Pensions are in Trouble in this "New World Order"

[Helena]

Interesting FOX Business news video

Cavuto interview with Tom Mackell, Chairman of the Board of the Federal Reserve Bank of Richmond.


Video - FOXBusiness.com

 

[ziggy29]

I don't think pensions need to go the way of the dodo, but many of them -- particularly municipal pensions and some state pensions -- need a dose of reality.

Like it or not, international competition has all but killed DB pensions in private industry; there's just no way to give that kind of benefit to workers when you compete with emerging markets with 1/5 the labor costs. Governments, with no competition and taxing power, aren't as vulnerable but even they need to be careful in an era when most people don't have pensions and they've seen their 401K hacked by 1/3 -- give too much when most people are seeing their own retirements melt and you sow the seeds of "revolt."

As mentioned in another thread, I think the feds did an admirable job with pension reform with the current FERS system as implemented in the 1980s. The conventional wisdom is that retirement is based on a "three legged stool" with personal savings, pension and Social Security, and the current federal model comes pretty close to mimicking that philosophy. And it seems pretty sustainable from the standpoint of the taxpayer.

 

[Helena]

This is the reason I took a lump sum from my defined benefit plan.

A bird in the hand and all that...

 

[Grep]

My conclusion after watching this video is that the flashier the graphics behind the talking heads, and the more swooping and dramatic the camera angles employed, the more empty the commentary actually is. In this case: total trash.

 

[chinaco]

The problems with pensions:


Many companies (some govt entities) never funded the pension appropriately. Then the accounting rules started changing because some groups (e.g. FASB) realized that companies had liabilities that were not properly reported. Then companies did a couple of moves. Some began ending pensions.... but they were still stuck with an under funded pension. TO give companies some cover they were allowed to account fairly liberally with the funding. Some pensions used risky assets (took too much risk) because it made the funding looke better.

Now we are seeing the results of underfunded pensions and companies trying to bridge the gap by taking big risks.

The root problem is that the companies went for years not properly funding the pensions and now those liabilites show on the books so investors see them.

IMO- The pension may wind up owning the company because of the liability. It should be in front of all investors because the PBGC and ultimately tax payers will have to pay for the shortfall.

-----------

Pension are a viable mechanism and will not go away. That FDIC guy had it right... a hybrid approach may be needed.


The benefit of a pension is the pooling of money. It spreads the longevity risk and takes less money to mitigate that risk than if everyone had to have assets to cover it themselves.

 

[ziggy29]

Pension are a viable mechanism and will not go away. That FDIC guy had it right... a hybrid approach may be needed.

The benefit of a pension is the pooling of money. It spreads the longevity risk and takes less money to mitigate that risk than if everyone had to have assets to cover it themselves.

The biggest part of the problem with pensions was the overpromising of benefits based on unreasonably aggressive assumptions about rate of return. If a pension fund has to use hedge funds and own 80% stocks in order to meet the rate of return needed to adequately fund the promised benefits, then it's time to stop promising the moon and the stars and give benefits that are inline with what a conservatively managed pension fund can generate.

 

[Helena]

Like Social Security, pensions are being hit by demographics.
And it is only the beginning. Baby Boomers... many of whom
are old school and worked for the same employer all their life...
who have been promised a certain pension are counting on it
for retirement. There will be hell to pay if their pensions are
reduced or eliminated.

As Cavuto said in the video, pensions are a grenade ready to explode.

 

[saluki9]

The biggest part of the problem with pensions was the overpromising of benefits based on unreasonably aggressive assumptions about rate of return. If a pension fund has to use hedge funds and own 80% stocks in order to meet the rate of return needed to adequately fund the promised benefits, then it's time to stop promising the moon and the stars and give benefits that are inline with what a conservatively managed pension fund can generate.

Yup, thats the truth. I think the best solution was provided by Bob Arnott of Research Affiliates (Now PIMCO) who when he was editor of the Financial Analyst Journal suggested that the actuarial rate of return from now on should be the on the run long TIPS rate.

 

[tuixiu]

Sometimes I look at the state pension plan my wife has and think to myself "if we weren't participants and I knew how fat this deal was I'd be pissed off."

Great deal man, especially those grandfather into the old straight 80 points deal who started work at age 22 and look forward to full retirement with generous COLA pension w/survivor and health by age 51.

They've since rigged it to 80 points w/minimum 55 years old but still a hell of a deal.

 

[ziggy29]

Sometimes I look at the state pension plan my wife has and think to myself "if we weren't participants and I knew how fat this deal was I'd be pissed off."

