'Insane' even by Illinois standards?

[youbet]

But that actually highlights the point: At the individual level, the only way to "avoid risk" is to put your money into money market funds currently earning 0.1%.

Pension funds, on the other hand -- assuming they are responsibly managed and don't overpromise -- can (relatively) safely take more risk over a very long period of time and no one participant shoulders the "market risk" where the timing of their retirement determines how much they get -- and indeed, whether they can retire at all.

Again, much like insurance, the goal of a pension fund is (or should be) to offload "market risk" away from the individual. It can be done responsibly if invested appropriately (and again, if they don't overpromise benefits). In other words, many people would rather forego the potential of 10% returns on their 401K if they could participate in something that would pretty safely be able to assume (say) 5-6% returns with the risk spread out among all participants to smooth out the ride.

Seeing as this would be optional, I don't know why those who don't like the concept would oppose it. It's not like I'm suggesting the end of the 401K as Teresa Whats-her-name was doing a while back.

Zig, sadly I think you're dreaming. It's a pleasant dream and I like it. But it's a dream.

Pension funds might be able to invest somewhat more aggressively than individuals and still guarantee 100% successful results, but I don't think in today's markets their ability to do so is as significant as you are portraying.

Most pension funds, Illinois comes to mind, are screaming that their underfunded status is the result of "poor market performance." I think that tells the story.

I have no issue with pension funds "offloading market risk from the backs of individuals" as you put it. But, it absolutely must NOT be done by simply putting that risk on the backs of others. Having tax payers or newer entrants to the fund shoulder the expense of paying guaranteed amounts to older plan members due to crappy market performance cannot be allowed to happen. Kicking the can down the road to the younger folks has become much too popular these days!

I will note that my son's 401k (Fidelity managed) does offer a stable value fund that is paying a few percent and looks attractive. Does your 401k have anything like that?

 

[donheff]

I love how you use the words 'plundered the plans to the benefit of executives and share holders'....

Nowhere did the companies say 'we will never change this plan... ever ever ever'.... and the companies paid what was PROMISED, which is what the employee had earned to date... you are not suggesting that an employee should be paid something they did not earn do you And in fact there were many employees who actually did get more than promised since if you were not vested, you became vested when they shut down a plan...

And again, the excess funding of ANY plan would not go to the benefit of the participants.... if you were in a DB plan, you got your DB.. nothing more... if the plan was fully funded or 100% over funded, you got your DB... so who actually 'owns' that excess funding The company... surprise....

I still do not see where the companies were not acting in 'good faith'... sure, the employees lost a benefit going forward, or was receiving a different benefit... but that is life... tomorrow my boss can come in and say 'we are cutting your salary by 20%'.... I don't view that as 'bad faith', just that I got shafted... to bad for me...

I purposely chose the word plunder because that is what she documents. I am willing to concede that I may have been deceived by a Wall Street Journal reporter who has a bias against business. I would recommend that you read the book and then either agree or disagree with what she found.

Employers chose to set up DB plans and were then obliged by law and regulation to administer the plans to the benefit of the plan enrollees. The author very explicitly documents that they intentionally did otherwise. Usually they could exploit loopholes to avoid penalty. But under ERISA, even if the employers were determined to have done wrong, employees have no right to punitive damages so corporations could "plunder" the plans with relative impunity - so they did.

The bottom line is that this book alleges and attempts to document that many, many employers intentionally and wrongly misused otherwise healthy DB plans. She is either wrong or right about that. I came away thinking she is right and it infuriated me. There is nothing to be done about it now, that song is sung. But so what? I want to rage about the practices. Please read the book cover to cover and disabuse me of my perceptions so I can chill out.

 

[ziggy29]

Zig, sadly I think you're dreaming. It's a pleasant dream and I like it. But it's a dream.

Pension funds might be able to invest somewhat more aggressively than individuals and still guarantee 100% successful results, but I don't think in today's markets their ability to do so is as significant as you are portraying.

A couple of things here.

