Manufacturing a Crisis


A version of this story ran in the March 2012 issue.

Have you heard about the rich guys in Houston who want to “reform” the public pension systems in Texas? Here’s the story: Bill King, a prominent Houston businessman and Republican who toyed with the prospect of a mayoral run in 2009, has become consumed with the idea that Texas’ public pension system is spiraling toward insolvency.

Last year, King—who, by the way, published a 2008 book arguing that banker fraud had nothing to do with the S&L scandals of the 1980s—got together with some other businessmen to form Texans for Public Pension Reform. The group notably includes John Arnold, the billionaire hedge fund manager who made a name for himself at Enron as an energy-trader wunderkind.

King has since resigned from Texans for Public Pension Reform in order, he told me, to maintain his journalistic objectivity as a columnist for the Houston Chronicle. But his message hasn’t changed: Public pensions that guarantee retirement benefits are in crisis and should be replaced with self-managed accounts such as 401(k)s.

The pension reformers are gearing up for a fight in the Texas Legislature next year.

In August, King told the Austin American-Statesman, “I think the state needs to get the hell out of this (pension) business completely.”

He now claims he was quoted out of context. But he and his comrades want a radical transformation of a system that has successfully provided a modest retirement to millions of Texas schoolteachers, firefighters and local and state workers.

King has made the $108 billion Teacher Retirement System his prime target. That is peculiar, because by almost any measure the 75-year-old TRS is a model not of dysfunction, but of quiet success.

Consider: Most public school districts in Texas don’t pay into Social Security for their educators. Instead, teachers are provided a guaranteed pension that’s partially funded by the state. Currently, the state chips in just 6 percent—the lowest portion in the nation. For their part, teachers put 6.4 percent of their salaries into TRS. The contributions are pooled and managed by investment professionals. Annual returns average more than 8 percent—enough to cover 60 percent of benefit payments. Overhead is one-half of 1 percent, a good bit more efficient than most IRAs and 401(k)s.

“It’s a ridiculously low-cost plan for the taxpayer,” says Keith Brainard, research director for the National Association of State Retirement Administrators.

But is it sustainable? King says no. “Every one of these plans is on a long-term go-broke scenario,” King says.

That’s not entirely true. The first thing to know is that TRS is in healthy shape by widely accepted standards. Despite the 2007-2009 market downturn, the system is funded at 82.7 percent. The rule of thumb is that funds with an 80 percent assets-to-benefits ratio are in excellent shape.

The system does have about $24 billion in unfunded liabilities. What does that mean for the system’s long-term viability? Let’s look at TRS’ most recent report:

“Assuming the current contribution policy continues, the Pension Trust Fund has assets in place to make benefit payments through 2112.”

In other words, TRS should be able to pay all guaranteed benefits to teachers for the next century.

To avoid insolvency in the very long run, the Legislature, some time in the future, would simply need to increase its investment in Texas teachers’ pensions from 6 percent to 8 percent, the rate that existed when I was in first grade in the mid-’80s.

Why don’t you advocate for that solution? I asked him. “I just don’t think it’s realistic” for the Legislature to spend more money, he told me.

While a minor financial shortfall that’s easily fixed and won’t cause problems for decades may not sound alarming to you, King claims it’s a crisis.

We’ve seen this movie before: Manufacture a crisis where there is none, scapegoat working people (even better if they work for the dread government), and under the guise of “reform” push through a plan that would never fly otherwise.

King wants to take away public employees’ guaranteed retirement benefit in favor of a defined-contribution, 401(k) approach subject to the vagaries of the stock market. This is destroy-the-village-to-save-it logic. And it’s certainly not “conservative” in the classic sense of the word.