The Pension Crisis PA 724 Economic Perspectives Summer 2015 San Francisco State University Masters of Public Administration By Jesse Lopez, Jasmine Moore and Brian Roberts AN ECONOMIC ANALYSIS Introduction Definition of pension : A fund established by an employer to facilitate and organize the investment of employees' retirement funds contributed by the employer and employees. The pension fund is a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years and begin their retirement. How it works? Pension funds are commonly run by some sort of financial intermediary for the company and its employees, although some larger corporations operate their pension funds in-house. Pension funds control relatively large amounts of capital and represent the largest institutional investors in many nations. Pension Crisis: is a predicted difficulty in paying for corporate, state, and federal pensions in various states (California) due to a difference between pension obligations and the resources set aside to fund them. The History of Pensions P ublic Pensions date back to the Roman Empire and evolved as we know it today. Public Pensions were documented as being established in the U.S as early widespread by the late 19th century. According to Frederick Smith a US historian they were created to motivate public servants and encourage long periods of employment for individuals. Was also a safety net for windows that lost their husbands because it let them to continue to run their households. Soldiers that served in the Revolutionary War were offered pensions. First pension to go bankrupt in the United States was the US Navy which went broke on three occasions within in a few years. In 1920 The Federal Retirement Act passed which Congress granted Pensions for all US Service workers. They qualified for this pension plan after 15 years of service upon reaching the ages of 62,65,or 70 years old. Pensions was definitely invested and improved on after the Great Depression and WWII the US saw how it important it was to save and prepare for retirement after such periods of economic distress. P ublic Pensions date back to the Roman Empire and evolved as we know it today. Public Pensions were documented as being established in the U.S as early widespread by the late 19th century. According to Frederick Smith a US historian they were created to motivate public servants and encourage long periods of employment for individuals. Was also a safety net for windows that lost their husbands because it let them to continue to run their households. Soldiers that served in the Revolutionary War were offered pensions. First pension to go bankrupt in the United States was the US Navy which went broke on three occasions within in a few years. In 1920 The Federal Retirement Act passed which Congress granted Pensions for all US Service workers. They qualified for this pension plan after 15 years of service upon reaching the ages of 62,65,or 70 years old. Pensions was definitely invested and improved on after the Great Depression and WWII the US saw how it important it was to save and prepare for retirement after such periods of economic distress. California Pension Crisis Summarizing the Issue Why Pensions are pushing states into a deficit? Baby boomers generation are fading out people are living longer with health care advances less births no regulation on pension funding (bonuses, overtime, last years salary) This Means. State taxpayers are on the hook for their states unfunded pension liability promises for both state workers and private corporations New Jersey taxpayers are expected to pay $16,000 each for their state's pension deficit Cutbacks on vital public services such as, police, firefighters, prison guards, and education Chapter 23: The Pension Crisis Summary Californias taxpayers are paying a large amount of police officers, firefighters, and prison guards retirement because of their option to retire early along with additional bonuses.Californias taxpayers are paying a large amount of police officers, firefighters, and prison guards retirement because of their option to retire early along with additional bonuses. California has been carrying budget deficits of billion per yearCalifornia has been carrying budget deficits of billion per year In past years state revenues have increased 25 percent mostly coming from tax. But pension cost for the state increased by 2,000 percent.In past years state revenues have increased 25 percent mostly coming from tax. But pension cost for the state increased by 2,000 percent. These pension cost are cutting other programs fundingThese pension cost are cutting other programs funding Only 4 states Florida, New York, Washington, and Wisconsin have fully funded pensionsOnly 4 states Florida, New York, Washington, and Wisconsin have fully funded pensions The government is also bailing out large private corporations such as General Motors.The government is also bailing out large private corporations such as General Motors. Miller predicts several bankruptcies in the near future and states that cities in California are cutting essential services just to cover pension costMiller predicts several bankruptcies in the near future and