1 -- I'm not suggesting this "pension" has to guarantee a certain level of benefits unless the benefits are computed much more conservatively than they have been in legacy plans.

2 -- Even with more conservative benefit estimates, you'd almost certainly beat the only "certainty" available to the 401K crowd -- an AA of 100% cash.

And with the more conservative growth estimates (say 5-6% instead of the 8% or so commonly assumed with legacy plans) -- these funds could significantly overperform in bull markets which would cushion the blow in bear markets. And such a plan would eliminate several factors which make traditional legacy pensions less sustainable: for example there would be no spiking mechanism, and because it is 100% participant funded, there would be no companies or government bodies "underfunding" the plan when it's convenient for them to do so. A person's benefit only rises to the extent to which they contribute. You don't fund it, your projected benefit doesn't rise.

 

[youbet]

A couple of things here.

1 -- I'm not suggesting this "pension" has to guarantee a certain level of benefits unless the benefits are computed much more conservatively than they have been in legacy plans.

2 -- Even with more conservative benefit estimates, you'd almost certainly beat the only "certainty" available to the 401K crowd -- an AA of 100% cash.

And with the more conservative growth estimates (say 5-6% instead of the 8% or so commonly assumed with legacy plans) -- these funds could significantly overperform in bull markets which would cushion the blow in bear markets. And such a plan would eliminate several factors which make traditional legacy pensions less sustainable: for example there would be no spiking mechanism, and because it is 100% participant funded, there would be no companies or government bodies "underfunding" the plan when it's convenient for them to do so. A person's benefit only rises to the extent to which they contribute. You don't fund it, your projected benefit doesn't rise.

So who would run this plan thats guaranteed to "overperform in bull markets?" Who would govern it? Would there be some kind of bailout mechanism if investment returns did stumble below their ability to support the prosmised pension levels?

Perhaps we could all have access to FERS? That might be close to what you're talking about.

Or, google the Wisconsin Retirement System. It's close to what you're talking about. It's 100% funded and the cola, if any, depends on investment returns. Right now, no cola which is appropriate for economic conditions. They can even reduce your pension due to poor investment returns, but not below the original level you received on day #1. Of couse, you'd have to substitute private funding for gov't funding.

 

[Mulligan]

The issue is that the individual faces greater investment risk than the pension fund because the fund can share the risk and the individual cannot. The individual doesn't need higher performance but lower risk. A "public pension fund" - like a non-for-profit annuity type fund would be a valuable option for the worker. Individual risk can be reduced and time horizon can be extended, which both lead to a more favorable outlook for the average person.

You are spot on with this comment. Most forum posters here without pensions know how to handle their money, but are still at risk to the whims of the market. The "average person" you mention Michael has double the risk, not only are they subject to the whims, they don't even understand what they are trying to do.

 

[youbet]

You are spot on with this comment. Most forum posters here without pensions know how to handle their money, but are still at risk to the whims of the market. The "average person" you mention Michael has double the risk, not only are they subject to the whims, they don't even understand what they are trying to do.

There it is! The youbet "understatement of the day." Congratulations on your award!

Here in Illinois (this thread did start out being about Illinois.......) our ability to be dumb and greedy when making investments is exceeded only by our love and admiration of corruption, graft, payola, scams, machine politics and the public servants who pull them off.

 

[ziggy29]

Would there be some kind of bailout mechanism if investment returns did stumble below their ability to support the prosmised pension levels?

Perhaps we could all have access to FERS? That might be close to what you're talking about.

Wouldn't the second paragraph make the first even worse? Make it a part of FERS and Uncle Sam is on the hook for all the underperformance -- not just of its own employees but for everyone who bought into it. I'm not necessarily opposed to that idea but it *is* in conflict with the concern over "bailouts" for underperformance.

And keep in mind that I am referring to concepts, not details. You are stuck on the details which would have to be worked out at a later time. First you need the concept, then you work the details to see if it can be feasibly done. I would think if nothing else you could pretty safely remove a lot of "market risk" in such a fund without needing to rely on the pathetic returns of cash and short-term investment grade bonds.

