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Old 11-05-2010, 10:14 AM   #201
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I will also say again that the alternative form of pension you have suggested in the past, the cash balance plan, does not eliminate market risk for the taxpayer. It is still a defined benefit plan, although of a different type than the more usual age + years of service variety. If, as can be the case with public pension plans, the pension was established by legislation and the employing government is required by law to pay the specified retirement benefits, taxpayers could end up being called on to make up a shortfall between the calculated cash balances and the amount of money actually generated from employee & employer contributions.

It does eliminate (or greatly reduces them) in a cash balance account... the employer puts in money... you can set it up where they also take money out from the employee (this was not the case at my mega)... it is not allowed to NOT fund the plan... you have a pile of cash... it is invested in Treasuries.... all the cash is there... there is not calculated DB.. the DB is what annuity that can be bought with that much cash at the time they retire...

Now, the other thread about safeguarding pensions I wrote that this can lead to someone retiring now compared to someone who retired years ago getting two different amounts even if everything else is the same...
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Old 11-05-2010, 10:25 AM   #202
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kyounge1956 brings up some good points that I have thought about, but not put in writing. The original OP asked about early pensions and my response to that is, unless the work is hazardous, extremely physically demanding or has performance that is subject to degradation due to age, then pensions for civil servants (not military) should be available without penalty no earlier than 60 years of age. I think that's a reasonable position at this time and would save pension systems a lot of money. The catch is that DB plans, even partial DB plans base the DB on time worked and some calculation of high salary. So there will be some increased cost which should be more than offset by not having to pay the pension as long.

If early outs for downsizing are offered, they should either be lump sum or heavily penalized the younger the person leaves. These all make sense. Many of the retirement ages were set when people lived at least 5 years less and maybe even 10 than they do now. For thse of us now over 60, life expectancy at birth is at least 10 years longer than when we were born.

I also agree with k1956 that CB plans are not the answer, expose governments to just as much risk as DB plans as the money can and will be used by politicians for other purposes, leaving a paper IOU instead. There is nothing wrong with DB plans that are properly structured and funded.

For those who keep insisting that public pensions take food out of their children's mouths, how is this any less of an issue than fire services you pay for but never have a fire, education if you never have children, welfare or food stamps if you never need them, etc? You can't pick and choose what you would like to pay for. And you can't complain about things that have no direct impact on you. Most of us are residents of and pay taxes in one state. Maybe we own a vacation or retirement home in another state and pay property taxes there. For the most part, our taxes are affected by what happens in a single state. So why are people so concerned with what happens where they don't pay taxes? Goes back to the doorman comment. What do you care what a doorman or garbageman or anyone else makes when you are not paying those salaries? I don't hear any complaints about the CEO of Lockheed Martin being paid $1.8M in 2010 plus stock options upwards of $10M? A very large portion of their business is DoD funded - so you have a direct line from your tax dollars to his pocket. Why does it bother people who live in Vermont what the civil servants in Arizona receive as pay or pensions?

This is where my pension envy comment comes from. Other than an academic interest, why is it so important to you what happens in areas that do not affect your personal taxes? Federal pensions are, at this time, pretty much in line with those paid by extremely large companies. Health care costs for feds are way higher than in most large private companies. Some employees are overpaid and many are underpaid in comparisons with similar jobs with similarly sized companies - that was the study some of you read. Some federal benefits are extremely rare in private companies - COLAs and health insurance in retirement. But does that equate to taking them away because you don't have them and are paying for them through your federal taxes?

I have said this before and it's apparently not sinking in. The current - for the past 24 years - federal retirement system is far less generous than the one prior to that. From the DB portion of the pension to retirement age, the amount that the government pays, and is funded by tax payers is way less than it used to be. The portion of the current federal budget spent on federal pensions is miniscule compared with the well over $1T total. Face it, public serants are an easy target to take out your anger and frustration on. Just remember that unhappy civil servant who is auditing your tax returns - be sure to tell him you think he is ovepaid and that his pension is far too generous .

BTW, not sure I remember where this happened, but did you read about the local fire department that refused to put out a house fire at a house where the owners would not pay their fire tax? Sort of puts it in perspective - you do not get to pay as you go for public services.

To me, this is mostly an academic discussion... I enjoy the back and forth of ideas on how things should be... but I am not going to go out and try and get anything changed... I also don't think that my state is in trouble as much as other states...

