Rhode Island: The Little State With a Big Mess

BobG

What's the problem with double dippers, triple dippers, etc? They worked, earned the retirement their employer promised them as part of their compensation package, and then kept working even after earning a retirement, and then earned the retirement their employer promised them as part of their compensation package.

Setting up multiple sources of income for a retirement just sounds like smart planning to me.

What would your solution be? A person could only earn retirement from one source? And would that include social security? After all, any retiree collecting money from both social security and their own retirement plan is a double dipper.

In fact, I guess I'm pretty much guaranteed of being a triple dipper. I'll have a military pension, social security, plus 401(k) from a post military career in civilian jobs.

Or does it only anger you when someone earns two retirements from the state government? What if they retired from state government and earned a second retirement from a non-government employer?

And since someone had to perform those government jobs, would it be more acceptable if the state government had paid the same retirements to two completely separate individuals for two completely separate jobs than paying the same retirements to one individual that happened to have two completely separate jobs during his career?

I think the article just tossed the term "double-dipper" and "triple-dipper" into the article because their terms that sound nice as long as a person doesn't put much thought into how that person earned those retirements.

Colorado isn't such a bad state for retirees, either. The first $20,000 of my military retirement isn't taxable when it comes to state income tax - or at least wouldn't be if my ex didn't receive half of my retirement. Pleasantly, her half of my retirement is fully taxable by the state she lives in. (Oh, the stupid things one takes pleasure in for no reason except bitterness.)

Oltz

That is not what I was saying at all.

I was saying that yes mismanagment is a problem.

But the BIGGER problem in my opinion was the structure and volume of Benefits. The Government is paying to much and the workers contribute to little. thus making the system unblanaced so any perturbance in the investments is felt long term by the state with no ill effects on those "paying" into the plan.

If my 401 K looses money I up my contribution to recoup. If the state pension plan looses money the tax payers need to kick in the extra.

The public unions took advantage of a good benefit and expanded the pay outs beyond what is reasonoable for a government to support with the limited contributions from the workers.

A pension plan that is 98% funded by your emloyer is asking to put that emloyer underwater eventually.

rhody

I am not angry at all, in fact you are more likely to NOT be a drain on the system, and have planned for retirement and taken every advantage you could to have a financially comfortable retirement. (if your retirement funding is sound, and I hope for your sake it IS).

The financial times we find ourselves in have broken all the rules in the past four or five years. Things that used to follow a plan of gradual increased growth in wealth have been thrown out the window. We are dealing with the chaos. How it will all shakeout is not certain. I predict little Rhody will be worse for wear (tax wise) by the end of 2013 based on their track record (state and local gov't financial decisions) over the past 27 years. It may hasten my decision to leave the state. The only choice left is to vote with my feet.

Rhody...

WhoWee

To summarize with a single word - yes.

I have 2 friends that worked their way through 8 years of college at the post office - night shift - and retired (with a small pension). Upon graduation, they went to work for the IRS - one will retire from the IRS and the other is now a practicing Attorney.

Locrian

Well, most funds everywhere have performed poorly over the past decade or so, with few exceptions. I know my state is running only a few percent over that time. With a couple of stock market crashes and the fed pushing down interest rates, it's really to be expected.

But one thing people need to keep in mind is that pension funds shouldn't be getting the kind of returns lots of other investments should because they have cash flows to manage and dealing with liquidity risk appropriately brings your return down. That's actually part of the problem for some plans; they are heavily into investments with a lot of variance and while they may pay off well in the future, they're hurting now.

Private plans are typically using discount rates of 5.5%-6.5%.

Locrian

Well, they aren't getting a guaranteed 8% return, exactly. It's just that 8% is what the plan is assuming they'll recieve on investments, and they're setting their contribution based on that. If an individual retires and dies before they get a payment, they got a -100% return. Others will live past the pack and do better. Some individuals will do better and others worse depending on the way the plan is structured. The group as a whole may do better or worse depending on experience.

Assuming a higher discount rate results in less taxes being taken from current taxpayers. But if they don't actually meet it, someone's going to pay the difference in the future, either through cut benefits or higher taxes.

Which leads me to another issue I have with DB plans - you don't really know what people receiving them are getting, so you can't really calculate their pay very exactly. Where I live the teacher compensation has so many perks (early retiree medical, fat pension that starts at retirement instead of 65, etc.) that really nobody knows how much money they make, including the teachers and the state.

WhoWee

It seems they are getting a guaranteed return - at taxpayer expense.

from the OP - my bold
"After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers. Before long, Ms. Raimondo has been cautioning in whistle-stops here and across the state, that figure will climb perilously toward 20 cents."

BobG

Whoever took those jobs was going to get those retirement benefits. The cost to the state is the same whether it's two completely different people that earned those retirements or if one person worked one of those jobs, then the other.

The issue is really the cost of those retirements, regardless of who earned those retirements.

Perhaps getting upset by one person earning two separate retirements from the same employer does touch on the real feelings about government employees. There's a feeling that employees working for the government are less qualified than employees working in private businesses and don't deserve to make as much money as we pay them.