In reality, I think the greatest risk would be political risk -- resisting the pressure to increase benefits in bull markets because the pension fund is so "overfunded". Avoid that temptation (this helped ruin the solvency of some pension funds) and it becomes much more likely to survive prolonged bear markets like 1966-1982 or 2000-20xx -- and be sustainable for many decades.

 

[youbet]

Make it a part of FERS and Uncle Sam is on the hook for all the underperformance --

Good point. Hey, I was just throwing out an idea.

And keep in mind that I am referring to concepts, not details. You are stuck on the details which would have to be worked out at a later time.

I was accepting your concept as a good idea. But sometimes you have to probe the details to see if it could actually be implemented. For example, Roosevelt thought it was a good concept to provide a safety net for retirees called SS and fund it with 1% of participants payroll dollars. Hmmmmmmm..... While it's a good idea to have the safety net, the 1% part hasn't worked out all that well.......

Zig, if ya don't look at the details and challenge concepts, it's pretty hard to formulate an implementation plan and actually make it happen.

As I stated earlier, your concept sounds like a sweet dream to me. I'm just having trouble thinking of a way it could actually happen and, if it did, how we could keep greedy managers and politicians from fouling it up in short order.

Bear in mind, I'm a Chicago boy and always assume that both private and public sector folks who run anything are always completely in it for themselves. It's our culture.

 

[ziggy29]

As I stated earlier, your concept sounds like a sweet dream to me. I'm just having trouble thinking of a way it could actually happen and, if it did, how we could keep greedy managers and politicians from fouling it up in short order.

Bear in mind, I'm a Chicago boy and always assume that both private and public sector folks who run anything are always completely in it for themselves. It's our culture.

Yeah, I added a paragraph to my post above to reflect that -- here it is again, repeated. This is probably the greatest "risk" of them all with such a proposal:

In reality, I think the greatest risk would be political risk -- resisting the pressure to increase benefits in bull markets because the pension fund is so "overfunded". Avoid that temptation (this helped ruin the solvency of some pension funds) and it becomes much more likely to survive prolonged bear markets like 1966-1982 or 2000-20xx -- and be sustainable for many decades.

Basically the fear is that someone could "buy votes" by promising them a higher benefit if they are elected... and they just undermined the relatively conservative actuarial assumptions of the fund and put it at risk of going insolvent in a long bear market. That would need some way to be avoided, for sure.

 

[Bestwifeever]

I could see all pensions turned into SS on steroids--no more private/municipal/state/federal pensions or social security retirement, just a mandatory contribution to a new national pension fund managed by a new agency; if you wanted to put more in, too bad, manage that on your own (like one does when they exceed limits on IRA and 401K contributions).

 

[Mulligan]

There it is! The youbet "understatement of the day." Congratulations on your award!

Here in Illinois (this thread did start out being about Illinois.......) our ability to be dumb and greedy when making investments is exceeded only by our love and admiration of corruption, graft, payola, scams, machine politics and the public servants who pull them off.

Why thank you, Youbet! I haven't received an award since I went to the principals office... Wait that was for a spanking... This might be my first ever!
Seriously though my 5 closest friends who don't have pensions, are putting money in their 401k. But they have no idea how much they need or how to appropriate it properly. I couldn't beat any of them with a paddle long enough or hard enough to get them to pay attention to know what funds they are investing in or what the funds investing goals are. This spring my GF complained her funds went up "only 5%" the past quarter. I could barely get her to understand that her money would double in less than 4 years at that "only" amount.

 

[MichaelB]

In reality, I think the greatest risk would be political risk -- resisting the pressure to increase benefits in bull markets because the pension fund is so "overfunded". Avoid that temptation (this helped ruin the solvency of some pension funds) and it becomes much more likely to survive prolonged bear markets like 1966-1982 or 2000-20xx -- and be sustainable for many decades.

