Pension problems?

[gcgang]

I saw from a poll a couple of years ago that showed about 40% of FIRE participants say that their pension or defined benefit plan (not Social Security) is their most significant source of income.
While Detroit is a special case (single industry problems), I think it is the tip of the iceberg for underfunded benefits. The idea that one could work for 20-30 years, and then collect about 80% of your pay for the rest of your life, is being exposed as the ponzi scheme it is.
Everyone, especially elected officials, love to make promises now, that someone else has to pay for later. Later is here.
If you are receiving benefits, in light of what is happening in Detroit, do you feel worried about continuing to receive benefits?
How do you feel about beneficiaries having to settle for less than they were promised, because funding of benefits was not adequate?

 

[MichaelB]

Pensions, public or private, are not a "Ponzi Scheme". Indeed, many are fully funded, and in all cases, their level of funding is measurable. Like an annuity, one's sense of financial security would depend on how well the pensions are funded.

 

[ERD50]

My private pension is insured by payments made to the PBGC. I am under the 'cap' where limits would be made, so I am (theoretically), in no danger of losing any of my pension.

I say theoretically, as the insurance could hit a point of not being able to cover defaults, but I think that is not a big risk, and I would assume any shortfall would affect from the top down. I have some 'headroom' to the current cap, so I don't expect to be first on the list of adjustments.

There is no cola, so over time it becomes less and less of important anyhow.

The idea that one could work for 20-30 years, and then collect about 80% of your pay for the rest of your life, is being exposed as the ponzi scheme it is.

That isn't even close to my private pension numbers. After working 28 years, I have to wait ~ 15 years to start collecting a pension that is ~ 40% of my final salary, and with no COLA, the 'real' number is far less. Would have been ~ 20% if I waited 5 years.

Broad brush?

-ERD50

 

[ERD50]

...
How do you feel about beneficiaries having to settle for less than they were promised, because funding of benefits was not adequate?

Sorry, didn't answer this.

IMO, how anyone 'feels' about it is irrelevant. You can't get blood from a stone, money doesn't grow on trees, and good people get terminal illnesses. I feel terrible about all those things, but it doesn't change any of them.

Private pensions have some protection from the insurance they paid into all along. And if/when a company cannot pay, the insurance takes over, and if you are over the cap, you lose some of your pension. That's not a good scenario, but it seems reasonably practical, and achieves some level of subjective 'fairness'.

What would you suggest?

-ERD50

 

[Which Roger]

That isn't even close to my private pension numbers. After working 28 years, I have to wait ~ 15 years to start collecting a pension that is ~ 40% of my final salary, and with no COLA, the 'real' number is far less. Would have been ~ 20% if I waited 5 years.

Broad brush?

-ERD50

+1 my non-COLAd pension will be about 23% of my final salary, and I will have to pay 100% of the health insurance premium.

 

[Calico]

+1 my non-COLAd pension will be about 23% of my final salary, and I will have to pay 100% of the health insurance premium.

My non-COLAd pension will be about 50% of the average of my last five years' salary. (I am extremely fortunate). No retiree medical for me; that's what medicare is for.

We receive an annual summary report of our pension plan's funding level; I read it every year and it is always 100% funded.

To the OP: I've never heard of a pension which provides "80%" of a person's salary, and I don't think my pension is a ponzi scheme.

 

[H2ODude]

I have a government pension that I paid 6% in and jurisdiction paid a little less than that each year. It's one of the more responsibly run ones. Looks like there will be no cola this year but that's ok; shows they are keeping it quite solvent. After 25 years at 60 I got 45% of last 4 years salary. I think it was a good deal, I think it's sustainable and so do others more savvy than I.

I think its horrible that governments have over promised and allowed political manipulation of these systems. I refuse to make apologies for this pension; to have it compared to systems where employees paid zip and the jurisdictions didn't live up to responsibilities is aggravating.

Not sure what brought all that on, it just bugs me that people think government pensions are all unsustainable voodoo. Many are, but not all.

 

[brett]

80%
Ponzi Scheme

I think that you should focus on the majority of DB plans.

Mine is 1 percent per year of service based on best 5 out of last 10 years. No indexing.

The company that I worked for did not have to make any contributions for a number of years...the investments were doing well. However, they have been topping it up over the past several years.

The company was bought out in early 2000's. One reason was the large surplus in the DB plan.

 

[BLS53]

Some of the "political manipulation", at least as it pertains to teachers in Illinois, has been in the form of work stoppages.

 

[pb4uski]

.....The idea that one could work for 20-30 years, and then collect about 80% of your pay for the rest of your life, is being exposed as the ponzi scheme it is. .....

Ignorance is bliss.

