This page has been archived and commenting is disabled.
Please read my latest entry and post your comments here:
http://pensionpulse.blogspot.com/2010/04/consensus-slowly-building-on-pension.html
Thank you,
Leo Kolivakis
- advertisements -
Contact Information:
Tips: tips [ at ] zerohedge.com
General: info [ at ] zerohedge.com
Legal: legal [ at ] zerohedge.com
Advertising: ads [ at ] zerohedge.com
Abuse/Complaints: abuse [ at ] zerohedge.com
Suggested Reading:
Make sure to read our "How To [Read/Tip Off] Zero Hedge Without Attracting The Interest Of [Human Resources/The Treasury/Black Helicopters]" Guide
It would be very wise of you to study our disclaimer, our privacy policy and our (non)policy on conflicts / full disclosure. Here's our Cookie Policy.
A friend of mine was contemplating this whole retirement DC/DB issue recently and figured he would have to win a lottery. Yesterday he did so.
http://www.theprovince.com/cars/Home+lotto+winner+gets+look+prize/290920...
The trouble is even the beneficiaries of these pensions would blanche at funding them at a realistic level. How many folks would be willing to take a 25% - 30% drop in their take home pay in order to guarantee a comfortable retirement? Most people would accept a 5% - 10% drop, but that's not nearly enough.
Like all perpetual motion machines, antigravity devices, and financial pyramid schemes. All these "I'll pay you two hamburgers tomorrow for one hamburger today" schemes were destined to fail.
All that talk about "privatizing social security" was pure and simple deception. A determination to sweep all the trash and impossible promises under the blue rug and not the red one.
Fractional reserve banking can't work in the long run. That's why it ALWAYS breaks down once debt service as a % of new money starts to trend up in a power curve. There's simply no way to generate enough new money to fund the mirage that created and continues to support the old money.
Financial professionals have always known this was a scam. (Yes there are probably a few lacking the intellectual horsepower to connect the dots, and a few who convinced themselves they were not part of a massive fraud out of self preservation). But so long as the credit pie continued to grow, it was unclear how long it could all go on. Up until 2008, the math was not yet inarguable. A reasonable person (not a smart person) could look at future income + spending curves, GDP projections, money supply indicators, cash flow projections, etc and think "well heck, i guess this thing just keeps going forever."
Not anymore.
Interesting study on the funding of the various state Teacher pension funds. Woefully underfunded, and intentional as the money was never contributed. The snide comments about corporate underfunding should apply even more to the different state schemes. Anyone who believes that the people responsible for the funding are ready, willing, and able to step up with the cash is just dreaming. There are always more compelling immediate interests that can vote today and will, if given some cash.
http://www.manhattan-institute.org/html/cr_61.htm
The crux of the problem is the gap between assets and liabilities affecting the fifty-nine pension funds that cover most public school teachers in America. Some of these are general state-employee pension funds, while others cover only teachers. Among the findings of our study of these funds:
The general picture is not a good one. According to the fifty-nine funds’ own financial statements:
According to our more conservative calculations:
In addition, we have found that:
What explains the rest of the gap between the funds’ estimates and our own? The funds aggressively “discount” the cost of paying benefits in the future because they assume that stocks’ values will be much higher by the time the funds have to pay out those benefits. This assumption permits public officials to contribute fewer dollars toward satisfying these plans’ obligations, and thus to avoid taking the cautious but unpopular step of raising taxes or cutting services.
Under current guidances, which are prepared by separate bodies, state pension funds are able to set aside fewer assets than their counterparts in private companies to cover equal liabilities. Private pension plans may invest in stocks and other higher-risk assets, but those plans may not reduce their pension funding on the basis of the superior performance expected of these types of assets. This is because those higher returns are accompanied by greater risk that returns will fall short of expectations. Yet pension funds’ obligation to retirees present and future does not diminish accordingly.
By contrast, public pension plans are permitted to base the amount of money they need today to meet their future obligations on the higher expected performance of stocks, allowing sponsors to cut their contribution rates and hope the markets perform as anticipated. Unfortunately, markets can drop instead of rising, as they did in 2008-2009, when the large decline in the Standard & Poor’s 500 index of stocks created especially severe shortfalls among public pension funds. With formal bond indebtedness of U.S. states and localities reaching approximately $2.4 trillion, the shortfalls in teacher pensions alone increased the indebtedness of state and local governments by roughly one-third.
Consensus: DB plans are better than DC plans or individual retirement plans. Private sector will fight tooth and nail to keep its piece of the pension pie, but they can't compete with the large DB plans who on a cost per return basis. If you raise contribution rates, extend retirement age, and link benefits to realistic investment returns, DB plans can work.
No they can't Leo (see my post above). The only solution to put everyone on a level playing field is to do away with public DBs entirely as they will all eventually fail as will the entire fiat monetary system. No tree grows to the moon.
