Pension Risks are Growing

[nun]

I will admit to not knowing a whole lot about how pension fund actuarial calculations are made, not having a pension myself. I just observe that whenever a pension problem is discussed in public, the two factors that are often cited are 1) the increase in the ratio of retirees to contributing workers, and 2) actual investment returns being lower than projected.

And the way this has been solved is always 1) reducing benefits to future retirees, and 2) demanding a higher contribution from current workers. So, that led me to think that the original benefit formula was too generous, whatever the cause of it.

In MA the solution has so far protected the pensions of retirees and current employees. The changes have been implemented for new employees and involve increasing minimum retirement age from 55 to 60, using a the average of the highest 5 years of salary rather than 3 years in the pension calculation and extra state budget appropriations for pension contributions.

 

[NW-Bound]

Whatever the fix, the sooner the problem is recognized and remedied the better. It would prevent 1) the perceived unfairness towards the young workers who will not receive the same benefit, or 2) in the present case of the OP's article nearly total collapse of the fund and draconian cut-back in benefits to the existing retirees.

In the article, it was said that some existing retirees argue that the current benefit should be continued until the fund runs out. I wonder if those retirees are among the older ones, who only think of themselves and not the workers coming after them.

 

[pb4uski]

....I wonder if those retirees are among the older ones, who only think of themselves and not the workers coming after them.

Sounded like that to me too. Screw those young whippersnappers!

 

[hnzw_rui]

I will admit to not knowing a whole lot about how pension fund actuarial calculations are made, not having a pension myself. I just observe that whenever a pension problem is discussed in public, the two factors that are often cited are 1) the increase in the ratio of retirees to contributing workers, and 2) actual investment returns being lower than projected.

And the way this has been solved is always 1) reducing benefits to future retirees, and 2) demanding a higher contribution from current workers. So, that led me to think that the original benefit formula was too generous for the amount that was put aside by employees and employers, whatever the cause of it.

Yes, the original benefit formulas were fairly generous (likely because investment returns were very good during the 80s and 90s with 10- and 15-year rolling averages of around 12% for our fund). Most pension systems (including ours) have already undergone changes to make them more sustainable. As nun has mentioned, some of those changes include increase in employee contributions, increase in retirement age, decrease in the benefit factor, etc.

Mind, a large part of the problem with pensions is that employers didn't always contribute their share of the funding regularly. If they had been forced to contribute annually ala-SS, the problems with under funding likely wouldn't be as bad.

 

[NW-Bound]

Were the investment returns so good that in the case of some pensions, they allowed generous benefits to be based on the salary of just a few most recent years, which were then spiked with overtime, accrued untaken sick and vacation, etc...?

I would have thought that a fair benefit formula would depend on the contribution, both from the employee and employer, over the entire working career. You know, like 401k? Or at least over a reasonable number of years, like SS?

I suspect that the largesse came from the expectation that new employees will continue to contribute. So, when that dwindles, either from poor employment, bad economy, or union membership drop, they have a huge shortfall.

 

[Big_Hitter]

Were the investment returns so good that in the case of some pensions, they allowed generous benefits to be based on the salary of just a few most recent years, which were then spiked with overtime, accrued untaken sick and vacation, etc...?

I would have thought that a fair benefit formula would depend on the contribution, both from the employee and employer, over the entire working career. You know, like 401k? Or at least over a reasonable number of years, like SS?

.

A bit of background to 20 years ago, many pension plans had experienced enormous investment return windfalls from the period just after black Monday. Many plan sponsors used this windfall to fund special retirement programs and/or to improve benefit levels.

DB plans are designed to replace a certain percentage of final pay at retirement. Therefore most defined benefit formulae use a final 3 or a final 5 year average approach because it makes it easier to design a plan to replace x% of compensation for career employees. Most pension designs when combined with SS usually target 70 to 80% of final pay.

Career average plans, like you describe, are more popular now but they are in the form of cash balance designs.

Employee contributions are almost unheard of in the private sector but almost universal in the public sector.

 

[Greencheese]

Personally I think the issue comes down to mobility. People used to stay in the same place for generations, nowadays people work in one place and retire in another. Thus 1 generation utilizes benefits, moves, and then expects another to stay in place and pay for them. However, if people aren't willing to move in and replace those leaving... well then the math fails.

 

[Music Lover]

Public pensions are a typical Ponzi scheme...those who get in early receive the most benefit, while those who come along later are forced to pay for a pension that may not be there when they retire.

 

[dixonge]

Public pensions are a typical Ponzi scheme...those who get in early receive the most benefit, while those who come along later are forced to pay for a pension that may not be there when they retire.

First, the only pension in the original article was the Teamsters, a union-based pension. Their union membership has drastically shrunk.

Second, public pensions can be perfectly fair and level. Much of this depends on the structure and adjustments made.

Our pension is with TCDRS - evidently they do things a bit different...

 

[ERD50]

First, the only pension in the original article was the Teamsters, a union-based pension. Their union membership has drastically shrunk.
...

This is one of the problems with future promises like this. The promise needs to be fully funded, and those funds collected as they are earned, and conservative growth estimates used ( like zero real - and adjusted by increasing contributions if needed). If the promise depends on furture contributions, and your base shrinks - that's a problem.

