This piece of wisdom was aptly updated in a December 23, 2010, New York Times editorial by Paul Krugman as follows:
“…why does it matter what some politicians and think tanks say? The answer is that there’s a well-developed right-wing media infrastructure in place to catapult the propaganda…to rapidly disseminate bogus analysis to a wide audience where it becomes part of what “everyone knows.”
I believe this goes a long way toward explaining what “everyone knows” about government employees in general and public employee retirement plans in particular that just ain’t so. Some of what “everyone knows” now, based on such propaganda and bogus analysis, follows:
- Government employees are overpaid relative to private sector employees.
- Government employees have retirement plans that are overly generous.
- Governments continually expand the size of their workforce.
- Government retirement plans are hiding the “true” cost of those plans.
- Government retirement plans are being far too optimistic about future investment return.
- Government employees should have nothing but defined contribution plans.
While I’m sure you can think of a number of other unsubstantiated criticisms, this list is sufficient for addressing the disinformation dilemma.
Regarding base compensation, comparing the pay of a research scientist at the Center for Disease Control with pay of a box store greeter would probably suggest a disparity. Is it valid? No, but validity does not seem to be instrumental in making their case. So, who are these overpaid underworked nameless, faceless public sector derelicts that have been dehumanized in the interest of creating targets for criticism? They are a workforce that is contracting and not expanding. They are teachers and first responders and corrections officers and mental health direct care workers. They are conservation agents and protectors of the environment. Some of them are even securities regulators. In other words, they are your friends and neighbors. They did not cause the credit crisis and market meltdown. They did not produce the current level of unemployment. They did not promise themselves a certain level of benefit for a career of public service. Yet they seem to be the ones who are expected to bear the responsibility for all of the problems being faced by the nation today – at least there are some well financed “researchers” who would like very much for that to be part of what “everyone knows.”
The retirement issue (particularly the defined benefit/defined contribution debate) actually has a long history. In the late 1990s, there was a major push in a southern state to give state employees the option of moving from the existing defined benefit plan to a defined contribution plan, with the expectation that there would be a large number wanting to make the move, given the long running bull market at that time. Promoting the legislation to give employees this option were 70 plus lobbyists, described in the Wall Street Journal as being lined up Gucci to Gucci in the capitol building, who, not so coincidently, were there representing a number of large financial institutions. It just so happened that those financial institutions were expecting to play a role in managing the individual accounts in the defined contribution plan. A local newspaper picked up a sense of what was happening in the following excerpt from an editorial regarding the existing defined benefit plan.
“The problem with the state's pension fund is simple: No one's making any money off it except the retirees. The money just sits there, happily accruing interest and none of the state's huge financial corporations see a penny of it.”
There is no disputing the fact that large pools of defined benefit plan money can be managed much more cost effectively and efficiently than can individual self-directed accounts in defined contribution plans. That potential fee differential on hundreds of billions (trillions) of dollars has not gone unnoticed by those who would like a piece of the action.
Interestingly enough, a defined contribution plan does not have to be made up of individually managed accounts – that is, it can be managed in a single pool with participants owning proportionate shares of the pool. However, that does not run up the fees and it leaves the employer and the trustees with fiduciary responsibility for anything that goes wrong.
Some years ago the federal government ruled that private sector employers could effectively avoid the fiduciary responsibility bullet by simply making enough options available to plan participants. (As you might expect, there was no shortage of interest in that regulation.) Fees, of course, were not an issue for the employers since those were being charged to the individual participant accounts, in many cases without disclosure of the impact fees were having on account balances. Of late, a number of so-called think tanks have been generating reports alleging that public retirement plans are being overly aggressive with their assumptions about future earnings on their portfolios. The claim is that if the plans lower their earnings assumptions it will reveal the “true liabilities” of these plans and substantially lower the extent to which the liabilities of public plans are funded. The reporters “catapulting this propaganda” apparently are quite willing to accept that the claims set forth in these research reports are credible and independent because, after all, the researchers say that they are. This is an issue that can actually be resolved quite easily. All the think tanks have to do to confirm their independence is to reveal the source of their funding and let the readers decide. After all, they expect elected policy makers to fully disclose the source of their funding. It seems only reasonable that since they seemingly also want to play a policy making role they should be equally forthcoming with information regarding who is directly or indirectly picking up the tab for their work.
