Pensions vs personal investing: Pensions win???

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femtoace
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Pensions vs personal investing: Pensions win???

Post by femtoace » Wed Jan 16, 2013 10:02 pm

When I looked at the arizona state retirement system's plan (https://www.azasrs.gov), it looks like the payout is far higher than a 401a with say a 7% contribution to fidelity. It seems like a no brainer to choose the pension system given the guaranteed 8% (risk free for current contributors?) regardless of the market performance. What I don't understand is how the government will sustain the plan say 25 years down the road. Are there any risks with a pension system or is the pension system clearly the better way to go? And if it is able to beat the market so consistently (the pension system generates approximately 8% return every year which is probably on par with a 100% stock portfolio on a lucky day!), how is it doing that! Are pension systems free lunch?

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Re: Pensions vs personal investing: Pensions win???

Post by NYBoglehead » Wed Jan 16, 2013 10:10 pm

Pension systems are not free lunch and the unfunded liabilities of municipal and state pension plans are estimated to be as high as $2 Trillion dollars (estimates vary, and of course the studies took place over different periods)

As a New Yorker, I know the pension plans have to get an 8% return or whatever shortfall exists is covered by the taxpayer. I'm not sure how long that can last if there is an extended period of time when 8% is not reached. I'm not making a political statement, just an observation that things could get dicey if the returns aren't enough to sustain and even more money is needed to fund the pensions.

In terms of what is better for the employee, so long as the funding and actuarial soundness of the pension is good than it absolutely trumps any DC plan. I'd make sure I contribute every year to a Roth IRA just in case there is a future haircut of benefits on the pension plan.

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Re: Pensions vs personal investing: Pensions win???

Post by tetractys » Wed Jan 16, 2013 10:17 pm

I was offered a pension or 457b. After running the numbers the pension won hands down. But I think obviously, when given a choice it depends on the pension. Is it COLA'd, how much will it cost, how does the vesting work, what kind of interest will it earn up until payout, etc.??? Funding is a concern; but in many cases over ranted, IMO--again it depends. -- Tet
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elgob.bogle
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Re: Pensions vs personal investing: Pensions win???

Post by elgob.bogle » Wed Jan 16, 2013 10:18 pm

I retired with the option of either taking a state defined benefits pension or a setting up a 401a pension before my retirement date, which I did. I was worried about the same things you mentioned, and the fact that inflation was pegged at 3% for the pension. So, I took the 401a and after a mandatory 90-day waiting period, I rolled it into a Vanguard IRA. I'm glad that I did. :D

State governments are likely to have the same headwinds that the Federal government is having - trying to keep up with the baby boomer retirements and the "promises" that have been made. Good luck, and be careful how you discuss this issue or the thread may get locked.

elgob

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Re: Pensions vs personal investing: Pensions win???

Post by Levett » Thu Jan 17, 2013 7:23 am

You ask: "Are there any risks with a pension system or is the pension system clearly the better way to go?"

Here's my perhaps non-Bogleheadish response:

1. To your first question, I answer: yes, there's some risk, but compared to the risk of an individual doing his or her own thing I would describe the risk of a pension system as minimal.

2. To your second question, I would suggest that many Bogleheads prefer to go it on their own, but in polls I've seen of the general public (not to be confused with a Boglehead sample) the general public would much prefer having a pension--in other words, a DB plan rather than a DC plan.

Yes, there was a recent analysis--in the Wall Street Journal, I believe--showing that a number of state and/or municipal pension plans were underfunded (e.g. below the 80% funding mark), but those plan have far more resources, such as taxing authority, than any individual has.

Doubtless, others will express great confidence in their own ability to devise a persona pension plan. :wink:

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bberris
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Re: Pensions vs personal investing: Pensions win???

