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Old 10-13-2011, 12:01 PM   #21
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Your point is certainly valid, but I was referring to the fact that the new CB plans are generally not as $ beneficial as the old ones, except for the portability issue as you point out or the case of one working a shorter period of time at a particular company.
This is probably true. And it's probably true that a "cash balance" pension plan isn't as generous as the legacy plans. But is it more sustainable? And just as importantly, are they better than having no pension option at all (other than purely DC plans like 401Ks and IRAs)?

There's no going back to legacy pension plans for the masses, I think. But I do think we can create and sustain portable "pension lite" plans for people who would prefer to have some of their retirement savings go into a plan where there is more certainty for planning purposes. And if the choice is between plans like these (especially if it's optional) and having nothing but 401K and IRAs to rely on, I'd prefer to see these plans readily available to the masses. It's as close to a "pension" many folks would see (apart from SS, I suppose).
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Old 10-13-2011, 12:19 PM   #22
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Yep, whether it's business people, or politicians, if they can get at large amounts if $ they will do it. I have a pension through the state I live in, and just have to assume it's going to be there. They have upped my mandatory contributions by 2.25% of my pay, with no corresponding increase in benefit. Makes me wonder what's going on behind the curtain.
You might be surprised how little your contribution rate determines in the overall health of your fund, I know I was. Throughout most of my working years we contributed 13% of our salary and benefits, and that was matched by the school. Many people assumed that was the force behind funding the system. Actually it was around only about 35%. The remaining 65% or so comes from the compounding of yearly assumed 8% return on these assets. With the market essentially flat for the past decade, it sure makes it hard to hit that assumption. So actually it shouldn't be surprising to find out your contribution rate has to go up to help keep the system funded. Assuming of course they didn't fully invest in gold the past few years
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Old 10-13-2011, 12:59 PM   #23
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This is probably true. And it's probably true that a "cash balance" pension plan isn't as generous as the legacy plans. But is it more sustainable? And just as importantly, are they better than having no pension option at all (other than purely DC plans like 401Ks and IRAs)?

There's no going back to legacy pension plans for the masses, I think. But I do think we can create and sustain portable "pension lite" plans for people who would prefer to have some of their retirement savings go into a plan where there is more certainty for planning purposes. And if the choice is between plans like these (especially if it's optional) and having nothing but 401K and IRAs to rely on, I'd prefer to see these plans readily available to the masses. It's as close to a "pension" many folks would see (apart from SS, I suppose).
Ziggy,

I find myself in agreement with almost everything you post, maybe its a case of great minds think alike
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Old 10-13-2011, 01:12 PM   #24
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The remaining 65% or so comes from the compounding of yearly assumed 8% return on these assets. With the market essentially flat for the past decade, it sure makes it hard to hit that assumption.
I don't think that's where the problem lies with public pension funds. The 8% assumed return is nominal, I believe, but in nominal terms, the market has not been flat for a decade. The Hawaii retirement portfolio (as I posted previously) has done quite well recently (though the fund has a large unfunded liability):
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The ERS portfolio of investments had a total value of $11.6 billion as of June 30, 2011, up 18.3 percent over the previous year. The fund saw a 20.7 percent return on investments for the year ended June 30.
Honolulu Civil Beat - Hawaii Employees' Retirement System
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Old 10-13-2011, 01:23 PM   #25
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Your point is certainly valid, but I was referring to the fact that the new CB plans are generally not as $ beneficial as the old ones, except for the portability issue as you point out or the case of one working a shorter period of time at a particular company.
We agree then.

But I do want to emphasize that the portability issue is huge. Under the plans I've looked at comparing DBP's and CB's, someone who works for several firms for a total of 30 yrs under DBP's is at a huge disadvantage to someone who does the same but with CB plans.

