Over-Manipulated and Under-Funded: Louisiana's Pension Problem and Its Impact on Public Employees
Author | Alyssa Depew |
Position | J.D./D.C.L., 2018, Paul M. Hebert Law Center, Louisiana State University. |
Pages | 673-704 |
Over-Manipulated and Under-Funded: Louisiana’s
Pension Problem and Its Impact on Public Employees
TABLE OF CONTENTS
Introduction .................................................................................. 674
I. Understanding Retirement: The Social Security Act
and Louisiana State Pension Systems .......................................... 677
A. The Social Security Act ......................................................... 678
B. Louisiana’s Public Pension Systems...................................... 680
II. The Dire Financial State of Louisiana’s Two Largest
Pension Programs: LASERS and TRSL ...................................... 682
III. Social Security Perks: Are Public Employees in
Louisiana Missing Out? ............................................................... 684
A. How Could Louisiana “Opt-in” to Social Security,
and What Would the Consequences Be? ............................... 684
B. Empirical Strategy and Data Analysis ................................... 688
1. An Introduction to the Difference-in-Difference
Framework ...................................................................... 688
C. Application of the Difference-in-Difference
Estimation Strategy ................................................................ 690
1. Louisiana vs. Alabama .................................................... 690
2. Teachers in Non-Section 218 States vs. Teachers
in Section 218 States ....................................................... 693
IV. Reform Measures for Louisiana and Other Non-Section
218 States ..................................................................................... 695
A. Strategies to Modify Existing Pension Structures ................. 695
1. Make Money Before Spending Money ........................... 696
2. Let’s Swap: Defined Benefit for Defined
Contribution .................................................................... 697
B. Minimize Moral Hazard Through Lawmakers
and Taxpayers ........................................................................ 698
1. Promote Lawmaker Responsibility ................................. 699
2. Address Taxpayer Passivity ............................................ 700
C. Incentivize Public Employees to Maximize
Current Contributions ............................................................ 702
Conclusion .................................................................................... 704
674 LOUISIANA LAW REVIEW [Vol. 78
INTRODUCTION
A well-dressed salesperson is explaining to a potential customer,
Bernie, an investment opportunity that will provide high returns with little
to no risk. All Bernie has to do is deposit a percentage of his salary each
month into a larger fund that will be invested in the stock markets by
experts. When Bernie needs money someday, the funds will have grown
exponentially. Additionally, some of Bernie’s hard-earned money will be
used to pay out customers who have invested during prior years because
the investments are not generating a large enough return to pay everyone
what was promised.
At first Bernie thinks he is hearing a pitch for a classic Ponzi scheme,1
but, as it turns out, the salesperson is giving a description of a public
pension system.2 Scholars have argued that public pensions are similar to
Ponzi schemes, with the major difference being that the latter are illegal.3
This criticism may be harsh; after all, pensions are not created with the
intent to defraud employees out of their hard-earned money with the
promise of guaranteed investment returns. Public pensions, however, do
have a “consistent theme of understating liabilities, overstating assets, and
pushing costs into the future.”4
For public employees, retirement concerns are mounting in light of the
nationwide public pension crisis, resulting from mismanaged funds and
Copyright 2017, by ALYSSA DEPEW.
1. Ponzi Schemes, U.S. SECURITIES AND EXCHANGE COMM’N, https://www
.sec.gov/answers/ponzi.htm (last visited Sept. 22, 2017) [https://perma.cc/P947-
3PLX]. A P onzi scheme is an investment scheme in which the operators attr act
new investors by promising to generate high returns with little to no r isk. The
funds taken from the ne w investors then are used to pay existing investors,
disguised as high returns. Id.
2. Definitions, INTERNAL REVENUE SERV., https://www.irs.gov/retirement-plans
/plan-participant-employee/definitions (last visited Sept. 22, 2017) [https://perma.cc
/7UXG-2EVL]. A traditional pension plan promises the participant a specified monthly
benefit at retirement. Often, the benefit is based on factors, such as the participant’s
salary, age, and the number of years she worked for the employer. Id.