Post by bberris » Thu Jan 17, 2013 7:33 am

In theory, an institutional system is a far better way to organize retirement payments. The reason is simple. Individuals retire at one particular point in time. They need to reduce the risk of their private savings over time as they age. The returns will thus decrease over time. An institution has no such need of reducing risk over time, because they are diversified in terms of payouts. In a large institution (private or government), people are joining, earning, and retiring continuously.

The comments talking about the large unfunded liabilities of public pensions show the failure of practice over theory.

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Re: Pensions vs personal investing: Pensions win???

Post by Default User BR » Thu Jan 17, 2013 1:39 pm

Pension terms vary. One needs to compare not with investments in retirement but equivalent annuities. At MyMegaCorp, the options for pension (non-COLA) are single payee or spousal (probably includes same-sex partners in state with no marriage). The latter option is a reduced payout while the beneficiary would get a 50% payout until their death. No other beneficiary can be named.

So if I die before I take any benefits, the money goes *poof*. Gone. Nothing to nobody. If I die after retirement, then all I will have is the payouts to that date. If I have an investment, I get the earnings while alive and the residual amount is there for the heirs (or the Four Wheel Drive Museum, that'll teach 'em) to divvy up.

Now, most pensions would require a pretty hefty SPIA to match their returns. For instance, one online site indicates that to match what I would get from MyMegaCorp if I retired right now would take a lump sum of about $580,000. That's substantial.


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Re: Pensions vs personal investing: Pensions win???

Post by dbr » Thu Jan 17, 2013 2:19 pm

At Megacorp the deal when they granted a pension was no lump sums offered and survivor at 0%, 50%, and 100%. The payout at 50% is the same as the payout at 0% as a form of family friendly posturing while the cost for 100% survivor is substantial. Naturally almost anyone evaluating the elections would take the 50% survivor.

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Nosferatu
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Re: Pensions vs personal investing: Pensions win???

Post by Nosferatu » Thu Jan 17, 2013 2:27 pm

Diversify - take the pension and invest in whatever vehicle is offered by your company and a Roth.

Worst case scenario you end up with both a pension and a healthy IRA = more fast boats and faster women.

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Re: Pensions vs personal investing: Pensions win???

Post by Exterous » Thu Jan 17, 2013 3:30 pm

Nosferatu wrote:Diversify - take the pension and invest in whatever vehicle is offered by your company and a Roth.

Worst case scenario you end up with both a pension and a healthy IRA = more fast boats and faster women.
That is what we did. When Michigan revised their pension structure the pension at a 1.25% multiplier was still much better than we could do on the offered 403b alternative. If I remember correctly we would have needed to contribute 7% assuming a 7% return to match what she was getting for a 4% contribution before factoring in her COLA. Given that the future is uncertain we went ahead and put 3% into a 457

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Re: Pensions vs personal investing: Pensions win???

Post by texasdiver » Thu Jan 17, 2013 3:50 pm

One reason why pensions can sometimes get away with higher returns is because there are lots of short-term workers who pay into a pension fund for a few years then move on to other jobs or careers and never qualify to draw. Also people die before reaching retirement or shortly into retirement and draw nothing or next to nothing. So the number of people drawing long-term pensions is always smaller than the number of people who paid in.

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Re: Pensions vs personal investing: Pensions win???

Post by FinancialDave » Thu Jan 17, 2013 4:10 pm

femtoace wrote:When I looked at the arizona state retirement system's plan (https://www.azasrs.gov), it looks like the payout is far higher than a 401a with say a 7% contribution to fidelity. It seems like a no brainer to choose the pension system given the guaranteed 8% (risk free for current contributors?) regardless of the market performance. What I don't understand is how the government will sustain the plan say 25 years down the road. Are there any risks with a pension system or is the pension system clearly the better way to go? And if it is able to beat the market so consistently (the pension system generates approximately 8% return every year which is probably on par with a 100% stock portfolio on a lucky day!), how is it doing that! Are pension systems free lunch?
The answers on this topic are really - "who knows," but let me offer the following:

First the good news -- if you actually end up getting the pension, it is at least one source of guaranteed income that you don't have to worry about. Also as mentioned there is always a case to be made for diversification.

