Yesterday, I blogged about fixing the American economy because of a prompt at Instapundit’s blog. I forgot to mention a huge deal.
Pensions.
Government pensions are guaranteed. Defined benefit they call it. They get cost of living raises until the day they die.
It is a double-edged sword. We want to have great people work for the government because we assume that hiring great people equals good government. But, traditionally, government employees that took that position were not getting wealthy. They were middle class. My grandfather worked for the USFS for his entire career. He loved what he did and he did it well. He retired, and he got a public pension which allowed him to live a nice life, but not a luxurious one.
Contrast that with people like Tony Fauci. Contrast that with people in the Illinois pension system. Wirepoints and Illinois Policy have done yeoman’s work on uncovering all this drek.
Remember the hiring of 87,000 new IRS agents? The US Taxpayer gets to pay their pensions too when they retire after they are done harassing the middle class.
I’d turn government pensions into a defined contribution system and end the current defined benefit system. It would empower government employees to save for themselves and would make them more attuned to the private stock and bond markets which they pay no attention to now. It might make them more empathetic to the great unwashed US citizenry and free enterprise system when they wrote regulations.
Critics would say they would not enact regulations that might hurt their stock portfolio. Meh, no one regulation crashes an entire market. If they were investing in index funds, they’d have no conflicts.
There are huge costs to administering the current government pension plan. Defined-benefit plans require complex actuarial projections and insurance for guarantees, making the costs of administration very high. That’s why the private sector has largely ditched them.
Do you want to get economic incentives between bureaucrats and the private sector aligned? Change their pension structure to defined contribution.
I know this has nothing to do with the post at hand, but I have a question that I think others might have as well for which I believe you are uniquely qualified to answer. I don't have your email address, so I'm asking it here. Just delete this if it's inappropriate or whatever.
ZeroHedge has been writing about a gi-huge-ic margin call coming due with regards to energy.
https://www.zerohedge.com/markets/trillions-liquidity-support-going-be-needed-swiss-finns-join-europes-bailout-brigade
The problem for me is that the article kind of assumes the reader knows what is going on and I don't. I know what buying on margin is and I understand the mechanics of a margin call, but this case it isn't about a few 1000 shares of APL in my brokerage account. It's Europe. And big Euro utes who are in trouble.
Do you know what this is about? Would you mind explaining it? Thanks.
Unless something has radically changed, US government pensions transitioned from CSRS, a 100% defined-benefit plan, to FERS, a (largely) defined-contribution plan, in 1984 (!) when I was in the third year of my career working for the Navy.
It's true that there is a small guaranteed benefit. But most of the benefit comes from the employee's levels of contribution, which are matched in part by the government.
In my day the government contributed 1% of your base pay to your retirement, and would match up to the first 5% of employee contributions on a 1-to-1 basis. The government would match the next up to 5% of your contribution on a 0.5-to-1 basis. So the most the government would match is about 7.5% of your base pay, and then only if you were in the bottom half of the workforce.
There was also a cap on the government contribution based on the average level of contributions throughout the workforce, intended to avoid a "rich-get-richer" issue.
The contributions were invested in a series of broad-based funds: at the start there was an equities fund, a fixed-income fund, and a Treasuries fund. Later they added some others.
But since no new hires has been added to the older, defined-benefit plan since January 1984, the number of living beneficiaries is negligible. You'd have to have been working for over 38 years for the Feds to still be a beneficiary. Most of the folks I worked with retired somewhere around 30-37 years of service, the top figure being the "crossover point" at which you gained no additional benefit from continuing to work.
I am sure that there are a handful of diehards still diligently working away (*ahem* Fauci *ahem*) but I'd be extraordinarily surprised if there were more than a few hundred at this point, out of a workforce that's the high side of a million.
I've often pointed all this out in Social Security reform discussions, that if a defined-contribution plan is good enough for the Feds, surely it's good enough for everyone?