+1

I could see all pensions turned into SS on steroids--no more private/municipal/state/federal pensions or social security retirement, just a mandatory contribution to a new national pension fund managed by a new agency; if you wanted to put more in, too bad, manage that on your own (like one does when they exceed limits on IRA and 401K contributions).

+1

They have tried to do this in other countries. I haven't paid too much attention but I believe Australia and the UK have some version. Chile and Argentina for sure. Some suffer from high fees, killing returns. Argentina's funds were raided - the gov't forced them to buy gov't bonds when no one else would. Still, as an alternative it is alluring.

 

[samclem]

I could see all pensions turned into SS on steroids--no more private/municipal/state/federal pensions or social security retirement, just a mandatory contribution to a new national pension fund managed by a new agency; if you wanted to put more in, too bad, manage that on your own (like one does when they exceed limits on IRA and 401K contributions).

Re: conversion of state/local public employee plans to federal control: I'd hate to see yet more power and control move upward. Is there some reason to believe other public employers are less adept than the feds? Any reason to protect them from themselves if they are?

Re: Conversion of private pensions: Same issue, but more so. How is this the business of the federal government?

And with the new government agency making the stock and bond purchases, we'd have increased government ownership of US private companies. Can they buy tobacco companies? Of course they should preferentially invest in "green" companies. Sometimes companies get into labor disputes, I wonder if anyone in Congress might move to disinvest from such companies at strategic times. And sometimes companies need "help" so this will be a good mechanism for accomplishing that.

Please, no.

I look at our federal government, the tremendous waste there and lack of responsiveness and accountability, and wonder why there is still some sentiment for wanting to bump things up to a higher level of centralization. The terms "federal", "national" etc still have some type of special esteem in some quarters.

 

[Bestwifeever]

It would be like getting private and public employers out of the health insurance business. I'm just floating that out there.

 

[Bimmerbill]

Does anyone believe that an employer offering a pension is a good thing?
Does anyone believe that there can be well funded and well managed pensions?

 

[samclem]

Does anyone believe that an employer offering a pension is a good thing?

In the abstract and starting from a clean sheet of paper: No. For all the reasons we've seen, employment (compensation now for work performed now) and the concept of guaranteed lifetime income in retirement are two separate things that each do better when kept separate.

Now, if a private employer wants to attracts and keep employees with some type of deferred compensation scheme, to include a pension, they should be allowed to do that. The mechanism to do that is with a contract, and the government should have no further interest in assuring that this contract is fulfilled than it does with any other contract. No public reinsurance, no shifting of risk to other entities. The government provides the courts for use in settling contract issues.

Does anyone believe that there can be well funded and well managed pensions?

Sure. But is there any reason to believe that a company with expertise in producing toasters will be the very best choice to meet the need for lifetime income of several thousand employees? Wouldn't we expect this to be done better if they could choose a specialized manager in an open marketplace?

 

[youbet]

Does anyone believe that there can be well funded and well managed pensions?

I'd point you to the Wisconsin Pension System. I'm not a member, never even lived in Wisconsin. But it's structure and operation are impressive. They fully fund each retiree's pension at the beginning per actuarial standards and, apparently, realistic investment yield expectations. Then they modulate the pension amount (including going DOWN!) to accomodate investment performance.

It really looks sustainable. Participants tolerate some payment variation but are rewarded with full funding.

I'd rather DIY, but I understand that is too stressful for some and the Wis system looks like a reasonable alternative.

 

[Bestwifeever]

I'd point you to the Wisconsin Pension System. I'm not a member, never even lived in Wisconsin. But it's structure and operation are impressive. They fully fund each retiree's pension at the beginning per actuarial standards and, apparently, realistic investment yield expectations. Then they modulate the pension amount (including going DOWN!) to accomodate investment performance.

Is that a state agency that administers the pension? If so, couldn't a federal agency emulate it?

 

[ziggy29]

I'd point you to the Wisconsin Pension System. I'm not a member, never even lived in Wisconsin. But it's structure and operation are impressive. They fully fund each retiree's pension at the beginning per actuarial standards and, apparently, realistic investment yield expectations. Then they modulate the pension amount (including going DOWN!) to accomodate investment performance.