Is there a reason all of the better qualified employees would go to work in private businesses instead of work for the government? Especially if the government is really setting up all of its employees for life regardless of whether they do their job or not?

Or are both a myth and governments pay out roughly the going rate for employees, whatever that might be, because they need qualified employees just as badly as private businesses do?

Regardless, waiting until after the fact - after the employee retires - and then saying, "You know what, I changed my mind and you weren't worth that much after all, so I'll just change our agreement to what I think is fair now" is criminal. Now it's too late for the employee to say, "The hell with that deal - I'll go get a better paying job with someone else."

However fair it might be, it is true that most state governments missed the boat when it came to retirement planning. The military's compensation plan is the best. They give a low base pay, but supplement it with tax free allowances - keeping in mind that the lower enlisted ranks will be among the 47% of the population that pay no federal taxes once deductions and earned income credit gets added in (oh, wait, those allowances and the value of military provided housing get added back in when it comes to earned income credit, but the lower ranks still pay little in federal income tax). When military members retire, their retirement is based only on their base pay; not their allowances. The result is that the effective percentage of retirement benefits are always lower than advertised.

Ironically, even with a very good retirement model, retirement benefits are too expensive - especially when you toss in the medical benefits for retirees. As with everyone else, those rising costs for medical benefits blow everyone's plans out of the water. The response is the same: "We promised retirees free medical insurance for life, but now that's too expensive, so you'll have to pay something for that insurance. But don't worry. The amount you have to pay is a lot, lot less than people working for private employers have to pay." (And it is, but it's not what was promised during the time those people were in the military.)

Locrian

No, they are not, and the quote you have doesn't support the statement. I gave examples showing why they are not getting an 8% guarranteed return.

WhoWee

Good news rhody - according to Locrian (see above). On the other hand - if there's no guarantee (real or implied) - why are they prepared to double taxes and/or cut essential services?

Locrian

Well I would argue there are two issues. First, the cost of the retirements. But secondly, the management of the plans. The reason why I dwell on the discount rate used so much is because using a high discount rate can effectively hide the actual cost of the retirements being promised. Politicians have used the discount rates and other funding schemes to give out benefits when times are good, and then someone else pays the cost when things don't pan out.

Medical benefit cost inflation is definitely an issue. But note that a lot of pension plans are sunk without including medical benefits. A defined benefit (DB) pension plan is basically an annuity and there's just no excuse to be as behind as some states are in their funding (IL, NJ, RH).

But overall I agree with you. Double dipping and spiking may or may not be reasonable things to allow in a plan, but they can both be planned for, and don't explain the funding problems plans are in right now.

WhoWee

I have no problem with the examples I cited where the individuals grew in their positions/career.

The teacher who retires on a pension - then rehired to teach in the same classroom (instead of hiring a new person) are very troubling to me.

Locrian

False. I said there is not an 8% guaranteed return, not that there's no guarantee. There's a guaranteed cash stream. The return for both the individual and the group will depend on mortality, plan design, return on investment and actual salary levels (versus forecasted).

Either you don't understand how to cacluate the return on an annuity with a variable number of payments or you're being dishonest. Either way consider cutting back the snark.

WhoWee

When I posted this:
"It seems they are getting a guaranteed return - at taxpayer expense.

from the OP - my bold
"After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers. Before long, Ms. Raimondo has been cautioning in whistle-stops here and across the state, that figure will climb perilously toward 20 cents.""

I was not making a specific interest rate claim - was I? The word "seems" implies opinion. Your response:

"No, they are not, and the quote you have doesn't support the statement. I gave examples showing why they are not getting an 8% guarranteed return."

My post supported itself - they are considering a 100% tax increase to meet (or guarantee) the under-funded pensions.

Your personal attack
"Either you don't understand how to cacluate the return on an annuity with a variable number of payments or you're being dishonest. Either way consider cutting back the snark."
is quite unappreciated. Please save us both time and energy next time by not over-reacting to the word "seems".

BobG

Returns on investments are never guaranteed. The issue is who assumes the risk - the state or the employees. With 401(k), etc, it's the employee that assumes the risk of a bad economy reducing the growth of their funds. With definied benefits, the employer agreed to assume that risk.

That's not a position about whether the employer should have offered to assume the risk in the first place. It's a position about making an agreement and then modifying it after the fact when it didn't turn out as well as you hoped.

WhoWee

Again - it "seems" they are getting a guaranteed return - at taxpayer expense. The taxpayers need to replace their management team - IMO - with problem solver/reformer types.

Locrian

Increasing taxes for higher contributions to maintain benefit levels does not imply a guaranteed rate of return. It doesn’t even seem like one.

This is because the actual return for both the individuals and groups will depend on many factors including their mortality, plan design, final salaries and even the tax code. The final return will vary by individual, and it will vary over time for the group.

Do some calculations for a given annuity with different numbers of payments and see how the return varies.