Now, if I hear that the feds are thinking about bailing out California or Illinois... then I will be calling, writing letters etc.. but we all know what that will accomplish.... nothing...


I also agree that the Fed program is not out of line... seem quite reasonable from what you say... I do agree that pensions should not start before 60 like you state... and I would also like to see spiking eliminated...
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Old 11-05-2010, 03:04 PM   #203
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For feds, I don't think spiking is much of an issue. Overtime is not common unless you are in one of the law enforcement professions. At grade 13 (about $100K) and above, there really is no overtime. Even those who are eligible for it rarely get authorization. Comp time is far more common and that does not raise your salary. Plus, pensions are based on a one year average of your highest continuous 36 month period of employment, which for most people is their last 36. It's pretty hard to spike for 36 months. I do remember when I lived in NYC, both police and firefighters would put in for tons of overtime during their last year as their pensions were based on the 12 months preceding retirement.
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Old 11-05-2010, 05:59 PM   #204
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I guess my question to Kyounge and Beowolf is a pretty simple one. If the total unfunded liability for state and local pension is $3 trillion that works out to $27,000 per household an amount that needs to paid over the next ten or so years. Now this burden isn't shared equally state like NJ, IL, and my state of Hawaii have a more severe problem and handful of states have modest problem.

How do we in general go about bridging the gap? Do states and local government raise taxes, cut services, cut salaries of state and local workers, increase their contributions, or change the retirement rules in the future or pray for Dow 35,000? Should current pensioners be expected to share any of the pain or should they be treated just as a regular taxpayer?

I think steps like raising the minimum pension age 60 is modest step in the right direction.
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Old 11-05-2010, 06:38 PM   #205
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There is nothing wrong with DB plans that are properly structured and funded.
It may be unlikely that governments will properly fund DB plans. If DB plans were not permitted for governments, that would avoid this problem.
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Old 11-05-2010, 08:11 PM   #206
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So I read through a lot of these pension threads, and I am curious about one thing. Where is the money for these underfunded plans supposed to come from? My 401K lost half of it's value (but has climbed back to near what it was 3 YEARS AGO). Do I stay in an underfunded state with my reduced 401K and pay higher property taxes and/or state income taxes to fund the guaranteed pensions? No, I move to a state with a well funded pension system (or perhaps Alaska, which has none of these problems). The question then becomes, how does the state ever get funding for the pensions if everyone leaves?
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Old 11-06-2010, 12:43 AM   #207
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kyounge1956 brings up some good points that I have thought about, but not put in writing. The original OP asked about early pensions and my response to that is, unless the work is hazardous, extremely physically demanding or has performance that is subject to degradation due to age, then pensions for civil servants (not military) should be available without penalty no earlier than 60 years of age.(snip)
Why 60? Why shouldn't a pension system be able to set up whatever eligibility rules they please, as long as the funding mechanism is adequate? It's true that for many pension systems right now, the funding mechanism is not adequate—so, let the actuaries determine what the possible remedies are, and let the affected people decide which one(s) to put into effect.
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Old 11-06-2010, 03:28 AM   #208
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I guess my question to Kyounge and Beowolf is a pretty simple one. If the total unfunded liability for state and local pension is $3 trillion that works out to $27,000 per household an amount that needs to paid over the next ten or so years. Now this burden isn't shared equally state like NJ, IL, and my state of Hawaii have a more severe problem and handful of states have modest problem.

How do we in general go about bridging the gap? Do states and local government raise taxes, cut services, cut salaries of state and local workers, increase their contributions, or change the retirement rules in the future or pray for Dow 35,000? Should current pensioners be expected to share any of the pain or should they be treated just as a regular taxpayer?

