By: David A. Smith
‘Tell me,’ he said, ‘how soon will they shoot me?’
The longer a retiree lives, the more he or she should save for retirement, so if you’d like to save less today, plan on dying sooner tomorrow?
“I’m not scared of dying?”
Principal sources used in this post
The Wall Street Journal (2 June 2015; brick red font)
New York Times (July 10, 2015; forest green font)
Even better is to talk someone else into funding your retirement, as long as you want to live, based on that person’s belief you’ll die soon, even if you know you intend to live longer. The moral hazard risks of this have dawned on even the New York Times (8 July 2015):
Bad Math and a Coming Public Pension Crisis
Busted US governmental entities appear to be Ms. Williams Walsh’s beat: she’s written regularly on Puerto Rico, Illinois, and pension issues.
When Jim Palermo was serving as a trustee of the village of La Grange, Ill., he noticed something peculiar about the local police officers and firefighters. According to pension tables, they were not going to live as long as might be expected,
Why would the police and firemen be projected to die so rapidly?
Mr. Palermo has stumbled into the land of pension-fund doublethink.
And I’ll never grow up, either
Doublethink depends on horizons beyond which one is allowed not to think and where the sun never shines.
Important sources relevant to public-employee pension funds
For the doublethinker, the horizon is information. Any doublethinking will be encoded in jargon – comprehensible to other dialect-speakers but unintelligible to outsiders – that under no circumstances may be translated into plain speech.
So far, so good
For the beneficiary, the horizon is temporal, the unpredictable (and therefore unquantifiable) future. If no catastrophe is certain within the temporal horizon, why worry about anything beyond that?
Nothing to worry about, as long as you feed me
For both groups, all future catastrophes are implicitly equivalent, so one might as well choose whatever works best, right here, right now.
I’m Walter Blunt – right here, right now
That mentality prevails until those who have to pay run out of money, or until they wake up to the imminence of inability to pay.
After Mr. Palermo dug into the numbers –
Mr. Palermo’s no yokel; he’s “a director and securities analyst with Chicago Equity Partners,” which is “a multi-asset class investment platform with approximately $10 billion in assets under management.”
Advising on $10 billion of other people’s money; now advising on his own
– he found that the actuary — the person who advises pension plan trustees about how much money to set aside — was using a mortality table from 1971 that showed La Grange’s roughly 100 police officers and firefighters were expected to die, on average, before reaching 75, compared with 79 under a more recent table.
How would you feel if, after you’d taken out your loan, the bank wrote you saying it had decided to extend the loan’s maturity four more years, and you’d be making the same payments, just 48 more of them?
Four more years?
As we saw when exploring France’s en viager housing arrangement, annuities are the temporal mirror image of mortgages:
Turn a mortgage inside out and it’s an annuity
Like a mortgage in reverse, the longer the annuity runs, the more you need up front.
When actuaries calculate the numbers for a pension plan, mortality rates are a powerful hidden factor. If an actuary predicts the workers will live to an old age, it means they will be drawing their pensions for more years. That, in turn, means the employer should set aside more money up front, to keep from running out later.
For public-employee retirees, the annuity’s term is the same as the en viager resident’s – the rest of your natural-born life.
Assuming shorter life spans reduces annual contributions and frees up money for other things, like bigger current paychecks.
And if the plan bases pensions on pay, as those in most American cities do –
Not trusting her readers to know what a ‘defined benefit’ plan is, Ms. Walsh chooses to skip over that after the emergence of ERISA (which doesn’t apply to public entities), private employers all shifted to defined-contribution (like everyone’s 401k), while the public employee unions clung to their defined-benefit plans – almost as if they knew they were getting something better than they should.
– shortening the workers’ life spans on paper could lead to both fatter paychecks now and bigger pensions in the future.
In La Grange’s case, those four years meant tens or hundreds of thousands of dollars to each retiree.
To each retiree means from the taxpayers.
But if more workers are retiring and not dying on schedule –
Retire earlier, live longer; isn’t that what they’re encouraged to do?
– it can be a recipe for financial disaster.
Who could have been so dumb as to let the village agree to this?
The recommendations made by pension actuaries, like which mortality table to use, are largely hidden from public view, but each decision ripples across decades and can have an outsize effect.
As we saw in California, CalPERS made very sure that the public employee unions who were its economic bosses would be able to choose the actuaries, and that no one could remove them – thus guaranteeing that they could overload the pension system at will.
You can’t remove us
On Thursday, a panel of senior actuaries will consider whether to update, or elaborate on, the existing actuarial standards for public pensions.
Belatedly, the numerate have groggily awakened to the many-hundred-billion-dollar fleecing they have allowed to happen to them.
Oh, my god, what did I sign last night?
The pension-fund madrigal
A fraud for many voices
[To be sung slowly, with rising triumphalism]
[Actuary] We defrauded you on the cost of making promises.
[Fund manager] We defrauded you on your ability to pay for future promises.
[Public employee unions] Based on our frauds, you made the promises.
[Accountants] Then you caught on to our fraud]
[Public employee union lawyers] Too bad you can’t rescind your promises.
[All] Ha ha. Ha ha!
And ha ha ha!
And ho ho ho!
You’re doomed and damned
And now you know
[Continued tomorrow in Part 2.]