Of late, a number of so-called think tanks have been generating reports alleging that public retirement plans are being overly aggressive with their assumptions about future earnings on their portfolios. The claim is that if the plans lower their earnings assumptions it will reveal the “true liabilities” of these plans and substantially lower the extent to which the liabilities of public plans are funded. The reporters “catapulting this propaganda” apparently are quite willing to accept that the claims set forth in these research reports are credible and independent because, after all, the researchers say that they are. This is an issue that can actually be resolved quite easily. All the think tanks have to do to confirm their independence is to reveal the source of their funding and let the readers decide. After all, they expect elected policy makers to fully disclose the source of their funding. It seems only reasonable that since they seemingly also want to play a policy making role they should be equally forthcoming with information regarding who is directly or indirectly picking up the tab for their work.
Other than for those in the private sector who have direct financial motivations or whose greed in the 1990s cost them dearly in the last 10 years, are there others who would like to see public sector defined benefit plans just go away so the public sector would join the private sector in a race to the bottom? It turns out that there are.
- It seems that these pesky public sector institutional investors who manage defined benefit plan assets actually vote their proxies and think they should have some “say on pay” at the corporations in which they invest. Grover Norquist, head of Americans for Tax Reform, is on record as having said, "Just 115 people control $1 trillion in these funds. We want to take that power and destroy it." What better way to destroy it than to encourage a mass migration to defined contribution plans? As you might imagine, powerful lobbying groups, such as the U.S. Chamber of Commerce and the Business Roundtable were quick to endorse this concept because participants in self-directed accounts do not vote their proxies. However, the institutions that are doing the investing for those companies do vote proxies. The institutions that are investing defined contribution assets also have business relationships with the corporations in which these investment accounts are invested and I am sure they want to maintain those relationships. How likely is it that they are going to vote against management at these companies, particularly management making the decisions regarding which financial institutions they will use?
- Another beneficiary of the defined benefit to defined contribution movement is the federal government. The theory supporting defined contribution plans is that when employees move from one organization to another they will take their retirement accounts with them and continue to pursue the accumulation of money that will be available to support them when they retire. In reality, many of these accounts are cashed out when employees move from one organization to another. Those amounts are then taxable income in the year of the distribution and, in many cases, are also subject to a 10% premature distribution penalty. The fact is that these distributions are producing billions of dollars in federal revenue, all without the necessity of increasing tax rates. It is also a fact that when these former plan participants come up short in retirement, several years will have passed and it will be someone else’s problem (likely the problem of some state or local governmental unit).
This does not exhaust the list of those who stand to benefit in the short term from the demise of defined benefit plans in the public sector but I think it serves to suggest that there may well be less than altruistic motivations driving the proponents. When you hear or read that “they” say, give some thought to who “they” are and what it is “they” would like for “everyone to know” regardless of whether or not it can be supported by objective analysis. The environment has been ripened for exploiting the fear and anger that seems to be driving the masses today. It’s ironic that those who were largely responsible for that crisis that led to the fear and anger would be the beneficiaries of the elimination of public sector defined benefit retirement plans through increased fees.
I do have to give credit where credit is due. Whoever is paying for all of the current bashing of government employees and defined benefit plans is certainly getting their money’s worth. In the past two years, I’ve seen more of it than in my previous 35 years in the business combined. The approach is really simple – if you provide resources to others who will say something loud enough and with enough frequency, it does become part of what “everyone knows” despite the fact that it “just ain’t so.” The volume is impressive – it reminds me of the legal tactic of burying opponents in discovery. This week I found myself wasting time countering a “think tank” research report in which it was claimed, among other ridiculous things, that workers are better off in defined contribution plans because individuals will take more risk than will investment professionals managing pooled funds. I felt obligated to waste time on it simply out of fear that some people reading it might actually take it seriously.
In thinking all of this through, something did occur to me that I’ll mention only briefly here and reserve for future detailed commentary. In trying to identify their overall objective, I have to at least allow for the possibility that public sector defined benefit plans are simply a pawn in a much bigger chess game. It is beginning to display earmarks of being nothing more than a well-orchestrated initiative targeted at public sector union busting – signs of that are surfacing with some regularity but that’s a discussion for another day.
For the benefit of those who are annoyed by this article, I will, for their benefit, conclude the way I began – with a Twain quote:
“Few things are harder to put up with than the annoyance of a good example.”
- Gary Findlay, Executive Director, Missouri State Employees’ Retirement System (MOSERS).
Mr. Findlay is executive director of the Missouri State Employees' Retirement System (MOSERS), a position he has held since 1994. Prior to that, he spent 16 years as an administration and benefit consultant with Gabriel, Roeder, Smith & Company, a national actuarial and benefits consulting firm that specializes in serving the needs of public employee benefit plans. He was CEO of that firm from 1986 until he joined MOSERS.