Pandemic of pension woes is plaguing the nation (CNBC)

[Midpack]

Not new information and I realize those affected already know far more than I do, but I don't think most people (self-included) have really thought about it beyond a vague concept, about actual financial implications. I know some people think the promises made are guarantees, some may be very unpleasantly surprised. It would seem this will probably impact everyone, not just retirees and not just taxpayers, despite protestations by both. It won't be as simple as cutting current/future benefits, nor as simple as increasing taxes/fees to erase shortfalls IMHO.

I'd rather we just faced up to it, so we could all plan accordingly, but another case of kicking the can down the road it seems...see Illinois.

Seventeen states have funded more than 80 percent of their projected pension liability, a level that's generally seen as financially sound. Most of the rest have been scrambling to make up investment losses inflicted by the 2008 market collapse and the shortfalls in sales, property and incomes taxes produced by the Great Recession.

But even as the economy and housing markets have recovered, most states are still falling behind in closing their pension funding gaps. In the last year, 34 states have seen their pension funds stretched further as they've failed to make the full contributions needed to meet the projected cost of retirement promises.

Nine states—Hawaii, Alaska, Kansas, Rhode Island, New Hampshire, Louisiana, Connecticut, Kentucky and Illinois—have now set aside less than 60 percent of what they need. Illinois has saved just 43 cents to cover every dollar of what it needs to pay 350,000 retirees and 500,000 current plan participants who are counting on a pension check.

Pandemic of pension woes is plaguing the nation

 

[pb4uski]

How long are we going have to listen to this excuse? Unless they panicked and bailed, shouldn't they be ahead by now? I know I am.

...Most of the rest have been scrambling to make up investment losses inflicted by the 2008 market collapse...

 

[REWahoo]

How long are we going have to listen to this excuse? Unless they panicked and bailed, shouldn't they be ahead by now? I know I am.

What do you mean,"panicked and bailed"? No, they simply ran into some bad luck with their market timing strategy.

 

[NW-Bound]

As I described in another thread, the market performance in the last decade has been dismal. Here's the result from a historical simulation that I found online for 3 different portfolios over the period of 1/2000 to 1/2013. The results are annualized and corrected for inflation.

100% stock: -0.5%/yr (Note: Annualized total return, inflation-adjusted)
50/50 stock/bond: 0.97%/yr
100% bond: 1.49%/yr

It should be no wonder that so many institutional investors ran into trouble. I am sure they used much higher return numbers in their projection.

So, unless they were good stock pickers or good market timers, they were doomed. If you are average, you are dead meat. And of course, not everybody can be above average.

 

[NW-Bound]

OK, I read the article. The pension managers generally did do BETTER than the 3 simplistic portfolios I showed above. In the excerpt below, the period was 2001-2011, compared to my numbers for 2000-2013. In addition, their numbers were not inflation-adjusted, but I think these were not bad at all, and most likely did beat the average investor. They are not idiots!

In 2011, the latest data available, the 100 largest public pension funds projected an average return of 7.84 percent. But their actual return over the prior 10 years was just 5.6 percent a year, according to a survey by Pensions and Investments, a trade publication.​

 

[NW-Bound]

I just thought of something else.

If you are a better-than-average investor like the above pension managers who got 5.6% nominal return, or find an active MF manager who can do it for you, then after the inflation rate of 2 to 2.5%, you can have a WR of 3 to 3.5%.

That's the gist. In periods of low returns like what we have been through, only the good can hope for a 3.5% WR. The bad and ugly ones will eat pet food. For each above-average investor, there's another one that's below average.

And I am reminded of the following movie scene.

The Good The Bad and the Ugly Finale - YouTube

 

[Chuckanut]

How long are we going have to listen to this excuse? Unless they panicked and bailed, shouldn't they be ahead by now? I know I am.

+1

I hear this also from private investors. "I lost nearly 50% of my savings in the economic collapse!" Where have they been lately? Did not the S&P 500 brush up against record highs recently? Or was I dreaming?

 

[ERD50]

As I described in another thread, the market performance in the last decade has been dismal. Here's the result from a historical simulation that I found online for 3 different portfolios over the period of 1/2000 to 1/2013. The results are annualized and corrected for inflation.

100% stock: -0.5%/yr (Note: Annualized total return, inflation-adjusted)
50/50 stock/bond: 0.97%/yr
100% bond: 1.49%/yr

...

