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Public Pensions--a burden on Illinois taxpayers Part 2 of 2 by Bill Zettler

In the first article of this series, I discussed how distorted the Illinois Public Employee Pension Systems are compared to the retirement systems available to private sector workers. I documented how tens of thousands of public employees become retirement millionaires at taxpayer expense. Then I discussed how the $320 billion state officials say taxpayers now owe for pensions could actually be low--if the assumed rate of return on public pension investments is too high.

I don’t want to get between Warren Buffet (who predicts no more than 6.5% return) and a pension manger (who predicts either 9.3% or 8.5% returns), but I know if I asked someone to guarantee a 9.3% return on my retirement funds he would say something like, "You are nuts, I am not guaranteeing you anything. Your retirement investments are your problem." My sentiments exactly--no one should be the guarantor of anyone else’s retirement, including Illinois taxpayers guaranteeing Illinois Public Employees retirement funds.

Buffet has said, "Pension managers continue to make investment decisions with their eyes firmly in the rearview mirror," meaning past performance does not guarantee future results.

Let me outline some reasons why future returns may not match past returns:

1. The human population will never double again.

This has never been true before, but demographers say the world’s population will level off at about 11 billion in 2100 from 6+ billion now. This is important because new workers are an important part of economic growth as they work, earn, consume and invest. This compares with a doubling of population between 1960 and 2000 the era of highest economic growth in history.

2. Major economic powers have birth rates below replacement rate.

Economic powerhouses China, Japan and Europe will all have decreasing populations in the next decades, another historical first. Economic growth will almost certainly slow from past decades.

3. Life expectancy is growing.

Related to number 1 and 2 above, this means more senior citizens supported by fewer workers. For example, China’s life expectancy has gone from 45 to 80 in just the last 50 years. This means current actuarial assumptions for life expectancy are almost certainly too low, meaning future pension obligations are larger than currently assumed.

4. People are retiring at an earlier age.

Earlier retirement age, plus longer life expectancy means slower economic growth and more taxes on fewer workers. See 1, 2 and 3 above.

5. All of the above.

All of the above means more income/wealth will need to be transferred via taxes from fewer working/productive people to more non-working/non-productive people thus greatly decreasing investment and economic growth. A given dollar cannot go two places, investment and tax, at the same time.

6. Oil prices since 1981 have actually gone down.

During the greatest economic growth period in history, oil prices were decreasing in real inflation adjusted prices from $80/barrel in 1981 to about $65 with most of that period below $25. This has enabled economic growth because there is a direct correlation between BTU per capita and GDP per capita. If the cost of BTU’s go up the rate of GDP growth will go down. In 1998, during the greatest stock market boom in history, oil hit $10 per barrel. In the coming years, do you think oil will more likely hit $10 or $110?

7. Economic engines China and India will slow over the next couple of decades.

As the middle-class grows in India and China, the demand for more government services and subsequent taxes will have those economies reverting towards the mean of western countries 0-4% growth rates. That leaves only the Muslim crescent from Bangladesh to Morocco and sub-Saharan Africa as potential economic growth engines. I rate the chances of those two areas becoming the next China and India as extremely low.

8. The terrorist risk premium.

A dozen terrorists with dirty bombs (let alone nuclear weapons) could simultaneously shut down Manhattan, Toronto, London, Paris, Amsterdam and Berlin causing complete financial chaos and bringing the world economy to a halt. I do not know whether that risk premium is one percent, two percent or more, but I do know it is greater than zero.

Having said all that, the real argument is not investment return rates. It is the inherent unfairness of one group of people having to guarantee that rate for another politically connected group of people, i.e. public employees and their politically influential unions. Common sense fairness dictates all citizens should share the risk of economic benefit or detriment equally.

I would suggest a 10.95% employer contribution rate (Social Security plus a 4.75% 401K contribution) would be fair for public employees. This is higher than the average private sector contribution, but less than half of what we contribute now to public employees retirement. But as we make that transfer to the retirement system with each paycheck our liability ends. From that point forward, it is the employee’s responsibility. If he gets a 9.3% return, good for him. If he doesn’t, it should not be our problem.

Tenure for public employees salaries while they are working is bad enough, but pension tenure guaranteeing them an investment return is unfair, unacceptable and financially impossible long term. Retirement at 62 or older based upon Social Security and 401K's for all employees, public and private, is what’s fair and necessary and what all Illinois taxpayers deserve.

So, Governor Blagojevich, I find it curious you do not deem it immoral when tens of thousands of public employees become millionaires after donating millions to your political campaign.

Let’s work together on the "Moral Imperative" of putting public employee pensions on a par with their private sector peers--fairness to all, no more and no less.

What could be more "moral" than that?

NOTE: More detailed information on public pensions can be found at the Family Taxpayers Network web site:  www.thechampion.org. 