The problem with the DB plan is that it is impossible to predict what the benefits will be or to predict what the actual investment results will be. When lifespan increases and returns are lower, the gap is impossibly wide and cannot be overcome. However, with the DC plan both the sponsor and the beneficiary know what is available and can adjust for the changes as they are taking place. That is a whole lot better than finding out that the payments made to beneficiaries for the last 10 years were too high so that anyone starting to get a check now will have little expectation of getting anything.
DC plans have been an abject failure. If you think otherwise, please do the research. They are underperforming and charging excess fees for mediocre results.
Yes Leo, DC plans have been and will continue to be a failure. But they are at least more honest than DB pensions that promise something that is unsustainable. Nobody can guarantee returns into perpetuity.
How should an asset manager earn returns in a flat market for the last 10 years? You may consider the fees excessive, and I'm sure some are, but would you let a pushcart vendor run your money, if the cost was low enough? Are you sure that the managers of the DB plans have done any better? And if there has not been outperformance by the DB plans, why would you expect that the promised benefits will ever be paid? Suppose I've been promised $10,000 a month and it will be inflation adjusted to continue as long as I live. That works great, until the account is drained. Then I get NOTHING. You seem to have the idea that you would rather rely upon an impossible promise.
The advantage of the DC plan is that it IS funded and when I leave I can take it with me. I don't have to worry about getting a bankruptcy notice from the plan. Sure, the value of the monthly benefit is not determined. My point is that the DB plan is not really guaranteed either.
a consensus..lol would cut the payment in half , wait until the old codger's are 80 to begin payment .
surely the pensions need more dough, need to be actuarial sound , woulda coulda shoulda ,
many will implode especially in the US public sector ,
benefits are to high , payout begins to soon .
private pensions were in the main underfunded as payments were delayed to show higher
earnings for stock options . assumptions of rate of return way high.
so the consensus is a bunch of guys scratching their heads. Hoping for a government save.
What I dislike is how corporations are deliberately underfunding pensions because they think that the government will bail out the pensioners with takeovers of the pension funds.
Ultimately nothing in life is or can be guaranteed (except of course death and taxes). Each individual must do what he/she deems is best for themselves. That is why family is such an important institution. I would rather rely on myself and my family to get me through rough times than to have government tell me what is best for me. Better government means less government. QUIT TRYING TO LEGISLATE AWAY THE WORLD'S PROBLEMS. It can't be done and you only end up making things worse.
I couldn't agree more. Funny how taking care of the elderly wasn't such a huge problem in the past. It was done at home. No debate. Let's release people from carrying the weight of supporting folks who feel entitled to live the life of ease after reaching a prescribed age and the parasitic money managers and let us take care of ourselves. Caring communities will not let old people starve in the streets. It's time to foster a spirit of self reliance and stop this outsourcing of caring for each other to governments and corporations.
why not just excecute folks when they no longer can work. just think of how much mony this will save the government.
I've noticed often folks like you like to scream about contract law when the goverment intrudes on somethin you don't like. well this was a contract too.
when you sign a contract do you think the person on the other side should attempt to honor it. what about if they make more for themselves by ensuring they can't honor the long term contract.
why is allowing a company to walk away from pension obligations any different from allowing somsone to walk away from a mortgage scott free.
what if the person who signed the mortgage had no intention of paying in the long rub because he knew he could. how is this different than a company that pays the ceo bonus, stock holders dividends, but doesn't fund the pension.
how abou the ceo who levers up the company, that gives him a geat stock option bonus, buy now the debt obligations mean it can't fund the pension.
the pension is the contract with the worker. how do you like it when you do a job and not get paid as per the contract you have with your employer.
you talk about caring communities. is the company part of the community. what about the fact that real wages have fallen for 25 years. what happens when it is the policy of the company to give the communiy fewer and fewer resources every year while ceo pay goes fom 35X to 300X the average worker. yeah, i don't know what those workers were thinking.
There's a misunderstanding here. My distrust of governments and corporations is precisely why I would rather they not be relied upon to provide for our retirements. I realize having the productive members of the family care for their aging parents is not an innovative financial solution but it seems to have worked in the past before pensions became a neccesity. I'm not sure where you got the impression I wanted the elderly not cared for. I will take care of my parents and hopefully my children will care enough for me to do the same when I'm less capable.
Agreed. The institution called the family should be our primary concern in life. Take care of those that you love but don't expect them to return the favor. If they are good people and deserving of your love they will of course return the favor but that should not be your primary reason for good deeds in the first place. Instead of relying on each other many people have come to expect that "the government" or "society" owes them a living. Take responsibility for your own actions and help those that you love.
