George Rebane

OK folks, here’s the drill.  Today, almost all government and union pension plans are in trouble.  Bottom line, they are under funded.  And having heard that explanation, you are supposed say, ‘Oh, alright.’ and act as if you understand whether you do or don’t.  Since all institutional pension plans sooner or later become playpens for major mischief, we’ll try to demystify some of the fundamentals of how a pension plan works.  Who cares?  All of us do, because there will be major grabs for your wallet by about everyone out there who believes you still have a wallet.

A legitimate vanilla pension plan works by first setting up an account into which the worker and/or employer put money on a regular basis while the worker works for the employer.  The money in the account is invested, and, hopefully, continues to grow as you work.  The fancy term is that it accrues at some rate of growth through interest, dividends, capital appreciation, and, of course, worker/employer contributions.

When you quit working for the employer, hopefully your account may still continue to grow until you retire.  It all depends on what you do with it after you quit.  If/when you retire, then the amount in your account will begin to be drawn down.  How it gets drawn down depends on what kind of bet you want or are allowed to make.  That ranges anywhere from grabbing the money and managing your own affairs from then on, to having a monthly check sent to you by some financial management outfit in charge of a lot of retirement accounts like yours.

Somewhere along the line you start thinking about the ‘what ifs’, like what if there’s less there than I had planned?  Boy, that cuts to the chase real fast.  If there’s less there to fund the payments that you expected, then doesn’t that big financial management outfit have to make up the difference?  Definitely not; all those guys are responsible for is what is known as ‘best efforts’ in investing and managing your account while not intentionally robbing you blind (although that part is not always as hard and firm as it should be).  So who is responsible for cutting you the retirement check you were told to expect when you signed on?

Here we need to get more specific.  If you worked for a government agency, then the taxing government jurisdiction is responsible for your contracted due.  And if your account cannot fund that amount every month, the jurisdiction is supposed pony up the needed monies from its tax base.  Well and good, you’re covered.  But not so fast.

Here we have to take a little detour into the realm of behavioral finance and get introduced to the two little known but universally practiced Rebane’s Rules of Cash.

Payer Rule – 1) Pay as little as possible, 2) as late as possible, and 3) only then when absolutely necessary.

Payee Rule – 1) Get as much as possible, 2) as soon as possible, and 3) under any and all circumstances.

Meanwhile back at the ranch you are waiting for the check from your under-funded government pension plan.  As payer, the government is ahead of you and has already implemented the Payer Rule with the help of the big financial management outfit – let’s use Calpers as an example.  Now you have to understand at this point that Calpers’ customer is the jurisdiction, not you.  For its customers Calpers helps implement the Payer Rule in two ways.

First, it ‘securitizes’ (where have you heard that before?) your government jurisdiction’s retirement obligations by putting them into a pool that is made up of a lot of other jurisdictions also practicing the Payer Rule.  Now every retiree from all those jurisdictions gets their check from the pool’s account.  (Think of Calpers as being made up of a lot of these pools of money.)

Second, each jurisdiction can delay putting in the full amount required to completely fund the future stream of promised retiree checks.  It does this by continuing to make payments into the pool from just their current employees.  And if that isn’t enough to cover a jurisdiction’s obligated draw, why then Calpers will simply lend the jurisdiction the added amount, and the jurisdiction will only have to make interest payments on their loan.

Here the astute reader is beginning to detect a whiff of a Ponzi wafting through the rafters.

And someone is sure to ask, well what about paying off the principal?  At this point the answer is ‘Can you spell U-N-F-U-N-D-E-D  L-I-A-B-I-L-I-T-Y?’  Yes, dear reader, most jurisdictions are making up their current retirees' pensions from the income they receive from their current tax bases and their current workers, who also get their wages from the tax bases.  You see, all the money to make these payments that was supposed to be there, isn’t – just like it isn’t in your celebrated Social Security Trust Fund.  (And for practicing this tried and true method of government finance in the private sector, Madoff is now doing hard time until he dies.)

Someone else probably asked, ‘well where’s the money for the current workers’ retirements going to come from?’ And then, some other smart-aleck will pipe up, ‘but what if the government can’t pull enough money out of the taxpayers at some point in the future?’  The answers come in two flavors – Chapter 9 bankruptcy and federalization.  (We eliminate economic growth with attendant fiscal responsibility as being way too radical of an approach for the governmental mind, and for the voters firmly clenched on the government teat.)

Chapter 9 is the part of US bankruptcy code that applies to government jurisdictions like municipalities and counties.  Understandably, government worker unions are now pressing for laws that will prevent financially destitute jurisdictions from declaring bankruptcy without first getting union permission.  Yes, you read that correctly.  The unions don't want to re-negotiate their pension contracts down to nothing with a bankruptcy-protected jurisdiction, they'd rather have that jurisdiction be forced to sell its city parks to the developers, and put their snowplows on the block to make up the shortfalls.

Federalization is when the feds step in and fund the retirement accounts with freshly printed money (this comes under the sobriquet of “monetary easing”, I love that term).  When these eased monies arrive, you can kiss such local governments good-bye, because all federal bucks come with their own rulebooks.  Your local government center will then become just another long arm of the federal government.

Some may now be breathing a sigh of relief because their retirement accounts are set up through their unions.  I’m afraid to be the bearer of bad news, almost all union retirement accounts are already well into the Ponzi phase, and will either go belly up or bribe their local politicians to federalize them out of their unfunded liabilities.  They’re paying out current retirees with money from their working members.  Delving into this instantly sheds light on the recent (and sure to be resurgent) ‘card check’ scheme that the unions are pushing to pump their memberships so they can continue applying the Payer Rule.  BTW, unions have some really interesting two-tiered retirement systems – one for the union bosses and one for the worker bees – sorta like our electeds in Washington.

How did we get into this mess?  In the next exciting chapter of Pension Pranks and Ponzis we’ll take a look at some actual numbers and answer that question – but then, you knew that.

ps. Isn't it amazing how quiet the current government employees and union members are about all this – no torchlight meetings to demand a full accounting on the status of their plans and what, if anything, their employer or union intends to do to make them whole.  It's almost as if they're expecting to retire with their pensions intact before the music stops playing.