Pension problems?

[aja8888]

The pension plan described by Shawn looks very generous. Still, if a system is self-contained, it's nobody's business to envy or to criticize it.

Nobody is going to bail me out if I draw 10% WR from my portfolio and deplete it. Well, I guess there is. It's called food stamp and Medicaid.

Yes, that is quite a nice pension program (Shawn's). No wonder university costs have risen to the stratosphere over the last decade or so. (but that's a topic for another thread)

I don't have a pension and have to rely on my own contributions, with, of course, no bail out provisions. If we don't make it on our own, the only other alternative is to move in with the kids.

If I had it to do over again, I would have made my career a government employee or a professor in a university system.

 

[NW-Bound]

My sister teaches at the local state university. I do not envy her pay, but of course we are not in California.

Still, my children's tuitions were so high at that university, compared to what I myself had to pay 30+ years ago. And many classes were even online. Good lord, what does the money go for? Not all of it goes to the profs and instructors, I can tell you. They have horrendous admin and overhead now. What do they do, I have no idea. I guess it's the same as at one megacorp I have worked, where they had more bean counters than engineers.

Sorry for the diversion...

 

[Chuckanut]

Still, my children's tuitions were so high at that university, compared to what I myself had to pay 30+ years ago. And many classes were even online. Good lord, what does the money go for? Not all of it goes to the profs and instructors, I can tell you. They have horrendous admin and overhead now. What do they do, I have no idea. I guess it's the same as at one megacorp I have worked, where they had more bean counters than engineers.

Sorry for the diversion...

+1

This would make quite a good conversation in itself. I know several people who have taught at community colleges and the local BIG university. The administrators routinely make high five figures going into six figures, while the teaching staff are lucky to get $60,000 a year. And do that only if they have many years of teaching and take on extra courses.

 

[youbet]

Here in Illinois these legislators and unions have to come to some agreement on pension reform.

Actually, the unions don't get a vote. They can whine and pout and wave signs and sing songs and all that. But, in the end, the legislators are 100% responsible for the outcome.

I'm willing to take a hair cut as long as it is fair

I wonder who will define what "fair" is? If we had a philosopher king in charge of that decision, the tax payers would get hit for a modest portion of the funding that was skipped during the "pension holiday" years, retirees who "worked the system" and spiked or received other special treatment would get a haircut and your long retired 3rd grade teacher who has a modest pension, no SS and always paid for school supplies out of her own purse would be left unmolested. Current and future employees would be part of SS and have some "instant vesting" system, such as a 401k plan, where politicians cannot renege on promises after the years are already worked. But, it'll never work that way. The folks that got the most will keep the most. The folks who gave the most will get the least. Current and future employees will think that whatever benefits they thought they were working for in past years cannot be taken away while the politicians are simply waiting for the right time to do so. And the politicians will continue to point at everyone other than themselves as being to blame while hauling their own loot away.

It's Illinois!

 

[Bestwifeever]

The only article on this I've seen lately is this one Just how generous are Detroit's worker pensions for retirees? - Jul. 23, 2013

Thanks for posting that, Timo. Very interesting to see the averages. If the combined (employee and employer) contributions are in the 29 to 36 percentage range as mentioned in this thread, those are reasonable amounts (i.e., the SS combined contribution is what, 13 percent? and is maybe $25K? at FRA).

 

[NW-Bound]

...If we had a philosopher king in charge of that decision, the tax payers would get hit for a modest portion of the funding that was skipped during the "pension holiday" years, retirees who "worked the system" and spiked or received other special treatment would get a haircut and your long retired 3rd grade teacher who has a modest pension, no SS and always paid for school supplies out of her own purse would be left unmolested...

It's Illinois!

How fair and how unlikely for that to happen!

I am not religious, but I have often thought how people believe in after-life because that's the only way to have justice. Else, it may drive one insane.

 

[chasesfish]

80-100% of final salary is crazy. My private sector pension is capped at 35% of salary, 1% for every year of service, 0.5% for each year if you take it at 55.

 

[youbet]

80-100% of final salary is crazy. My private sector pension is capped at 35% of salary, 1% for every year of service, 0.5% for each year if you take it at 55.

You're a lucky guy....... The MegaCorp I toiled at now offers a DBP of 0% of your final salary! There is a decent 401k plan though.

It seems like the tide has turned for public pensions and we'll continue to see changes for new employees and for the future years of current employees likely involving 401k type plans.

I think the real issue when discussing underfunded public pensions is what to do about folks already retired and what to do about the credits already earned by current employees. I don't know of any instances in the private sector where an ongoing company rewrote history and reduced the pensions of retirees or told current employees that the credits earned in prior years and already in the books were being reduced. So in places like Illinois and Calif, we're treading on new ground. And we might be setting precedents that carry over to the private sector.