I think steps like raising the minimum pension age 60 is modest step in the right direction.
I don't know if that's really the case. I've been arguing against this mainly on the basis of "a promise is a promise, employees have kept their side of the deal, and should get the promised benefits". But something in the wikipedia article on defined benefit pensions prompted me to start playing with a spreadsheet, and raising the minimum eligibility age to 60 would not always result in a savings to the pension fund. I won't go into the exact figures, but in my retirement system, I would cost the fund least if I retired at my earliest possible date (age 52 with more than 20 years of service). I ran some cumulative totals up to lifespans of 100, and unless I died before age 62, retirement at 52 was less costly to the pension fund over my remaining lifespan. Whether I cost the fund more by retiring at 57 or at 60, depends on how long I lived after that. If I lived past 78 (which is longer than my statistical life expectancy but shorter than I expect to live, based on my parents, who are both still living in their mid-eighties) I would cost the pension fund more by waiting until age 60 to retire. That's how it shakes out with Seattle's retirement formula, my actual salary, 1% COLA increases from now until retirement age, and the 1.5% annual adjustment on pension benefits, but since there are probably almost as many formulas as there are pension systems, that old saying "your mileage may vary" most definitely applies here. Another pension system might find that raising the minimum age did always result in an overall reduction in the amount of benefits the fund had to pay out.

So, to answer your main question, we don't bridge the gap "in general", but by picking a specific solution to solve the specific problems of a specific pension fund. I'm not sure how to answer the question about pensioners sharing the pain. That depends on exactly what pain you have in mind. You mentioned being treated like any taxpayer, so I suppose you're asking about tax increases. Whether retired City employees shared the pain of, e.g. a sales tax increase in Seattle, would depend on whether they still lived here or not. They move to Florida, they're off the hook. I suppose it would be the same with any local or state system—the impact on retirees would depend on which tax was being raised. Did that answer your question?
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Old 11-06-2010, 07:37 AM   #209
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Very good question. I don't have an answer, just this thought:

You, OP, may be somebody who makes an informed choice about where to live, then picks up and moves there.

In my experience, many people either can't pick up and move for various reasons, or find the prospect of going away to live in a strange place too scary. So, states probably won't face a situation where "everyone leaves." I can imagine some states facing a situation, though, where many old residents die (or can't pay the high property taxes) and not enough new people find the state attractive enough to move in.

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Do I stay in an underfunded state with my reduced 401K and pay higher property taxes and/or state income taxes to fund the guaranteed pensions? No, I move to a state with a well funded pension system (or perhaps Alaska, which has none of these problems). The question then becomes, how does the state ever get funding for the pensions if everyone leaves?
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Old 11-06-2010, 08:39 AM   #210
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Very good question. I don't have an answer, just this thought:

In my experience, many people either can't pick up and move for various reasons, or find the prospect of going away to live in a strange place too scary. So, states probably won't face a situation where "everyone leaves."

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True, but you don't need "everyone" to act to make a big difference. It's the same argument people make about raising taxes - they say "all the job creators won't just close up shop". Also true. But some will, and some may decide to skip or scale down that next expansion, just too much risk for the reward.

But I'd bet that a cross section of the highest tax payers in a state would also reveal a group with a pretty high relative level of 'mobility'. And certainly, when it comes to people moving into the state to create a business, high taxes are going to be a negative factor. Add up some people leaving, and fewer moving in, and it can be a big deal over the course of a decade.

And of course, it snowballs - for every high earner that leaves (or that they don't gain), they will need to raise taxes on the remaining people - and it will take a lot to make up the losses from high earners. Rinse, repeat and it's a downward cycle.

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Old 11-06-2010, 08:39 AM   #211
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I don't know if that's really the case. I've been arguing against this mainly on the basis of "a promise is a promise, employees have kept their side of the deal, and should get the promised benefits". But something in the wikipedia article on defined benefit pensions prompted me to start playing with a spreadsheet, and raising the minimum eligibility age to 60 would not always result in a savings to the pension fund. I won't go into the exact figures, but in my retirement system, I would cost the fund least if I retired at my earliest possible date (age 52 with more than 20 years of service). I ran some cumulative totals up to lifespans of 100, and unless I died before age 62, retirement at 52 was less costly to the pension fund over my remaining lifespan. Whether I cost the fund more by retiring at 57 or at 60, depends on how long I lived after that. If I lived past 78 (which is longer than my statistical life expectancy but shorter than I expect to live, based on my parents, who are both still living in their mid-eighties) I would cost the pension fund more by waiting until age 60 to retire. That's how it shakes out with Seattle's retirement formula, my actual salary, 1% COLA increases from now until retirement age, and the 1.5% annual adjustment on pension benefits, but since there are probably almost as many formulas as there are pension systems, that old saying "your mileage may vary" most definitely applies here. Another pension system might find that raising the minimum age did always result in an overall reduction in the amount of benefits the fund had to pay out.

