The Retirement Heist

[Mulligan]

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.

 

[GregLee]

... 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.

 

[Mulligan]

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.

 

[ziggy29]

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.

 

[GregLee]

... 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.

 

[Mulligan]

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.

 

[youbet]

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!"

 

[Mulligan]

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.

 

[Mulligan]

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.

 

[youbet]

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.

 

[ziggy29]

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.

 

[youbet]

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.

 

[Texas Proud]

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'....

 

[youbet]

..

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.

 

[Chuckanut]

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.

 

[JP.mpls]

donheff,
The pensions at my company were fully funded by earlier management, and then overfunded, because these funds were invested well. Our newer management saw this as a big nest egg that they wanted to get their hands on.

They closed down our defined benefits pensions, and cashed us out for what seemed like an illegally low amount, but they got away with it. I'm assuming after the payouts, the execs got a nice big bonus with our pension money.

I got $25K for 15 years in a pension. Only people over 50 were allowed to keep the pensions. My buddy kept his, and just retired early at 58 with about 25 years in the pension (he is getting $2K/month). That would compliment a retirement very nicely. I would have 23 years in the pension right now if it was still going.

My apologies for the whining. It does shock me that they could get away with this legally.


Take care,

JP

 

[eytonxav]

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.

I don't blame any of the folks who received promises and had the rug pulled out from under them, whether gov't or corporate employees, as they are certainly entitled to gripe. However, I do blame the execs/officials who designed these plans to keep workers locked up for years thinking those benefits would be there for them, but did not understand the consequences down the road; and especially the ones that profited handsomely by taking away those benefits.

In corporate america, if you were management, you didn't have a union to back you up, so that made take backs very easy for corp execs. Most such take backs flew under the media radar without a lot of public outcry. Now that gov't workers are the target, I suspect they have a bit more clout and can make more noise, so if anything, thats probably why there is some efforts being made to push the blame or vilify them.

 

[ERD50]

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.

Maybe I missed it if there was something in an earlier post, but what are you talking about?

Who is 'shifting the blame to the public service worker? From what I've read here, this book is about private pensions, and I have not seen (again, maybe I missed it), any blame being put on average public workers.

This seems to be a common straw-man argument to me - 'everybody is just picking on the little guy, so therefore their argument should be ignored'? Who is picking on the little guy?

-ERD50

 

[Bimmerbill]

I think the blame is being shifted to public employees as well. We seem a convienent scapegoat. I search out and read any/all articles I can find on public employee compensation, pensions, etc, and things just don't look good in the court of public opinion.

 

[donheff]

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.

Maybe I missed it if there was something in an earlier post, but what are you talking about?

Who is 'shifting the blame to the public service worker? From what I've read here, this book is about private pensions,...

Who is picking on the little guy?

-ERD50

I think the blame is being shifted to public employees as well.

Come on ERD, don't take vague general "feeling" posts personally. These guys are talking about the atmosphere they perceive is swirling around them. If you wonder who is picking on the little guys, just turn on Fox News. As to your specifics about this thread, you are correct. The book is about private sector pensions and definitely blames the big guys, not the little guys.

 

[Texas Proud]

donheff,
The pensions at my company were fully funded by earlier management, and then overfunded, because these funds were invested well. Our newer management saw this as a big nest egg that they wanted to get their hands on.

They closed down our defined benefits pensions, and cashed us out for what seemed like an illegally low amount, but they got away with it. I'm assuming after the payouts, the execs got a nice big bonus with our pension money.

I got $25K for 15 years in a pension. Only people over 50 were allowed to keep the pensions. My buddy kept his, and just retired early at 58 with about 25 years in the pension (he is getting $2K/month). That would compliment a retirement very nicely. I would have 23 years in the pension right now if it was still going.

My apologies for the whining. It does shock me that they could get away with this legally.


