Taxpayers Could Be On the Hook
By ROSS GOLDBERG, Special to the Sun
June 26, 2008

New York City officials are bracing for increased pressure on the budget as the city's pension funds are reeling from the credit crisis and posting billions of dollars in losses.


In the nine months leading up to March 31, the city's five pension funds lost a total of nearly $5 billion, or 4.4%, according to data from the city comptroller's office. This is a far cry from projections published as recently as last month, when budget planners assumed the pension system would post no losses.

If those losses are not recovered by the end of the fiscal year, which ends Monday, the city will have to pay out several billion dollars through 2015, with the first payment of $190 million set for 2010.

The government will have to make up the shortfall from the poor performance of the pension funds at a time when it is already suffering from tax revenue losses due to a souring economy.

"In itself, it's manageable," the research director for the Citizens Budget Commission, Charles Brecher, said of the pension fund losses. "The fact that it's going to be combined with revenue shortfalls means that we've got serious problems."

The Teachers' Retirement System of the City of New York, which has lost 5.06% of its value in the nine months ending March 31, has been the worst performer so far this year. The New York City Employees' Retirement System, which lost 3.98% in the same period, performed the best. Other pension funds include the New York City Police Pension Fund, the New York City Fire Department Pension Fund, and the Board of Education Retirement System of the City of New York. Numbers for the state pension system are not yet available, a spokesman for the state comptroller said.

The city's funds' performance so far this fiscal year "adds significantly to the amount of money the city has to contribute," a spokesman for the Independent Budget Office, Doug Turetsky, said. "The city is going to be facing bigger increases than perhaps previously anticipated."

New York City's pension funds did worse during the nine months ending March 31 than other public pension funds worth more than $1 billion, which posted an average loss of 3.3% during that period, according to an index from consulting group Wilshire Associates.

New York's pension funds may have suffered more than their peers because of heavy investments in stocks. "They have such a high exposure to stocks that if the stock market isn't doing well, it's going to be more visible for them," the editor of the newsletter Pensions & Investments, Nancy Webman, said. "But in a year when the market is doing well, they're going to be fabulous."

A spokesman for Comptroller William Thompson Jr., who is an investment adviser to New York City's pension funds and is a likely candidate for mayor in 2009, said the funds have diversified in recent years. "A challenging market over the past year has affected investors worldwide," a spokesman, Michael Loughran, said in a statement. "However, the funds are performing on pace with the major market indexes, due in part to the diversification of the portfolio."

According Wilshire's index, other large public funds have returned an average of 12.01% annually over the five years ended March 31, 2008. New York's worst-performing fund, the teachers' fund, returned 11.97% during that period, while the best, the police fund, returned 12.89%.

While the funds' gains over the past several years should help offset the rough times experienced during a slowing economy, legislators took advantage of the strong performance of the funds to authorize additional pension benefits, the director of the Empire Center for New York State Policy, E.J. McMahon, said. The city's annual contribution to the pension system will have nearly doubled between fiscal years 2005 and 2009, when it will owe about $6.1 billion.

"A large chunk of all the revenue generated by the economic growth of the last few years has been consumed by the increase in pension costs," Mr. McMahon said. "The way the legislature approached pension sweeteners is just to pass the union's wish list."

I wonder if the allocation of the money is "locked" for an amount of time? In other words...they can't move it around to different investments like you and I can?

Doh!

I wish my 401k was backed by the tax payers.

This is ludicrous. They had gains, so they increased benefits, now they are losing money so we have to back them. That makes sense....

WM,

Although I completely understand and agree with your sentiment....Tongue in cheek...."Careful what you wish for".....

I already fear some ill-advised gov't plan to 'absorb' 401ks and IRAs into the general national plan as a part of 'saving SS' and funding current entitlement plans under the guise that they were 'gov't IRS' plans to start with.

Yeah, that was completely in jest.

My views on the future will be that your retirement accounts will be evaluated before you recieve your due SS benefits. Those who properly lived within their means and saved properly will be the ones punished. Seems to be the way it works now....

Maybe I am reading something incorrectly here.

Aren't we talking pension funds and not 401Ks?

Isn't the investing in these funds being done by the municipalities, without any control by the beneficiaries?

I am thinking, the pension funds are funded by the employer, and possibly in some part by the employee. Then the employer invests the money as to increase the value of the fund without any input or control by the employee.