So, to answer your main question, we don't bridge the gap "in general", but by picking a specific solution to solve the specific problems of a specific pension fund. I'm not sure how to answer the question about pensioners sharing the pain. That depends on exactly what pain you have in mind. You mentioned being treated like any taxpayer, so I suppose you're asking about tax increases. Whether retired City employees shared the pain of, e.g. a sales tax increase in Seattle, would depend on whether they still lived here or not. They move to Florida, they're off the hook. I suppose it would be the same with any local or state system—the impact on retirees would depend on which tax was being raised. Did that answer your question?


Just curious.... did you fix the time you leave work

IOW, you leave at 52 and start to take your pension... vs you leave at 52 and can not start to take your pension until you are 60...


I would be very surprised that your pension would go up that much if you were not working...

If you assumed you kept working, well, the City got more work out of you and should be paying a higher pension...
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Old 11-06-2010, 08:58 AM   #212
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To everyone who has never worked for any level of government in any capacity as a direct employee, the question is why? If the pay and pensions are so wonderful, why wouldn't everyon be lining up for those jobs for the last 50 years? Think about it - there must be some reason you chose to stay with private industry.
How do you know that they were not lining up for the jobs? It probably depends somewhat on where the jobs were and what they were. When government in my city had clerical jobs just about every secretary in town would apply. The jobs were in high demand and we, the largest law firm in greater Minnesota, could not compete with government for secretaries with less than 10 years experience. It wasn't money, the money was about the same. It was the extra days off, no overtime, and the lower pressure.

Lawyer jobs varied. It depended on the job as to who would be lining up for it. I never wanted to be a prosecutor, it wasn't my thing. However, the local level government lawyer jobs were very competitive. Most of the county attorneys have been with the county their whole career. I tried to hire one of the newer ones away once. I could pay half again the pay but I they would be taking their own risk on retirement and they would have had to put in quite a few more hours and take the risk of never becoming a partner. She turned me down. The senior ones never wanted to leave.

I did work as a law clerk for a federal judge after law school. This is not a permanent job, usually lasting one or two years. When I went to private law after my federal job I took a pay cut and my insurance benefits were not as good and I worked harder. But I was relatively young and the hard work was not bad and there was a degree of independence that came with the years that I never would have in government. Also, what was important to me at the time was to live where I was living. There was no government jobs for me there.

However, if I had to do it again I would have moved away not have worked for a law firm, maybe I would not have burnt out so fast. If not government, in house somewhere. But who knows, I didn't have the experience so I can't be sure.

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So I read through a lot of these pension threads, and I am curious about one thing. Where is the money for these underfunded plans supposed to come from? My 401K lost half of it's value (but has climbed back to near what it was 3 YEARS AGO). Do I stay in an underfunded state with my reduced 401K and pay higher property taxes and/or state income taxes to fund the guaranteed pensions? No, I move to a state with a well funded pension system (or perhaps Alaska, which has none of these problems). The question then becomes, how does the state ever get funding for the pensions if everyone leaves?
Taxes. Reduction in other services. Inflation. Not that many people are going to leave or can leave. Many people want to be at where they identify as home. Many people want to be near family. All the jobs are not going to move too. Nor is all the housing. As a retiree you may have more flexibility than most. Look at the differences in taxes different states levy. People do not automatically gravitate to where the taxes are lowest.
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Old 11-06-2010, 10:26 AM   #213
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Taxes. Reduction in other services. Inflation. Not that many people are going to leave or can leave. Many people want to be at where they identify as home. Many people want to be near family. All the jobs are not going to move too. Nor is all the housing. As a retiree you may have more flexibility than most. Look at the differences in taxes different states levy. People do not automatically gravitate to where the taxes are lowest.
Well I guess the unfortunate people that stay will be the bagholders paying for these pension plans. I will take my much reduced 401K and moe to a state without problems. Unless the state agrees to tax everyone and raise property taxes to bring my 401K balance up to the level it should be if I assumed 8% returns (like the pension plans do).

