Since we have no idea the details, do we know what due dilligence has actually been implemented.

What is a bit scary in the context of all of this.  All I have been able to glean on this personally are some comments made to me that the pension fund has in recent years been bringing down their investments in these high risk, or illiquid, assets. I can neither verify or dispute that. If true,and if it still has $50 million invested this way, then it begs the question of how big big a percentage these high risk investments made up of the pension fund in the past?
and I know I am a broken record….. but will someone please please do a follow up of this story:  City acts to curb further pension losses.  I’ll stand on my head if it helps.  Do I need to wander around Downtown aimlessly wearing those big dual placards over my shoulders you used to see folks wearing… Are any of those folks still around?  Problem is that the placards would have to have messages written in tiny type to explain it all.  People would think I was walking around with the Rosetta Stone or something.
]]> http://www.citizeneconomists.com/blogs/2010/11/24/on-high-risk-investments/feed/ 1 Perpetually Parsing Pensions http://www.citizeneconomists.com/blogs/2010/10/22/perpetually-parsing-pensions/ http://www.citizeneconomists.com/blogs/2010/10/22/perpetually-parsing-pensions/#comments Fri, 22 Oct 2010 12:53:01 +0000 Christopher Briem http://www.citizeneconomists.com/blogs/?p=5297 You know this whole debate over whether to get the pension fund to 50% funding may not matter as much as it may seem.  Or at least the problem may be so much worse than we think and that the numbers we assume are good turn out to be wildly optimistic.

The government accounting folks, . . . → Read More: Perpetually Parsing Pensions]]> You know this whole debate over whether to get the pension fund to 50% funding may not matter as much as it may seem.  Or at least the problem may be so much worse than we think and that the numbers we assume are good turn out to be wildly optimistic.

The government accounting folks, GASB, are considering a change in pension accounting rules that would bring public pension accounting more in line with private sector accounting.   The result, if it happens, is that the calculations of almost all public pension liability will be much much higher than they are now.  So Pittsburgh’s billion dollar liability would be something a lot more. What if the number was $2 billion? Any % increase on a billion dollars is real money.  If you want to see more on the accounting issue, see this from the WSJ:  Board at Center of Pension Dispute Note the Pittsburgh connection in the story that has nothing to do with the city btw.

I was reminded of that because I was reading a paper that just came out.  Remember when I compared Pittsburgh’s debt and pension obligations per capita to that in Vallejo, California (which is still plodding through a bankruptcy proceeding) to Pittsburgh. Someone has taken the time to parse those numbers more systematically across a number of cities.

The Crisis in Local Government Pensions in the United States (link)

or if you want crib notes, read the Economist’s coverage of their research.

It does not look like they included Pittsburgh in their research, most likely because the city is so small.  No time to parse all that, but in scanning it I think they calculated some liability valuations that use some more normal assumptions on things like the future discount rate. Public pension plans tend to use a very high discount rate of 8%.  Actuarial valuations of private sector pension plans almost always use a much smaller value for their discount rate.   I suspect that if they did do such a calculation for Pittsburgh would be quite a shock and show a lot higher than the billion dollar liability we are talking about these days.  Just imagine where we would be in that case?

Join the forum discussion on this post - (1) Posts]]> http://www.citizeneconomists.com/blogs/2010/10/22/perpetually-parsing-pensions/feed/ 0 Will the Elderly Poor Fare Better Under Pensions Means Tests? http://www.citizeneconomists.com/blogs/2010/09/30/will-the-elderly-poor-fare-better-under-pensions-means-tests/ http://www.citizeneconomists.com/blogs/2010/09/30/will-the-elderly-poor-fare-better-under-pensions-means-tests/#comments Thu, 30 Sep 2010 18:16:18 +0000 Winton Bates http://www.citizeneconomists.com/blogs/?p=5117 I ended my last post suggesting that it is absurd to provide pensions that are not subject to means tests because this involves taxing people of working age more heavily in order to add unnecessarily to the incomes of wealthy retirees. This raised the question of whether the elderly poor are likely to fare . . . → Read More: Will the Elderly Poor Fare Better Under Pensions Means Tests?]]> I ended my last post suggesting that it is absurd to provide pensions that are not subject to means tests because this involves taxing people of working age more heavily in order to add unnecessarily to the incomes of wealthy retirees. This raised the question of whether the elderly poor are likely to fare better in the context of the looming pensions crisis in OECD countries under means tested pensions or universal benefits.