So one on hand, the "employment agreement" between the employer and employee has a formula that dictates that upon retirement, they can expect a given number of dollars.

But on the other hand, the dollars are not there because of mismanagement, bad economy, or whatever the reason.

So the employer is digging into its pockets to supplement the losses.

What if the same thing happened to GE, GM, or one of the few employers that still offer a defined benefit plan. Would the company be expected to cover those losses?

So is there a difference in that regard between a public and private corporation?

Regardless of whether anyone believes that a pension is a right or not, fact is, when that employee got hired, it was part of their compensation - no different than wages, vacation, or other benefits. So regardless of whether the employer was stupid in offering it or not, the employee has earned it.

On the other hand, if they only lost 5% in these economic times - I'd say they are doing pretty good.

OK, my bran is starting to wander here....

But this differs vastly from a 401K or IRA in which the beneficiary has direct control of their own retirement, where they can reap benefits much greater - or losses more significant - because the individual is managing their own money, not their employer.

And I for one, am actually for conversion of Social Security into a 401K-like fund.

The government established a 401K-like plan for government employees and the military over 20 years ago, called the Thrift Savings Plan. Contrary to rhetoric, it is actually one of the most successful things that the government has done - finance wise. One reason for its success is that it is an independent entity - and amazingly is pretty immune to manipulation by political forces.

As a result, many, many government employees that began with the program 20 years ago, are sitting on some very significant money. In 2007, the plan had 231 Billion in assets, with 3.8 Million participants; an average of about $70K per participant. Many folks have over a million dollars!

What is even more incredible is that depending on the retirement plan, the government, as an employer does match up to 5% in some cases - but for employees in the older plan and the military - the government provides Zero dollars in matching funds. So much of this money is strictly from individual investment.

But you will never see Social Security converted to such a system, for several reasons:

I might be wrong, but I do not believe that Social Security payments that everyone makes goes into a special fund earmarked for Social Security. Rather, I believe it simply goes into the general fund - where it can be SPENT; so it becomes a mega-slush fund. If it was to be a 401K-like plan, that money would have to be INVESTED, and no one could get then access that money for other purposes. In other words, no slush fund.

Social Security remains as an entitlement sadly to say, which means that folks that never paid into it do get a benefit (not including beneficiaries of someone that paid into it and died). It therefore is impossible to convert the system into an investment-based system, as that would mean only those that actually pay into Social Security would be able to manage their investment. This in effect limits Social Security to those that pay into it.

One popular argument against Social Security conversion into an investment system - mostly by elected officials - is that they would hate to see a little-old-lady lose all of her money by making bad decisions. OK, this is from the same government that provides a 2% benefit in the Social Security you pay anyway. So, they don't trust you to make sound investment decisions, but at the same time, provide you with a 2% benefit.

But for a practical matter, yes there is risk. But as with any other kind of 401K system, there are different funds, with typically a super-safe fund offering at least 4% interest - still a winning situation in my mind.

I think though that I have the answer.

The government requires you to invest 6% of your income into a retirement system. Lets not talk so much about the government telling you what to do with your money, but think of this idea in light of you having to pay Social Security.

OK, you have to set aside a minimum of 6% into some retirement. If your employer has a 401K plan, your "retirement obligation" can be fulfilled by you dumping 6% into that system, and you will pay nothing into Social Security. Of course, you can put in more if you wish.

Secondly, the government offers a plan similar to the TSP open to government employees and the military for those folks that do not have access to their own employer plan. But without any matching funds from the government. Same thing, if you invest 6% into that plan, you pay nothing into Social Security.

And lastly, if you do nothing, either because you cannot or will not manage your own retirement, the government will do it for you, and automatically enroll you into Social Security at the same 6% rate.

But I don't think such a thing would ever happen.

Most government and older company retirement programs were nothing but Ponzi schemes. As long as they kept growing the number of contributors, they had enough to fund the retirees.

Many of the retirement programs have been moved to stock portfolios, but not all. In the long run, it is about the only way to keep the funds healthy. It does have to be balanced over the long run. Probably the best system is one that gives an individual a choice between 3-4 high quality investment funds and moves a fixed amount to the selected fund every month, or quarter. And if the individual changes jobs, he can either continue to use his investment group, or move to one of the new employer's groups.

