CBO Estimates

[SoCalActuary]

After reading the Congressional Budget Office report, I was struck how misleading it is.

Their scoring method is the effect on the Federal Budget of tax revenues.

So if Congress forced private industry to pay a huge tax to a non-budget entity (read PBGC),

then more business deductions are allowed and tax revenues are "LOST" to Congress.

Meanwhile, the govt has taken a lot more money. What is not measured along the way is that PBGC is less likely to need a bail-out.

[david rigby]

... PBGC is less likely to need a bail-out.

The PBGC will always need a bail-out, unless and until Congress realizes that pension plan terminations are not insurable events. They had the opportunity to freeze it, but they made it worse.

[Guest mjb]

There has always been a budget tension between requring larger deductions to insure plan solvency which increases the deficit and limiting how much can be contributed which increases underfunding in plans of bankrupt employers. The PBGC is an off line agency whose assets do not show up in the fed budget as revenue. From a budget point of view all tax deductions for retirement plans- employer, employee, IRA are revenue losers which is why the govt is encouraging Roth accounts.

[Don Levit]

mjb:

I was not aware that the assets of the PBGC are not in the budget.

I guess that includes its liabilities also, which, apparently, exceed the assets.

I read a report recently from some national association of public pension administrators that said public defined benefit pensions are safer than private defined benefit pensions, even considering the PBGC.

It went on to state the reasons were that public pensions are backed by the state constitions, as well as the state's taxpayers.

Any thoughts?

Don Levit

[Guest mjb]

State/ municipal employee benefits are guaranteed by either state law or the state constitution (not by the PBGC) which in turn is funded by the state's taxing power. (states do not declare bankruptcy to avoid paying benefits.) There was recent Alaska ct decision which held that the state could not cut back on retirement benefits paid to state workers. NY and NJ have large deficits in their state pension plans and NJ increased the sales tax by 1 cent in July to pay for $1B in this years's contributions to the state pension plans and local NJ govts are being required to contribute 600M for their workers. The NJ govt pensions are underfunded by 18B. The NYTimes ran an article this week on NYC (not NY state) pension plans which under some actuarial calculations could be under funded by $49B (not M). Would you believe that NYC has 250,000 employees (more than the entire state of CA.) In addition states/ local govts have guaranteed retiree health benefits to their workers for billiions more which will be paid by the taxpayers.

[Don Levit]

mjb:

Wow, you seem to be on top of this issue!

In your opinion, are these benefits any safer than defined benefit federal pensions, or even Social Security and Medicare?

Don Levit

[Guest mjb]

mjb:

In your opinion, are these benefits any safer than defined benefit federal pensions, or even Social Security and Medicare?

Don Levit

They are safer b/c the courts will require that the states pay for the promised benefits even if it requires raising taxes. SS/medicare benefits are not legally guaranteed like state pension benefits

[Don Levit]

mjb:

I understand what you are saying.

The same claims were made in the report I read by some people associated with the public pension system.

The same claims were made by the GASB.

You and I both know that the taxpayers are pretty much up to the limits of what they can bear.

The federal government can, legally, run deficits, while the state governments cannot.

Both the federal and state debts will be passed to the taxpayers.

Regardless of the paper guarantees of the courts and the constitutions, I cannot envision the full faith and credit of the states being more valuable than that of the federal government.

Don Levit

[Guest mjb]

The courts will simply enforce the promises made by the state govt and leave it to the legislators to raise taxes or reduce other services. This is what the AK court did when it ruled that the the legislature could not reduce benefits that had been promised to state retirees. Where the promise is constitutional, e.g. retirement benefits cannot be reduced during employment, the state govt wont even try to cutback retiree benefits. The result will be a migration of people to low tax states that dont have such legacy obligations, just as there has been a migration of airline travelers to low cost airlines that dont have the legacy costs of the established carriers for retirement and health benefits. Most of the states with heavy unfunded obligations to public workers are blue states that impose higher state taxes and whose residents have higher incomes than states w/out such obligations (and account for most of the AMT taxes paid). You ought to ask joel on the 403b board for his opinion about the possibility of cutting back on benefits promised to public employees.

[david rigby]

You ought to ask joel on the 403b board for his opinion about the possibility of cutting back on benefits promised to public employees.

AAIIIIEEEEE!

[Don Levit]

mjb:

What you said I understand to be correct.

I have spoken with several people in different states, and they all confirmed what you said about the state's inability to change benefits, including retiree health benefits!

They mentioned that, regarding health benefits, there is more flexibility regarding the premiums the retirees would have to pay, though.

Of course, whether or not the states can meet their responsibilities is another question.

I have some interesting material on San Diego, that provides details on the "amendments" made to the plan, enhancing benefits, when the city was having trouble meeting its unenhanced promises.

I will be happy to E-mail to those who are interested.

Don Levit

[SoCalActuary]

Somewhere along the way, about the time of Don Levitt's comments, this started to become a forum on gov't plan funding.