Why can they extend SS retirement age and not extend pension benefit age? I contributed almost 13% of my income to SS, and I am told I should not rely on it, and in fact eventually it may be means tested. Will pension plans eventually switch to means tested also?
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Old 11-06-2010, 12:34 PM   #214
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I contributed almost 13% of my income to SS, and I am told I should not rely on it, and in fact eventually it may be means tested. Will pension plans eventually switch to means tested also?
Well, SS is already means tested by being subject to tax if you have other income above a certain level.

I'm sure that Congress will realize the concept could be extended to pensions. They won't have to call it "means testing", they'll just call it something like "enhanced revenue realization from higher-income recipients".

Or we could continue to call it "income tax brackets" and just remove pensions from any exclusion from federal/state/local taxation.
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Old 11-06-2010, 01:27 PM   #215
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Just curious.... did you fix the time you leave work

IOW, you leave at 52 and start to take your pension... vs you leave at 52 and can not start to take your pension until you are 60...


I would be very surprised that your pension would go up that much if you were not working...

If you assumed you kept working, well, the City got more work out of you and should be paying a higher pension...
I did assume that I would continue to work. In the Seattle system, if I'd retired at 52 and started drawing benefits immediately, my pension would have been 34.5% of my base salary. If I had left City employment at 52 (at which time I had 23 years of service) but not started my pension until age 60, I would be eligible for a pension of 46%. I didn't save my spreadsheet and don't have time to set it up again at the moment, but I think this is in the area where how long I live determines which option costs the fund less overall. I think the break-even point might be in the mid-eighties somewhere, which is above current life expectancy. If City of Seattle employees started leaving the workforce at age 52, but not drawing benefits until 60, I think that would probably result in a significant savings to the retirement system.

The relevant question then becomes, how many people would actually do that? I certainly would not have. I think that if the minimum age for benefits were raised to 60, most employees would simply continue working until age 60. I don't think there are many of us who have the option of leaving our jobs without an immediately available replacement income.
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Old 11-06-2010, 11:32 PM   #216
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So many interesting comments and so much passion on how people don't want to pay for public pensions. How do I know people aren't lining up for federal jobs? Well, many actually are, but they want jobs paying $100K and have absolutely no qualifications for them. When I was a hiring authority, I used to receive lists of 20 resumes of people who were supposedly qualified, but a deeper analysis showed they just parroted back the job announcement and said they could do it. No support for that assertion, but it happens all the time. My office was looking for RF engineers a few months ago - must have a BSEE or higher and and 10 years RF experience. These are jobs paying $125K and up. We received one qualified applicant for 3 positions. It doesn't matter how many people apply, it matters how many are really qualified to do the job. Yes, in general, lawyers in government don't work hours as long as those in private practices. But they also don't become partners and earn obscene amounts of money. Latest OPM stats show that 28% of new hires at grade level 5 to 7 leave the jobs within 2 years. Another 25% leave within 5 years. The real percentage of feds who actually qualify for a full retirement under FERS is about 15% of those who join the gov. Of course, with the more portable system in force today, that's to be expected. As I said before, in bad economic times people go for any job they can find, in good times, they are a lot pickier and federal employment is not at the top of their list.

But enough about feds - I think that really is a dead horse that's been beaten to death. I give up on the DB argument - it's clear that several folks believe that it's the spawn of the satan and will bring down the free world. Actually, it's a great idea that has worked well for many millions of people in the private sector, as well the the public. The key is full funding and that's not happening - but it could.

I have a simple answer for who is going to pay for state and local pensions that are unfunded. You won't like it, but the answer is all of us. Just like all of us get to pay for police, fire, water and all public services. You may not want to, but I really can't see people moving to a different state to avoid a small increase in taxes. I don't know if $27K per family is the liability or not. Nor do I know if 10 years is realistic either. Most people these days are retired for about 20 years. If you look at it that way, it's $1,400 per family per year and those in lower income brackets will not pay that much and those who earn higher will pay more. But this is all fiction. We really don't know the true liability and fear of it is kind of silly, considering the real threats of terrorism, plague, pestilence, water shortages, global warming, global cooling, rogue meteors and bed bugs. Do people really sit around and worry about things like this? Must have very wonderful lives if this is at the top of their worry list.
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Old 11-07-2010, 12:37 AM   #217
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I did assume that I would continue to work. In the Seattle system, if I'd retired at 52 and started drawing benefits immediately, my pension would have been 34.5% of my base salary. If I had left City employment at 52 (at which time I had 23 years of service) but not started my pension until age 60, I would be eligible for a pension of 46%. I didn't save my spreadsheet and don't have time to set it up again at the moment, but I think this is in the area where how long I live determines which option costs the fund less overall. I think the break-even point might be in the mid-eighties somewhere, which is above current life expectancy. If City of Seattle employees started leaving the workforce at age 52, but not drawing benefits until 60, I think that would probably result in a significant savings to the retirement system.