Except that's a bit of (unintentional, I assume) cherry picking (or 'dung-digging', since it is focused on the negative?), since 1/2000 was near a market peak. Like most investors, they would have been putting money in all along, not a lump sum on that date. Not too meaningful, IMO. I recently looked at the 10 year performance for SPY - it more than doubled. Is that due to measuring from 2003 instead of 2000?

I recall reading that the investments in IL sounded just like an amateur - buy hi and sell low 'Hey, stocks are up, let's pile on!' and 'Hey, stocks are down, better get out and stop losing money!'.

A different perspective: Some googling should come up with an answer, but I gave up the last time I tried. But I wonder - what is so important about a government 'funding' these pension liabilities? Why can't they pay for them out of current revenues? When I was a 30-something, and took out a mortgage, I certainly didn't have any 'fund' that could pay 80% of those payments. I was counting on future income streams. Governments have these, they are called taxes. So why not tax for what we need later - why not just pay it as we go?

Now, I have a pragmatic answer to that, but I'm not sure it is relevant. And that is, we should be paying today for the promises we make today. That helps keep the actual cost more transparent. But, if that were controlled (dreaming?), why not just leave it unfunded and pay as we go?

-ERD50

 

[NW-Bound]

Except that's a bit of (unintentional, I assume) cherry picking (or 'dung-digging', since it is focused on the negative?), since 1/2000 was near a market peak. Like most investors, they would have been putting money in all along, not a lump sum on that date. Not too meaningful, IMO. I recently looked at the 10 year performance for SPY - it more than doubled. Is that due to measuring from 2003 instead of 2000?

I recall reading that the investments in IL sounded just like an amateur - buy hi and sell low 'Hey, stocks are up, let's pile on!' and 'Hey, stocks are down, better get out and stop losing money!'.

Yes, if you count from 2003, things look a lot better. Or if you count over a longer term, like from 1990 till now, things also look good.

But that asides, to provide more data for an apple-to-apple comparison, I recompute the return from 2001-2011 to match the period when the pension managers were getting 5.6% according to the article. See my post above.

100% stock: -1% (Annualized total return, inflation adjusted)
50/50 stock/bond: 0.9% (As above, rebalanced on Jan 1)
100% bond: 1.6%

I then looked up the cumulative inflation in 2001/2011 time frame. It's 25.77% cumulative, which works out to be 2.3% annualized. I then used it to correct the pension return for inflation.

Our cursed-at pension managers were getting 5.6%-2.3% = 3.3% real return, beating the 3 simple investors. The real problem was that they planned on a WR of 6%.

I rest my case.


PS. If these institutional investors were beating the market, then there had to be losers. I suspect the latter are mostly retail investors, the real bozos in this game.

 

[photoguy]

If you are a better-than-average investor like the above pension managers who got 5.6% nominal return, or find an active MF manager who can do it for you, then after the inflation rate of 2 to 2.5%, you can have a WR of 3 to 3.5%.

Are the pension fund managers better than average? I don't know if the original study is reliable and representative but the skeptic in me has doubts. Even something simple like picking the 100 largest funds as of the end of the 10-year period could substantially bias results.

 

[NW-Bound]

OK, I concede that it is not likely that all pension managers get the above-average return of 5.6%. But you cannot automatically assume that a fund with a short budget is a poor investor.

For, even if you get a market-beating return of 3.3% real return (5.6% nominal), if your WR is 6% then you have a shortage of 2.7% per year. Multiply that by 10 or 13 years then you are seriously short by 30%.

And if you get just the market return (see my post #9 above) while drawing 6%, you are dead! You have to be a good stock picker or market timer, way way above average.

I think the real problem is that everybody was lulled into complacency by the bull market of 1980-2000. Early retirees like us who manage our own money know to cut back to 3.5% WR (here's that magic number again), but pensions have obligations that they have to meet.

 

[Mulligan]

Except that's a bit of (unintentional, I assume) cherry picking (or 'dung-digging', since it is focused on the negative?), since 1/2000 was near a market peak. Like most investors, they would have been putting money in all along, not a lump sum on that date. Not too meaningful, IMO. I recently looked at the 10 year performance for SPY - it more than doubled. Is that due to measuring from 2003 instead of 2000?

I recall reading that the investments in IL sounded just like an amateur - buy hi and sell low 'Hey, stocks are up, let's pile on!' and 'Hey, stocks are down, better get out and stop losing money!'.

