Should publicly funded pensions start later?

[jdw_fire]

A DC plan by its nature is fair to everyone.... the money that goes in goes in to YOUR account... the funds get invested and you get to keep the income (or loss if you get to choose your investments)... they can not mismanage the funds because they are not managing them.... (now, the DC plan that I am in pays us the 10 year Treasury rate... so I guess there is a possibility that they could mess that up)....

actually DC plans are not fair to everyone, they favor the financially astute and are unfair to the financially challenged

 

[Texas Proud]

actually DC plans are not fair to everyone, they favor the financially astute and are unfair to the financially challenged

You can't help stupid....


But you seem to lump all of them together... I was in a DC plan that is fair to everyone... we have an account.. the account earns at 10 year Treasuries... done...

It is your money, but you can not invest it... it grows, but again, it does not have anything to do with you being astute or challenged...

 

[jdw_fire]

....


But you seem to lump all of them together... I was in a DC plan that is fair to everyone... we have an account.. the account earns at 10 year Treasuries... done...

ok TP hows this?

actually DC plans are not fair to everyone, they favor the financially astute and are unfair to the financially challenged

except yours TP

 

[ERD50]

Of course, some people will say that the voters are responsible for these problems. Later today, I'll print out the ballot for my area and study it. Maybe one of those people could help me to find the correct boxes to check to fix this problem?

-ERD50

You do know, of course, that the word "responsible" does not mean "able to control". You can in fact be fully responsible for people or actions over whom you have no control.

I meant to respond earlier, the window got hidden behind some other stuff, so...

? "of course" I know that? No, I don't. Because it's not correct.

Definition number ONE (bold mine):

Responsible | Define Responsible at Dictionary.com

re·spon·si·ble

–adjective

1. answerable or accountable, as for something within one's power, control, or management...

Perhaps you meant to say "that is not the ONLY definition of 'responsible'"? Yes, one can be held 'responsible' for things outside their control. I often considered that almost a definition of "middle management". But they must have some accountability in some way, or the word is really meaningless. For example, maybe an employee did something wrong. I couldn't have stopped it, but I can be held responsible as their manager. But, for me to have accountability, I have to have some authority - hire/fire, input on raises,promotions, assignments, - something. Without that, it isn't really 'responsibility'.

And I stand by my assertion that my right to check a box on a ballot does not make me "responsible" for the shenanigans that will be performed by any/all people running for that office.

-ERD50

 

[beowulf]

"It is your money, but you can not invest it"

Sorry, but it's not really your money except in the vaguest of meaning. If you have no control over, if you have no say in how it's invested, if you can't differentiate your money from someone else, then its....SOCIAL SECURITY. Except you get back what you put in plus some sort of interest. Or, if it's invested poorly, then you all lose equal percentages. Of course it's not fair - those who contribute the least, low pay or whatever, have no real chance to take risks when they are young and make more. Those who contribute a lot will have more, or maybe less. Who knows - they have no control over the investments.

That's about the sorriest excuse for a DC plan I have ever heard of. I believe the choices in my 401K are really poor, but at least I have a choice, albeit poor ones.

 

[Texas Proud]

"It is your money, but you can not invest it"

Sorry, but it's not really your money except in the vaguest of meaning. If you have no control over, if you have no say in how it's invested, if you can't differentiate your money from someone else, then its....SOCIAL SECURITY. Except you get back what you put in plus some sort of interest. Or, if it's invested poorly, then you all lose equal percentages. Of course it's not fair - those who contribute the least, low pay or whatever, have no real chance to take risks when they are young and make more. Those who contribute a lot will have more, or maybe less. Who knows - they have no control over the investments.

That's about the sorriest excuse for a DC plan I have ever heard of. I believe the choices in my 401K are really poor, but at least I have a choice, albeit poor ones.

Just because you do not have control over the money does not mean it is not yours...

The whole POINT of a DC plan is that the pension that you get is based on your earnings... if you earn $50K and it is your first year, then compated to someone who earns $100K and their first year you only have half the funds... simple...