My observations on gov't plans is this cynical perspective:

Judges won't let gov't plans cut back on benefits for any state or local employees, in fear that it could happen to them.

[Don Levit]

So. Cal. Actuary:

It seems like you feel it is unlikele the PBGC will go bankrupt.

Do you have any figures to back up your premise?

What are the chances, in your opinion, of the federal government bailing out the states, if needed?

Don Levit

[SoCalActuary]

So. Cal. Actuary:

It seems like you feel it is unlikele the PBGC will go bankrupt.

Do you have any figures to back up your premise?

What are the chances, in your opinion, of the federal government bailing out the states, if needed?

Don Levit

My opinion is that PBGC will not "go bankrupt", partly because they pay annuity benefits only, and that they will ultimately be seen as part of the basic level of social protection in this country. In other words, PBGC is backed by political willpower, along with taxing authority sanctioned by Congress. It is the smaller brother of Social Security, which also has no true ability to pay benefits except the tax and borrowing authority of the US Gov't.

On state funding issues, the legislatures have made their choices and now must live with them. They will find the money somehow, including their traditional methods of borrowing today to pay for tomorrow, along with following the theme of the Beatles song "Taxman". It will be interesting if GASB will have enough teeth in it to force the states to pay for their reckless promises.

[AndyH]

Cheap shot on judges, eh, SoCalMoe?

[Don Levit]

So Cal:

You seem to believe that "the full faith and credit of the U.S. government" means a lot.

At what point will we have to descend to where it means a lot less?

Apparently, Moody's is considering downgrading the risk of U.S. Traesury bonds.

Don Levit

[SoCalActuary]

AndyH - I'm sorry this got personal, because this forum is valuable to many people.

Yes, I sincerely believe that gov't plans will never cut back benefits to existing employees.

If the attempt is made, a judge will invalidate it. Somewhere in the last 35 years as a practicing actuary,

this was made clear in several articles and actual cases.

Don - Who prints the money to pay the bills of the gov't - the Federal Reserve. There are no employees or governors of the Fed who will allow the US gov't to forfeit an obligation. Even if they are paid in inflated (ala Jimmy Carter) dollars, the bonds are solid. And for those challenged by economic reality, the gov't has not raised taxes as high as they could go, because fortunately Congress hasn't let them. But if they had to, the gov't could charge much higher taxes to pay their bills, including Social Security, PBGC liability, and gov't subsidies to state & local gov'ts to pay their pensions.

[Don Levit]

SoCalActuary:

I agree with you that Congress could raise taxes to pay for these benefits, in order that the federal government would not default.

Do you think that a (federal-type) government has never defaulted before?

It sounds like you feel the U.S. is immune from this possibility.

Don Levit

[david rigby]

... the gov't has not raised taxes as high as they could go, because fortunately Congress hasn't let them.

Huh?

[SoCalActuary]

SoCalActuary:

I agree with you that Congress could raise taxes to pay for these benefits, in order that the federal government would not default.

Do you think that a (federal-type) government has never defaulted before?

It sounds like you feel the U.S. is immune from this possibility.

Don Levit

You understand me correctly. A federal-type government could, but I think this one won't!

The political process has too much at stake. We are not in deep recession, our tax burden is

reasonably related to GNP, interest rates are relatively stable, and unemployment is not

driving reform. The big changes will occur in 6-10 years, when SS taxes are not supporting the rest

of the gov't. But even then, federal default is political suicide, so count me 99.9% certain.

Meanwhile, back on the original point of this discussion, private industry will be making a lot more

deposits to a federal agency (PBGC) and more required funding of their pension benefits,

but they call this a loss in federal revenue because employers get to take a tax deduction.

[Don Levit]

So.Cal.Actuary:

That does seem like weird accounting.

What happens to the paymernts made to the PBGC, less the tax deduction?

How is that accounted for?

You mentioned our tax birden is reasonably related to GNP?

Are you referring to our deficit this year?

I assume you are aware that the deficit does not include Social Security and Medicare.

Also, whenever I hear the pundits talk about the deficit being only 4% of GNP, they do not speak of the accumulated deficits over the years.

I believe the accumulated deficits are higher than our GNP.

You know, rarely did Muhammad Ali knock out an opponent with one punch.

It was more likely an accumulation of punches.

Don Levit

[SoCalActuary]

Remember that our recent low interest rates kept federal debt service costs down,

allowing both the executive and legislative branches to spend freely.

It is an odd and complex part of our economy that federal deficits are part of the

expanding money supply associated with economic growth. This is partly because

federal debt has a special role in bank liquidity requirements.

How does our accumulated deficit compare with our GNP? How has it changed

from prior years? Does it require a large burden on our national resources to

service the national debt? I don't hear many main-stream economists or bankers

shouting doom or disaster right now.

My mortgage balance is higher than my annual income too. So what?