A different perspective: Some googling should come up with an answer, but I gave up the last time I tried. But I wonder - what is so important about a government 'funding' these pension liabilities? Why can't they pay for them out of current revenues? When I was a 30-something, and took out a mortgage, I certainly didn't have any 'fund' that could pay 80% of those payments. I was counting on future income streams. Governments have these, they are called taxes. So why not tax for what we need later - why not just pay it as we go?

Now, I have a pragmatic answer to that, but I'm not sure it is relevant. And that is, we should be paying today for the promises we make today. That helps keep the actual cost more transparent. But, if that were controlled (dreaming?), why not just leave it unfunded and pay as we go?

-ERD50

I think that is why based on my reading "experts" generally agree a system that is over 80% funded is considered sound. You can keep the unfunded part rolling perpetually with a few tweaks. But when it starts to break down, you can't get returns needed to fund the heavy lifting of the payouts. For example, my pension model is 30 yrs of employe and employee each contributing 14.5% a piece. However ultimately about 67% of all pension money received in retirement comes from investment returns not contribution monies. Plus, for most systems you probably will eventually have a tsunami of retirees hitting retirement and continuing to live. For example, Illinois teacher system is projected to run dry in 20-30 years if my memory is correct. This despite continued employee contribution, and I assume some from the state. It could be done but it would be very expensive! If my thinking is correct the postal system kind of did it the way you mentioned, ERD. But since they went to prefunding their retirement the system has incurred massive losses. They do mention often the postal system would be showing a profit if they didn't have to change the pension accounting.

 

[Midpack]

But since they went to prefunding their retirement the system has incurred massive losses. They do mention often the postal system would be showing a profit if they didn't have to change the pension accounting.

Often repeated even today by self-serving "interested parties" who know (or should) better. While true in 2007-08, it's been false since 2009 and every year since. Tangential to the thread, but FWIW...

 

[pb4uski]

...I rest my case.....

I still don't buy the excuse that investment losses from the 2008 market collapse are a valid reason for pension fund problems or even individuals problems in RE. Just look at the growth of $10,000 charts for Vanguard Total Stock and Wellington from 8/1/03 to 7/31/13 (most recent 10 years and readily available at this link and use the Add a fund box to add in Wellington).

At the depth of the recession the $10,000 invested on 8/1/03 had declined to $8,591 and $11,459 for Total Stock and Wellington, respectively, but the most current values are $22,363 and $23,198, respectively for IRRs for the 10 year period of 8.4% and 8.8%, respectively.

Wellesley had a flatter line and dipped to $11,478 in 2008 but still returned 7.4% for the 10 year period.

 

[MichaelB]

Not wanting to get in the way of a good rant, but at least in this article, pension fund investment losses from 2007 isn't an excuse anyone is making for the underfunding.

 

[Mulligan]

Often repeated even today by self-serving "interested parties" who know (or should) better. While true in 2007-08, it's been false since 2009 and every year since. Tangential to the thread, but FWIW...

The chart actually does a good job of reinforcing the tremendous costs of trying to play check up in prefunding a pension system instead of pay as you go.

 

[pb4uski]

Not wanting to get in the way of a good rant, but at least in this article, pension fund investment losses from 2007 isn't an excuse anyone is making for the underfunding.

I was just responding to this part of the OP:

Seventeen states have funded more than 80 percent of their projected pension liability, a level that's generally seen as financially sound. Most of the rest have been scrambling to make up investment losses inflicted by the 2008 market collapse...

and frequent references I see to the 2008 market collapse as being an excuse for something (like not being able to RE).

Edit: I just read the entire article and concede that it doesn't seem to use that as an excuse other than in that one place - the more relevant problem is shortchanging contributions - just like not saving for retirement for individuals.

 

[Chuckanut]

I still don't buy the excuse that investment losses from the 2008 market collapse are a valid reason for pension fund problems or even individuals problems in RE. Just look at the growth of $10,000 charts for Vanguard Total Stock and Wellington from 8/1/03 to 7/31/13 (most recent 10 years and readily available at this link and use the Add a fund box to add in Wellington).

At the depth of the recession the $10,000 invested on 8/1/03 had declined to $8,591 and $11,459 for Total Stock and Wellington, respectively, but the most current values are $22,363 and $23,198, respectively for IRRs for the 10 year period of 8.4% and 8.8%, respectively.

Wellesley had a flatter line and dipped to $11,478 in 2008 but still returned 7.4% for the 10 year period.

Stop confusing us with the facts!

 

[ERD50]

Yes, if you count from 2003, things look a lot better. Or if you count over a longer term, like from 1990 till now, things also look good.