That could work -- at least if nothing else, the state funding is a sunk (and just as importantly, known and predictable) cost each year as a part of employee non-cash compensation, and the risk to the taxpayer for "underperforming" pension funds is very limited.

 

[youbet]

Is that a state agency that administers the pension?

Yes.

If so, couldn't a federal agency emulate it?

I'm sure a fed agency could emulate it........ if they could sell the constitutents on a pension plan where monthly payments are recalcualted each year based on a rolling average of fund investment performance.

 

[youbet]

the risk to the taxpayer for "underperforming" pension funds is very limited.

Yes. By actually reducing pensions (but not below their original amount), they minimize tax payer liability for investment performance in market downturns. Of course, this means that a retiree who received big increases during several years of market run up could see those increases vanish during a prolonged downturn.

They do the calculations on a rolling average basis to keep from knee jerking folks. And there are two investment categories to chose between, one more aggressive, one less aggressive. If you go to the web site and look at historical payouts, the more aggressive fund has had some significant ups and downs over the years.

The sharing of investment risk between the retirees and the tax payers seems like a good plan. At least I'd like it here in Illinois. In our case both investment risk and shenanigan risk (spiking, double/triple dipping, etc.) are on the backs of the tax payers.

 

[GregLee]

Is that a state agency that administers the pension? If so, couldn't a federal agency emulate it?

There would, at least, be a problem of confidence. After years of bluster and threats to reduce Social Security benefits, certain government-hating politicians have gotten people really scared about whether they'll ever actually get any SS. If I had a nickel for every poster in this very forum saying he couldn't plan on SS payments when he retires, I wouldn't even need a pension.

 

[steelyman]

It's conceivable that this thread could be redirected to another current one titled "The Retirement Heist".

 

[youbet]

There would, at least, be a problem of confidence. After years of bluster and threats to reduce Social Security benefits, certain government-hating politicians have gotten people really scared about whether they'll ever actually get any SS. If I had a nickel for every poster in this very forum saying he couldn't plan on SS payments when he retires, I wouldn't even need a pension.

Any lack of confidence in SS that I have has its roots in the big gov't advocates who think they can add an unlimited number of folks and increase benefits without end.

There are those who want to privatize or just kill SS. And there are those who will bring it to its knees by using it far beyond its original charter, although with good intentions I suppose. Either way, the integrity of the program suffers.

In any case, the situation with Illinois public pensions and the associated ongoing "happenings" has little relation to SS other than many Illinois public pension recipients don't participate in SS.

 

[BLS53]

It's very fair. But the concept is a real culture shock in many parts of the country, mine included.

Heavy duty spiking, at least for public school teachers, State of Illinois employees and City of Chicago employees has been rampant. (I can't speak for employees working for counties or smaller municipalities.) It's a major cause of pension fund underfunding.

An employee progresses to a salary of $60k over her career. And pension fund dollars are contributed by the employee and by the gov't to fund a pension based on the current formula and that level of salary. Then, suddenly, at career end the employee makes $80k, $85k and $90k for the last three years qualifying her for a much larger cola'd pension. Funds were not set aside for that level.......

Recent legislation in Illinois has subdued spiking for educators. They're now limited to having only the first 6% of raises during their final 3 years count towards pensions (with, of course, some exceptions for promotions and the like). It's causing a real uproar as generous spiking had become so common it's current limitation is being referred to as a "broken promise!" Other legislation which limits the amount "retired" public employees can work (at the same job they retired from) while collecting their pensions is also being fought.

The inequities are even more noticeable in small, far downstate communities, where the median household income is a little over $30K, and all the teachers live in the gated subdivision with the doctors and lawyers.

It wasn't always this way. My old high school principal is 85 years old and draws a $28K pension, and lives in the same modest house he did 40 years ago.

Maybe teachers were underpaid for a long time, but the pendulum has swung too far the other way now.

The recently retired ones I know, wear those pensions like a badge of honor, and look down on those of lesser fortune.