2013-10-28

Pension Heaven? No, Pension Reality

A mistake people make when reading this story is that they think these pensioners have lost 84 cents on the dollar. This is incorrect. What is happening is they are receiving 16 cents of every promised dollar in benefits. Since those benefits were impossible to pay, and also unfunded, the actual loss is far lower.

Detroit Pensioners Face Miserable 16 Cent On The Dollar Recovery

Here's an article from earlier in the year: How Underfunded Are Detroit's Pension Plans?
The actuaries hired by the city’s emergency manager say that the pensions are underfunded by 40 percent to 50 percent.

...Officials working for Mr. Orr said their estimates of a 7% rate of return on the funds' investments is more realistic than the 8% used by the funds, which they said was too high because it didn't account for demographic changes of pensionholders and the funds' investment mix.

... The actuary calculates funding status for three scenarios: 7 percent (what the city requested); 7.5 percent (to show sensitivity or results to changes in investment returns) and 6.3 percent (what the actuarial consultant thinks is the most likely actual market return.) By contrast, the unions are projecting an average market return of 8.4 percent before expenses.
By those estimates, it's likely Detroit was at best 50 percent funded. Suddenly, 16 cents on the dollar turns out to be 32 cents on actual monies. But wait, there's more.

Here’s the really interesting question, however: Why is the pension fund arguing about this? Heading into the bankruptcy, a pension fund would normally try to inflate the underfunding estimates as high as possible, not minimize them. That’s because the unfunded pension liability is treated as an unsecured debt; it has to assemble with other unsecured creditors to collect whatever’s left over after the secured creditors have been paid. The bigger the claim, the larger the amount you’re likely to collect.

Chapter 9 bankruptcy is a little different, of course. Still, it doesn’t seem possible that transforming a $3.5 billion claim into a claim for less than $700 million could be in their interest. So why are they fighting this estimate so hard?
One possibility is that they’re trying to keep from triggering a Michigan law that lets Governor Rick Snyder fire and replace the board of a public pension whose funding status goes below 80 percent. Snyder could then, in theory, replace the board with one that is a better negotiating partner. But I’m not sure how convincing I find this, because we’re well beyond the negotiating stage at this point. Why would the pension funds fear Snyder more than the bankruptcy judge?
The key point to understand here is that pensioners are getting 100 cents of every dollar they put into the system. What they are not getting are their promised benefits that are impossible to pay. They are getting 16 cents on every dollar of the $3.5 billion in pension under funding.

From the Reuters article linked in the ZeroHedge piece above: Detroit pension cuts 'function of mathematics' -investment banker
The city has said about half of its liabilities stem from retirement benefits, including $5.7 billion for healthcare and other obligations, and $3.5 billion involving pensions.
Detroit has $18.5 billion in debt and $9.2 billion of it is healthcare and pension liabilities. Detroit is like almost every other municipality that has declared bankruptcy: it is the pensions and healthcare benefits negotiated by unions and politicians. They made these crony deals together, an exchange of money for power and votes. Voters are to blame as well; most politicians that have tried to cut spending on education, for example, were targeting wages, pensions and benefits of teachers. Ever time a politician tried to cut spending that flowed to the unions, they were demonized in the media and voters bought the story. Everything was going good until reality hit: these huge benefits were never funded.

No money has been stolen. Promises by crooked politicians to crooked unions will not be kept; they are being tossed out by bankruptcy judges. The precedent is now clear: impossible to fulfill pensions and benefits promises will be scrapped.

And by the way, Detroit unions looted their own pensions. Orr proposes freeze for Detroit pension funds
In another move Wednesday, Orr ordered 21 pension officials — including City Council President Saunteel Jenkins — to turn over records relating to more than $1.9 billion in excess earnings paid to city retirees and employees.

Orr wants documents and records relating to the pension fund’s practice of issuing bonus checks to retirees and a savings plan for current employees. The excess earnings totaled $1.92 billion since the mid-1980s.

Any government retiree or worker near retirement needs to find out how much their pension is funded ASAP.

And everyone else take note. The promises of Social Security and Medicare have even less legal standing that these pensions. When the money runs out, benefits will disappear. In the end, the low tide reveals all lies.

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