Now, you can quibble about the percent of pay that goes into the plan... the one I was in started at 4% and went to 8% at higher years of service (it used to go to 18%, but got cut down a few times over the years... yea, who knew)....

The employees are not contributing anything to this plan... all the money is put in by the employer... 100%...

It the stetement "those who contribute the least, low pay or whatever, have no real chance to take risks when they are young and make more. Those who contribute a lot will have more, or maybe less. Who knows - they have no control over the investments." Well, that is what a 401(k) is for.... this is NOT a 401(k)... it is a DC plan... if the person wants to put some of their own money into a plan... go for it... but don't confuse a DC plan with a 401(k) plan...

 

[Texas Proud]

ok TP hows this?



except yours TP

Hmmmm, I can take that as an insult.... you seem to lump me in with the financially challenged..... but with an exception...

 

[haha]

Think about it - there must be some reason you chose to stay with private industry.

I think my vote would go to watching the dispirited zombies moping around the average government office that deals with the public. Or reading even one government HR document.

Private industry may be catching up with what appears to be the soul destroying nature of government work, but then again it may still have some distance to go.

Ha

 

[jdw_fire]

Hmmmm, I can take that as an insult.... you seem to lump me in with the financially challenged..... but with an exception...

no reason to feel insulted, you werent. i was commenting on your DC plan, not about your personal financial IQ.

 

[Texas Proud]

no reason to feel insulted, you werent. i was commenting on your DC plan, not about your personal financial IQ.

Didn't think you were... just pointing out that you could read it that way... language is strange in that you put down something that is perfect... nobody can misunderstand what you wrote.... and then someone does... got to love it...

 

[beowulf]

"but don't confuse a DC plan with a 401(k) plan... "

I'm now totally confused. Most companies consider their 401K plans to be DC plans - in the sense that they match a certain portion of the employee's contribution and the employee can only put in up tp a certain amount. I have never heard of a DC plan being one as you describe. Plus, your company must be one of maybe a handful that are so generous. Must be a non or not for profit.

Here is the wiki definition of a DC plan:

In economics, a defined contribution plan is a type of retirement plan in which the amount of the employer's annual contribution is specified. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account. Only employer contributions to the account are guaranteed, not the future benefits. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings (usually pretax) to an individual account, all or part of which is matched by the employer.[2] In the United States, 26 U.S.C. § 414(i) specifies a defined contribution plan as a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.

Examples of defined contribution plans in the USA include Individual Retirement Accounts (IRAs) and 401(k) plans. In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated.


Based on the above, it would seem to me that your plan may be a DC plan, but so are all 401Ks, 403Bs, IRAs, etc. the ONLY things that seem to be special about yours are the high contribution by your company (and none from employees) and the TOTAL inability of employees to determine the fate of their money. Plus, the last sentence states clearly that the employee is responsible, to one degree or another, in the selection of investments. Your plan misses that factor completely.

I don't call that a great deal. An OK deal maybe, but certainly not a great deal.

 

[Texas Proud]

"but don't confuse a DC plan with a 401(k) plan... "

I'm now totally confused. Most companies consider their 401K plans to be DC plans - in the sense that they match a certain portion of the employee's contribution and the employee can only put in up tp a certain amount. I have never heard of a DC plan being one as you describe. Plus, your company must be one of maybe a handful that are so generous. Must be a non or not for profit.

Here is the wiki definition of a DC plan:

In economics, a defined contribution plan is a type of retirement plan in which the amount of the employer's annual contribution is specified. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account. Only employer contributions to the account are guaranteed, not the future benefits. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings (usually pretax) to an individual account, all or part of which is matched by the employer.[2] In the United States, 26 U.S.C. § 414(i) specifies a defined contribution plan as a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.

Examples of defined contribution plans in the USA include Individual Retirement Accounts (IRAs) and 401(k) plans. In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated.


