Definitely a cause for concern. This is all you need to see: The public defined-benefit plan is in a hole. Just about every defined benefit plan in the country - public or private - is likely to melt down at some point. The public plans are actually in much worse shape because they are allowed to estimate a higher future rate of return than private plans. To make it worse, governments like to balance their budgets by contributing less than required to these plans at times with the intent to make it up later. Both governments and companies are getting smarter and shifting to defined contribution plans, but there are still a ton of defined benefit plans out there.
The current pension system is set up to fail. Defined-benefit or defined-contribution...both are going to buckle under the weight of demographic reality. It doesn't help that the same ham-headed rating agencies that rated Enron investment-grade four days before its' insolvency, and Lehman Brothers, still have the same operational model. Struggling pension funds desperately chasing after the best "AAA" yields will be a significant contributory factor in another financial bubble, if we are not careful.
Defined contribution plans just expose participants to even more volatility from the markets. They're a nice fix for budget problems, but not so nice for the actual goals of pensions; security for the elderly who should not have to work.
Certainly - but at the end of the day, they are at least sustainable and won't implode. It's done by simply lowering payments, but that's a better outcome than a total implosion and no payments at all.
The best outcome would be to acknowledge that the idea of a pension simply can't work in an out-of-control market. Even some hedge funds are getting out because the volatility is just insane these days. Forget about pension funds; they're stuck snatching at whatever mispriced "AAA" delusion the rating agencies are peddling at the moment. The difference between defined-contribution and defined-benefit is really pasting over the reality of demographic topping-out and an insecure market. I feel that ultimately, even if defined-contribution plans are an improvement, that change alone doesn't truly address any of the underlying issues that are causing these bankruptcies.
So . . . when people complain about Social Security . . and say it should be put into private hands. . . . are these the private companies that should be running them?> Rocket River
I'm not actually sure how the privatization was supposed to work - or even if there were ever a specific plan. But SS is a bit different. The basic problems stem from the same issue of it being a defined benefit program. But the way it's funded and structured is different from other pension plans, private or public.
I work for the city. I would much prefer they just have matched my deferred compensation plan contributions as opposed to having a defined pension plan. I don't think I will see the pension. I have a long way to go. I would prefer to be on my own as much as possible. I'd prefer to not have to give social security and be on my own their too though.
Things are still bad. In somewhat related news to the original post as a first, the city of Stockton, CA has filed for bankruptcy:
Governments have basically robbed people and gotten away with not actually funding pensions. Basically its the same drill every year. The comptroller shows that the pension is screwed. They make up some numbers that close the gap based on a totally improbable rate of return and buy more time. No one is interested in actually doing anything to structurally reform pensions so they kick the can down the road over and over again and the result is bleeding pensions into the red year after year. This is not a problem with pensions. This is a problem with borderline criminal accounting practices that have pushed pensions into insolvency. The market collapse of 2008 certainly hurt them, but they hurt everyone. But pensions were screwed with or without the collapse. When you are expecting a 40% rate of return on your investments in order to be solvent, you're screwed. Stockton isn't the first and it won't be the last.
there is nothing wrong with defined benefit plans per se if you have honest accounting and conservative management like you had in the 50's and 60's- alternately it is ridiculous to imply all is cool for retirees with dishonest accounting or projections and high risk in their 401 k plans. it is true corporations prefer to offset retirement risks to the 99 percent and promote the joys of 401 k' fooling a lot of folks
I don't think the plans are bad per se...just that the folks responsible for them are screwing it all up.
It's not really about conservative or aggressive management. When interest rates are low, the only way to make the target rates of return is to increase risk - that's just basic finance 101. We've had a multi-decade bull market in bonds with interest rates dropping over time. To maintain rates of return, pensions have to take on risk - otherwise, there's no possible way to be solvent. And when that happens, then when the market implodes, the pension fund implodes. The problem is not with the management principles - it's that, to succeed, the funds are required to generate a specific rate of return which ignores the reality of what is happening in the world. The problem is even worse when the law allows governments to assume a higher rate of return than corporations do, meaning they get to contribute less to their funds and take on more risk. Who has suggested that?
Major, having too high of a target return is tantamount to aggressive management of a pension fund. I agree public pension funds need to have the same or stricter standards as private ones Much of this problem has been caused more or less deliberately as pensions have been deregulated and underfunded. The resulting savings have been used to make politicians look like good managers or net bigger bonuses for private executives I know you did not glorify 401 k,s but feel you were unfair to defined benefit plans. The looting and trashing of them has been a goal of the more viciously class warrior one percent Overall an important and new thread
I agree with all of this. When I say defined benefit plans are destined to fail, I'm not really trying to make a judgment of them in theory. In an ideal world, they can certainly work if you regulate them enough and lower the target interest rate enough. My problem is that in reality, that's not how it plays out. For starters, the target rates of return are allowed to be here - we both agree this needs to change, but as it is, it allows government to contribute less to its pensions, which forces those pensions to take on more risk. It's even worse in the current environment where interest rates are at record lows, meaning no set of bonds can generate the required returns. And then the other problem is taht when there are deficits at the state and local level, the budget has to be balanced by law. And when the choice is between cutting services immediately or screwing with the pension plans, the latter is always the preferred option for politicians because the consequences are delayed. So that's the reason I'm convinced all of these things are going to fail eventually - the system is just not designed for them to succeed. Private pensions are in a bit better shape because their funding is better regulated and the return threshold is more conservative, but they'll have their own share of problems. The big one is the difficulty of predicting what the cost will be for the pension plan when a person is 20-30 years old - projections of 40-70 years are difficult at best. The issue is one that also plagues SS - as people live longer, these plans will cost more than projected, making it harder or impossible to sustain the benefits they promised decades ago.
Public Employee Unions means working 30 years and getting paid 60 years. In the private sector, they renegotiate with the bankruptcy court or the companies disappear like the steel manufacturers. Tax, Baby, Tax!
tHis is only true if we the people allow this. I bet in Sweden or even Germany the pensions don't just disappear when the companies go under
They actually don't here either. We have an insurance program sort of like the FDIC for this: http://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation Not sure where BetterThanEver gets his information.