That seems to be about it on the good news, however, signing up for a pension today (this does NOT relate to those close to retirement that have a pension) is akin to taking out an annuity in todays low rate environment in which the 10 year risk free rate is less than 2 %. Those companies, etc, that still have their "heads in the clouds" as far as payouts go, could be ok if rates go up in the near future, BUT they could go the way of a lot of todays companies and states that are cutting the pension payouts. In some cases this happens every 5 or so years during your employment history when you aren't even paying attention because you have so many years to go.

Clearly there are risks that the pension could be cut or LOST completely -- just ask some airline pilots or many different states teachers.

Where does it say that every pension system (or even your pension) is going to generate 8% a year and even if it had in the past - which is entirely possible given the bond market over the last 20 years, this is no guarantee of the future.

I usually encourage signing up for a pension, but not because it is the best return on your money -- it is one of those "other" reasons - you can't spend it! :D

fd
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555
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Re: Pensions vs personal investing: Pensions win???

Post by 555 » Thu Jan 17, 2013 4:10 pm

They set up a choice so it looks like the 401a and the pension have equal contributions going in. But in reality, the pension has gigantic subsidies.

Where I work, when you start you make an irrevocable choice of 401a or pension. You are told that whatever you choose, the employee will contribute 8% of income, and the employer will contribute 5% of income. But what nobody realizes when they make the choice is that the employer contributes another 20% of income, but that 20% goes to the pension fund regardless of if you choose 401a or pension.

So if two workers start at $50k/year, and one chooses 401a and one chooses pension, then $6,500 will go into the 401a, and $26,500 will go into the pension, more than four times as much.

It's as simple as that. The single dominant difference between DC and DB plans is that DB plans have vastly more money poured into them.

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Re: Pensions vs personal investing: Pensions win???

Post by FinancialDave » Thu Jan 17, 2013 4:21 pm

When I looked at your ASRS link to their investments, I was encouraged somewhat that they seem to have no position whatsoever in Bonds, which actually gives me a little more confidence in their long term performance.

This however worries me not in the area of long term viability, but in the area of volatility, which could cause them to be underfunded in the eyes of the state during some particularly down market periods, which we all know do happen.

All in all though I like what I see with the ASRS, so I am more in favor of it now than before -- but I still think you also need diversification.

fd
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Re: Pensions vs personal investing: Pensions win???

Post by ofcmetz » Sun Jan 20, 2013 12:54 pm

texasdiver wrote:One reason why pensions can sometimes get away with higher returns is because there are lots of short-term workers who pay into a pension fund for a few years then move on to other jobs or careers and never qualify to draw. Also people die before reaching retirement or shortly into retirement and draw nothing or next to nothing. So the number of people drawing long-term pensions is always smaller than the number of people who paid in.

I've wondered about this. At my state pension, workers contribute between 7.5% and 9.5% of their pay. The state kicks in the rest which changes yearly and is usually an amount equal to 20% of that workers pay. When workers leave prior to vesting they only receive back their own contributions without any interest. I'm guessing that all those vested workers really benefit from this.
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Re: Pensions vs personal investing: Pensions win???

Post by ofcmetz » Sun Jan 20, 2013 12:59 pm

femtoace wrote:When I looked at the arizona state retirement system's plan (https://www.azasrs.gov), it looks like the payout is far higher than a 401a with say a 7% contribution to fidelity. It seems like a no brainer to choose the pension system given the guaranteed 8% (risk free for current contributors?) regardless of the market performance. What I don't understand is how the government will sustain the plan say 25 years down the road. Are there any risks with a pension system or is the pension system clearly the better way to go? And if it is able to beat the market so consistently (the pension system generates approximately 8% return every year which is probably on par with a 100% stock portfolio on a lucky day!), how is it doing that! Are pension systems free lunch?
The pension is usually the better choice if it seems you will stay long enough to vest or if your contributions will be returned to you with some type of interest.

