April 29, 2012

MORE ON THOSE UNDERFUNDED / OVER-GENEROUS PUBLIC PENSION PLANS: How Retirement Benefits May Sink the States.

Government retiree costs are likely to play an increasing role in the competition among states for business and people, because these liabilities are not evenly distributed. Some states have enormous retiree obligations that they will somehow have to pay; others have enacted significant reforms, or never made lofty promises to their workers in the first place.

Indiana’s debt for unfunded retiree health-care benefits, for example, amounts to just $81 per person. Neighboring Illinois’s accumulated obligations for the same benefit average $3,399 per person. Illinois is an object lesson in why firms are starting to pay more attention to the long-term fiscal prospects of communities. Early last year, the state imposed $7 billion in new taxes on residents and business, pledging to use the money to eliminate its deficit and pay down a backlog of unpaid bills (to Medicaid providers, state vendors and delayed tax refunds to businesses). But more than a year later, the state is in worse fiscal shape, with its total deficit expected to increase to $5 billion from $4.6 billion, according to an estimate by the Civic Federation of Chicago.

Rising pension costs will eat up much of the tax increase. Illinois borrowed money in the last two years to make contributions to its public pension funds. This year, under pressure to stop adding to its debt, the legislature must make its pension contributions out of tax money. That will cost $4.1 billion plus an additional $1.6 billion in interest payments on previous pension borrowings.

Business leaders are now speaking openly about Illinois’ fiscal failures.

Let’s just be thankful that the folks running our national budget don’t think the same way as . . . uh oh.

See, the thing is, some people say that people aren’t clever enough to plan for their own retirement. But what makes anyone believe that people can then be clever enough to plan for other people’s retirements?

Or as one commenter says:

So Nocera made bad, costly decision after bad, costly decision, and his conclusion is “The 401(K) is a failed experiment”?

Let me guess: the solution is a government-funded retirement for everyone. Yes, that’ll work out just fine. Nocera can retire, and I can pay for his retirement with my tax money.

Only if politicians value buying his vote more than yours.

UPDATE: Reader Joe Glandorf writes:

Nocera doesn’t seem to notice that defined benefit plans, both public and private, have failed and (for the public sector) are on the verge of failing, massively. Does he not know that all these beneficiaries will get downgraded from what they were “promised”? Yes, as recently as 20 years ago, managing a 401-k or IRA was expensive as well as challenging. Today, however, a complete investment novice can go on-line and quickly find a low cost, highly diversified, automatically re-balancing investment program from a number of sound investment firms (I use Vanguard) for one’s IRA if not an employer’s 401-k. These will, essentially, duplicate what any pension fund has historically done. The difference is that the beneficiary will know each step of the way where they REALLY stand and can control their spending and expectations accordingly. But that would take most people about 30 hours to do some thorough research. Apparently, this is too much for the Nocera’s of the world to expect from anyone; actually do some work understanding how to provide for your own financial security.

Of course, that won’t help you if you raid the fund to pay for new granite countertops. But then, that’s what our political leaders have been doing on a national scale for years.

ANOTHER UPDATE: A reader writes: “One recurring theme that I’ve noticed with 50-60 something NY Times columnists, and indeed men of that age in general, is that their financial woes involve a messy divorce earlier in their life. For people who are wondering why young men don’t ‘man up’ and marry, they may want to consider the effect of one example of divorce-induced financial ruin after another.” Well, that’s what the Insta-Wife’s forthcoming book is about.

And reader Jeff Randles emails: “If I raid my 401k then I’ve got the granite counter tops. If the government raids my 401k, then somebody else gets the granite counter tops.”

MORE: A reader who asks for anonymity comments: “Just wanted to point out that Teresa Ghilarducci was the Democrat operative that proposed the GRA to a congressional committee as a replacement for the 401K. That was what triggered the blogosphere backlash and the subsequent backpedaling of Democrats when it was suggested that they were trying to seize peoples’ 401K and IRA accounts. So having Joe Nocera quote her in his article about his 401K is a bit telling, don’t you think?”

MORE STILL: Reader Theodore Simon spots an irony:

‘What, then, will people do when they retire? I asked Ghilarducci. “Their retirement plan is faith based,” she replied. “They have faith that it will somehow work out.” ‘

Isn’t that precisely what Congressional Democrats always offer as their excuse for doing nothing to ensure the long-term viability of Social Security and Medicare, that in the end, it will “somehow work out”?

As I say, if people are too dumb to plan for their own retirements, they’re probably too dumb to plan for other people’s, too. And certainly there’s no evidence that the folks in Washington are any less dumb than the public at large.

STILL MORE: Reader John Primmer writes:

Professor Reynolds: Isn’t it telling that when a 60 year old NYT columnist wakes up to the fact that he has messed up his retirement plans, he turns to a “behavioral economist at the New School.” And the advice he gets is “OMG this is truly a mess. We must devise a new system to fix it.” As another reader observed, you can go online and have access to gobs of information that can help you make sound investment decisions. Or you can call on financial consultants employed by dozens of low-cost brokers/custodians, such as Schwab, Fidelity, T Rowe Price, E Trade, et al. In contrast to most politicians, reputable financial advisors realize that their advice has consequences and they will be judged on their performance.

Heh. Indeed.