The problem with government employees is that they are often underpaid, but have good benefit packages. That is because politicians love deferred funding. You can promise the employees today, what someone else will have to pay for later. The same way with Social Security. When the public was not worried about Social Security, it was easy to promise additional care after stories of elderly people living on dog food came out. It was media hype, but it caught the public eye. The government was told that we were not doing enough for our elders, so they looked at Social Security. And there are many other issues, like the average lifespan increasing, but the retirement age not. My favorite is the niche babies. SS was given a rate schedule by Congress that looked OK, until they realized that it had a growth pattern that would bankrupt the system within years if continued. So they cut the program off at a certain point and started everyone from a certain age on, at the right amount of benefits. No one 'lost' any benefits, they just did not get more than what they were due. However, the number of advocacy groups and lawyers that popped up crying about how they were being cheated.

The biggest issue with stock market retirement plans is that the stock market has its ups and downs. If you retire when the market is flourishing, and expect it to continue that way, you may get hurt because you do not have any buffer built in. If you chose a plan that is overly ambitious, they will be the first to fall in bad times. And even the best investment groups have vulnerabilities to individual fraud and malfeasance. You can never get rid of all the risks. And government oversight can often be worse than no oversight at all.

I have my retirement in three different venues. I have a investment portfolio through work that I leave to the experts. It has grown nicely, but the last decade has not been the greatest for the stock market. I have my state retirement that is not invested, but has to be guaranteed by the state. It is traditionally underfunded, but no state can afford not to pay its bills to employees. And then I have a federal monthly plan through my military service. There is also Social Security. Nothing is perfect, but if for any reason, one of my programs disappears, I am still in good shape.

But I planned for my retirement. Too many people do not, or they have reasons that make them rob their retirement funds due to emergencies. And it is not unusual for people to invest their retirement money in schemes that they think will make them rich. We need to have some way of saving people from their own stupidity. The problem is that as long as funds are run by people, they will make mistakes. And if you have them run by machines, they will never make a profit.

I suppose in some cases, defined retirement plans are indeed Ponzi schemes. But; if it was the current offering by the company, and generally, the employee had no opt-out option, then as bad of a decision as it might have been for the employer to offer such a scheme, it was their offering, and they are obliged to cover the wager.

For at least one older government plan, the federal government's Civil Service Retirement system, employees paid 7% of their after tax wages into the plan, with some degree of match by the government. For this, they get about 2% of their wages for each year they work. Its not quite 2% as it is a graduated scale. But say someone has 25 years of service, they would get about 46% of their wages in retirement.

They can also contribute their own money into the government's version of a 401k, but there are no matching funds paid by the government employer.

In reality, the CSRS is an annuity, not a Ponzi scheme, as the employee paid for a substantial portion of it. This system was closed to new employees around 1984.

The newer FERS system that all government employees hired since 1984 are in, as well as members of Congress, is a 3-tier system.

First, they get 1% per year of their wages for each year they work. So that same employee with 25 years of service would get 25% of their wages.

The employee must also contribute 7% of their wages; 6.2% into Social Security, and 0.8% to get that 1% per year benefit.

And lastly, they can contribute to the government 401k plan, and the government matches the first 5% of what they contribute.

So depending on how much the employee puts into the 401k plan, the stock market history, and a bit of luck, they can retire either better or worse than the old CSR plan. But in this case, the employee must take an active role in their retirement.

And as many of you say, a lot of folks are up the creek, because they have neglected to do any retirement planning.

I didn't worry about it much until I was in my mid-30s; then my wife and I became serious about it, and got 401ks going. While it was our fault in part that we didn't start until around 1990, 401ks were only available just a couple of years prior. If I recall, it wasn't until 1985 or 1987 until my employer even offered one. My wife's employer did as well.

Unfortunately for the both of us, our employers did not offer much of a match. My wife's employer did offer a 100% match, but only up to a total of $150 annually - wow, big deal. But it was better than my employer, which offered no match. So everything we have in our accounts was from our own investment.

I kicked both of my boys in the pants to get 401ks going where they work, and they are already amazed at the $$ they have saved. But there are some horror stories out there as well. One of my co-workers, in his '30s has been robbing his 401k each year to buy Christmas presents for his kids! I guess folks have a different opinion of what an emergency is.

In my opinion, you should not rob from your 401k unless you are laying on the operating table or headed for the poor house. Yea, those are emergencies worthy of using your 401k.