State pensions expect very high returns from their investments. Many are lowering these expected returns gradually as doing so increases their unfunded liabilities in most cases.

State pensions are not free lunches. If returns are not achieved then either the taxpayer makes up the difference or the pensioner receives less. I think even if we receive less than what is promised we will still come out better with a pension.
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Re: Pensions vs personal investing: Pensions win???

Post by Levett » Sun Jan 20, 2013 1:09 pm

FYI--

June 25, 2012 12:00 am • The Arizona Republic The Arizona Republic(56) Comments
Arizona taxpayers are about to start paying more to prop up four of Arizona's ailing public retirement plans.

The plans continue to suffer such heavy market losses that their values are far below what they owe pensioners over the long term. Increased payments begin July 1.

"The picture is not good," said Jim Hacking of the Public Safety Personnel Retirement System. "And there is not much of anything we can do about it. We can only hope the financial markets start improving."

The bleak outlook comes as the Pew Center on the States, a national organization that seeks ways to make government more effective, last week released a study saying Arizona's state pension systems is underfunded.


The Pew Center said Arizona's management of its long-term liabilities for public pensions was cause for "serious concern." The Pew Center said Arizona's four statewide systems, as of fiscal 2010, faced a $12 billion funding gap. The funding gap is the difference between assets on hand and the amount needed to pay for retirement obligations of those enrolled in the system.

State pension administrators had forecast an increase in contributions by public employers to their trust funds during the coming fiscal year because of stock-market declines dating to 2008. But an overall market decline in the current fiscal year, which ends June 30, means even more money than anticipated likely will be needed over the next few years to help stabilize the public-safety-personnel fund, the Elected Officials' Retirement Plan, the Corrections Officer Retirement Plan and the Arizona State Retirement System, officials said.

Additional contributions are needed to keep the gap from widening. The increase in public-employer contributions forces governments to cut elsewhere or raise taxes.

Ideally, a public-pension trust is 100 percent funded, meaning the current value of assets in the trust is equal to the pension cost calculated for all current and future retirees. Pensions funded at 80 percent or higher are considered healthy.

All of Arizona's pension funds were below that benchmark in 2010, and fell further in 2011, according to records obtained by The Arizona Republic.

The largest system, the Arizona State Retirement System, whose members include teachers and government employees, had the highest funding level at nearly 76 percent as of June 30, 2011
.

Lev

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Re: Pensions vs personal investing: Pensions win???

Post by sscritic » Sun Jan 20, 2013 1:17 pm

ofcmetz wrote:
texasdiver wrote:One reason why pensions can sometimes get away with higher returns is because there are lots of short-term workers who pay into a pension fund for a few years then move on to other jobs or careers and never qualify to draw. Also people die before reaching retirement or shortly into retirement and draw nothing or next to nothing. So the number of people drawing long-term pensions is always smaller than the number of people who paid in.
I've wondered about this. At my state pension, workers contribute between 7.5% and 9.5% of their pay. The state kicks in the rest which changes yearly and is usually an amount equal to 20% of that workers pay. When workers leave prior to vesting they only receive back their own contributions without any interest. I'm guessing that all those vested workers really benefit from this.
I think of vesting as something else. The plan I was in was vested after five years. You could quit and leave your money there and you would get your pension when you got old enough. That's what vested means to me. Now if you quit after vesting and asked for your money back, you got yours back, but not theirs. I think that is what you are describing.

And don't forget death. My wife died 40 days too early. I got hers but not theirs.

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Re: Pensions vs personal investing: Pensions win???

Post by momar » Sun Jan 20, 2013 1:20 pm

ofcmetz wrote:
texasdiver wrote:One reason why pensions can sometimes get away with higher returns is because there are lots of short-term workers who pay into a pension fund for a few years then move on to other jobs or careers and never qualify to draw. Also people die before reaching retirement or shortly into retirement and draw nothing or next to nothing. So the number of people drawing long-term pensions is always smaller than the number of people who paid in.