Bill Zettler is a contributing editor to RFFM.org.

Public Pensions--a burden on Illinois taxpayers Part 1 of 2 by Bill Zettler

Part 1 of 2

In this short series, I will discuss the great discrepancy between the pension plans of public employees and the pensions available to their employers--who are the taxpayers of Illinois. This discrepancy is aided and abetted by liberal politicians taking large donations from public sector employee unions. This results in high taxes to fund public pensions, with every tax dollar paid for public pensions being a dollar unavailable to the taxpayers for their own retirement needs. I believe this to be immoral.

We have all heard Governor Blagojevich speak of “moral imperatives” lately. I would like to add one that I think overrides all of his--reform of the state pension system. This is a system that rewards teachers (TRS - Teachers Retirement System), university employees (SURS - State University Retirement System) and state employees (SERS - State Employees Retirement System) with pensions far beyond what is available to the average Illinois citizen. And, according to my calculations, the taxpayers of Illinois pay 85% of the cost of those pensions.

The Top 100 Pensions paid out in 2006 ran from $153,000 to an unbelievable $357,000 per year. And this top 100 includes 94 educators, 1 politician and 5 judges. In total, over 1,400 former public employees have pensions worth over $100,000 per year--paid for by you-know-who. And that elite group is growing at 20% per annum as public educator's salaries soar into the stratosphere. And they can retire at age 55 with 3% guaranteed increases each year. Keep in mind a $45,000 per year pension, indexed for inflation at age 55, has a cash value of over $1 million, meaning we--the taxpayers of Illinois--are making millionaires out of tens of thousands of public employees.

In 2006 we had a suburban high school Business Manager (basically the school accountant) retire at age 56 with a pension approaching $200,000 per year. If he lives an expected lifetime of a male adult, this former geometry teacher will rake in over $9 million in pension related funds.

How does that compare to your 401K?

State actuaries have calculated Illinois owes approximately $320 billion (that’s with a “b”) in pension payments over the next 40 years, over 75% of those funds will go to retired school employees. That’s an average of $8 billion a year (ranging from $2 billion next year to $16 billion in 2045) going from taxpayers to public employees via taxes. 

Now, the $320 billion is just an estimate based upon what actuaries and pension managers think can be accumulated, assuming a certain rate of return on pension investments over the next 40 years. It could be much higher.

Without getting too esoteric in my math, I think it is fair to say there is a great disagreement on the rate of return on investment Illinois pensions should assume going forward. SURS suggests 9.3%, the TRS says 8.5%, Warren Buffet says to expect no more than 6.5% over the next 20 years, Stephen Johnson makes a good argument for 5% and there is the historical 2.5% from the Dow Jones Industrial Average for the 40-year period 1929-1968. That 2.5% was in spite of the 23-year economic boom following WWII.

Reasonable men can differ reasonably on this issue. The question is: which reasonable men end up paying the tab, if the return estimated by state pension managers is lower than estimated?

Something that appears to be a small difference when compounded over many years can end up being enormous. And since we are talking about Public Act 88-0593 that has a 50-year payment schedule (with 40 years left) and a newly hired 21-year old teacher that has a 83-year life expectancy, these differences can be very large.

For example, if there is a 9.3% return per year (SURS assumption) for 40 years on $10 billion worth of pension assets, you end up with $350 billion. If you have a 6.5% return (Warren Buffet’s assumption) you end up with $125 billion. As former Illinois Senator Everett Dirksen once said, “A billion here, a billion there, pretty soon you’re talking real money.”

In this particular example, if SURS is wrong and Warren Buffet is right, Illinois taxpayers are stuck with the extra $225 billion difference because guaranteeing an annual pension amount is the same as guaranteeing a rate of return. Meaning families with likely decreasing wealth and retirement assets (private sector workers with no guaranteed pension) have to come up with cash, via taxes, to guarantee public employees wealth while retirement assets do not decrease. Unfair, to say the least.

In part 2, I will examine the reasons for doubting the numbers given us by public officials and argue for replacing the current millionaire-making system with one like most of us have--Social Security and 401K's.

NOTE: More detailed information on public pensions can be found at the Family Taxpayers Network web site: www.thechampion.org.

Bill Zettler is a contributing editor to RFFM.org.

News Flash! Democrats Ban High Rise Construction…

From the Desk of Bill Zettler

News Flash! Democrats Ban High Rise Construction…
Or “Where there’s smoke there’s lemmings”.

Fresh off their victory protecting tavern workers and their ignorant patrons from the dangerous effects of smoking, Illinois Democrats and the governor have decided to ban the building of high rises in Illinois.

