Letter: Fanciful pension calculations put taxpayers on the hook

Posted 2/4/17

To the editor:

The intention of funding defined benefit pensions in advance is to ensure that the city or town has covered the cost of each employee while that employee is still working. …

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Letter: Fanciful pension calculations put taxpayers on the hook

Posted

To the editor:

The intention of funding defined benefit pensions in advance is to ensure that the city or town has covered the cost of each employee while that employee is still working. Theoretically, whenever an employee retires, taxpayers shouldn’t have to continue paying for work that was performed in the past. Otherwise, as in Tiverton’s police department, taxpayers wind up paying two or three livelihoods for each worker actually on the force.

This plan relies heavily on the investment rate that the town assumes it will make on investments, because profits from the stock market are contributions that taxpayers don’t have to make. To figure out that number, it appears investment advisors aren’t really telling elected officials and pension boards what they should expect to make, but giving their blessing to assumptions made for political reasons. That is, the politicians figure out what the assumed investment rate would have to be in order to avoid taking drastic measures (either increasing taxes or reducing benefits), and then the advisors make up some reason that it would be okay.

As a member of the Tiverton Budget Committee, I asked the town’s investment advisors about this. Here’s a key exchange from our January 12 meeting (at 1:09:40 here: https://youtu.be/jQO_80osJ9Y?t=1h9m40s).

Me: If I were to come to you and say, “I have a set amount of money I need to have in 20 years, 30 years,” what discount rate would you advise me to use in calculating my personal finances?

Gene McCabe, director of investments for Washington Trust: The conversation doesn’t go that way. It’s more about: so you have a 20 year time frame; can you risk this money? If this money goes away, do you have assets to back you up or not? You know, what’s your risk tolerance? …

Me: So … the fact that the town can in 20, 30 years increase taxes to make up for the loss, then you have a little higher tolerance for risk, so you can go up to 7.5% [investment assumption], which you may never hit, but in the end of 20, 30 years, you’ve got other assets — taxpayers — you can take money from. Is that part of the conversation?

GM: It is.

So there you go. The key consideration for calibrating the amount of money the town puts into its fund and what it plans to make rolling the dice on the stock market is not what it realistically can expect the investments to generate, but the extent of its power to take more money away from homeowners and businesses.

A smarter bet would be that we’ll find out in the coming years and decades what happens when that assumption proves as fanciful as the discount rate.

Justin Katz

Tiverton.

Mr. Katz is a member of the Tiverton Budget Committee.

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