Pension Safety

[gerrym51]

I think it is just human nature to project that good times last forever. I first read of the possibility of pensions being underfunded in the early 2000s, from an article in BusinessWeek. The article sounded an alarm that many pension managers upped their investment return projection based on the stock market rise in the 1980-2000 time frame. Yes, 10%/yr, from here to eternity.

Many businesses made the same rosy projections for business growth, and paid a heavy penalty for plants and tooling investments that sat idle. California, being home to many tech companies, raked in big tax revenues from cap gains paid by high-tech workers, managed to spend all of that, then had big deficits when the tech bubble burst.

I do not think it is any different than when an individual loses his home because he expects it to keep rising in value and cashes out all of his home equity to spend. Businesses and governments are not that much smarter than the average Joe Blow, because they are of the Joe Blows, by the Joe Blows, and for the Joe Blows.

That's my explanation, and I am sticking to it.

some of us think everything will be the worst case scenario. this will also cause you paralysis in doing anything.

 

[westcoast]

That book has come up before. It seems to be a case of 'tell the people who hate MegaCorps what they want to hear'.

The author is a Pulitzer Prize winning editor and investigative reporter for the Wall Street Journal, where she has worked since 1990 - not exactly a bastion of megacorp haters.

Here's part of her bio:

"Ellen Schultz is a news editor with the Money & Investing section of The Wall Street Journal. She continues her coverage of pensions and benefits plans and also works with other editors and reporters to broaden the Journal’s coverage of the problems individuals face in the increasingly complicated financial world. Schultz's book tells the story of how this happened.

"In February 1990, Ms. Schultz joined the Journal as a reporter in New York. She has covered personal finance, mutual funds, medical insurance and benefits. She was named a special writer in April 1995 and a news editor in June 2001. Prior to joining the Journal, Ms. Schultz covered personal investing at Fortune magazine from 1987 to 1990.

"In 2003, Ms. Schultz was a member of a team of Journal reporters awarded the 2003 Pulitzer Prize in explanatory reporting for a series of stories that exposed corporate scandals, elucidated them and brought them to life in compelling narratives. Ms. Schultz and colleague Theo Francis won a George Polk Award in the financial reporting category and a Sidney Hillman Foundation Award for their investigation into how companies profit from benefits plans and benefit from the deaths of workers on whom they hold life insurance. She also shared a SABEW award with other Journal reporters for their “What’s Wrong” series, for an article on how companies hide executive compensation, and shared a SABEW award with other Journal reporters for their coverage of Enron. Also in 2003, she and Mr. Francis were finalists in the Investigative Reporters and Editors contest and the Gerald Loeb awards."


Lots of people on this board lament how their pensions were frozen or cut after years of excellent service for their corporate employers, who were presumably lobbying for the changes in law that permitted them to plunder the pension plans of their workers while richly compensating upper management.


This may not be a subject you wish to explore in excruciating detail, but it can't be easily dismissed as "a case of 'tell the people who hate MegaCorps what they want to hear.'"

 

[ERD50]

Lots of people on this board lament how their pensions were frozen or cut after years of excellent service for their corporate employers, who were presumably lobbying for the changes in law that permitted them to plunder the pension plans of their workers while richly compensating upper management.


This may not be a subject you wish to explore in excruciating detail, but it can't be easily dismissed as "a case of 'tell the people who hate MegaCorps what they want to hear.'"

Go back and read my comments from earlier threads. AFAICT, none of those examples resulted in anyone losing the benefits they had earned to date, with the possible exception of "high earners". Take that up with the PBGC. But the impression given by supporters of that book, was that pensions that were earned were lost.

Pensions were modified and cut so that future earnings were not the same as past earnings. But that was never guaranteed. If you want assurance that the benefits you signed up for on day one are going to be the same for ever and ever, rather than being subject to possible negotiation each year, then you should be willing to have that apply to your salary also. No raise for you - ever! This is the salary you agreed to on day one, keep your 'promise'!