I've wondered about this. At my state pension, workers contribute between 7.5% and 9.5% of their pay. The state kicks in the rest which changes yearly and is usually an amount equal to 20% of that workers pay. When workers leave prior to vesting they only receive back their own contributions without any interest. I'm guessing that all those vested workers really benefit from this.
Pensions are also more efficient because of the simple fact that if everyone has to save individually, we all have to plan to live far longer than the average person will. So on average we, in theory at least, oversave. Most people won't enjoy a 30+ year retirement, simply because they die.
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Re: Pensions vs personal investing: Pensions win???

Post by 555 » Sun Jan 20, 2013 1:55 pm

momar wrote:"Pensions are also more efficient because of the simple fact that if everyone has to save individually, we all have to plan to live far longer than the average person will. So on average we, in theory at least, oversave. Most people won't enjoy a 30+ year retirement, simply because they die."
That's pretty much a red-herring. Individuals can get annuities. The real difference is that pensions get huge subsidies.

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Re: Pensions vs personal investing: Pensions win???

Post by ofcmetz » Sun Jan 20, 2013 2:16 pm

555 wrote:
momar wrote:"Pensions are also more efficient because of the simple fact that if everyone has to save individually, we all have to plan to live far longer than the average person will. So on average we, in theory at least, oversave. Most people won't enjoy a 30+ year retirement, simply because they die."
That's pretty much a red-herring. Individuals can get annuities. The real difference is that pensions get huge subsidies.
Wouldn't a difference also be that annuities turn a profit for the insurance company where as pensions do not?
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Re: Pensions vs personal investing: Pensions win???

Post by 555 » Sun Jan 20, 2013 2:30 pm

ofcmetz wrote:"Wouldn't a difference also be that annuities turn a profit for the insurance company where as pensions do not?"
That's a valid point. But pension funds can also squander money on management fees.

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Re: Pensions vs personal investing: Pensions win???

Post by nedsaid » Sun Jan 20, 2013 6:17 pm

In normal times, a pension would beat the pants off of personal investing. Early posters summed up the reasons really well.

But now we are seeing these large unfunded liablities in public and private pensions. I am glad that I have very little of my retirement funds tied up in pensions. Could you imaging being retired on a state pension getting lets say $2,100 a month and at some point getting a letter stating that from now on your monthly payment will be $1,500 a month? Remote possibility but looking more likely by the day. I think Illinois is a bit more than 50 percent funded. Wow.

Pensions only look safe because the beneficiaries never see the risks that the pension managers are taking. Golly, how many private pension plans have been taken over by the Federal Government? They don't look so safe to me. The defined contribution plans look risky because the participants make the investment decisions and take the risk themselves. Both are risky. No sure things in investing.
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Re: Pensions vs personal investing: Pensions win???

Post by Valuethinker » Mon Jan 21, 2013 9:40 am

femtoace wrote:When I looked at the arizona state retirement system's plan (https://www.azasrs.gov), it looks like the payout is far higher than a 401a with say a 7% contribution to fidelity. It seems like a no brainer to choose the pension system given the guaranteed 8% (risk free for current contributors?) regardless of the market performance. What I don't understand is how the government will sustain the plan say 25 years down the road. Are there any risks with a pension system or is the pension system clearly the better way to go? And if it is able to beat the market so consistently (the pension system generates approximately 8% return every year which is probably on par with a 100% stock portfolio on a lucky day!), how is it doing that! Are pension systems free lunch?
yes you should join the state system if you can.

Yes the promises are likely too generous and at some point will be cut. This is happening all over the US. The return assumptions used were too generous.

6% would be a reasonable forecast, or 5.0% even, but many states have been using over 7%.

Generally existing benefits accrued are in a better position than future accruals (many states will move to Defined Contribution, for example). However that is apparently not always the case, that existing benefits are protected.

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Re: Pensions vs personal investing: Pensions win???