states that cities in California are cutting essential services just to cover pension cost Vallejo and Stockton already have filed bankruptcies due to large retirement rates and Lack of fundsVallejo and Stockton already have filed bankruptcies due to large retirement rates and Lack of funds Defined Benefits VS. Defined Contribution Defined Benefit Plan (DB) A DB pension plan promises to pay you a certain amount of retirement income for life. The amount of your pension is based on a formula that usually takes into account your earnings and years of service with your employer. In most plans, both you and your employer contribute. Your employer is responsible for investing the contributions to ensure theres enough money to pay the future pensions for all plan members. If theres a shortfall in the money needed, your employer must pay the difference Defined Contribution Plan (DC) With a DC plan, contributions are guaranteed, but retirement income is not. Usually, both you and your employer contribute to the plan. Your employer may match some of the contributions you make. You are responsible for investing all contributions to grow your savings. In this way, the plan is similar to an RRSP The amount available for your retirement depends on the total contributions made to your account and the investment returns this money earned. Pension Benefit Guaranty Corporation An agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 commonly known as ERISA. Keeps pension insurance premiums at a low cost creating dues to be enough to keep the fund operating correctly. PBGC takes over private funds that have filed bankruptcy. Once they have taken a pension fund over they compensate workers to a certain percentage but often are not able to give individuals their full amounts promised. ERISA also regulates how private pensions funds are being spent and operated. Economic Analysis Key Concepts Factors of Production/Labor Market Payroll Tax Tax Incidence Elasticity of Supply and Demand Key Concepts Factors of Production/Labor Market Payroll Tax Tax Incidence Elasticity of Supply and Demand 1.Social Security aka OASDI 2.Medicare 3.Medicare Surtax Economic Model Circular Flow Model Function of a Labor Market Labor Demand = Firms (Buyers) Labor Supplied = Workers (Sellers) Firms produce goods and services using inputs such as labor while households owns factors of production and consume all the goods and services that firms produce. Economic Analysis Key Concepts Key Concepts Factors of Production/Labor MarketFactors of Production/Labor Market Payroll TaxPayroll Tax Tax IncidenceTax Incidence Elasticity of Supply and DemandElasticity of Supply and Demand Tax Incidence: The manner in which the burden of a tax is shared among participants in a market. Payroll Tax: A tax on wages that firms pay their workers. Elasticity of Supply and Demand: 1)When supply is more elastic than demand, the incidence of tax falls more heavily on firms than workers. 1)When demand is more elastic than supply, the incidence of the tax falls more heavily on workers than firms. How does a Payroll Tax work? Quantity of Labor Labor Supply Labor Demanded Wage Firms Pay Wage workers receive Wage without tax* Wage Tax Wage Q* Elasticity and Tax Incidence Wage Firms Pay Wage without Tax Wage Worker Receives Supply Demand Wage Quantity of Workers Tax Firms Tax Burden Workers Tax Burden Labor Market: Inelastic Supply, Elastic Demand Government Collects Tax Revenue Impact of Social Security Taxes Would reforms on immigration help our pension deficit/state debts? Guest worker program seen essential part of any reform proposals would include means to keep and attract workers with backgrounds in science, technology, engineering and mathematics. aimed both at foreign students attending American universities where they are earning advanced degrees and high-tech workers abroad. By helping more immigrants enter the country legally and allowing many illegal immigrants to remain, the United States could help offset a slowing birth rate and put itself in a stronger demographic position than aging Europe, Japan and China Overhaul could boost housing, productivity, tax revenue Reforms could boost growth 0.8 pct point a year-economist It increases demand and productivity, helps drive innovation and lowers prices Some argue gains to economy won't be significant Report says gov't should raise money by auctioning visas Policy Implications Will there be enough money when we retire? Baby BoomersUsThe Future Lobby to reduce pension bonuses for city and state workers/public safety officers Propose for these public agencies to hire more workers in order to cut down on overtime which increases pension funds/debt Create a mandated pension pay based on years working with a company versus last year of worker's salary- streamline pension pay outs for all workers Discussion Questions Should Pensions be Restructured Similar to 401ks? How Would you Solve the Pension Crisis? Alternatives Convert to self funded 401.k system Propose streamlined educational information to workers early on Suggest retirement alternatives like 401.ks, Roth IRAs, other investments like stocks and bonds Save, save, save for your own future!