 

[Mulligan]

Pensions, public or private, are not a "Ponzi Scheme". Indeed, many are fully funded, and in all cases, their level of funding is measurable. Like an annuity, one's sense of financial security would depend on how well the pensions are funded.

OP has made the mistake thinking all pensions are the same. You are correct, Michael. There are more pension systems than a dog has fleas. Many different public pension systems sometimes in the same city, let alone state. My pension is a little under 70% of entire salary package. If I had went 4 more years, I would have been close to 80%. System is 85% prefunded and in a trust. Employer pays in 14.5% and employee also pays 14.5%. I must admit in my younger years, I paid no attention to the system or even thought of its funding level. I definitely feel sorry for the people who could be faced with a loss of pension, especially the ones that did not have the opportunity to contribute to SS. These people could be in a potential nightmare situation.

 

[Chuckanut]

The idea that one could work for 20-30 years, and then collect about 80% of your pay for the rest of your life, is being exposed as the ponzi scheme it is.

Wow!!!! You have quite a good deal there. The best I might have done is 60%. And given the five year average calculation, it's probably more like 58% of my highest pay. Max. A far cry from 80%. Note: That's the best I might have done, not what I actually get which is nearer to 34%.

Not sure why it is a Ponzi scheme since both my employer and I have been contributing to it for my entire time of employment.

 

[TuborgP]

There is over 2.2 Trillion in the top 100 public pension trust funds.

 

[NW-Bound]

It appears that when a particular pension benefit is high, meaning 50 to 70% of final salary, it is because of a high contribution rate by the employee and the employer. One poster quoted a number of 29% for combined contribution. That's a lot more than SS or contribution into a typical matching 401k.

I often thought that a factor that may contribute to a pension shortfall is the allowance of early retirement, in the 50s perhaps, compared to 62 with SS. But this is then compensated by lack of COLA in many pensions as posters here have noted.

So, pardon my ignorance, but would the pensions in trouble more likely be the ones when they allowed early retirement, paid a generous 50% or more of salary, and COLA to boot, and then topped it off with spiking?

 

[Mulligan]

It appears that when a particular pension benefit is high, meaning 50 to 70% of final salary, it is because of a high contribution rate by the employee and the employer. One poster quoted a number of 29% of combined contribution. That's a lot more than SS or contribution into a typical matching 401k.

I often thought that a factor that may contribute to a pension shortfall is the allowance of early retirement, in the 50s perhaps, compared to 62 with SS. But this is then compensated by lack of COLA in many pensions as posters here have noted.

So, pardon my ignorance, but would the pensions in trouble more likely be the ones when they allowed early retirement, paid a generous 50% or more of salary, and COLA to boot, and then topped it off with spiking?

I am no expert either, but in addition, I would think a few other variables may factor in also. Such as did the government ever skip their yearly contributions to the system? Or did the system meeting it's annual investment return goal? I read deep into my systems report one time. There are a lot of actuarial assumptions that have to be correct, such as annual return, annual inflation in regards to COLA payouts, life expediency of the male/female retired population, etc. The pension director made a joke recently about checking each day to see if one of the pensioners is still alive drawing on the system. He said she was 106, and had been drawing her monthly pension check since 1961. Fortunately for the system, Cola's are maxed out after 80% of final 3 year average salary.

 

[NW-Bound]

Ah, as I just discovered from this thread that not all pension plans are COLA'ed, I was just thinking that perhaps many pension managers were planning on the average historical inflation to help with the funding problem.

A bit of inflation may not hurt the fund investment return and can even help, while at the same time dilutes out the non-COLA'ed benefits of existing retirees. The last few years were not at all normal, so caught them off-guard. Just a simple-minded theory of mine, of course...

 

[TuborgP]

Pensions get in trouble when they are poorly designed without a sound actuarial foundation. Things that can create poor actuarial foundations are:

Lack of a real actuarial structure based on contribution rates from employees and employers. Lack of modernization to reflect increased life expectancies.
Variable salary ranges within sub districts with some paying higher at the top end and creating distortion. If you are contributing 5 percent a year the sooner you approach the upper end of the scale the more you contribute. If you move up during the back end of the scale the less you will contribute over the years. In many states the money for pensions are contributed at the state level and salaries are paid at the local level. This is especially true for teachers. Thus a district can have multiple bumps up in years 27-30 and not have to pay the resulting increase in pensions.

There are a lot of other reasons including gov't not making their required contributions. It should be noted that much of the out cry about funding level came in the year following the market crash. Many funds are at much level funding levels as the market bounced back. Remember it was the FDIC that a couple of years ago wanted public pension funds to help bail the banking system out. I will link that in a bit.