This came about after Blago’s science advisor, Dr. Clinically Correct, mentioned a recent study showing high death rates for ironworkers. These are workers who walk on 6-inch wide beams while working hundreds of feet in the air. Apparently the death rate of ironworkers is even higher than that of workers in taverns that allow smoking. Since smoking has been banned to protect tavern workers certainly “high iron” work has to be banned.

The referred to study appeared in a rather obscure publication called the Kazakhstan Journal of Science and Magic. In this extensive 12-day study a large group of 4 lemmings were fed French fries cooked in trans fat. The lemmings were then trained to climb up to the 16th story of partially completed high rises. At that point the lemmings were forced to smoke 2 packs of unfiltered Camel cigarettes. One of them apparently fell to his death.

It is a little know scientific fact that falling lemmings reach a top speed of 318 miles per hour and thus this particular lemming became a projectile that killed an innocent tavern worker on the sidewalk below. The unfortunate bartender had just stepped outside for a smoke when the lethal lemming landed. Fortunately the lemming bounced off of the bartender and fell on top of the lit cigarette, snuffing the killer weed beneath him. This allowed emergency personnel to approach the body without HAZMAT suits.

The New York Times said this study offers proof that “second hand lemmings” kill innocent people. This led Lisa Madigan to propose banning lemmings in cars that contain children.

However, after the study was completed it was discovered that lemmings have a genetic fear of camels and the demise of the poor fallen lemming could have been caused by his exposure to the cigarette pack with the picture of the camel on it. The shock of seeing a camel that close to him may have caused him to jump.

Undeterred, Blago insisted that scientific consensus was on his side and those who disagreed were “flat earthers” and apologists for the big oil companies and that building high rises would be banned in order to protect ironworkers.

Many high-powered government officials, including the trustees of the Liberty Township Playground Sub-committee, concurred.

A much more important constituency, Starbucks patrons, were heard applauding the ban, apparently not caring since Starbucks are always on the ground floor.

Construction companies complained that the new law would drive them out of business. The gov called them “silly” because if they went out of business they would not have to pay his Gross Receipts Tax though he was not happy about that prospect. As Blago so aptly put it “Companies that go out of business because of my policies should pay their fair share.”

When last seen Blago was on his cell phone talking to Al Gore about producing a new movie called “An Inconvenient Lemming”.

Stay tuned.

Nothing Good Happens Without a Profit by Bill Zettler

Nothing Good Happens Without a Profit...

And how do we maximize this goodness?  By lowering taxes, that's how.  As three successive generations of Presidents (Kennedy 1960, Reagan 1980 and Bush 2000) have proved; when taxes are lowered, government revenue increases.

However, this basic economic concept is misunderstood by many people--especially those involved in the public sector.

What do the leading liberal Democratic politicians in Illinois--Blagojevich, Madigan, Durbin, and Obama--all have in common?  Amazingly, none of them have ever worked for a for-profit enterprise let alone started a business or managed a business.  None of them have created one single job.  They have spent their entire adult lives drawing a check from the government, i.e. the taxpayer.  No wonder they do not understand the problems or concerns of the businessman, large and small.  It is also no wonder that they believe more government and more taxes are the solution to all of our problems.  That is all they know--they have no other experience.

But the fact is without profits, there are no jobs.  Without jobs, there are no taxes.  Without taxes, there are no funds for AIDS relief in Africa, Medicare benefits or homeless shelters.  There are also no salaries for policemen, teachers, Governors, Senators or Mayors.

That's because only profit generates capital, only capital generates investment, only investment generates jobs, only jobs generate taxes. Therefore, without profits, as for example in Zimbabwe, there are no schools, there are no roads, there are no public services and, in fact, there are no public sector jobs or pensions.  Thus everyone--public and private worker alike--should focus their efforts on profits.

For those who say, "Profit is OK, but it needs to be limited," I say this:  Limited profit means limited investment, means limited jobs, means limited taxes, and means limited, i.e. lesser good.  Limited profit means fewer new factories, fewer new machines, fewer new computers, trucks and life-saving drugs--which, in turn, means fewer employees and fewer tax dollars and therefore, less money for the public good.

Without profits there is also limited charity.  Bill Gates was only able to establish the $21 billion Gates Foundation because he made unlimited profits.  Would the world be better off if the government had limited his profits, i.e. taken that $21 billion for its own purpose?  You could only believe that if you believe Jack Benny statues in Waukegan, bridges to nowhere in Alaska and multi-million dollar pensions for public employees would serve the world better than the Gates Foundation's malaria and AIDS research.

Even our friends on the Left benefit from profits.  The leftist website moveon.org owes its existence to uber-capitalist George Soros who has donated tens of millions of his several billion dollars to support the radical leftist ideas at moveon.org.  In an ironic twist, it has recently been revealed that good ole George has bought millions of shares of Halliburton, the defense company savaged by moveon.org for the last four years as a war profiteer.  Ah, ain't America great!