But that asides, to provide more data for an apple-to-apple comparison, I recompute the return from 2001-2011 to match the period when the pension managers were getting 5.6% according to the article. See my post above.

100% stock: -1% (Annualized total return, inflation adjusted)
50/50 stock/bond: 0.9% (As above, rebalanced on Jan 1)
100% bond: 1.6%

I then looked up the cumulative inflation in 2001/2011 time frame. It's 25.77% cumulative, which works out to be 2.3% annualized. I then used it to correct the pension return for inflation.

Our cursed-at pension managers were getting 5.6%-2.3% = 3.3% real return, beating the 3 simple investors. The real problem was that they planned on a WR of 6%.

I rest my case.


PS. If these institutional investors were beating the market, then there had to be losers. I suspect the latter are mostly retail investors, the real bozos in this game.

I suspect the devil is in the details. So they say:

In 2011, the latest data available, the 100 largest public pension funds projected an average return of 7.84 percent. But their actual return over the prior 10 years was just 5.6 percent a year, according to a survey by Pensions and Investments, a trade publication.

The market has been very volatile - moving the dates a bit can make big changes in those numbers. Is that 1/1/2000-12/31/2009? 1/1/2001-12/31/2010? 1/1/2002 - 12/31/2011? Or some other date range? Is that 5.6%/year average, or 5.6% compounded? How do they account for deposit/withdrawals to/from the funds?

I guess I'm just skeptical that the average of the 100 largest public pension funds could beat those indexes so handily as your numbers suggest. From the studies we have seen, that does not seem to be the case with active mutual funds. Do these pension managers really know something the top guys/gals at Fidelity and other fund companies do not? Or did differences in re-balancing methods have a positive effect relative to the re-balancing you assumed? This re-balancing could go relatively negative over other time periods - it really depends on the way the peaks/troughs run.

-ERD50

 

[NW-Bound]

I still don't buy the excuse that investment losses from the 2008 market collapse are a valid reason for pension fund problems or even individuals problems in RE. Just look at the growth of $10,000 charts for Vanguard Total Stock and Wellington from 8/1/03 to 7/31/13 (most recent 10 years and readily available at this link and use the Add a fund box to add in Wellington).

At the depth of the recession the $10,000 invested on 8/1/03 had declined to $8,591 and $11,459 for Total Stock and Wellington, respectively, but the most current values are $22,363 and $23,198, respectively for IRRs for the 10 year period of 8.4% and 8.8%, respectively.

Wellesley had a flatter line and dipped to $11,478 in 2008 but still returned 7.4% for the 10 year period.

Stop confusing us with the facts!

I knew that my data will cause a dissonance.

I did not look up performance of Wellesley or Wellington, or Dodge & Cox Balanced which is another good fund that I have. If you said that these return better than the 5.6% that the 100 largest pensions obtained, yes, that could be very well true. What does that prove? It proves that the above 3 funds, active funds mind you, not indexed, have been good funds, and I hope that their performance will continue (I have some money in all 3).

Why don't pension funds all buy into these 3 funds? Suppose they did. All that means is that these 3 funds would become so large that they would have problem beating the market; they became the market. Remember that these 3 funds are active, and they picked stocks and never indexed! Doesn't Wellington try to limit money inflow, as they are afraid of fund bloat? Dodge & Cox also closed to new investors in the past.

Now, ERD50 questioned the time period that I used. In my post #9, I used 1/2001 to 1/2011. Did that match the time period that they used in the article? I cannot be sure, but that's the best I could deduce from that writing.

Now, perhaps the 100 fund managers never did get that 5.6%. I do not have inside info, and cannot prove one way or the other.

But here's my suggestion. So many of us, myself included, have trusted FIRECalc as the golden rule for what one can expect as an average investor, meaning one who indexes and rebalances on Jan 1st to avoid any luck, good or bad. I have also been using ********.

So, anyone can make a run, using any time period you like, using any portfolio mix that you want. I used 100/0, 50/50, and 0/100 to cover the entire continuum. Do that with a WR of 6%, and see what you get for the last 10 to 15 years.

 

[ERD50]

I knew that my data will cause a dissonance.

I did not look up performance of Wellesley or Wellington, or Dodge & Cox Balanced which is another good fund that I have. If you said that these return better than the 5.6% that the 100 largest pensions obtained, yes, that could be very well true. What does that prove? It proves that the above 3 funds, active funds mind you, not indexed, have been good funds, and I hope that their performance will continue (I have some money in all 3).

