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Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Friday, October 5, 2012

The usual suspects, part 6

This series of posts on the usual suspects concludes on a rather depressing note.  The public sector pension crisis is an unfortunate manifestation of several groups all doing what is best for themselves.  Some might also include public pension actuaries in this stew, but while they may be guilty of overly rosy expectations, they are bound by the laws politicians enact and must invest in a volatile and unpredictable market.  Neither politicians, Wall Street, nor public sector employee unions intended to create the public sector pension crisis, and the reader can make a judgment as to who has the most responsibility.  However, blaming any or all of them is pointless.

The previous five posts were meant neither as a defense nor an indictment of politicians, Wall Street, or public sector employee unions.  Instead, it was to show how each group acts in the best way it knows to maximize benefits for itself.  The more suspicious readers may believe that this is part of a conspiracy in which politicians, public sector employee unions, and Wall Street all collaborate to fleece the taxpayer.  Politicians promise public employee unions generous pay and benefits without the revenue to pay for them.  These promises eventually become unsustainable, so underfunded pensions are forced to invest in riskier and riskier Wall Street products in a losing game to bring pensions back to full funding.  Wall Street reaps large fees that they can also channel back to politicians in a neverending cycle.  Each group then points the finger at the others to confuse the taxpayer about the shared culpability.

The truth is much simpler and sadder.  There was simply no one who would stand up to the absurd and dangerous groupthink that afflicted politicians, Wall Street, and public sector employee unions.  The politicians in Stockton already had adequate evidence of the harm done by passing unsustainable pension costs into the future, yet when Lehman Brothers told them they could again push costs further into the future, they went for it.  They did this despite their own skepticism and professed ignorance of the bond market.  This never addressed the fundamental problem that got them into the mess in the first place--promising more than they could ever pay for--and kept right on with their standard behavior.

As for public sector employee unions, it is possible to see the dangerous groupthink here in Arizona.  The reforms to PSPRS are slowly being chipped away.  The public employee unions never really accepted the changes made to PSPRS, and they are fighting them out of sight of the public in the courts and legislature.  The notion that a benefit could be taken away is anathema to unions, and the cost, sustainability or fairness of a benefit is not a consideration, even if its existence affects the long-term health of PSPRS.

There is not a lot to say about Wall Street.  Pensions must work with Wall Street to earn the returns they need to pay retired members what they were promised, but pensions are under no obligation to buy or utilize defective products.  Wall Street is just as prone to groupthink as the others and will follow any trend that makes them money.  They will have no qualms about selling a popular or profitable product, even if there is a potential for poor returns or default.  Pensions should not count on Wall Street to help them earn enough to make up for bad political and financial decisions .

If this is the way the system continues to work, the public employee pension crisis can only end with the bankruptcy of defined benefit pensions and their replacement with defined contribution pensions.  Simple arithmetic tells us that costs can not be deferred infinitely to the future and that benefits can not accumulate infinitely without a way to finance them.  The only salvation will be if politicians and public sector unions begin to accept reality and honestly deal with the crisis before courts and angry taxpayers do.

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