Today, thousands of workers and retirees rallied in Puerto Rico to protest ongoing austerity measures, including proposed cuts to public pensions. Puerto Rico’s public pensions have been threatened for years by the long-lasting debt crisis and other calamities to befall the island. We wrote about public pensions in Puerto Rico two years ago. We are reposting that blog today as we stand in solidarity with those fighting to protect their retirement security.
Puerto Rico is currently experiencing a debt crisis. This crisis has plagued the island for years and is reminiscent of other debt crises in Detroit, Greece, and Argentina. Today, we will look at one often overlooked aspect of Puerto Rico’s debt crisis: the plight of Puerto Rico’s pensioners. Puerto Rico’s pension system is almost completely out of funding. At this point, the pension fund is paying out the money it takes in, and accumulating no assets for future liabilities. The last publicly available valuation of the pension plan had the funding ratio at 3 percent.
When pensions are in trouble, the root causes are typically irresponsible politicians failing to make their payments and the global recession following the 2008 economic collapse. Both are true in the case of Puerto Rico, where economic problems pre-dating the Great Recession were only exacerbated. The island also has to contend with its unique status as a territory. Its territorial status means Puerto Rico is governed by a patchwork of laws that create huge loopholes for mainland financial interests to exploit. Vulture hedge fund managers have flooded in to take advantage of the economic crisis.
During the Great Recession, the government of Puerto Rico issued a series of bonds to cover its mounting debts. This short-term solution kept the government afloat during the recession. Even after the recession officially ended, however, the island’s economy did not recover and its debt situation grew worse. Many people stopped lending to Puerto Rico’s government- except for vulture hedge funds. These hedge funds are called “vultures” because they specialize in buying up the debt of distressed governments for pennies on the dollar and then they use legal threats and political pressure to force repayment of that debt on favorable terms for them. Vulture funds can make huge profits off this debt- if they get repaid at full dollar value plus interest.
Puerto Rico has at least $73 billion of debt that it cannot repay. Thousands of Puerto Ricans leave each year to find jobs in the mainland United States. This diminishes the labor force and erodes the tax base in the commonwealth. Puerto Rico’s poverty rate is already an astonishingly high 45 percent. The vultures, though, want their money. They are making a concerted effort to force Puerto Rico to repay the full cost of its debt although the island’s economy cannot handle that amount of debt repayment. The vulture hedge funds even paid someone to write a report recommending the commonwealth take drastic measures to cut costs including firing teachers, closing schools, and cutting pensions.
Cutting pensions for Puerto Rico’s retirees in order to pay Wall Street hedge funds should not be on the table. The Puerto Rico Government Employees’ Retirement System has over 125,000 active members, who contribute 10 percent of every paycheck toward their pension. There are 107,848 retirees who are receiving benefits. The average annual pension benefit in Puerto Rico is an extremely modest $12,708- significantly lower than most pension benefits on the mainland U.S. The pensions of these retirees should not be used as a bargaining chip in negotiations with the vulture hedge funds.
Recently, several U.S. senators introduced legislation that would designate Puerto Rico’s pension funds as “senior secured debt” in any decision over debt repayment or restructuring. This means that Puerto Rico’s pensions would be prioritized in negotiations over how the commonwealth should settle its debts. All of the parties involved in resolving this crisis- the U.S. Congress, Puerto Rico’s political leaders, the vulture hedge funds- have a moral obligation to protect the island’s retirees. Retirees should not be cast into poverty so that wealthy Wall Street financial interests can make a profit. These retirees worked hard and played by the rules their entire working lives, and should not bear the cost of others’ mistakes.
Puerto Rico’s public employees and retirees did their jobs and earned the pension benefits they were promised. Gutting pensions in order to pay bondholders not only does nothing to make the situation better, but will make the existing humanitarian crisis worse. Congress has a moral imperative to act.
Read a Spanish language version of this blog post here: http://protectpensions.org/2016/03/23/puerto-rico-pensiones-y-los-fondos-buitre/