Post by jmg229 » Mon Jan 21, 2013 11:32 pm

Valuethinker wrote: Generally existing benefits accrued are in a better position than future accruals (many states will move to Defined Contribution, for example). However that is apparently not always the case, that existing benefits are protected.
This is the part that always concerns me and makes me uncomfortable with the idea of a pension. What happens when you plan your whole career for one thing and then it changes at the last minute. My father's plan (NJ) lost COLA shortly before he planned to retire. This is a huge change that he didn't plan for and that uncertainty would make me uncomfortable.

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Re: Pensions vs personal investing: Pensions win???

Post by ofcmetz » Tue Jan 22, 2013 12:09 am

jmg229 wrote:
Valuethinker wrote: Generally existing benefits accrued are in a better position than future accruals (many states will move to Defined Contribution, for example). However that is apparently not always the case, that existing benefits are protected.
This is the part that always concerns me and makes me uncomfortable with the idea of a pension. What happens when you plan your whole career for one thing and then it changes at the last minute. My father's plan (NJ) lost COLA shortly before he planned to retire. This is a huge change that he didn't plan for and that uncertainty would make me uncomfortable.
I work in a 65 officer department where all the employees fall under a state pension that is currently 57% funded. The pension is only based off of these guy's base pay and most them make about 50% or more than their base pay when overtime is included. We aren't part of social security and the pension is all there is unless you choose to participate in the 457B or 403B or both. There is tremendous political pressure in this state to scale back the pensions because of the massive unfunded liabilities. When it comes up in conversation I try to encourage my guys to participate in the 457B or 403B. While I've had some success getting my officers to sign up, most only put in $100 or so a check. If benefits ever get cut these guys will be in trouble. I really like what the Feds are doing instead compared to the state. A combination of a small pension, social security, and the thrift savings plan with a match that encourages people to save some seems to be ideal.
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Re: Pensions vs personal investing: Pensions win???

Post by Grt2bOutdoors » Tue Jan 22, 2013 8:40 am

nedsaid wrote:In normal times, a pension would beat the pants off of personal investing. Early posters summed up the reasons really well.

But now we are seeing these large unfunded liablities in public and private pensions. I am glad that I have very little of my retirement funds tied up in pensions. Could you imaging being retired on a state pension getting lets say $2,100 a month and at some point getting a letter stating that from now on your monthly payment will be $1,500 a month? Remote possibility but looking more likely by the day. I think Illinois is a bit more than 50 percent funded. Wow.

Pensions only look safe because the beneficiaries never see the risks that the pension managers are taking. Golly, how many private pension plans have been taken over by the Federal Government? They don't look so safe to me. The defined contribution plans look risky because the participants make the investment decisions and take the risk themselves. Both are risky. No sure things in investing.
Quite a bit of the underfunding is due to the required contributions not being made into the plan at the agreed upon schedule and poor market returns coupled with untimely increases in wage schedules. That trifecta is what has caused this to shortfall to occur. We know you can only control the amount saved - you can not control market returns, therefore the earlier you contribute the less likelihood you will have a shortfall - compounding can work if given enough time.
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Re: Pensions vs personal investing: Pensions win???

Post by Grt2bOutdoors » Tue Jan 22, 2013 8:41 am

nedsaid wrote:In normal times, a pension would beat the pants off of personal investing. Early posters summed up the reasons really well.

But now we are seeing these large unfunded liablities in public and private pensions. I am glad that I have very little of my retirement funds tied up in pensions. Could you imaging being retired on a state pension getting lets say $2,100 a month and at some point getting a letter stating that from now on your monthly payment will be $1,500 a month? Remote possibility but looking more likely by the day. I think Illinois is a bit more than 50 percent funded. Wow.