Times change. AFAIAC, DB pensions should go the way of the do-do bird. I don't want a promise, I want the money, and I want to be in charge of it!

-ERD50

 

[NW-Bound]

I don't want a promise, I want the money...

The truth is that promises are cheap to make, while money is, well, money.

Governments around the world have not been able to keep their promises, from totalitarian nations like Russia and China, to some European countries. It is that much harder for private corporations to fulfill their promises made when the wind of a growing economy was on their back.

 

[ERD50]

The truth is that promises are cheap to make, while money is, well, money.

Governments around the world have not been able to keep their promises, from totalitarian nations like Russia and China, to some European countries. It is that much harder for private corporations to fulfill their promises made when the wind of a growing economy was on their back.

Maybe I wasn't clear - in place of a pension future promise (which can be hard to keep), I would rather have actual contributions made to an account in my name - like a 401K. Money now, let me worry about it, instead of a promise which means I have to worry about the promise-giver, which I have less control over.

-ERD50

 

[NW-Bound]

I know what you meant. Again, promises are "cheaper" than real money. I would be able to promise you more money than what I can provide now.

You (and I) love to have real money in our 401k, but some people are afraid of having to manage it. They prefer the "safety" of the promise.

 

[westcoast]

Maybe I wasn't clear - in place of a pension future promise (which can be hard to keep), I would rather have actual contributions made to an account in my name - like a 401K. Money now, let me worry about it, instead of a promise which means I have to worry about the promise-giver, which I have less control over.

-ERD50

You express a common sentiment, but the law of large numbers argues for pensions.

An individual without a pension must accumulate the resources for a very long retirement, which is very difficult for most people, especially those with families, to accomplish.

A pension system, on the other hand, is based on the actuarial reality that for every retiree who lives for 30 years, there will be one who lives for only a short while. The fund can invest with that in mind - and invest more aggressively than an individual who will quite sensibly feel compelled to follow the "age in bonds" dictum.

With the crash, pension funds have run into trouble, but that doesn't negate their value - or their superiority over 401(k) as a mechanism to fund retirement.

 

[NW-Bound]

A pension system, on the other hand, is based on the actuarial reality that for every retiree who lives for 30 years, there will be one who lives for only a short while. The fund can invest with that in mind - and invest more aggressively than an individual who will quite sensibly feel compelled to follow the "age in bonds" dictum.

That's a very valid point.

To reconcile that with the fact that investment returns of a pension would still have fluctuations like a personal 401k, perhaps a pension distribution should not be a fixed and guaranteed amount, but a floating number based on market performance. Quite radical, I know. People like to have assurances, and I don't think too many would go for that.

Another solution is to provide a cash-balance fund, which then allows the retiree to buy an annuity on his own terms. That seems to be what many corporations are leaning towards these days. That shifts the risks to the annuity seller, which we have also talked about in other threads.

I do not believe that there is ever any real certainty in life. We can try one thing or another, and blame different things or entities, but sh*t happens. Some people like to use the government as the ultimate guarantor, but there have been so many precedents showing that it did not work either. When a society does not produce enough for all its citizens, people will have to consume less. The standard of living goes down. Is there another way?

 

[BigE]

My first encounter with the PBGC was reading an article about how the higher compensated employees (pilots in this case) were getting the shaft due to the ceiling of the guarantee. I remember feeling sad for those hard working pilots. Although this is pure speculation, I think there may be some similarities in the PBGC methodolgy and the way SS is handled in the future with upcoming shortfalls. Specifically, I think the top tier will get the haircut first. As someone at the tail of the baby boom, the thought of working the extra years to max my SS contribution is not appealing at all. Not trying to divert the thread, just seemed like this may be related.

 

[kumquat]

That's a very valid point.

To reconcile that with the fact that investment returns of a pension would still have fluctuations like a personal 401k, perhaps a pension distribution should not be a fixed and guaranteed amount, but a floating number based on market performance. Quite radical, I know. People like to have assurances, and I don't think too many would go for that.

