Warren Buffet On Pensions: States Will Either Have To Break Their Promises Or Raise Taxes Dramatically
Here in North Dakota, much like a lot of other states, we’ve had a major debate about pension plans. There were bills, defeated unfortunately in the state House, which would have moved the pension funds for state employees and teachers over from the sort of defined-benefits plan that is going broke all over the nation to a defined-contributions plan of the sort most in the private sector enjoy.
Right now, North Dakota’s pension plans are facing billions of dollars in unfunded liabilities. The unions in the state tell us that the problem is the stock market, and that once we see some economic recovery the pension plans will bounce back.
Warren Buffet, speaking on CNBC, said the exact opposite. He pointed out that states and municipalities and even companies like GM made promises on defined benefits pension plans that they knew they wouldn’t be able to keep down the road, and that the only two options to deal with these promises now is to either break the promises or raise taxes dramatically to keep them.
It was so easy—it was easy for General Motors back in the 60s—to promise pensions and health benefits that later brought the company to bankruptcy. it was easy for the states and municipalities when they were negotiating contracts 20 or 30 years ago to put in cost of living adjustments and retirement after 20 years and back-end loading in terms of the last few years of employment. And all of those things, and those promises, come due so much later, long after the politicians left office, that it’s a tremendous problem. But the future does arrive, and when the future arrives and you’ve made a lot of promises, you’re either gonna break the promises, you’re going to raise taxes dramatically, or you’re going to inflate. …
Many states and municipalities . . . have made promises on benefits that really can’t be fulfilled if you continue to keep making them. Listen, I would identify with the municipal employee who said, “Look, you made the deal with me. I mean, I came to work here because you said I was gonna get this.” But the one thing I think you do is you quit making new promises. I mean, you may be able to fulfill the ones that you’ve got up to this point but you say, “Lookit, this is gonna bust us and I’m gonna make no more new promises,” and that’s a tough thing for a politician to say.
Buffet also points out that most of the actuaries who are doing the calculations for state and municipal pensions are giving the public a false picture of just how bad a shape these pension funds are in. Buffet says it is “nuts” for some of these actuaries to be counting on 8% rates of returns for their funds.
[State and local governments] use unrealistic assumptions . . . in determining how much they had to put in the pension funds to meet the obligations. The pension fund assumptions of most municipalities, in my view, are nuts. But there’s no incentive to change them. It’s much easier to get a friendly actuary than to face an unhappy public. …
I would say that when they have pension assumptions that are assuming they’re going to earn 8% or something like that when bonds are yielding what they are now, that’s crazy.
Of course, an 8% rate of return is exactly what North Dakota’s pension actuaries are counting on and even with that overly-rosy outlook they’re still projecting big shortfalls.
North Dakota’s pension funds are, like the funds in pretty much every other part of the nation, in serious trouble. But unlike other states, North Dakota has the means to fix the problem right now. We have the funds available to pay out the existing defined-benefits pensions for all existing state employees while shifting new hires over to a defined-contribution system.
But our legislators instead allowed themselves to be swayed by the union lobbyists, and decided to kick the pension reform can down the road. More than likely to a day when the state won’t have the resources it has now to fix the problem.
Tags: North Dakota News, Pensions, warren buffet
