NY Times Spouts GOP Propaganda In Article About Puerto Rico Pensions

Mary Williams Walsh has a piece in the New York Times that mixes in Republican propaganda talking points with a story about Puerto Rico's teachers' pension system. It is true the pension system in Puerto Rico is failing and is likely to actually run out of money next year. But Walsh insists on calling the present situation a Ponzi scheme, a favorite claim of the right about any social investment plan like Social Security.

The basis for Walsh's claim is that teachers today will end up paying more into the pension fund than they will get out of it. According to Walsh, "In Puerto Rico, for instance, the pension funds are so short of cash that money contributed by working teachers basically flows straight out to retirees. None of Puerto Rico’s current teachers can expect to get their money back, because the fund is due to run out of money in 2018, long before they retire. That is, essentially, a Ponzi scheme." The problem with Walsh's characterization, as at least she admits, is that this is entirely legal. "But this structure is legal in Puerto Rico because of a complicated series of changes in the law brought about in recent years by the island’s financial crisis."

Puerto Rico's pension problems are an extreme version of the ones facing other states like New York, Pennsylvania, and Illinois. They are not Ponzi schemes. They are the result of decades of mismanagement by lawmakers and investment managers. As Walsh points out, "plans have been poorly funded in the past by legislators who gave priority to more pressing budget needs, or who misjudged the costs of paying so many pensions as baby boomers retired. Some plans felt flush enough in the bull market of the 1990s to increase benefits, only to see the money melt away in the dot-com rout and the crash of 2008. Even longevity gains in life expectancy, normally a cause for rejoicing, are contributing to the pension woes."

In the 1980s and 90s, budget-strapped state governments refused to spend the money now to actually pay municipal workers like teachers, police, and firemen what they were worth and what they deserved. Instead, they put off those payments until the future via increased pension and/or health benefits. In addition, fund managers and state legislatures got used to the higher returns of the late 1990s and early 2000s and either expanded benefits even more, while keeping salaries down, or simply raided the pension funds for other obligations. Unfortunately, the future is now. The below average returns since the financial crash along with the increased demands of those heading into retirements are putting these plans under strain.

In order to fund their shortfalls, again, rather than really fixing the problem, governments are extending vesting times and using less and less of the current pension payments for investment and more and more to pay current beneficiaries. Once again, lawmakers are refusing to meet the obligations they made to workers years ago and are forcing existing workers to make those payments for them. This is much less of a Ponzi scheme than lawmakers stealing from existing workers to pay for deals those lawmakers agreed to decades ago.

Needless to say, the conservative answer to  this problem is to describe these plans as Ponzi schemes, as they have with Social Security. Their answer is to move away from a defined benefit plan and move these municipal workers into insufficient 401k plans or their municipal equivalent. Using such loaded terms as "Ponzi scheme" in describing the failures of state governments and fund investment managers just plays right into Republican talking points rather than placing the blame where it really lies.