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Pension port
Old 03-09-2010, 05:46 AM   #1
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Pension port

Interesting article how corporate and public pension managers seem to be moving in different directions. Also interesting how public pension managers will not change their return assumptions - because of the huge increase in unfunded liabilities

Public Pensions Are Adding Risk to Raise Returns - NYTimes.com

States and companies have started investing very differently when it comes to the billions of dollars they are safeguarding for workers’ retirement.

Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, said states were looking at riskier investments in an effort to meet pension obligations.

Trent May, chief of Wyoming's pension fund, said states were “moving away from the perceived safety and liquidity of the investment-grade market.”

Companies are quietly and gradually moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds.

But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.
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Old 03-09-2010, 11:52 AM   #2
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Here in NH they just filed a lawsuit against the state due to changes in the amount the state is going to pay in to the pension.

That got me to thinking: were pensions ever financially viable? Or were they just ponzi schemes where the bill is now coming due?
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Old 03-09-2010, 03:28 PM   #3
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Originally Posted by Bimmerbill View Post
Here in NH they just filed a lawsuit against the state due to changes in the amount the state is going to pay in to the pension.

That got me to thinking: were pensions ever financially viable? Or were they just ponzi schemes where the bill is now coming due?
I guess you could say the same about SS. Exactly how much is in that lock box and what percent are we withdrawing to pay current claims?
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Old 03-09-2010, 04:21 PM   #4
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I guess you could say the same about SS. Exactly how much is in that lock box and what percent are we with with drawing to pay current claims?
Thomas Sowell did say just that, and I like the critic on Wikipedia to his stance.
Quote:
Sowell's critics say his Ponzi metaphor is not literally accurate. A Ponzi structure is inherently unsustainable, whereas Social Security, enacted before the baby boom existed, simply relies like any non-profit endeavor on projections of revenues. When revenues appear set to change, adjustments become necessary.
Sound like "We will just tax the current workers more until the numbers work." Man, I'm thinking there are going to be a lot of broken backs amongst all of those youngsters carrying two-three retirees around.

It's not like they have to actually make any money, they can just conjure it up magically.

Or they could just means test.
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Old 03-09-2010, 06:02 PM   #5
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Things are going to end really badly, whether for taxpayers or pensioners (or both), if pension funds and their management continue to assume 8-9% returns.

As for being viable, yes, unlike SS which was pay as you go, pension funds are paid out with previous contributions invested (hopefully) prudently. But the promises to pensioners were often made with unrealistic long-term returns, perhaps because of the optimism over the post-WW2 economic bubble and political promises to important constituents, as planned and expected. If they assumed a 5-6% return instead of a 8-9% return, they'd be fine even after the lost decade and the crush of retiring boomers.
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Old 03-09-2010, 07:22 PM   #6
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Originally Posted by Bimmerbill View Post
Here in NH they just filed a lawsuit against the state due to changes in the amount the state is going to pay in to the pension.

That got me to thinking: were pensions ever financially viable? Or were they just ponzi schemes where the bill is now coming due?
The NY Times should have provide a link to the Pew Center on the States center on the Trillion dollar gap which gives more detail. The trillion dollar is just the current unfunded pension and medical benefit problem today and doesn't include the high probability that 8% assumption for future is overly optimistic.

To me the 64 trillion dollar question is how many other financial products, public pension plans, retirement calculators, annuities etc. are based on similar 8% projections and what happens if returns for the next couple of decades are considerable below that.

One of the big concerns for me how do we get to an 8% average return, given the current bond and stock markets. Bonds have a had great 30 year run as interest rates have plummeted from the double digit range. A big portion of bond returns came from capital gains. Given the current interest I don't think it is mathematically possible (baring a depression) for bonds to have another 10 or 30 year period like the last one. The pension/insurance/private equity/hedge fund manager and individual investor all face the same challenge. If you have 30-60% of your assets in fixed income and we know those returns going forward are going to be less, it requires stocks to have double digit returns. Considering the remarkable rally (at least some of which makes sense compared to winter 2008/spring 2009 market levels) we have had in the last year is that a realistic assumption?

My answer to Bimmerbill very good question, was that no most pensions weren't Ponzi schemes, but given they are currently severely underfunded and expecting to make 8%+ going forward they are.
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Old 03-11-2010, 11:45 AM   #7
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... unlike SS which was pay as you go ...
SS is not a pay as you go system which is why there is a SS trust fund.

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... pension funds are paid out with previous contributions invested (hopefully) prudently...
so does SS. SS just 1st uses current income (FICA taxes) to pay its obligations before cashing some of those US bonds it holds in the trust fund. btw alot of retirees do the same, they take their WD from income (like pensions, interest, dividends, etc.) before cashing in investments.
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Old 03-11-2010, 01:16 PM   #8
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SS is not a pay as you go system which is why there is a SS trust fund.
It's not a true PAYGO system, but all current expenses are paid out of current year FICA income. The excess is borrowed by the government by selling special non-marketable bonds to the SSA - that's the trust fund. Those special G-bonds aren't like real assets held in a pension fund, they're just the government's promise to pay.

The G itself said this in the 2010 Federal Budget, on page 345:
Quote:
"The existence of large trust fund balances … does not, by itself, increase the government's ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the government as a whole."
It doesn't matter how much is in the trust fund, it's just an IOU, a way for the government to justify switching the sources of funds to pay future obligations from FICA to general revenue on the day that SS obligations exceed FICA revenue.

Those special G-Bonds are non-marketable, presenting them to the treasury for payment is like Oliver Twist asking the workhouse master for more gruel; "Please, sir, I want some more."
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Old 03-11-2010, 03:31 PM   #9
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SS is not a pay as you go system which is why there is a SS trust fund.
The trust fund is nothing but a federal agency holding federal debt -- borrowing from the left hand to pay the right hand. Sort of like me putting $100,000 in the bank by taking out a $100,000 mortgage on a paid-off house and claiming I'm more solvent because I have $100K in the bank.

Any pension fund manager who tried to do this would wind up fired at least and in prison at worst.
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Old 03-11-2010, 05:53 PM   #10
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It's not a true PAYGO system, but all current expenses are paid out of current year FICA income. The excess is borrowed by the government by selling special non-marketable bonds to the SSA - that's the trust fund. Those special G-bonds aren't like real assets held in a pension fund, they're just the government's promise to pay.
Hmmmm, as are t-bills (and t-notes, t-bonds, i-bonds, TIPS, ...) which are so secure/valuable that some people are willing to invest in them for a return of 0%. who can fault the SSA for investing in the most secure instrument available (even if they are legally required to do so). would you rather they now invest in greek debt or years ago in argentinian debt?
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Old 03-11-2010, 06:09 PM   #11
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The trust fund is nothing but a federal agency holding federal debt -- borrowing from the left hand to pay the right hand. Sort of like me putting $100,000 in the bank by taking out a $100,000 mortgage on a paid-off house
actually it is more like you having a large 401K that you are contributing to at work and you decide to buy a house but you need more money for that so you borrow money from your 401K to meet that expense knowing full well that you will need to repay it in the future (or face a penalty)
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