Taxpayers don't actually pay union worker's pensions

[RecycleMichael]

http://blogs.forbes.com/rickungar/2011/02/25/the-wisconsin-lie-exposed-taxpayers-actually-contribute-nothing-to-public-employee-pensions/

The Wisconsin Lie Exposed – Taxpayers Actually Contribute Nothing To Public Employee Pensions

Feb. 25 2011

By RICK UNGAR
Pulitzer Prize winning tax reporter, David Cay Johnston, has written a brilliant piece for tax.com exposing the truth about who really pays for the pension and benefits for public employees in Wisconsin. Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to "contribute more" to their pension and health insurance plans. Accepting Gov. Walker' s assertions as fact, and failing to check, creates the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not. Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.

Via tax.com

How can this be possible?

Simple. The pension plan is the direct result of deferred compensation- money that employees would have been paid as cash salary but choose, instead, to have placed in the state operated pension fund where the money can be professionally invested (at a lower cost of management) for the future.

Many of us are familiar with the concept of deferred compensation from reading about the latest multi-million dollar deal with some professional athlete. As a means of allowing their ball club to have enough money to operate, lowering their own tax obligations and for other benefits, ball players often defer payment of  money they are to be paid to a later date. In the meantime, that money is invested for the ball player's benefit and then paid over at the time and in the manner agreed to in the contract between the parties.

Does anyone believe that, in the case of the ball player, the deferred money belongs to the club owner rather than the ball player? Is the owner simply providing this money to the athlete as some sort of gift? Of course not. The money is salary to be paid to the ball player, deferred for receipt at a later date.

A review of the state's collective bargaining agreements – many of which are available for review at the Wisconsin Office of State Employees web site - bears out that it is no different for state employees. The numbers are just lower. Check out section 13 of the Wisconsin Association of State Prosecutors collective bargaining agreement – "For the duration of this Agreement, the Employer will contribute on behalf of the employee five percent (5%) of the employee's earnings paid by the State. "

Johnston goes on to point out that Governor Walker has gotten away with this false narrative because journalists have failed to look closely at how employee pension plans work and have simply accepted the Governor's word for it. Because of this, those who wish the unions ill have been able to seize on that narrative to score points by running ads and spreading the word that state employees pay next to nothing for their pensions and that it is all a big taxpayer give-away.

If it is true that pension and benefit money is money that already belongs to state workers,  you might ask why state employees would not just take the cash as direct compensation and do their own investing for their retirement through their own individual retirement plans.

Again, simple.

Mr. Johnston continues-

Expecting individuals to be experts at investing their retirement money in defined contribution plans — instead of pooling the money so professional investors can manage the money as is done in defined benefit plans — is not sound economics.  The concept, at its most basic, is buying wholesale instead of retail. Wholesale is cheaper for the buyers. That is, it saves taxpayers money. The Wisconsin State Investment Board manages about $74.5 billion for an all-in cost of $224 million. That is a cost of about 30-cents per $100, which is good but not great. However it is far less than many defined contribution plans, where costs are often $1 or more per $100."

If the Wisconsin governor and state legislature were to be honest, they would correctly frame this issue. They are not, in fact, asking state employees to make a larger contribution to their pension and benefits programs as that would not be possible- the employees are already paying 100% of the contributions.

What they are actually asking is that the employees take a pay cut.

That may or may not be an appropriate request depending on your point of view – but the argument that the taxpayers are providing state workers with some gift is as false as the argument that state workers are paid better than employees with comparable education and skills in private industry.

Maybe state workers need to take pay cut along with so many of their fellow Americans. But let's, at the least, recognize this sacrifice for what it is rather than pretending they've been getting away with some sweet deal that now must be brought to an end.

UPDATE: Since this post was published earlier today, many commenters have made the point that, while it is true that it is state employees' own money that funds the pension plan, when the pension plan comes up short it is up to the taxpayer to make up the difference.

There is some truth in this – but not as much as many seem to think. Because the pension plan is a defined benefit plan – requiring the state to pay the agreed benefit for however long the employee may live in retirement- if the employee lives longer than the actuarial plan anticipated, the taxpayer is on the hook for the pay-outs during the longer life.

But is this the fault of the state employees? The pension agreements are the result of collective bargaining. That means that the state has every opportunity to properly calculate the anticipated lifespan and then add on some margin for error. What's more, the losses taken by the pension funds over the past few years can hardly be blamed on the employees.

Take a look at what Sue Urahn, an expert on the subject at the Pew Center on the States, has to say about this when describing the $1 trillion gap that existed between the $2.35 trillion states had set aside to pay for employees' retirement benefits and the $3.35 trillion price tag of those promises.at the end of 2008-

To a significant degree, the $1 trillion reflects states' own policy choices and lack of discipline:

•• failing to make annual payments for pension systems at the levels recommended by their own actuaries;
•• expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
•• providing retiree health care without adequately funding it
Via Pew Center on the States

That is the point. While the governor of Wisconsin is busy trying to shift the blame to the workers in an effort to put an end to collective bargaining, the reality is that it was the state who punted on this – not the employees.

Further, by the state employee unions agreeing to the deal proposed by Walker on their benefits (as they have despite Walker's refusal to accept it) they are taking on much  - and possibly all – of the obligation out of their own pockets.

As a result, the taxpayers do not contribute to the public employee pension programs so much as serve as insurers. If their elected officials have been sloppy , the taxpayers must stand behind it. But if the market continues to perform as it has been performing this past year, don't be surprised if the funding crisis begins to recede. If it does, what will you say then?