Why don't pension funds all buy into these 3 funds? ...

Maybe I'm not being clear.

Sure, some funds will beat indexes, that is expected. But would the average of the 100 largest active mutual funds beat the indexes by a significant margin? IIRC, studies say no. That is why I question those numbers.

-ERD50

 

[NW-Bound]

Maybe I'm not being clear.

Sure, some funds will beat indexes, that is expected. But would the average of the 100 largest active mutual funds beat the indexes by a significant margin? IIRC, studies say no. That is why I question those numbers.

Yes, that does seem high. But that's what they quoted out of a survey.

From what I know, MFs that are opened to retail investors have a very tough time to beat the market. Why?

Retail investors flock to a hot MF when it's high. That causes the MF manager to buy high. They redeem when the market is low. That causes the manager to sell low. The MF manager has no choice!

Institutional investors who have control of the fund inflow/outflow can often do a lot better. Same as small investors like us who can stomach the variations, and perhaps can make some fortuitous rebalancing (yeah, that's dirty market timing that's frowned on again).

Some retail active funds have done well, I think mostly because their clients are loyal and do not flock to redeem when the market is bad. That allows the manager to make better investment decisions than constantly selling to meet redemption.

To verify my theory, I would need to compare fund size changes (total assets under management) of Wellesley et al to other funds that cratered. I suspect that the funds that did terribly met their demise because of their shareholders who panicked and fled. Selling begets more selling.

PS. I just now noted that you said "active MFs". No, the article talked about 100 pension funds, which are not the same thing. Pension funds are institutional investors, and they do not all invest in MFs like retail investors.

 

[ERD50]

Yes, that does seem high. But that's what they quoted out of a survey.

From what I know, MFs that are opened to retail investors have a very tough time to beat the market. Why?

Retail investors flock to the market when it's high. That causes the MF manager to buy high. They redeem when the market is low. That causes the managers to sell low. These MF manages have no choice! ...

OK, that could well be. But aren't index funds subject to this also? Yet, they run very close to their index. OK, maybe people move in/out of index funds less than the more active funds, but it must still be happening.

I would think that the Retirement Target funds would be the 'purest' of Buy & Holds. I know their fees are very low (a reflection of limited trading?), but I have not tried to compare to an index - that might not be too hard, IIRC they don't change their AA every year, but maintain an AA for maybe a decade or more at some stages. And they can probably adjust their AA with new deposits, rather than having to sell/exchange.

-ERD50

 

[NW-Bound]

Index funds are, well, indexed. So, if people bailed out of VFINX (Vanguard S&P index), that added to the decline of the S&P500, and VFINX still matched its index by definition (minus the transaction costs and other frictions of course).

Good active funds like Wellesley/Wellington/Dodge & Cox are leery of fund bloat. People flock to them when they are doing well, and they will not be able to invest that new money well. Keep bidding up on the stocks that they already have? And causing the same explosion that ballooned up the dotcoms of 2000? And these newcomers will be the first to redeem, causing them to sell low.

Talk about the tough challenges faced by MF managers, I have told of a musing written by the manager of a relatively small MF of only about $1B in assets. He spotted a small company that had great prospects. In order to make it worthwhile, he had to accumulate several tens of $MM. But that was a relatively high volume for this small stock, and whenever he tried to buy, the sellers moved up their ask price. So, it took him a couple of months of nibbling to get the amount of shares he wanted, while the price was inching up. As for small guys like me who only wants a few hundred shares, one click then I am done. Big MFs of course have to pass over these deals, because even if they own the entire small company, that still does not make a dent in their bottom line. And when they want to sell, whom do they sell to?

Not to make excuses for MF managers, but just telling the other side of the story. What have I got from this? I have decided to be a slicer-and-dicer, and invest mostly in individual stocks or sectored ETFs, so that I can rebalance between them or buy/hold as I see it. I will be responsible for my own actions, and do not want to be negatively affected by fellow MF shareholders.

PS. Please see my postscript in the post above about the distinction between MFs and pension funds.

 

[Midpack]

The chart actually does a good job of reinforcing the tremendous costs of trying to play check up in prefunding a pension system instead of pay as you go.

Indeed it does. Though it also shows they are losing big money completely aside from pension funding. USPS is simply going to have to reinvent themselves in the digital age, might as well get on with it IMO...instead of throwing out red herrings like the pension issue as if that was the solution.