How the Pension Reactionaries Mislead the Public
re·ac·tion·ar·y, rēˈakSHəˌnerē, adjective
1. (of a person or a set of views) opposing political or social liberalization or reform.
– Source: Google search “what is a reactionary”
When it comes to civic financial health and quality public education, “reactionary” is a word with increasingly bipartisan connotations. But the other qualities connoted by the word all still apply; shrill and divisive rhetoric, an almost militant unwillingness to acknowledge any of the opposition’s arguments, and, of course, an unyielding position favoring the status-quo, no matter how untenable.
Pension reactionaries embody all of these characteristics. For the most part, they are also hypocrites. Because their devastatingly effective campaigns against pension reformers are funded not only by public employee unions, but also by powerful elements of those same Wall Street financial interests those unions routinely deride. They employ distortions of fact, they demonize reformers, and they employ inversions of logic.
Let’s examine some of the misleading arguments and tactics of the pension reactionaries, in no particular order:
(1) Identify key reformers, demonize them, then accuse anyone who advocates reform of being their puppets. Pension reformers have been the victims of character assassination for years. The more they represent an effective threat, the more potent the attacks leveled against them: John Arnold, a “hedge fund billionaire,” Charles and David Koch, the “conservative billionaire brothers,” and, of course “Wall Street” whose alleged shenanigans are said to pose the real threat to the solvency of these funds. The fallacy here, notwithstanding the vicious and unfounded attacks that have tainted these individuals, is that whether or not pensions are financially sustainable or equitable to taxpayers has nothing to do with who some of the reformers are. And what about liberal democrats who advocate pension reform, such as San Jose mayor Chuck Reed, Chicago mayor Rahm Emanuel, Rhode Island governor Gina Raimondo, and countless others? Are they all merely puppets? Absurd.
(2) Assume if someone advocates pension reform, they must also want to dismantle Social Security. While there are plenty of pension reformers who have a libertarian aversion to “entitlements” such as Social Security, it is wrong to suggest all reformers feel that way. Social Security is financially sustainable because it has built in mechanisms to maintain solvency – benefits can be adjusted downwards, contributions can be adjusted upwards, the ceiling can be raised, the age of eligibility can be increased, and additional means testing can be imposed. If pensions were adjustable in this manner, so public sector workers might live according to the same rules that private sector workers do, there would not be a financial crisis facing pensions. There is no inherent connection between wanting to reform public sector pensions and wanting to eliminate Social Security. It is a red herring.
(3) Public sector pension plans would be financially healthy if they had not been invested in risky derivatives, especially mortgages. This is a clever inversion of logic. Because if pension funds had not been riding the economic bubble, making risky investments, heedless of historical norms, then public employee unions would never have been mislead by these fund managers to demand and get unsustainable enhancements – usually granted retroactively – to their pension benefit formulas. The precarious solvency of pension funds today is entirely dependent on asset bubbles. Most of these funds still have significant positions in private equity investments, which are opaque and highly volatile, and despite recent moves by some major pension funds to vacate hedge fund investments, they still comprise significant portions of pension fund portfolios. What the pension reactionaries either don’t understand or willfully ignore is a crucial fact: if pension funds did not make risky investments, they would have to bring their rate-of-return projections down to earth, and their supposed solvency would vaporize overnight.
(4) Weakening pensions is a choice, not an imperative. The crisis is political, not actuarial. This really depends on how you define “weakening.” If you weaken the benefits, you strengthen the solvency. The fundamental contradiction in this logic is simple: If you don’t want pension funds to be entities whose actions are just like those firms located on the proverbial, parasitic “Wall Street,” then they have to make conservative, low risk investments. But if you make low risk investments, you blow up the funds unless you also “weaken” the benefit formulas.
To drive this point home with irrefutable calculations, refer to the California Policy Center study “Estimating America’s Total Unfunded State and Local Government Pension Liability,” where the impact of making lower risk investments that yield lower rates of return is calculated. If, for example, state and local public employee pension funds in the United States were to lower their rate-of-return to a decidedly non-“Wall Street,” low-risk rate of return of 4.33% (the July 2014 Citibank Pension Liability Index Rate, used in the study – it’s even lower today), and invest their $3.6 trillion in assets accordingly, their aggregate unfunded liability would triple from today’s estimated $1.26 trillion to $3.79 trillion. The required annual contribution (normal plus unfunded) would rise from the estimated $186 billion to $586 billion. The alternative? Lower benefits.
The pension reactionaries willfully ignore additional key points. They continue to claim public sector pension benefits average only around $25,000 per year, ignoring the fact that pension benefits for people who spent 30 years or more earning a pension, i.e., full career retirees, currently earn pensions that average well over $60,000 per year. Public safety unions still spread the falsehood that their retirees die prematurely, when, for example, CalPERS own actuarial data proves that even firefighters retire today with a life-expectancy virtually identical to the general population.
Reactionary propagandists who oppose urgently needed pension reform should recognize that it is bipartisan, it is a financial imperative, and it is a moral imperative. They need to recognize that the sooner defined benefits are adjusted downwards, the less severe these adjustments are going to be. They need to understand that for many reformers, converting public employees to individual 401K plans is a last resort being forced on them by political, legal and financial realities, not an ulterior motive. They need to stop demonizing their opponents, and they need to stop stereotyping every critic of pensions as people who want to destroy retirement security, including Social Security, for ordinary Americans. And if they wish to defend Social Security, then they should also be willing to apply to pension formulas the tools built into Social Security – including its progressive formulas whereby highly compensated workers receive proportionally less in retirement than low income workers. Ideally, they should support requiring all public workers to participate in Social Security, so that all Americans earn – at least to the extent it is taxpayer funded – retirement entitlements according to the same set of formulas and incentives.
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Ed Ring is the executive director of the California Policy Center.
REFERENCE
Estimating America’s Total Unfunded State and Local Government Pension Liability
California Policy Center study, September 2014