Take care,

JP

The problem with what you post is that there is not enough info to know if you got a low amount... what was the plan benefits? How old were you? What was your salary? What was the interest rate when they closed it down?

So, say you started at 18, worked 15 years... now 33... you get $25K of money that you can invest... you invest at 6% until you are 65... you now have about $171K.... you buy an annuity at todays rate and your pension is $1,032.... (this is the kind of math they can use... I just don't know the actual numbers)...

So it does not seem like it is that 'illegal low amount' you mentioned...

But, this shows the problem companies have with DB plans.... they have to put aside more and more the older you get and the more you make... so a small contribution when you are young becomes a big contribution when you are old.... this was another reason they fired older folks... they cost a lot more than younger ones....

 

[ERD50]

RE: 'blaming the average public worker'...

Come on ERD, don't take vague general "feeling" posts personally. These guys are talking about the atmosphere they perceive is swirling around them. If you wonder who is picking on the little guys, just turn on Fox News.

I'm not really sure how to respond to this. For one, I don't have cable, so no access to cable Fox News (our over-the-air local Fox news does not seem all that political to me). I do listen to a fair amount (but not exclusively) of conservative radio, and I don't get that sense of 'blaming the little guy' at all, and they throw a lot of blame around! (as do their liberal counterparts).

If they are expressing their 'feelings' or 'perceptions' that they are a target - what is the source of that? How am I to take this, without some backup? Is there really any evidence that it is a wide spread belief held by a significant % of a cross section of America? Clearly, one can read the comments sections of any hot topic and see extreme points of view. And often, people filter those and remember the ones that they don't like. That doesn't make it a wide spread belief, any more than the earth is flat or men did not land on the moon, even though we can find people who hold that opinion too.

-ERD50

 

[ziggy29]

When I start seeing references to Fox News in a thread, it's coming dangerously close to the precipice (and the Pig). It's sort of like our version of Godwin's Law, I think.

This has mostly been a good thread so far. Let's not derail it with blatant ideological and partisan sludge.

 

[Chuckanut]

ERD,
In 2008 and 2009 there was, IMHO, feeling among many that irresponsible and greedy people in certain investment and banking fields had brought our economic health to its knees. As a result of this irresponsible behavior, tax revenues are down. Now, they seem to be forgetting why tax revenues are down and are talking about excess public employee benefits and pensions as though the economic disaster of 2008 never occurred. My modest pension is not the reason my state is having financial problems. The reason is the poor economy caused by irresponsible elements in the financial industry. Read the book "All the Devils are Here".

After working over 20 years, putting in many extra hours, and CONTRIBUTING 6% OF MY OWN SALARY to my pension, I don't think the 30% pension I will be getting is excessive. Don't blame me for wanting to receive WHAT I HAVE EARNED. I CANNONT GO BACK IN TIME and do it over again.

 

[clifp]

ERD,
In 2008 and 2009 there was, IMHO, feeling among many that irresponsible and greedy people in certain investment and banking fields had brought our economic health to its knees. As a result of this irresponsible behavior, tax revenues are down. Now, they seem to be forgetting why tax revenues are down and are talking about excess public employee benefits and pensions as though the economic disaster of 2008 never occurred. My modest pension is not the reason my state is having financial problems. The reason is the poor economy caused by irresponsible elements in the financial industry. Read the book "All the Devils are Here".

.

There is plenty of blame to go around for the financial crisis. Certainly Wall St deserve a lion share. But every one of the 10 millions of American who signed a mortgage application under penalty of perjury, who lied about their income or assets deserves some of the blame. As did the mortgage brokers and realtor who encouraged it. Investor like myself who blind chased yield, without thinking about the risk involved we are guilty also. Yes public employee who push for every increasing pension benefits despite being told their plans were underfunded, they deserve some of the blame also.

Americans as society consumed too much and saved too little. To a very large extent the people who are both the victims and culprits of this crisis stare back at us every time we look in mirror.