Pensions only look safe because the beneficiaries never see the risks that the pension managers are taking. Golly, how many private pension plans have been taken over by the Federal Government? They don't look so safe to me. The defined contribution plans look risky because the participants make the investment decisions and take the risk themselves. Both are risky. No sure things in investing.
Quite a bit of the underfunding is due to the required contributions not being made into the plan at the agreed upon schedule and poor market returns coupled with untimely increases in wage schedules. That trifecta is what has caused this to shortfall to occur. We know you can only control the amount saved - you can not control market returns, therefore the earlier you contribute the less likelihood you will have a shortfall - compounding can work if given enough time.
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Re: Pensions vs personal investing: Pensions win???

Post by sscritic » Tue Jan 22, 2013 8:55 am

Grt2bOutdoors wrote: Quite a bit of the underfunding is due to the required contributions not being made into the plan at the agreed upon schedule and poor market returns coupled with untimely increases in wage schedules. That trifecta is what has caused this to shortfall to occur. We know you can only control the amount saved - you can not control market returns, therefore the earlier you contribute the less likelihood you will have a shortfall - compounding can work if given enough time.
You left out what underlies it all, the promises made. The promises were controllable, but no one wanted to.

Let's start with the promises made when times were flush.
Instead of giving 1.5% per year of service, let's make that 2.0%
Followed, when times got a little tight, by
Instead of pay raises this year, let raise the pension to 2.5% per year of service.

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Re: Pensions vs personal investing: Pensions win???

Post by carolinaman » Tue Jan 22, 2013 9:08 am

Some of these pension funds are so badly underfunded that something will have to give. I know state statutes usually protect pension holders from govts declaring bankruptcy to avoid these obligations, but I do not see how the pensions can pay their obligations long term, especially if (when) we have serious economic downturns.

I receive a pension form the NC state pension fund for local govts (better funded than the NC state pension). It is one of the best govt pension funds but still has serious challenges. Our pension is not indexed to inflation but historically had provided COLAs that kept up with inflation until about 2008. When I retired in 2010, I expected my pension would keep up with inflation. There has not been a COLA since 2008 and I do not expect one in foreseeable future. Any COLA must come from surplus funds as determined by the actuaries. The actuaries have determined there are no surplus funds currently. The actuaries have determined the fund is 99% funded now but there is an accounting change slated for next year that will value obligations differently and will reduce the funding level to 90%. Payments by the local govts have increased by more than 2% in recent years and there is tremendous pressure to reduce or at minimum not increase their contributioons.

In effect, I now view my pension as non-COLA which is very different than what I thought I had and means the purchasing power will seriously erode over time. However, the silver lining in this is that the solvency of our pension is intact and pension holders are highly likely to receive their pensions, albeit without COLAs. I do not see how severely underfunded pensions, some of which have fixed COLAs of 3% to 5% per year which further exacerbates their funding problems, can fully meet their long term obligations.

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Re: Pensions vs personal investing: Pensions win???

Post by mikegerard » Tue Jan 22, 2013 10:25 am

femtoace wrote:What I don't understand is how the government will sustain the plan say 25 years down the road.
It's a good question. Most state governments can only look out one year.

In general I think these are pretty safe...but I would be willing to bet a few months pay that in the next 25 years at least a few 5 states cut back their "guarantees". They simply will not have the money to pay these expenses along with their ongoing expenses. And they can't just print more money like the fed can.

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Re: Pensions vs personal investing: Pensions win???

Post by Grt2bOutdoors » Tue Jan 22, 2013 10:36 am

sscritic wrote:
Grt2bOutdoors wrote: Quite a bit of the underfunding is due to the required contributions not being made into the plan at the agreed upon schedule and poor market returns coupled with untimely increases in wage schedules. That trifecta is what has caused this to shortfall to occur. We know you can only control the amount saved - you can not control market returns, therefore the earlier you contribute the less likelihood you will have a shortfall - compounding can work if given enough time.
You left out what underlies it all, the promises made. The promises were controllable, but no one wanted to.