Especially if all you had for retirement was a 401K that lost 1/3 of its value in the last year, and you're hearing that the states and cities need more of your tax revenue to bail out others.

I have a puny pension coming in the future from a previous employer, but it'll mostly just provide some spending money for the month -- it's hardly enough to base a retirement decision on.

Oh -- and will your wife marry me?

 

[tuixiu]

As far as puny pensions go I have a coworker who gets/getting about $120 monthly from Sears, I thought that was pretty funny until I saw the poster on here with the $28ish dollar check.

 

[ziggy29]

As far as puny pensions go I have a coworker who gets/getting about $120 monthly from Sears, I thought that was pretty funny until I saw the poster on here with the $28ish dollar check.

Even mine isn't that puny. If I choose the 100% survivor option and wait until I'm 65 (in 2030), it will be about $650 a month. At 55 it would be about $280.

My mom worked at K-Mart for about 15 years. She gets a whopping $105 monthly pension as well as the survivor pension from my dad. Guess it's a good thing they took the 100% survivor option since he died at 70.

 

[Independent]

Corporate DB pensions are subject to the same market forces that hit individual 401k balances. With 60%+ of the money in equities, the funding status changes every year. This report by S&P has some good data: http://www2.standardandpoors.com/spf/pdf/index/051908_SP500_PENSION-Report.pdf

348 of the S&P 500 companies have DB pensions. 127 of these were "overfunded" at the end of 2007 (and 221 underfunded). The overfunded were apparently the bigger plans, as the overall funding level was 104.4%.

 

[cashbalancetrouble]

"There will be hell to pay if their pensions are
reduced or eliminated."


Just in case you beleive this, I must point out pensions have been cut dramatically already and the outrage has well been contained through corporate and consultant actions. Congress doesn't answer to the people anymore.

As the most recent example, you might think the Pension Protection Act of 2006 helped the common pension participant. It helped mostly the Pension Plans reduce their liabilities through a change in the Lump Sum Distribution calculation. Prior to 2008, the calculation to determine the present value used the 30 year treasury value, something like 4.6%. The calculation uses this interest rate to determine the present lump sum to produce the monthly payout earned for your mortality rate, life expectancy. Starting in 2008 this rate will be replaced by a blended corporate bond rate in 20% increments until 2012 when the rate will be 100% of the blended. In 2008 this reduced the lump sum pay out by about 2%, in 2009 it will be about 6%, in 2010 it will be 17%, when done the lump sum payout will be about 40% less than the same credits would have produced in 2007. So in 2012 if you expect to live longer, take the payments, especially if the payment is below the PBGC monthly insurance covered amount so when the pension terminates due to lack of funds, the rest off us can keep the companies promise through the PBGC.

There was no outrage, there were no screams. The majority of people in this country were not hurt as fewer people have this benefit. Divide and concur the people. Take advantage of the minorities.

 

[clifp]

The problems with pensions:

Many companies (some govt entities) never funded the pension appropriately.

.

I reword this; last I looked (6+ years), some companies and most govt entities never funded the pension appropriately. Not properly funding a private pension can result in various civil and criminal penalties, not funding a government pension may generate an angry letter to the editor of the local paper.

As anyone who has followed the board knows government pension, in general are available at an early age (e.g. Military, fireman, policeman), very generous, inflation protection, and are typically protected by a union contract.

To pick on Hawaii since I did some old research on it. The Hawaii employee pension like most government pension was underfunded in 2002 (during a bear market) not surprising. What made it dangerous was assuming an 8.5% CAGR (about .5% higher than average govt pension plans) going forward.

The kicker is desperate state governments can and do raid the pension plans. For instance the Hawaii legislator pass a law which eliminated the need to fund the pension plan if the pension fund investment returns exceeded 12%. Now try constructing a portfolio with 8.5% (real) withdrawal but any year you make more than 12% you donate the excess to charity....

I haven't been following my old home state of California very closely but I am almost sure that the Govenator and the crooks in Sacramento are doing some tricks with California Pension Fund (CalPERS)

We as taxpayers need to be keeping an on this situation just as much as Medicare and Social Security.

 

[Texarkandy]

Interesting FOX Business news video

Cavuto interview with Tom Mackell, Chairman of the Board of the Federal Reserve Bank of Richmond.


Video - FOXBusiness.com

The statement by Mackell that really jumped out at me was: "the social contract is out the window"

Well, I certainly hope not - because when the social contract goes out the window, so does social order, and that can only be prevented with a police state.