3. See, e.g., Christopher Carosa, Are Pensions Merely Ponzi Schemes?,
FIDUCIARY NEWS (Aug. 28, 2014), http://fiduciarynews.com/2014/08/are-pensions-
merely-ponzi-schemes/ [https://perma.cc/E7AP-ENEX].
4. JOE NATION, STAN. INST. FOR ECON. POL’Y RES., PENSION MATH: HOW
CALIFORNIA’S RETIREMENT SPENDING IS SQUEEZING THE STATE BUDGET 15 (Dec.
13, 2011), https://www.scribd.com/document/75598848/Pension-Math-How-Califor
nia-s-Retirement-Spending-is-Squeezing-the-State-Budget [https://perma.cc /3NP8-
LLEG].
2017] COMMENT 675
empty promises.5 To date, public pensions nationwide are over $900 billion
short of the amount that governments have promised to their workers in pension
benefits for a given fiscal year.6 Although pension problems transcend state
borders, Louisiana’s pension systems are especially underfunded.7 In a 2016
study, the two largest systems in Louisiana were ranked in the top 25 most
underfunded systems across the United States.8
Public-sector employees in Louisiana, particularly teachers, have limited
retirement plan options when they enter the workforce. Most public employees
are required to pay into a statewide pension plan,9 the two largest being
Louisiana State Employees’ Retirement System (“LASERS”) and Teachers’
Retirement System of Louisiana (“TRSL”).10 LASERS and TRSL are
categorized as defined benefit plans, which give the retired employee a fixed
income, usually calculated as a percentage of the employee’s highest earning
salary years.11
5. See JOSHUA D. RAUH, HOOVER INST., HIDDEN DEBT, HIDDEN DEFICITS
1–2 (Apr. 11, 2016), http://www.hoover.org/sites/default/files/research/docs/rauh
_debtdeficits_36pp_final_digital_v2revised4-11.pdf [https://perma.cc/5C9C-HE6
Y]. Most state and local governments provide retirement benefits to their employees
through guaranteed pension programs. The government body contributes taxpayer
money to public systems to fund these promises. Despite states’ optimistic
assumptions about future investment returns, assets in the pension systems will be
insufficient to pay for the pensions of current public employees and retirees and
eventually will have to be supplemented heavily by additional taxpayer dollars to
make up the difference. Id.
6. PEW CHARITABLE TRUSTS, THE STATE PENSION FUNDING GAP: 2014, at 1
(Aug. 24, 2016), http://www.pewtrusts.org/en/research-and-analysis/issuebriefs
/2016/08/the-state-pension-funding-gap-2014 [https://perma.cc/8EW6-H7KX].
7. REBECCA A. SIELMAN, MILLIMAN, 2016 PUBLIC PENSION FUNDING
STUDY 8–10 (Sept. 2016), http://www.milliman.com/uploadedFiles/insight
/Periodicals/ppfs/2016-public-pension-funding-study.pdf (analyzing data from
2014 and 2015 for the 100 largest pension programs in t he United States)
[https://perma.cc/QN9J-VCT2].
8. Id.
9. Some public employees in Louisiana may choose the Optional Retirement
Plan (“ORP”) instead of selecting TRSL. ORP is a defined contribution plan
administered through private carriers. Optional Retirement Plan (ORP), TEACHERS’
RET. SYS. OF LA., https://www.trsl.org/main/optional_programs/optional_retirement
_plan (last visited Sept. 22, 2017) [https://perma.cc/64G2-VCEW].
10. State Data: Louisiana , PUB. PLANS DATA (2015), http://publicp lansdata
.org/quick-facts/by-state/state/?state=LA [https://perma.cc/4ZG2-MEGM].
11. Choosing a Retirement Plan: Defined Benefit Plan , INTERNAL REVENUE
SERV., https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-defined
-benefit-plan (last updated Oct. 20, 2015) [https://perma.cc/R8KU -5NRX];
Retirement Topics – Defined Benefit Plan Benefit Limits, INTERNAL REVENUE
To continue reading
Request your trial