Thursday, October 3, 2019

Puerto Rico bankruptcy plan will cut pensions for some retired public employees: The bell tolls for you, dude!

According to the New York Times, a federal oversight board has issued a plan to deal with Puerto Rico's financial collapse. In addition to giving the territory's bondholders a "haircut," the board proposes to cut pension obligations to retired public employees. "Their pensions would be cut on a sliding scale," the Times reported.  "The biggest pensions would be reduced by, at most, 8.5 percent, and the smallest pensions would not be cut at all."

Puerto Rico scrapped its defined-benefits pension program years ago, forcing all public employees into defined-contribution plans similar to 401(k) plans. In the future, all of Puerto Rico's public employees will be in retirement plans that are subject to the vagaries of the stock market.

If we don't live in Puerto Rico, why should we care? Because Puerto Rico's pension meltdown is a movie that will soon be coming to your town. Nationwide, the Wall Street Journal reported recently, the states' public pension funds "have less than 73 percent of what they need to fund future pension obligations to public workers."

Some state pension funds are worse off than others. Three states--Kentucky, Illinois, and New Jersey--have less than 40 percent of what they need to fund future pension obligations.  New York and California are also woefully underfunded.  And Texas, which sends me a pension check every month, would be less than 40 percent funded if it adjusted its investment expectations to a realistic level.

What's going to happen? First of all, one by one, the states will abandon defined-benefits pension plans and put all public employees into 401(k) type plans that offer no certainty about retirement income.

And--in many states--retired public employees will start seeing cuts in their retirement income, just as Puerto Rico's retired employees are probably going to experience. For now, at least, Puerto Rico's federal oversight board proposes to cut the biggest pensions the most and to leave modest pensions untouched.

The coming public pension meltdown, like the coming student-loan meltdown, will affect the entire nation. But what did we expect? Some retired public employees are getting pension checks that total a quarter-of-a-million dollars a year. And some pension plans allow public employees to retire with full benefits at the age of 55 or even younger.

As Jonathan Swift observed, "When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully." Right now, the news media is concentrated on such weighty matters as President Trump's lousy hurricane predictions. But when the nation's retired public employees go to their mailboxes and find they have smaller pension checks than they received the month before--the public mind will concentrate wonderfully.

And then, my friends, we will see real trouble.

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