Pillaging Public Pensions
Last week, Oregon Governor John Kitzhaber called for a special legislative session (to begin 8am September 30th) noting that "we have an opportunity to combine cost savings from reforms to the Public Employee Retirement System (PERS) and new revenue to restore lost school days." In other words, maybe we can remedy some of the draconian cuts made to education in recent years by slashing the pensions of retired teachers and other public workers. Or in other words, let's pit old people against children.
The Oregon Center for Public Policy has noted that the purported revenue gains in the Governor's package would only last until 2015, and the plan is "mainly a tax cut for some of Oregon’s wealthiest 1 percent." A spokesman for the governor acknowledged that the real long-term revenue will come from cuts to pensions.
This is entirely in line with the findings in a set of reports released last week about the looting of public pensions in states across the US. In an article in Rolling Stone and in discussions on Democracy Now, Matt Taibbi reports,
The siege of America's public-fund money really began nearly 40 years ago, in 1974, when Congress passed the Employee Retirement Income Security Act, or ERISA. In theory, this sweeping regulatory legislation was designed to protect the retirement money of workers with pension plans. ERISA forces employers to provide information about where pension money is being invested, gives employees the right to sue for breaches of fiduciary duty, and imposes a conservative "prudent man" rule on the managers of retiree funds, dictating that they must make sensible investments and seek to minimize loss. But this landmark worker-protection law left open a major loophole: It didn't cover public pensions. ...
Because they were under no legal obligation to be prudent in their investments, managers of public pensions began putting money into hedge funds and other risky investments, even though, a lot of the prospectuses of these investments say right in the front, in huge letters, these are high risk investments, you may lose everything. It is exactly the opposite of what you want to put public money into. But "these public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its fraud-riddled mortgage-backed securities in the pre-crash years." When the crash came, then, the "resultant loss of tax revenue plunged states everywhere into spiraling fiscal crises, and local governments suffered huge losses in their retirement portfolios."
Those portfolios were also weakened by politicians often having failed to meet the Annual Required Contribution (ARC) as mandated by state law. For many state pension funds, a significant percentage of the money is built up by the workers themselves, who pitch in a part of their income, deferring wages of salary in favor of collecting retirement benefits later on. The rest of the fund is made up by taxpayer contributions. But in many cases, politicians illegally borrowed cash from public retirement funds to finance other budget needs. As Taibbi describes "the game":
Politicians run for office, promising to deliver law and order, safe and clean streets, and good schools. Then they get elected, and instead of paying for the cops, garbagemen, teachers and firefighters they only just 10 minutes ago promised voters, they intercept taxpayer money allocated for those workers and blow it on other stuff....
In "The Plot Against Pensions" from the Institute for America's Future, David Sirota tells us more about what they've been blowing it on, and it's not generally cops, garbage collectors, teachers, and firefighters:
States and cities have for years been failing to fully fund their annual pension obligations. They have used funds that were supposed to go to pensions to instead finance expensive tax cuts and corporate subsidies. That has helped create a real but manageable pension shortfall. Yet, instead of citing such a shortfall as reason to end expensive tax cuts and subsidies, conservative activists and lawmakers are citing it as a reason to slash retiree benefits.... and preserve expensive corporate subsidies and tax breaks.
In addition, the report finds that The amount states and cities spend on corporate subsidies and so-called tax expenditures is far more than the pension shortfalls they face. Yet, conservative activists and lawmakers are citing the pension shortfalls and not the subsidies as the cause of budget squeezes. They are then claiming that cutting retiree benefits is the solution rather than simply rolling back the more expensive tax breaks and subsidies.
And in addition to slashing retirement income for many pensioners who are not part of the social security system, many of the pension “reforms” being pushed by conservative activists are often more expensive and risky for taxpayers than existing pension plans. As Taibbi describes it,
unions and voters are being told that a key solution [to the fiscal crises] is seeking higher yields or more diversity through "alternative investments," whose high fees cost nearly as much as the cuts being demanded of workers, making this a pretty straightforward wealth transfer. A series of other middlemen are also in on this game, siphoning off millions in fees from states that are publicly claiming to be broke. Many of the "alternative investments" these funds end up putting their money in are hedge funds or Private Equity funds run by men and women who have lobbied politically against traditional union pension plans in the past, meaning union members have been giving away millions of their own retirement money essentially to fund political movements against them.
Cuts to cost of living adjustments sometimes (for instance in Rhode Island) "equal the fees that they’re paying to hedge funds in that state. So essentially it is a wealth transfer from teachers, cops, and firemen to billionaire hedge-funders." Thus,
Not only did these . . . workers already lose huge chunks of retirement money to huckster financiers in the crash, and not only are they now being asked to take the long-term hit for those years of greed and speculative excess, but in many cases they're also being forced to sit by and watch helplessly as [Wall Street shills] are put in charge of their retirement savings. [And ] In state after state, politicians are . . . using scare tactics and lavishly funded PR campaigns to cast teachers, firefighters and cops – not bankers – as the budget-devouring boogeymen responsible for the mounting fiscal problems of America's states and cities.
Moreover, as Sirota notes, "If the state-based crusade against public pensions is successful, it will probably fuel a renewed effort to privatize Social Security."
If, as Marx told us long ago, "The executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie," then current events should remind us how small that bourgeois class is. Americans like to think of ourselves as middle-class. But the interlude of progressive taxation and public investments that relatively leveled economic inequalities between World War Two and the 1970s has passed. It becomes increasingly clear today that the interests of the bourgeoisie are the interests of the one percent or less. Yet we can still challenge these actions.
Last week, during public comment on Kitzhaber's proposals, current and retired public workers and union officials turned out in Salem to protest the cuts to cost of living increases, to describe the human impact of the plan, and to oppose the willingness to violate contractual obligations.
It's not too late to contact your state representatives and let them know if you think the Governor's Grand Bargain amounts to Grand Theft.