 

[Flsail]

80-100% of final salary is crazy. My private sector pension is capped at 35% of salary, 1% for every year of service, 0.5% for each year if you take it at 55.

Im curious about the private sector pensions that you are referencing since I don't know how they are funded.. Does the employee pay a match like most public sector employees do? If your not and you are receiving 35% based on your employer only contributions, wouldn't it make sense that if a public sector employee was matching his employers contribution, that his benefit would be roughly twice as much -70% in your case? The employers would both be contributing the same amount. Just asking.

 

[Mulligan]

80-100% of final salary is crazy. My private sector pension is capped at 35% of salary, 1% for every year of service, 0.5% for each year if you take it at 55.

When you are in your own little world (referring to me during my early working years) you really have no clue to how good a pension system is. At 31 years, our system pays 80%. But due to the fact a persons 14.5% contribution is based on the total value of your compensation, not just salary, the take home pay in retirement is actually a bit higher. I went out 3 years earlier than 31, but my take home pay was still about 90% in retirement, but I am now on the hook for my own insurance. A person working 39 years would get 100% of salary but actually net out significantly more than working pay. I would say based on my experiences working, 3/4 of the people in the system could have cared less about the pension until turning 40 and then realizing that it is very valuable. But that is probably just human nature.

 

[utrecht]

80-100% of final salary is crazy. My private sector pension is capped at 35% of salary, 1% for every year of service, 0.5% for each year if you take it at 55.

80-100% of final salary is only crazy if there wasn't enough money contributed every year.
Some plans have the employer contributing 5% or so and the employee contributing nothing. Thats not going to add up to much. How much were yours and your employers contributions?

 

[chasesfish]

We have no "direct" employee contributions - there is no specific debit to our paycheck for pension. The employer makes a contribution each year based on an actuarial calculation. The higher an employees income and the closer to retirement, the higher the employer contribution,

Even though the contribution isn't a direct deduction, we as employees of this specific Megacorp work for about a 10% discount in our cash compensation relative to our peers. We get an annual funding notice, as of last year the plan had $2.5bil in assets and a little less then that in liabilities.

Most younger employees including me would just rather have higher cash compensation.

 

[Spanky]

80-100% of final salary is only crazy if there wasn't enough money contributed every year.

80-100% of highest average salary is awesome if it is sustainable.

Some plans have the employer contributing 5% or so and the employee contributing nothing.

My megacorp contributes 4.8% to the pension plan investing in a stable value fund. An employee is eligible for a lump-sum distribution on termination or retirement. Eligibility for retirement is age 55 + 10 years of service or age 62 or over regardless of age. A retiree has an option to receive a life-time annuity at an IRR of ~4.3% or slightly lower if continued spousal benefits on death option is chosen.

Clearly this plan is way inferior in comparison to any plan that pays over 7% of average salary of highest 3-year salary.

 

[utrecht]

We have no "direct" employee contributions - there is no specific debit to our paycheck for pension. The employer makes a contribution each year based on an actuarial calculation. The higher an employees income and the closer to retirement, the higher the employer contribution,

Even though the contribution isn't a direct deduction, we as employees of this specific Megacorp work for about a 10% discount in our cash compensation relative to our peers. We get an annual funding notice, as of last year the plan had $2.5bil in assets and a little less then that in liabilities.

Most younger employees including me would just rather have higher cash compensation.

This explains why you think 80-100% of final salary is crazy. You pay zero into your pension fund. Your employer pays some strange formula which includes a smaller contribution when they are younger. We all know the magic of compound interest and how much it hurts to not be contributing much at an earlier age. Between me and my employer, we contribute 36% of my salary during my entire career. Its no different than if you put 5% of your salary in your 401k and I put 36% of mine in my 401k. I'm going to be able to withdraw a lot more money when I retire than you. Just because some pensions pay a lot to their members, does not mean that the pension fund is being irresponsible or that that its going to have to be bailed out by taxpayers down the road.

As for younger people wishing they were paid more now, that's pretty much human nature and the younger people where I work feel the same way. But as they get older they start changing their tune. I work for one of the lower paid police departments in my region but the city also contributes more to my pension fund than any other city does. It sucked when I was younger and nobody felt sorry for me back then as I watched my non police friends making 6 figures, so I don't apologize to anyone now that I'm within 18 months of collecting a very healthy pension for the rest of my life.