Of course, CB plans seem to be fading away to DCP's anyway so not sure it matters much.
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Old 10-13-2011, 01:39 PM   #26
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I don't think that's where the problem lies with public pension funds. The 8% assumed return is nominal, I believe, but in nominal terms, the market has not been flat for a decade. The Hawaii retirement portfolio (as I posted previously) has done quite well recently (though the fund has a large unfunded liability):
I agree with you that it isn't the pension systems fault. I'm just speaking in generalities which is always subject to some inaccuracies, but for example the the S and P 500 is lower now than what it was 11 years ago. I understand you can ride the wave buying low and selling high, but you have to be good at it. I'm sure you know a couple of 20% increases don't make up for a 30% downdraft most funds took a few years ago, with the assumed 8% marching on yearly. I imagine most fund systems requires a certain percentage of assets in short/long bonds and maybe some cash. This really puts the managers in a bind hoping equities perform above that. Our pension director who runs the 30 billion dollar fund, admitted in a meeting I attended that consistent 8% return is unrealistic with today's interest rates and they cannot earn their way out of the 07-08 downturn even though the system returned more than 20% last fiscal year. Hence, the reason for my pension becoming a COLA light instead of full COLA this year. Maybe things will change, I hope, but next fiscal year sure isn't off to a great start for the systems.
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Old 10-13-2011, 02:44 PM   #27
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... but for example the the S and P 500 is lower now than what it was 11 years ago.
You said a flat for a decade. 10 years ago, 10/12/2001, the S&P 500 closed at 1091.65, but right now it's 1201.62.
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Old 10-13-2011, 03:00 PM   #28
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Ouch, ya got me I should have started with 11 years ago. You have to admit even using your correct basis point, it is extremely hard for a pension system to generate yearly 8% returns over the past 10 years. I don't think are thoughts are in conflict.
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Old 10-13-2011, 03:17 PM   #29
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Ouch, ya got me I should have started with 11 years ago. You have to admit even using your correct basis point, it is extremely hard for a pension system to generate yearly 8% returns over the past 10 years. I don't think are thoughts are in conflict.
Then again, if plans didn't underfund during the 1982-1999 bull market and didn't increase benefits because, doggone it, the fund was running such a big surplus at the time -- they are much more likely to not have problems now. If you look at the total rate of return from 1/1/1983 to today, *before dividends* the S&P 500 went from 145 to 1200 -- a CAGR of 7.7%. If dividends averaged (say) 2% over that period we're around a 9.7% return over the last 28+ years.

Now let's say these funds use a 60/40 asset allocation, where the bond market has returned about 7% over that stretch (as rates fell from nosebleed levels in the early 1980s it has been a huge bull run for bonds). That still leaves an 8.62% combined annual return, so if the fund expenses and overhead were less than 0.62% they should be clearing the 8% many of them assume. (I don't feel it's safe to assume 8% in the "brave new world" of investing but that's a side issue.) And if they assumed less than 8% it's gravy.

So what was the problem? Did these pension funds start improving benefits during this bull market as if the good times would never end? Did they fail to account for rising life expectancies or spiking? It wouldn't seem that the entire period from 1983 to today should have been a huge problem unless the pension plans fell victim to some of these things which are more likely to accelerate insolvency in a prolonged bear market.

I'll admit to some ignorance about this and how these work, but it doesn't seem like the bear market should be ruining these pension funds -- yet -- assuming they didn't overpromise during the bull market, didn't underestimate life expectancy and didn't get ravaged by spiking.
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Old 10-13-2011, 03:23 PM   #30
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... it is extremely hard for a pension system to generate yearly 8% returns over the past 10 years.
Perhaps, but I'm not convinced that is the problem. Here in Hawaii, critics have zeroed in on the state legislature's decision to divert funds that had been earmarked for the pension fund for other purposes, back at a time when the pension system was fully funded.

Also, unlike many here, I am not critical of the public pension system. I think it has worked very well. Right now, due to a difficult economic climate, the public pension systems are somewhat in arrears, but really, that is sort of the point. With responsible behavior of state legislatures, they can recover, and I think they will. If every individual has to fund and manage his own personal pension system, any little bump on the road can turn into a complete disaster. This is one of those things that require the resources of a state to do well.
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Old 10-13-2011, 03:30 PM   #31
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Then again, if plans didn't underfund during the 1982-1999 bull market and didn't increase benefits because, doggone it, the fund was running such a big surplus at the time -- they are much more likely to not have problems now. If you look at the total rate of return from 1/1/1983 to today, *before dividends* the S&P 500 went from 145 to 1200 -- a CAGR of 7.7%. If dividends averaged (say) 2% over that period we're around a 9.7% return over the last 28+ years.

Now let's say these funds use a 60/40 asset allocation, where the bond market has returned about 7% over that stretch (as rates fell from nosebleed levels in the early 1980s it has been a huge bull run for bonds). That still leaves an 8.62% combined annual return, so if the fund expenses and overhead were less than 0.62% they should be clearing the 8% many of them assume. (I don't feel it's safe to assume 8% in the "brave new world" of investing but that's a side issue.) And if they assumed less than 8% it's gravy.