Based on the above, it would seem to me that your plan may be a DC plan, but so are all 401Ks, 403Bs, IRAs, etc. the ONLY things that seem to be special about yours are the high contribution by your company (and none from employees) and the TOTAL inability of employees to determine the fate of their money. Plus, the last sentence states clearly that the employee is responsible, to one degree or another, in the selection of investments. Your plan misses that factor completely.

I don't call that a great deal. An OK deal maybe, but certainly not a great deal.

I will try and find out some more info on what I am talking about later... don't want to do it now...

I am no longer with that firm... they had two plans... a 'cash account' is what I am calling a DC plan.. they put up the money... we did not... but, they also offered a 401(k) plan... we put up money and they matched... the plan offered various investments and we could say where the money went.. (it got a 61 score based on the other thread)....

I will say that I do not consider a 401(k) plan a DC plan (which from what you post is wrong thinking)... but I guess it is...

 

[kyounge1956]

I'm amazed that there have been Idunnohowmany pension threads on this forum without my realizing until now that not all posters meant the same thing by "defined contribution plan". To the best of my knowledge, beowulf is in the right on this one. I've never heard any sort of plan other than 401k, 457b, 403b and the like called "defined contribution" plans.

I think what Texas Proud is describing is a Cash Balance Plan.

 

[Texas Proud]

I'm amazed that there have been Idunnohowmany pension threads on this forum without my realizing until now that not all posters meant the same thing by "defined contribution plan". To the best of my knowledge, beowulf is in the right on this one. I've never heard any sort of plan other than 401k, 457b, 403b and the like called "defined contribution" plans.

I think what Texas Proud is describing is a Cash Balance Plan.

WOW....

Who knew

Yep, that is what I was calling a DC plan... never knew that it was considered a DB plan... hmmmmmm..... what is the DB

 

[Amethyst]

Ouch, as a Federal employee (and a spirited one, who happens to write highly readable documents!) I would be getting hot under the collar at this remark, except that...the other day, I needed a question answered by the Office of Personnel Management (OPM) office in Boyers, PA, and by the end of 45 minutes on the phone, I wanted to strangle 4 separate [-]zombies [/-]people!

I think my vote would go to watching the dispirited zombies moping around the average government office that deals with the public. Or reading even one government HR document.

... the soul destroying nature of government work....

Ha

 

[RAE]

I think my vote would go to watching the dispirited zombies moping around the average government office that deals with the public. Or reading even one government HR document.

Private industry may be catching up with what appears to be the soul destroying nature of government work, but then again it may still have some distance to go.

Ha

Hey, if that's your opinion of govt. employees and you decided not to become one based on that perception of govt. work, that's certainly your prerogative. As Beowulf said, we all made our decisions on who to work for based on the facts available to us at the time (and/or our perception of those facts). I chose govt. work (federal) for my career, and have no regrets. I do feel badly for those who chose private industry and have had their promised retirement benefits reduced or eliminated. I don't feel that is a valid reason to attack the benefits that federal employees receive.

 

[youbet]

I do feel badly for those who chose private industry and have had their promised retirement benefits reduced or eliminated. I don't feel that is a valid reason to attack the benefits that federal employees receive.

I agree. The reduction and/or elimination of pensions provided by private businesses should not be, in itself, a reason to wipe out govt employee pensions. But there are other reasons, many extremely valid, why the current system of public pensions needs to continue to change across the fed govt, many of the states and many of the municipalities.

 

[GregLee]

I don't see any problem with attacking government pensions. Those who disagree can defend them, and perhaps through that discussion we can approach a sensible view. I don't care for being called a soulless zombie, however.

 

[RAE]

I agree. The reduction and/or elimination of pensions provided by private businesses should not be, in itself, a reason to wipe out govt employee pensions. But there are other reasons, many extremely valid, why the current system of public pensions needs to continue to change across the fed govt, many of the states and many of the municipalities.