Another solution is to provide a cash-balance fund, which then allows the retiree to buy an annuity on his own terms. That seems to be what many corporations are leaning towards these days. That shifts the risks to the annuity seller, which we have also talked about in other threads.

My bold.

Doing so does mitigate the risk of pension underfunding. It does not mitigate the risk of bad returns and all that but it does shift the pension fund management and administration away from a company that may, for example, mine coal to one that manages money. Whether there is a difference in returns, of cource, will reveal itself in time.

 

[NW-Bound]

some of us think everything will be the worst case scenario. this will also cause you paralysis in doing anything.

I just saw your comment, hence this late reply.

No, I do not say that we should be so disheartened that we just do not do anything. Actually, I always try my best, while preparing myself that things may not turn out as I plan. For example, I have decided that the 3.5%WR looks safe, simply because the past shows it to be so. Some people here are even more conservative and use 3% or even 2.5%WR. If I will be proven wrong, I hope to detect it soon enough to make adjustments. I will not beat myself up because things do not work out as I hope.

 

[Gearhead Jim]

Jim, was that 40% vs 60% of your final average earnings? I was a UAL "570" but elected to go to NWA in lieu of crossing. My pension was frozen and ended up with a 50% FAE, probably the best of the companies with a DBP. Like they always said, you never know if you made the right decision until you retired...in this case blind luck.

Sorry for the slow reply...

My projected monthly pension was about 55% of my FAE, and the actual payout is now about 35% of the projected pension, so about 20% of my FAE. These numbers are from memory but should be fairly close.

Fortunately, we also had a pretty good Defined Contribution plan (B Plan) and the convertible note payout that some of us got when UAL came out of Ch 11; in my case that was big enough they had to write several checks instead of one biggie.

The combination of UAL/PBGC pension + Social Security + B Plan IRA + convertible note payout Roth IRA; totals about 50% (with inflation adjustments in the future) of my FAE. I'm annoyed about being cheated out of some money, and more annoyed that many other people got cheated out of much more; but I still have a very nice retirement income. Glad to hear that yours worked out well, and I still appreciate what the 570 did. I kept buying dinner for them on layovers until I retired...

 

[Running_Man]

To the best of my knowledge, the Chicago School System does not own a significant number of buses. The vast majority of students either walk to neighborhood schools or take the CTA. What bus manufacturing company are you refering to? Perhaps a small firm which customized vans for physically challenged students or something like that?

According to this article in 2008 Chicago Public Schools had 1,600 buses from 16 different companies. A few contracts in there that might be worth something.


Chicago Public School Busses. - Chicago Public Schools | Examiner.com

 

[imoldernu]

PBGC Announces increase in guaranteed Pension Payment Maximum Amount for 2013. New amount $57,500... up from $56,000

PBGC Maximum Insurance Benefit Increases for 2013

 

[haha]

This would all have to meet PBGC guidelines, right? If the business is on the edge of failing, I would think that pulling the pension down to the minimum, but legal, limits of what the PBGC requires would be something that you would need to do to attempt to survive and protect those jobs.

Maybe PBGC should have stricter guidelines (and IMO they should - 100% funding and assumed returns no higher than inflation), but w/o info to the contrary, this all seems on the up-and-up. Maybe blame PBGC if you are going to blame anyone?

As an aside - the Chicago teachers went on strike recently. And even though there were many issues brought up, I never once heard them push for better funding of their pension plan. Their plan is woefully underfunded, in the 40%'s range IIRC. Why isn't this a major, major issue with the unions? I find that curious indeed.

-ERD50

Then every state and municipality should follow the same guidelines, but they don't now and never will. Much better to pretend, and then count on the taxpayer to bail these plans out.

Ha

 

[eytonxav]

Then every state and municipality should follow the same guidelines, but they don't now and never will. Much better to pretend, and then count on the taxpayer to bail these plans out.

Ha

But the tax payers can no longer be counted on either, they have had enough