So what was the problem? Did these pension funds start improving benefits during this bull market as if the good times would never end? Did they fail to account for rising life expectancies or spiking? It wouldn't seem that the entire period from 1983 to today should have been a huge problem unless the pension plans fell victim to some of these things which are more likely to accelerate insolvency in a prolonged bear market.

I'll admit to some ignorance about this and how these work, but it doesn't seem like the bear market should be ruining these pension funds -- yet -- assuming they didn't overpromise during the bull market, didn't underestimate life expectancy and didn't get ravaged by spiking.
Ziggy, I have to agree with you at least in my experience from my pension fund. Although I didn't follow it at the time being to young to care, but researching my fund it produced some increases in benefits that certainly aided in what you are claiming. Some of my pension examples include: 1) increasing multiplier from 2.0 to 2.5. 2) best three year average instead of five 3) increase in max lifetime cola cap 4) 25 and out reduced pension 5) 2.55 multiplier for anyone going 31 years. I'm sure these actions were taken because the bull market left the funds flush with cash at that time.
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Old 10-13-2011, 03:38 PM   #32
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I'm sure these actions were taken because the bull market left the funds flush with cash at that time.
Not because of political pressure from the unions?

"We helped you get the vote out. Now reward us by sweetening our pensions while the markets are performing well!"
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Old 10-13-2011, 03:44 PM   #33
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Not because of political pressure from the unions?

"We helped you get the vote out. Now reward us by sweetening our pensions while the markets are performing well!"
We have no union, but I'm not naive enough to think some political favor may have been gained.
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Old 10-13-2011, 03:56 PM   #34
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We have no union, but I'm not naive enough to think some political favor may have been gained.
I should say we have no mandatory organized union. Their are organizations that do lobby for educators so I'm sure there was political benefit to it. I never joined them so I didn't really follow them over the years.
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Old 10-13-2011, 03:59 PM   #35
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We have no union, but I'm not naive enough to think some political favor may have been gained.
It's certainly possible. Isn't there some spokesperson, association or organization for your group who could influence votes and political contributions and who would have some contact with the politicians?

I doubt some politician just woke up one morning and the thought occured that it would be fun to increase your group's pensions today!

Follow the money.

Edit: I see we cross posted while I was typing.
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Old 10-13-2011, 04:03 PM   #36
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It's certainly possible. Isn't there some spokesperson, association or organization for your group who could influence votes and political contributions and who would have some contact with the politicians?

I doubt some politician just woke up one morning and the thought occured that it would be fun to increase pensions your group's pensions today!

Follow the money.
I'm pretty sure that a state legislature that approves an increase in pension benefits isn't going to lose too many votes from the folks who received it. And when the economy was stronger there wasn't a "taxpayer backlash" because it felt like there was more than enough to go around at the time and states were often running surpluses.

So in the context of a strong economy it was probably a good way for incumbents to shore up the public sector employee vote without losing too many "taxpayer advocates" (at the time). The problem is that it led to a need to "pay the piper" today.
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Old 10-13-2011, 04:11 PM   #37
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I should say we have no mandatory organized union. Their are organizations that do lobby for educators so I'm sure there was political benefit to it. I never joined them so I didn't really follow them over the years.

I see. Well, I'm pretty experienced with unions, from both sides of the table, in the real world and in academia, and educator's "associations" are near the top of my list of the most powerful and effective of all "unions." They are among the most aggressive and effective in supporting their friends and in demonizing their enemies. They influence the media and the communities far beyond expectations. I'd rather deal with any of the industrial unions, even in non-right to work states, than the Illinois Education Association, for example.

BTW, despite being on the opposite side of the table in my last working years, I'm not knocking them. The above is meant as respect and a tip of the hat for a job amazingly well done in otherwise tough times for unions.
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Old 10-13-2011, 04:36 PM   #38
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Until recently, the employer...
True... true...

But now they have said 'we really don't care that much for you, we can get cheaper help in China, so go pound sand'....
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Old 10-13-2011, 04:47 PM   #39
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..

But now they have said 'we really don't care that much for you, we can get cheaper help merchandise in China, so go pound sand'....
There, just change one word and you have American consumers talking to American manufacturers and their employees.
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Old 10-13-2011, 08:19 PM   #40
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What is amazing to me is that they have shifted the blame for our financial mess from the politicians and big-shots whose mismanagment got us into this mess, to the public service worker. One would think that some clerk at the Motor Vehicles department or a public school teacher has some secret power to bring down the entire economic system.
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