Well, I won't argue that some changes to state and municipal pensions are needed (although as Beowulf said, you have to look at them individually, because there is a lot of variability and some may require little or no change). I don't agree that the Federal FERS system (which all Fed. employees hired since 1984 are under) is in need of a major overhaul. If you have an argument as to why that system is somehow inherently flawed, I'd like to hear your reasoning (and how it should be changed).

 

[youbet]

I don't agree that the Federal FERS system (which all Fed. employees hired since 1984 are under) is in need of a major overhaul. If you have an argument as to why that system is somehow inherently flawed, I'd like to hear your reasoning (and how it should be changed).

Please reread my post with your glasses on.

I did not say the FERS system required a major overhaul as you incorrectly state. I said "the current system of public pensions needs to continue to change across the fed govt, many of the states and many of the municipalities."

Thanks.

 

[GregLee]

Please reread my post with your glasses on.

I did not say the FERS system required a major overhaul as you incorrectly state.

I have glasses on. There is no such statement in RAE's post.

 

[clifp]

Abuse in any context should be stopped. However, people get outraged when a state employee gets $100k pension. They fail to realize that most of that payment has been funded by salary deductions. In MA the highest pensions go to people like cardiac surgeons/professors at UMass medical School and they are not out of line for what they do.

Once again there is a knee jerk reaction to a very small number of abuses that is applied across the spectrum of state workers. The initial reaction is to see them as "the other" and not doing much much for us as that's what we read in the media.....it just isn't true.

I'm too lazy to find my old posts on the subject, but earlier when I was researching pension in some depth I did a fair amount of calculations.

The basic problems is that most public pension plans allow employees to work 30+ years and than retire at 55 with only a modest reduction in benefits from the 62 years 'normal' retirement. So a kid who goes to work right out of college as a teacher at say 36K and than retires at 33 years later at age 55 with a final salary of say 75K (all numbers ignore inflation) (which represents a 2.2% annual merit increase), is often eligible for 2/3 (2%/year) of their final salary or 50K/year. They will be collecting a pension on average between 25-30 years or almost long as they worked.

Lets assume the worse case and assume that we are like Japan and capital has 0% percent real return. (10 Years TIPs are about .3% 30 years aren't much higher). This would require the teacher to have saved up 50K x 25 or 30 years or 1.25-1.5 million. Over 33 year working career that is 40K per year combined contribution. Clearly this difficult when you are making 75K and down right impossible when you are making 36K year as a starting teacher. Even if we give early retires a 25% penalty and reduce the pension to 40K/year we are still talking about needing a million+ dollars in assets to fund a 25-30 year pension. It is true that currently the average pension is lower 25K-30K is typical but even that require $500K - $750K in today interest rate environment for an early retirement. This amount is roughly twice the amount of assets that typical public pension has per retiree.

Now lets assume that world returns to normal and we go back to 2002 (without the real estate bubble) Pension funds and investors can look forward to 7-8% real returns (The average public pension fund assumes 7.5% down about 1% from the pre crash assumptions).


In order to fund a pension that allows somebody to retire in the 55-62 year range with between 60-80% of their final salary the combined contribution (i.e. the employee and the state) needs to be in the 25-35% range. Most public pension fund require an 8% employee contribution ( Nun's 11% is above average but still not enough), it is a very very rare state or city that consistently contributes more than 15% with most averaging in the 10-12% range. So basically for decades we have been funding public pension in the 18-20% range when we needed 25-35%. You throw in the financial crisis, with the 20-25% decrease equity values (although I am sure some pension sold stocks at the bottom), much lower bond yields, and a disaster for any real estate investment and we have a real crisis.

Finally let me note that at the root of the problem is that the most valuable contribution to any savings plans are the earliest, but that is when the public employees salary is the lowest. Yet the benefit is typically based on the final few years salary which are always the highest. The only way to have DB work in the long run is the base the pension on the average lifetime salary because that corresponds with the contributions.

 

[keegs]

never let a crisis go to waste.

 

[nun]

I'm too lazy to find my old posts on the subject, but earlier when I was researching pension in some depth I did a fair amount of calculations.