 

[Spanky]

As for younger people wishing they were paid more now, that's pretty much human nature and the younger people where I work feel the same way. But as they get older they start changing their tune. I work for one of the lower paid police departments in my region but the city also contributes more to my pension fund than any other city does. It sucked when I was younger and nobody felt sorry for me back then as I watched my non police friends making 6 figures, so I don't apologize to anyone now that I'm within 18 months of collecting a very healthy pension for the rest of my life.

First, congrats on being a short-timer and an awesome pension.

When I was young, I did not pay any attention to retirement. In retrospect, I should have stayed in the USAF and retired in my early 40s.

 

[mickeyd]

My corporate pensions are covered by the PBGC and my federal pensions are backed by my Uncle Sam. If they go away, we are all doomed anyway.

 

[NW-Bound]

My megacorp contributes 4.8% to the pension plan investing in a stable value fund. An employee is eligible for a lump-sum distribution on termination or retirement...

Clearly this plan is way inferior in comparison to any plan that pays over 7% of average salary of highest 3-year salary.

This reminded me of my wife's former pension plan. Her megacorp froze and converted its DB plan to a cash balance almost 30 years ago. All benefits from that point on were in the form of 401k.

The cash balance of the former DB plan has been invested in a stable value fund. Due to its low return and its being frozen and not added to, it is now puny compared to her 401k. It missed out on the market bull run of 1980-2000.

So, when a pension does not take the conservative approach, it can do better, or worse if not managed correctly.

 

[chasesfish]

This explains why you think 80-100% of final salary is crazy. You pay zero into your pension fund. Your employer pays some strange formula which includes a smaller contribution when they are younger.
.

To clarify, while there may not be a direct deduction from my paycheck, I certainly "pay" into my employers plan. I pay into the plan by working for a 5-10% discount to my peers at other institutions doing the exact same job,

 

[utrecht]

To clarify, while there may not be a direct deduction from my paycheck, I certainly "pay" into my employers plan. I pay into the plan by working for a 5-10% discount to my peers at other institutions doing the exact same job,

I understand what you are saying, but that's not enough to build a big pension fund which is why you think 80% is crazy. Now if you were working at a 12% discount which your employer was putting into the pension fund, along with another 12% of their own money that they were matching and contributing. AND you were having 12% deducted from your paycheck and contributing it to the pension fund, then you would be able to collect 75+% of your salary in retirement.

 

[Mulligan]

I just read in the op-ed section of my local newspaper, Hank Kim, the Executive director and counsel on Public Employee Retirement Systems proclaimed in his letter Detroit's pension system is not source of the city's failure. He wrote the the police and fire plan is 96% funded and over 87% funded for the other city employees. Now I can't imagine him outright lying on this figures, so assuming them to be true, why are these people being threatened with severe pension cuts? What am I missing here?

 

[utrecht]

The other side says there's a $3.5 billion shortfall. I would say that someone is seriously mistaken.

 

[chasesfish]

I just read in the op-ed section of my local newspaper, Hank Kim, the Executive director and counsel on Public Employee Retirement Systems proclaimed in his letter Detroit's pension system is not source of the city's failure. He wrote the the police and fire plan is 96% funded and over 87% funded for the other city employees. Now I can't imagine him outright lying on this figures, so assuming them to be true, why are these people being threatened with severe pension cuts? What am I missing here?

Here's a big overview on why this could be a game changer from one of the smartest people in finance:

Detroit Bankruptcy a

The question is will the bankruptcy judge try to change where Pensioners fall in the rank of creditors. If they place them higher than they normally would be, it'll really wreck other municipalities ability to borrower. The pension plans may or may not be funded, but the other obligations of the city were not. If a private employer goes under, the pensioner tends to only get a portion of what they were owed from the guarantee fund.

 

[Mulligan]

Here's a big overview on why this could be a game changer from one of the smartest people in finance:

Detroit Bankruptcy a

The question is will the bankruptcy judge try to change where Pensioners fall in the rank of creditors. If they place them higher than they normally would be, it'll really wreck other municipalities ability to borrower. The pension plans may or may not be funded, but the other obligations of the city were not. If a private employer goes under, the pensioner tends to only get a portion of what they were owed from the guarantee fund.

So in other words, the money may be there, but may also be used instead to pay other city debt and obligations. I just assumed previously that the money was separate and maybe severely underfunded, but neither of those are true.

 

[MichaelB]

The most recent annual report(s) should answer all funding questions. The data is there. One liability that is typically unfunded is future healthcare cost.

 

[Mulligan]

The most recent annual report(s) should answer all funding questions. The data is there. One liability that is typically unfunded is future healthcare cost.

The healthcare liability may be the difference in determining what is the "true" funding status of the system. Just my opinion, but I could see stripping the retiree healthcare out as a cut, but taking away true pension dollars when it is properly funded away from the pensioners is not right in my maybe biased opinion.