Mike Shedlock has an article out about the pension fiasco at the City of Providence, Rhode Island. The gist of the problem is that the cola raises are running at 6 per cent, which, when compounded, can double a pension in 13 years.
And certainly, most pensions are not run this way at the state and county levels. Mish is correct when he says that the Providence pension is unsustainable and that, looking back, was irresponsible as to raises.
While he raised red flags among reactionary types as he always does, Mish, as he is called, forgot to point out that the cola agreement that occurred in the early 1990’s was considered entirely reasonable by the actuary responsible for the solvency of the pension. I noticed that this little fact was entirely missing from Mish’s article. That is irresponsible and set up to inflame the ill informed.
Truth of the matter is that the actuaries expected rosy 8.5 per cent returns on the pension investments. That was not unlike most other pensions, though other pension funds are much more careful regarding the payouts of those benefits than what has occurred in many city pensions. No one is saying that this was not irresponsible looking back, but based upon the projections on earnings by the funds, it was not unreasonable at the time to make those predictions.
Yet by simply reducing the expected returns to 7.5 per cent, the fund would have made great strides in maintaining a stronger position with smaller colas. The actuary would have saved a lot of grief by just backing off a bit in his rosy predictions.
And if you add to this fact that jobs have been cut and salaries reduced, you can see that there are outside factors, like the credit crisis caused by the bankers that also makes the situation worse. If contributions by employees to the pension funds are reduced, that makes the problem worse. I know this has happened with regard to some pensions, but I do not know if Rhode Island city pensions are affected by this shortfall.
Add to all this the fact that the courts were involved, so that the administrators signed off on the colas to avoid further litigation and you have the makings of a failure. But the way Mish wrote his article, people were just stupid or corrupt and no other factors were at work here.
The Rhode Island Supreme Court later ruled that the retirement board did not have the authority to assign colas. But the damage was already done. Most colas in most pensions are based upon cost of living increases relating to actual inflation. Of course, where a pension does incredibly better than that benchmark, you will have pensioners contesting the amount of increases in court.
But over long periods of time, sticking with the actual cost of living increases as measured by the Federal Government is likely the best way to keep pensions from blowing up in bad times.
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