The basic problems is that most public pension plans allow employees to work 30+ years and than retire at 55 with only a modest reduction in benefits from the 62 years 'normal' retirement. So a kid who goes to work right out of college as a teacher at say 36K and than retires at 33 years later at age 55 with a final salary of say 75K (all numbers ignore inflation) (which represents a 2.2% annual merit increase), is often eligible for 2/3 (2%/year) of their final salary or 50K/year. They will be collecting a pension on average between 25-30 years or almost long as they worked.

Lets assume the worse case and assume that we are like Japan and capital has 0% percent real return. (10 Years TIPs are about .3% 30 years aren't much higher). This would require the teacher to have saved up 50K x 25 or 30 years or 1.25-1.5 million. Over 33 year working career that is 40K per year combined contribution. Clearly this difficult when you are making 75K and down right impossible when you are making 36K year as a starting teacher. Even if we give early retires a 25% penalty and reduce the pension to 40K/year we are still talking about needing a million+ dollars in assets to fund a 25-30 year pension. It is true that currently the average pension is lower 25K-30K is typical but even that require $500K - $750K in today interest rate environment for an early retirement. This amount is roughly twice the amount of assets that typical public pension has per retiree.

Now lets assume that world returns to normal and we go back to 2002 (without the real estate bubble) Pension funds and investors can look forward to 7-8% real returns (The average public pension fund assumes 7.5% down about 1% from the pre crash assumptions).


In order to fund a pension that allows somebody to retire in the 55-62 year range with between 60-80% of their final salary the combined contribution (i.e. the employee and the state) needs to be in the 25-35% range. Most public pension fund require an 8% employee contribution ( Nun's 11% is above average but still not enough), it is a very very rare state or city that consistently contributes more than 15% with most averaging in the 10-12% range. So basically for decades we have been funding public pension in the 18-20% range when we needed 25-35%. You throw in the financial crisis, with the 20-25% decrease equity values (although I am sure some pension sold stocks at the bottom), much lower bond yields, and a disaster for any real estate investment and we have a real crisis.

Finally let me note that at the root of the problem is that the most valuable contribution to any savings plans are the earliest, but that is when the public employees salary is the lowest. Yet the benefit is typically based on the final few years salary which are always the highest. The only way to have DB work in the long run is the base the pension on the average lifetime salary because that corresponds with the contributions.

It's ironic that getting a pension at 55 is an issue on an ER forum. If the arguments were solely financial I could understand it, but there is a streak of envy and outrage that mystifies me. I have yet to read a comment that starts " It's great that you can get a pension at 55, if there are problems with funding we should fix them while protecting the availability at 55".

You make many assumptions that I don't think are correct, but I agree with your conclusion. You fail to account for the extended vesting period in many public pensions and the sliding %age scale of benefits. This means that the plan only becomes a good value for people who contribute for at least 20 years. As I stated before the average public pension payment in MA is $26000, not $50k or $40k as you argue. I would, however, base the payment more on the way SS is calculated using complete salary history and introduce immediate vesting. There should be a progressive component to the calculation (as with SS) so that proportionally the benefit is higher for lower paid employees as they have less free income to invest in other ways. I believe in this progressive benefit (and also taxation) as its the "Christian" thing to do.

 

[73ss454]

Pensions are not the problem, abuse of the pensions are. Just an example, and I do have envy. A buddy of mine retired from a police dept on Long Island NY. He worked in an office his entire career and somehow became a detective. When he did he stayed in the same office and never once made an arrest or hit the street. His last 3 years he worked untold amounts of over time which he never did before. At 41 he retired and is collecting a full COLA pension of 129K a year. Oh yeah, don't forgete the health ins, dental and he has to have free eye glasses.

They get away with this fraud and laugh all the way to the bank. Not a bad scam.

Another good one, DW's boss was the superintendant of schools in a small town on Long Island. After 25 years he retired with a pension of about 160K a year. The next day he was sitting in the same seat collecting $1200 a day. Does this make sense?