You need look no further than General Motors, United Airlines or Lucent to see the negative effect of lack of profit.  Did 500,000 former GM employees do more good (i.e., pay more taxes) or do the current 100,000 employees?  Bankrupt United's former 80,000 highly paid employees or their current 30,000 employees?  Lucent's 1999 employee roster of 150,000 or today's 30,000?

For further proof of the dire results of no profits look at countries where there are no profits.  How much money has Haiti, Liberia, Syria, Mynamar, North Korea or Cuba contributed to the worldwide fight against AIDS?  Zero, nothing, nada.  But who has committed $15 billion to that fight?  The most profitable country in the world and it is only able to do so because of profits.

You can go on and on.  Who provides the most financial support to the UN even though it is often inimical to its interests?  The US of course, supplying over 22% of the UN costs and it is only 1 of 191 countries.  In fact the three most profitable countries in the world, the US, Japan and Germany provide 51% of all UN funding.

Why don't the other countries provide more funding for an organization they continually praise?  Because their political systems do not allow their economies to generate profits and therefore they cannot contribute to solving the world's problems.  Most of them are corrupt, genocidal, undemocratic...and unprofitable.  Indeed, citizens of non-profit making countries live truly Hobbesian lives: solitary, poor, nasty, brutish and short.

In the end, the entrepreneurial, risk-taking private sector, the ultimate source of all profits and thus all taxes, provides all government jobs, all donations, all charity and thus all good.

Nothing good happens without a profit.

Copyright 2007 Bill Zettler

I Am Liberal Therefore I Am Virtuous by Bill Zettler

I am liberal therefore I am virtuous.

This non sequitur is the mantra of Nancy Pelosi, John Kerry and other liberal elitists who seem to think they have a monopoly on virtue and compassion. Liberals think conservatives are dumb, greedy, lacking compassion and, well, red.

Liberal Gov. Rod Blagojevich recently stated it was a “moral imperative” to raise the cost of living of every family in Illinois by instituting a gross receipts tax on businesses. Rod thinks if you take money from people then give it back to them, minus the usual government commission, you are doing a moral thing. Conservatives think that taking $300,000 from the teachers union 3 weeks before an election he is leading by 22 points then supporting them for billions in high-priced taxpayer funded pensions is immoral. What would be moral is limiting pensions for public employees, such as teachers, to $1 million thereby providing the hard-pressed over-taxed families of Illinois over $100 billion in tax savings over the next 40 years.

Liberals think a woman sitting on a mans lap in Abu Grhaib is a human rights violation but they think pulling a 24 week old fetus from its mother’s womb with forceps and sucking its brains out is a woman’s right. Conservatives think the first one is unfortunate but hardly damaging to the victim while the second is a human rights violation of the first magnitude; that magnitude being the death of the innocent victim. Ted Kennedy and Patrick Leahy spend a lot of time talking about the horrors of Abu Ghraib but nothing about the horrors of partial birth abortion. Is that compassion or looking for votes?

Liberals think dialing an 800 number to Springfield to get social services for the needy is a reasonable and compassionate approach to needs delivery even if it takes 6 weeks and a multitude of forms before delivery. That is if the service ever gets delivered. Conservatives think funding faith based initiatives where volunteers for institutions who probably know the needy person and are able to deliver it quickly and compassionately are a better answer. In many cases these faith-based institutions are already delivering services and are only limited by lack of funding. Not to mention, a little competition would do wonders for improving the level of service from government agencies.

Liberals think the public school system is just what the country’s poor people need though of course they send their own children to private schools (see Rod Blagojevich, governor, Jesse Ruiz, Chairmen of the State Board of Education and Ted Kennedy, Senator from Massachusetts). Conservatives think consigning generations of poor children to a reactionary public institution based upon a 19^th century operational model is cruel and unusual punishment and lacking in compassion for the needs of poor kids everywhere. Why can’t poor children attend the school of their choice just like rich liberal politicians children do?

School vouchers make sense to everyone except those liberals receiving money from the teachers unions. Liberal icon Ted Kennedy once promised to “filibuster at the schoolhouse door” rather than give poor black kids in Washington DC vouchers and a chance at a decent education. Teddy, you sound more like George Wallace than your brother Bobby. Where is your compassion?

Liberal Jan Shakowsky, Democrat from Evanston, was quoted as saying the US is going to have a Canadian style health program eventually. To get an idea what that would be like go to your local Drivers License facility and pretend you are waiting to see a doctor. Except do not go on Monday because they are closed.

And finally, liberals say things are so bad in the US that they want to emigrate to Canada. I say for every liberal émigré to Canada let one hardworking Eastern European or Central American legally immigrate to the US.

Great deal for us, bad deal for Canada.


Bill Zettler