-ERD50

 

[Teacher Terry]

I really feel bad for these people. HOpefully, if they do cut it won't be as bad as they stated. I know Detroit proposed a much higher cut then what was originally proposed. Some of the comments were terrible. Many of those people probably have physical ailments related to their jobs. My Dad was a tool grinder in the auto industry when they didn't wear any protection so by 54 after over 30 years he could not walk a block and was on oxygen. Thankfully his pension paid until the end.

 

[marko]

In MA the solution has so far protected the pensions of retirees and current employees. The changes have been implemented for new employees and involve increasing minimum retirement age from 55 to 60, using a the average of the highest 5 years of salary rather than 3 years in the pension calculation and extra state budget appropriations for pension contributions.

Then there's this about MA pension abuse:
Massachusetts pension abuse - Boston.com

Seems that the rank and file are held to different set of rules than the errrr.....'connected'.

 

[FreeBear]

I guess that's one of the perils from a "pay-as-you-go" program. I'd rather have my own pile of money to manage, though it will not escape the vagaries of the market return either. However, I will be more informed of impending doom and hopefully able to adapt before it becomes too late.

+1

Rolled over a little mini-Megacorp pension just before ER, so now funded entirely on our savings. If my ER $$ car starts to go off the road, at least I'm in the drivers seat, not the back seat!

On the other hand, I have no one to blame if we're dining on cat food in our twilight years!

 

[nun]

Then there's this about MA pension abuse:
Massachusetts pension abuse - Boston.com

Seems that the rank and file are held to different set of rules than the errrr.....'connected'.

There have been a small number of cases of abuse, but part of the pension reforms was to stop "double dipping" and artificially inflating salary just before retirement. This is covered in the last article in your link. The MA pension is well run.

 

[Frankie1926]

I think there are still many loopholes in ma pension system, had a friend that served in an unpaid selectman position for 25 years which counted toward the pension when he took a full time city job. So he only needed to work a few years full time and take a pension like he worked 30. On and on it goes...


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[marko]

I think there are still many loopholes in ma pension system, had a friend that served in an unpaid selectman position for 25 years which counted toward the pension when he took a full time city job. So he only needed to work a few years full time and take a pension like he worked 30. On and on it goes...


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+1 There's so much that goes on that people don't (want to) know about.
There's a general "nothing to see here folks, move along" attitude.

I my little town, pensioned city employees get a 25% reduction on their property tax and, if you come down with something like (ahem) "hearing loss" or some similar 'disability' within six years after your retirement, your Federal income tax on your pension is paid for by the city; a nice little $10K-$15K increase in pay!

But at least the MBTA trains run on time.

 

[Corporateburnout]

But at least the MBTA trains run on time.

Do they? When was the last time you took the commuter rail?

I hope you're being sarcastic.

 

[nun]

+1 There's so much that goes on that people don't (want to) know about.
There's a general "nothing to see here folks, move along" attitude.

I my little town, pensioned city employees get a 25% reduction on their property tax and, if you come down with something like (ahem) "hearing loss" or some similar 'disability' within six years after your retirement, your Federal income tax on your pension is paid for by the city; a nice little $10K-$15K increase in pay!

But at least the MBTA trains run on time.

The MBTA pension is a disaster. MA local government pensions have had major troubles for years because of poor management and many are being transferred to the larger state system so PRIT can manage the money. Which MA pension are we talking about here? Your town's situation should be looked into...probably something to bring up at the next town meeting, there might be some MA state law issues as the municipal pensions must be run to MA legislation, but it has nothing to do with MSERS.

For most MA pensions the state puts in 4% of salary and the employee must put in 11%. The state and the employee do not pay the SS part of FICA saving the tax payer lots of money. The MA pension scheme costs the MA tax payer less than the vast majority of other state pensions. This is a good explanation of the current system and includes recent reforms.

Demystifying the State Pension System - MassBudget

 

[marko]

Do they? When was the last time you took the commuter rail?

I hope you're being sarcastic.

Quite, quite, quite sarcastic. I've been to third world countries where the public transit is 10 times better.

 

[LARS]

Honestly, this is old news. Nothing of substance will be done until all other options have been exhausted (which is generally to mean smoke and mirror type patches). Especially true at the civil level as has been discussed to death here, and elsewhere.


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[athena53]

For most MA pensions the state puts in 4% of salary and the employee must put in 11%. The state and the employee do not pay the SS part of FICA saving the tax payer lots of money.

Sure, it saves taxpayers the difference between the SS rate and 4% right now. What it does in the long run depends on what they promise in return for the 15% combined contribution. And, as I pointed out to a friend who hotly defended her teacher's plan as "just like a 401(k)", she has a promise that she'll never outlive her pension. This is a risk the municipality or other pension-providing employer takes.

 

[Chuckanut]

I my little town, pensioned city employees get a 25% reduction on their property tax and, if you come down with something like (ahem) "hearing loss" or some similar 'disability' within six years after your retirement, your Federal income tax on your pension is paid for by the city; a nice little .

Stop It! You folks keep reminding me I worked for the wrong government institution.