 

[TuborgP]

Failed Banks May Get Pension-Fund Backing as FDIC Seeks Cash - Bloomberg

March 8 (Bloomberg) -- The Federal Deposit Insurance Corp. is trying to encourage public retirement funds that control more than $2 trillion to buy all or part of failed lenders, taking a more direct role in propping up the banking system, said people briefed on the matter.
Direct investments may allow funds such as those in Oregon, New Jersey and California to cut fees for private-equity managers, and the agency to get better prices for distressed assets, the people said. They declined to be identified because talks with regulators are confidential.
Oregon’s retirement fund may contribute $100 million as regulators seek “the support of state pension funds to solve the crisis surrounding ongoing bank failures,” Jay Fewel, a senior investment officer at the Oregon State Treasury, said in a presentation at the fund’s Feb. 24 meeting. New Jersey’s fund may also participate
said Orin Kramer, chairman of New Jersey’s State Investment Council.

 

[utrecht]

It appears that when a particular pension benefit is high, meaning 50 to 70% of final salary, it is because of a high contribution rate by the employee and the employer. One poster quoted a number of 29% for combined contribution. That's a lot more than SS or contribution into a typical matching 401k.

I often thought that a factor that may contribute to a pension shortfall is the allowance of early retirement, in the 50s perhaps, compared to 62 with SS. But this is then compensated by lack of COLA in many pensions as posters here have noted.

So, pardon my ignorance, but would the pensions in trouble more likely be the ones when they allowed early retirement, paid a generous 50% or more of salary, and COLA to boot, and then topped it off with spiking?

Mine has a combined contribution percentage of 36%. Just a few days ago it was announced that its returns ranked in the top 1% of all public pension funds having over $1billion. Its also has the absolute highest 20 year returns of any public pension fund in the State of Texas. The pension fund is a separate entity from the City. The City cant access the funds and has no say so in how it is managed. It stands to reason that I take offense when people lump all pensions into the same bad boat.

There is no reason why all pension funds couldn't and shouldn't be managed as well as this one is. If that was the case we wouldn't be having all of these pension discussions.

 

[NW-Bound]

All right!

It goes to show one needs to know the whole story. It's the same with 401k, where many posters here, myself included, were able to retire early with it. So, it irked me when some pols said 401k's do not work, and the Fed needs to take control of everything, and to throw it all in a "lock box".

 

[Mulligan]

Mine has a combined contribution percentage of 36%. Just a few days ago it was announced that its returns ranked in the top 1% of all public pension funds having over $1billion. Its also has the absolute highest 20 year returns of any public pension fund in the State of Texas. The pension fund is a separate entity from the City. The City cant access the funds and has no say so in how it is managed. It stands to reason that I take offense when people lump all pensions into the same bad boat.

There is no reason why all pension funds couldn't and shouldn't be managed as well as this one is. If that was the case we wouldn't be having all of these pension discussions.

If you do not mind me good natured teasing you a bit Utrecht since I am a pensioner too. But, wow, 36% combined? I thought my matched rate of 29% was high. That is almost 25% higher. With that kind of contribution rate and top 1% fund management, there should be enough money left over to provide all the homeless people in Texas a small pension too!

 

[NW-Bound]

Given your huge savings of 29% and 36% of gross, you should be able to do well with a 401k type of retirement account too, I would say.

Then, it's your money and you do not have to explain to anybody, and also have total control. Do you think future and young employees prefer that? Is there any movement towards that?

With that kind of contribution rate and top 1% fund management, there should be enough money left over to provide all the homeless people in Texas a small pension too!

Eh, charity should be voluntary, not forced.

 

[chasesfish]

I have a non cola pension, but it is capped at 35% of income after 35 yrs of service. There's also an early option to get half that if you retire at 55 vs 65.


There's rumblings about it being too expensive, but I work for a private employer required to make pension fund contributions each year. I'd personally rather just have a pay raise and invest the money myself,

 

[TuborgP]

There are often youngish employees who feel they could do better on their own. With reform that number will increase. Remember if passing before you retire there is no pension form your spouse. How's your contributions are handled varies with the pan.

 

[Chuckanut]

There is no reason why all pension funds couldn't and shouldn't be managed as well as this one is. If that was the case we wouldn't be having all of these pension discussions.

Here is one article comparing pension fund management to and indexed approach over the last five years. State pension funds have a 1.5 % annual gain versus 2.19 percent for the indexed approach.

Active Managers Fail State Pensioners

Here is another one written in 2011 looking at a 10 year return. State pension funds have a 3.15 annual gain versus 6% for the index approach.

An Easy Way to Reduce State Debt

Hmm...