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