[TeeDub]

Your whole premise is flawed.   


Regardless, it would be fair to say that taxpayers actually pay 100% of not only state employee's pensions, but salaries as well.

[Hoss]

Your whole premise is flawed.   


Regardless, it would be fair to say that taxpayers actually pay 100% of not only state employee's pensions, but salaries as well.

As I read the article, I realized the piece was not written by RM.

Something you evidently didn't pick up on.

[BKDotCom]

As I read the article, I realized the piece was not written by RM.

Something you evidently didn't pick up on.

I think RM would have said "here's some article I found... but I don't agree with any of it"

When I give a Hallmark card... It usually expresses what I'm feeling better than I'd be able to put into words.

[RecycleMichael]

I guess the link at the top to Forbes.com and the prominent "by Rick Ungar" wasn't clear enough.

I didn't write this article. Sorry for any confusion.

[Hoss]

I think RM would have said "here's some article I found... but I don't agree with any of it"

When I give a Hallmark card... It usually expresses what I'm feeling better than I'd be able to put into words.

Glad you're a clairvoyant.  Wish I had those abilities.  I could leave my current job and join the circus and make tons of money speculating...

[TeeDub]

Um.   I didn't think you wrote it.    

Apparently I should have said "The article's" in place of "Your."   I made the mistake of assuming that since you posted it, you also agreed with it.   Worse yet, I never assumed that by using the "Your" it imply that you were trying to take ownership of the article, but rather rally around the premise of the article.

[Gaspar]

I saw this Friday, the same link to this article hit FaceBook at the exact same time from every union teacher we know (my wife is a teacher, and has many union friends).  Her friend Katy said that they got an email from the union to post it on FaceBook and Twitter.

The article was a really bad attempt to confuse people who are bad at finance.  "Deferred Compensation" is only real if the participant has the option to take that compensation out of deferred status.  Otherwise it is a play on words. 

Besides, 100% of their compensation is "contributed to by tax payers," deferred or not.  That's almost 100 pennies out of every dollar!  

This guy is either an idiot, or worse, he's playing to idiots.

 

[we vs us]

Your whole premise is flawed.    

Why is the premise flawed?  It's like a 401k but with no employer match.  Or at least that's how I'm reading it.  

EDIT:  actually, I think I get it . . . you're saying that, because they're government employees, all largesse flows the taxpayer . . . and that the taxpayers should be able to manipulate the entire benefit pool at will, or for political expediency. 

Another good argument for public employee unions, IMO.

[Red Arrow]

Whether or not the claims on the pension are fair depends on how the money shows up.

If it is like a 401K, the money should show up on the paycheck as part of the before tax compensation (hopefully considered to be a fair salary).   If part of that money is then put in a tax deferred retirement account, then it is like a 401K, sort-of.  A defined benefit package can run over the actuarial funded amount.  If the retired teacher dies early, is the money available to any heir like a 401K or does the money stay with the pool to pay those that live longer?  I don't know in this case.  If the retirement fund money is not part of the salary on the pay check, then I would not consider the retirement fund to be merely deferred compensation but rather it is an additional benefit.

It's all words and accounting tricks.  Of course all the money comes from the taxpayers, just as my salary comes from my employer.  

[Gaspar]

Why is the premise flawed?  It's like a 401k but with no employer match.  Or at least that's how I'm reading it.  

EDIT:  actually, I think I get it . . . you're saying that, because they're government employees, all largesse flows the taxpayer . . . and that the taxpayers should be able to manipulate the entire benefit pool at will, or for political expediency. 

Another good argument for public employee unions, IMO.

Actually under their contract, their wages were never reduced to implement the additional 5% "deferred," nor is the "deferral" voulentary.  Their wages were increased to match that amount, so the term "deferred income" has no value, except to idiots.

 

[RecycleMichael]

I don't know either and those are reasonable questions that should be answered before one has strong opinions on the matter.

The most striking part of the article to me was that often the blame is thatthe state didn't fund the pension plan as they should have. The employee union and the state administrator agree that the the employee puts 5% of their salary in an investment account controlled by the state and then the state never puts the money in.

The fault of underfunded pension plans isn't the union's doing, it is the mistakes made by the state financial workers or politicians.

[guido911]

Actually under their contract, their wages were never reduced to implement the additional 5% "deferred," nor is the "deferral" voulentary.  Their wages were increased to match that amount, so the term "deferred income" has no value, except to idiots desperate union members.

 

FIFY. I also saw the hammering of this article by teacher-friends of mine on Facebook.

[RecycleMichael]

Actually under their contract, their wages were never reduced to implement the additional 5% "deferred," nor is the "deferral" voulentary.  Their wages were increased to match that amount, so the term "deferred income" has no value, except to idiots. 

Why so mean?

The employees negotiate their salary and benefits and one year they didn't take pay raises instead agreeing to set up better pension plans.

By the way, look up deferred income on any search engine. It is a standard, well-recognized accounting practice. I guess that makes all accountants and tax professionals idiots in your eyes.

Oh yeah, you were the financial genius who told us the Dow was going to plummet 2,000 points right before it rose 2,000 points.

[JeffM]

Any article posted that uses the word "Union" and leaves out conservative adjectives like "boss" or "goons" will not be taken seriously by the usual TNF suspects.... just sayin'