The problem with all pensions but with DB in particular is that you cannot guarantee returns on investment. In the past 70 yrs nominal returns have fluctuated but generally increased steadily until recently. However this is not true when you look at real (after inflation) returns. In our ponzi fiat monetary system nominal returns will be generated until the level of debt exceeds the ability to service that debt. In other words when the marginal utility of debt turns negative the game is up. Many observers (myself included) believe that we are very close to this point and may well have already reached it. Any firm or government that promises you (contractually or not) that they will pay you and all other workers that both came before you and who will forever follow you a DB pension is either lying or is deceived by our ponzi fiat monetary system. Debt is money and money is debt in this system (Money = Debt). This system depends on debt levels to increase exponentially forever. This simply cannot go on forever and its demise is a mathematical certainty. I hope that we know how to look after each other when this happens.
why not just excecute folks when they no longer can work. just think of how much mony this will save the government.
I've noticed often folks like you like to scream about contract law when the goverment intrudes on somethin you don't like. well this was a contract too.
when you sign a contract do you think the person on the other side should attempt to honor it. what about if they make more for themselves by ensuring they can't honor the long term contract.
why is allowing a company to walk away from pension obligations any different from allowing somsone to walk away from a mortgage scott free.
what if the person who signed the mortgage had no intention of paying in the long rub because he knew he could. how is this different than a company that pays the ceo bonus, stock holders dividends, but doesn't fund the pension.
how abou the ceo who levers up the company, that gives him a geat stock option bonus, buy now the debt obligations mean it can't fund the pension.
the pension is the contract with the worker. how do you like it when you do a job and not get paid as per the contract you have with your employer.
you talk about caring communities. is the company part of the community. what about the fact that real wages have fallen for 25 years. what happens when it is the policy of the company to give the communiy fewer and fewer resources every year while ceo pay goes fom 35X to 300X the average worker. yeah, i don't know what those workers were thinking.
the eskimo people have a solution for old age pensions
an old person will go out and set on a ice flow, and never come back to the igloo
Having worked and lived in Native communities I can assure you that they treat their elders with respect.
Problem is that the real aim isn't in helping with the world's problems, but to stick the end of the corporate spear into everyone's lives. Neoliberalism! And when things get tough it's the spear of neoconservatism (war).
It's real funny how that when pensions and other lifetime benefits are starting to be used after the person has worked for 30 years, that now it's becoming unaffordable to pay them the generous or not to generous money from the pensions. I think this was made to fail by design, I truly do believe that. If you look at the Auto industry in the US where the Unions made deals with the companies by getting alot on the back end and saving money on the front end (raises not to big etc.), the unions thought that they where going to make a killing when they retire. What they didn't and still won't get (trust me those pensions aren't safe still and including alot of other ones state and federal included) is that the people who made those promises new they weren't going to be sustainable or honored in the future. For one, they where either not going to be at that company anymore or they will be dead from old age by the time that the future realize how they have been taken. Say your the CEO of GM, your making 15 milion a year or more with benefits. Then you see the union contract is coming up and they are playing hardball and if they don't get what they want they will go on strike. Now you have a dilemma, you the CEO is in the spotlight being called a fat cat (which you are) and many other names to make you seem like the cold hearted uncaring monster (which you may be). But in the world of public opinion and politicians you can't make it seem that you don't care about people or you may have the whole country and politicians going against you and even making business tough for you. You don't want that because being the CEO the owners seeing the negative press and the winds of change may think you aren't able to handle this so they may get rid of you and you may have your golden parachute, but you won't be getting that guaranteed salary every year that would come from being a CEO of GM.
So you and your people sell this idea to the board first (who will agree because they will want to see you land on your face if it doesn't work and one of them might be given the job) and then to the UAW. It's giving alot of stuff for the retired workers and future retired workers and a little up front for the young workers. Knowing that their are more retires than new workers they take it. This way the CEO you get to show that you made "concessions" without costing the company to much or not at all, and you get to continue to make your 15 million dollar salary. Because in the end when it doesn't work out you won't be in the driver chair, you will either be on some beach retired with 100 million dollars or dead.
This same thing is happening in other pension systems more or less, other private, Federal and state/local pensions. In the Federal they will pay the pensions or force them to make changes for the good of the country. State and local pensions if you read around or google bust local municipal pensions, you will hear that much of the states and local funds are not funded well enough even before the market hit. Also many of the states and local used rosy/forward looking projections that said taxes would keep up with output and it didn't. We have a convergence of forces that is coming together (pensions, federal and municipal debt/bonds, SS, Medicare, unemployment, toxic debt round 2, dollar implosion etc.) that makes it almost impossible to fix without alot of pain.
Politicians and union bosses and do-gooder activists always undersell the cost of social welfare systems, pensions included. If they were honest about the costs of fully funding them in a down-through-the-generations sustainable way, these programs would have never left the drawing board. But the whole idea is to get the system started and get the people hooked, then worry about funding later.
That's communist capitalism for you. Works the same way for the "defense" industry. Donald Rumsfeld tagged the Iraq war at $60 billion; latest figures, when all is computed, is more like about $3 trillion. Nothing compares to the war racket, nothing...