The relevant question then becomes, how many people would actually do that? I certainly would not have. I think that if the minimum age for benefits were raised to 60, most employees would simply continue working until age 60. I don't think there are many of us who have the option of leaving our jobs without an immediately available replacement income.

But the point is that you are working to get a higher pension.... which means they did not have to hire someone else to do that work and provide THEM with a pension while also paying your pension... the only way to compare is if you calculated both at the same retirement age....
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Old 11-07-2010, 01:50 AM   #218
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But the point is that you are working to get a higher pension.... which means they did not have to hire someone else to do that work and provide THEM with a pension while also paying your pension... the only way to compare is if you calculated both at the same retirement age....
I think you are missing my point. The OP on this thread originally proposed raising the minimum age to collect a public pension in the belief that it would result in savings. I have been arguing against the suggestion because I think it's unfair. Until last night it had not occurred to me to examine the assumption underlying his suggestion, but having done so, I am now also calling into question Dallas Guy's supposition that doing so would reduce public spending. There is no guarantee that there would be any savings at all. If the employees simply continue to work until the increased eligibility age (as many would, because without the pension they can't afford to quit), there might easily be no savings at all. My quick "what if" spreadsheet suggested to me that raising the minimum age to draw benefits only results in lower cost if employees leave their jobs some years before they are eligible to draw pension benefits.

Here's a thought experiment. What if it turned out that public pension funds could solve their underfunding problems by encouraging employees to retire earlier? The spreadsheet suggested that if I had retired at age 52, the retirement system would pay me considerably less over my remaining lifespan than if I wait until later. I couldn't afford to do it, because I had put hardly any other savings aside to supplement my pension, but if I had been putting even a low percentage of my salary into the 457 plan the whole time I was employed, I think it's easily possible I could have been able to retire at that age (just in time for the stock market crash ) If the City were to switch to automatic enrollment in the 457 plan for all new hires, as some private sector 401k plans have, would enough employees retire at the earliest opportunity to put the pension fund back in the black? And would the same people who are now worried they will have to bail out public pension funds with higher taxes be applauding?
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Old 11-07-2010, 07:24 AM   #219
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I think you are missing my point. The OP on this thread originally proposed raising the minimum age to collect a public pension in the belief that it would result in savings. I have been arguing against the suggestion because I think it's unfair. Until last night it had not occurred to me to examine the assumption underlying his suggestion, but having done so, I am now also calling into question Dallas Guy's supposition that doing so would reduce public spending. There is no guarantee that there would be any savings at all. If the employees simply continue to work until the increased eligibility age (as many would, because without the pension they can't afford to quit), there might easily be no savings at all. My quick "what if" spreadsheet suggested to me that raising the minimum age to draw benefits only results in lower cost if employees leave their jobs some years before they are eligible to draw pension benefits.

?
I have a question did you spreadsheet include the income lost by the pension due to paying out the pension earlier? If so what rate of return did you assume for the pension fund?

For example assume at age 52 you collected a pension of $25,000. If that $25,000 had remain in the pension fund and earned money at 8% it would have generated an additional $21,273 income for the pension fund
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Old 11-07-2010, 09:44 AM   #220
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I have a question did you spreadsheet include the income lost by the pension due to paying out the pension earlier? If so what rate of return did you assume for the pension fund?

For example assume at age 52 you collected a pension of $25,000. If that $25,000 had remain in the pension fund and earned money at 8% it would have generated an additional $21,273 income for the pension fund
Wait a minute, didn't you say in an earlier post that the public pensions were severly underfunded, that trillions of dollars are missing that we would all be paying through our noses forever?

If there is no money in the pension fund, how can you count interest on money that isn't there? Just like SS, you can't say the invisible fund gets interest as the government already spent the underlying contributions. Plus, if you can get 8% on a safe fixed bond investment , please let us all know where it is.

You can't have it both ways .
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