This question is most relevant in countries that have not already adopted some form of pay-as-you-go universal aged pensions. Path dependency is involved. Once a country goes down the universal pensions path there are substantial political difficulties in back-tracking because this system encourages each generation of retirees to expect rewards for the taxes they have paid to support the preceding generations of retirees.
I expect that the political economy of how the elderly poor are likely to fare under alternative systems has been researched previously, but I haven’t yet found any papers that are directly relevant. So I will attempt to sketch out some preliminary ideas, based heavily on Australian experience.
One factor that will influence how the elderly poor fare under alternative pension arrangements will be their own political power as a group. This seems to vary greatly between countries depending on such factors as their use of voting rights. The presence or absence of means-testing could make an additional difference to the political power of this group since it identifies pensioners as a particular group of elderly people who have a common interest in lobbying for higher pensions. In that respect, means testing causes the interests of the elderly poor to differ from those of other elderly people.
Growing Public: Volume 1, The Story: Social Spending and Economic Growth since the Eighteenth Century

Pension levels of the elderly poor are also likely to be influenced by the way the political objectives of other elderly people (and of middle-aged people who are planning for retirement) evolve under different systems. Peter Lindert’s analysis of the political economy of the public pension crisis seems to provide a good starting point to consider this. He summarises as follows:

‘At first, up to the 1980s, the rise of the elderly population gave the elderly more political clout in the industrialized OECD countries. The rise in their political strength was one reason why the relative generosity of pensions rose and budgets switched from fully funded pension systems to pay-as-you-go systems, giving one lucky generation higher pensions paid for in part by the younger generation. By the 1980s, the pressure on government budgets had become acute.

From that point on, the further rise in the elderly share of population began to undermine their political strength. True, pension budgets are not declining and are projected to rise a bit more as a share of GDP. Yet, the level of pension support per elderly person is destined to go on dropping as a percentage of the average income of the whole population’ (‘Growing Public’, Vol. 1: 208).

As the number of retirees rises relative to numbers of people in the workforce, their interests are increasingly aligned with those of the community at large in maintaining incentives for the goose to continue laying golden eggs. If excessive demands by retirees result in higher tax rates the adverse consequences for economic growth will be reflected back in their future pension levels.

The demographic transition stemming from lower birth rates and increased longevity is far more advanced in some countries (e.g. Sweden) than in others (e.g. Australia). Signs that the increase in the elderly share of the population may be beginning to undermine their political strength are only now beginning to appear in Australia, with a foreshadowed increase in the age of eligibility for pensions.

Australian experience suggests that when the aging middle classes have political clout they can exercise it to look after their own interests despite means tests for aged pensions. The relaxation of means tests, combined with tax concessions to encourage investment in private superannuation, has resulted in total government support for retirees being remarkably similar across a wide range of income levels (shown here). This suggests that total government support for retirees would be much the same under a flat rate universal system without incentives for private superannuation. Complicating matters further, however, the government has allowed people to access tax-privileged superannuation funds in lump sums prior to pension age. This has provided an added incentive for people to retire early, splurging lump sums and living off accumulated wealth until they become eligible for the aged pension.

As the increase in proportion of elderly people in the population in Australia reduces the per voter political power of this group, I would expect the per voter political power of the elderly poor to diminish to a smaller extent than that of the much larger group who hope to benefit from the private superannuation tax and pension means test rorts. I expect incentives for early retirement implicit in the superannuation arrangements will be an early casualty as attempts are made to contain government spending on retirees. If a choice has to be made at some time in the future between, say, maintaining the current level of the aged pension in real terms and maintaining superannuation tax concessions, I expect that maintaining the aged pension levels would be likely to win the political debate. Similarly, given a decline in grey power on a per voter basis I doubt whether superannuation tax concession would win the political debate if a choice has to be made at some time in the future between maintaining these tax concessions and an overall lowering in income tax rates to promote economic growth.

I suspect that the elderly poor would be less able to protect their interests under a universal pension because the support arrangements would not enable them to distinguish themselves as a group whose economic interests differ from those of other elderly people.

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