Here's an interesting article I came across related to the "social contract" and the governments obligation to enforce contracts - it's about investor "pushback" on the "lets just change the the terms of their mortgages" plan

A Tale of Two Loan Modifications, As Investors Sue Countrywide : HousingWire || financial news for the mortgage market

(They are seeking class-action status - but I am guessing that unfortunately in the current political climate this "pushback" will not be successful - investors will have to take it in the shorts)

 

[harley]

One of my old coworkers had a dad who had worked for PEPCO (electric utility) for like 30 years. He retired with a non-COLA pension. After 20 years of retirement the pension check was used to buy his monthly beer supply. Luckily he had saved aggressively on his own. Many of his compatriots were not in such good shape.

 

[chinaco]

One of my old coworkers had a dad who had worked for PEPCO (electric utility) for like 30 years. He retired with a non-COLA pension. After 20 years of retirement the pension check was used to buy his monthly beer supply. Luckily he had saved aggressively on his own. Many of his compatriots were not in such good shape.

Yup... many people do not factor in the reduced spending power due to inflation.


One of the main problems is that people do not understand basic personal finance concepts.

Employers should offer ongoing educational seminars on retirement prep and planning. Education is a key part of the overall solution.


The education on personal finance should start earlier in life. It should be taught in high school (mandatory). Some would still ignore it... but at least they would know.

 

[dm]

Well we are sure counting on my wifes teachers pension. She has been contributing something like 12% with the school district matching for 27 years. She has been exempt from paying Social Security so its all she has. If I had been putting 24% of my salary into a retirement plan for this amount of time I would think it would be a substantial amount.

 

[cashbalancetrouble]

Public / teacher employee pensions will have to change because the money will just not be there. the same as you will see for the auto workers pension and health care promises.

My older brother is teaching in Illinois. I new he was close to retirement when I saw a couple years ago the state was contemplating a change for their early retirement choices. I reveiwed this with my brother to find that a significant reduction in benefits was probably going into effect in about 2009. To get this benefit, he needed to declare he would retire a year before the 2008 retirement date. Had he waited until 2009 or later, he would have lost alot. He retired with his maximum benefit and then kept right on teaching.

BECAREFUL and keep up on proposed changes.

 

[dm]

She was going to retire last year to take advantage of a 25 and out plan that was expiring. But they have extended the plan so she decieded to work one more year. If they had not done this she would have had to work till she had in 30 years, or her pension would have been greatly reduced. The way it is now, for every year she works her pension increases around $6,000 per year.

Why would you think that the money would not be there? As far as I know the pension fund is funded by the teachers and administrators, and the state is not involved. Health care is not included.

 

[cashbalancetrouble]

"One measure of a retirement system’s health is how close it is to 100 percent funding. Illinois’ system is projected to be 57.7 percent funded in the current fiscal year, well below the 80 percent benchmark for a healthy fund."

Illinois' pension nightmare - Chicago Tribune


This Chicago Tribune article from 2006 is what alerted me.

 

[dm]

According to their website, they are 83.5% funded. So hopefully they can last another 30yrs or so. They have raised the contribution to 13% from 12.5% though.

There is always the lump sum option, but because my wife's salary has jumped the last few years, and the way they payout based on your highest 3 years salary, it is to our advantage to take the pension.

 

[deserat]

Yup different streams of income - I will have two pensions, SS (perhaps!), tax deferred and taxable savings to draw from....and an early retirement. How? LBYM and saving, saving, saving - up to 50-60% of income. What's interesting is the last employer I had used a 'three-legged' stool of their own - small DB Pension, 403B (of which they contribute 2% of your salary), and 401A (which they contributed 5% of your salary and which you could contribute to after-tax up to $10K yearly). I also supplemented with my own savings and another 'job' which has a pension. And all of this counted towards SS.....I consider myself lucky - very lucky. Let's see how this all pans out over the years....

As for a regular 'pension', yes, I can see how those could go by the wayside - I'll have to hand it to my former employer, they enforced a savings plan in addition to the pension aspect - plus, you have to have a combined number of 75 years age and time of service for free healthcare - also, if you retire early (at 55) you must have at least 15 years of service and that pension payout is 50% less than at age 65. I've opted for the pension at 65...figure it will be good for wine money or whine money

 

[REWahoo]

Yup different streams of income - I will have two pensions, SS (perhaps!), tax deferred and taxable savings to draw from....

Belt, suspenders, coveralls, ...and a roll of duct tape just to be sure.