Let's start with the promises made when times were flush.
Instead of giving 1.5% per year of service, let's make that 2.0%
Followed, when times got a little tight, by
Instead of pay raises this year, let raise the pension to 2.5% per year of service.
What is the value of a promise if not backed by collateral? Nothing.
A possible solution - accept only if collateral is placed in a trust that can not be legally unbound. Culpability lies with both parties - he who giveth and he who taketh away. As with any other contract it relies on two parties to make it work and if one fails to perform, seeking redress is usually the first step to a viable solution. Sitting on one's hands does not help - in other words, this problem needed to be addressed long long ago, it did not just crop up in the last 5 years - turning a blind eye and hoping for the best is not the way to go, especially since those who represent both parties are financially savvy.
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Re: Pensions vs personal investing: Pensions win???

Post by Grt2bOutdoors » Tue Jan 22, 2013 10:42 am

mikegerard wrote:
femtoace wrote:What I don't understand is how the government will sustain the plan say 25 years down the road.
It's a good question. Most state governments can only look out one year.

In general I think these are pretty safe...but I would be willing to bet a few months pay that in the next 25 years at least a few 5 states cut back their "guarantees". They simply will not have the money to pay these expenses along with their ongoing expenses. And they can't just print more money like the fed can.
In terms of budgeting, state governments can only look out one year. However, pension funds are long dated plans and I believe when they project they are accounting for the age of the participants, amount of career service left and life expectancy. A local government is focused on undertaking behaviors that provide the most benefits to its constiutents. A retiree class is a small subset of the greater population at large and although they can institute actions such as voting, it likely will not be enough to override the greater needs of all. The first benefits to go will be healthcare - you can not offer a limitless supply of unknown costs.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Pensions vs personal investing: Pensions win???

Post by tibidabo » Tue Jan 22, 2013 10:44 am

Very interesting listen on public pensions: http://www.econtalk.org/archives/2012/1 ... uh_on.html
The publicly stated shortfall in revenue relative to promised pensions is about $1 trillion. Rauh estimates the number to be over $4 trillion.
Government plans use criminally optimistic assumptions in valuing their liabilities. One of the guy’s main points is that despite widespread fear of ‘social security not being there for me’ at retirement, social security will still be around, though probably reduced and at a later age. Public pensions, on the other hand, might not.

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Re: Pensions vs personal investing: Pensions win???

Post by finley » Wed Jan 23, 2013 9:17 am

mikegerard wrote:
femtoace wrote:What I don't understand is how the government will sustain the plan say 25 years down the road.
It's a good question. Most state governments can only look out one year.

In general I think these are pretty safe...but I would be willing to bet a few months pay that in the next 25 years at least a few 5 states cut back their "guarantees". They simply will not have the money to pay these expenses along with their ongoing expenses. And they can't just print more money like the fed can.

I am enrolled in the SC pension fund and it underwent a major revision within the past year, which took care of many of these issues (hopefully it was enough). It decreased some guarantees, decreased the assumed return from 8% to 7%, increased contributions by the employee 1.5% (6.5->8), increased service years needed for retirement, as well as a few other things. Needless to say, these changes made me more comfortable with the sustainability of the plan.

I am still very early in my career and chose the pension fund as a way to diversify my retirement investing. I planned to live in my current location for a very long time. I still contribute aggressively to other retirement accounts and do not count on the pension fund so hopefully this will lead to a good retirement for me.

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Re: Pensions vs personal investing: Pensions win???

Post by Valuethinker » Wed Jan 23, 2013 9:22 am

jmg229 wrote:
Valuethinker wrote: Generally existing benefits accrued are in a better position than future accruals (many states will move to Defined Contribution, for example). However that is apparently not always the case, that existing benefits are protected.
This is the part that always concerns me and makes me uncomfortable with the idea of a pension. What happens when you plan your whole career for one thing and then it changes at the last minute. My father's plan (NJ) lost COLA shortly before he planned to retire. This is a huge change that he didn't plan for and that uncertainty would make me uncomfortable.
It appears you have llimited legal protection. In the private sector in the USA the PBGC will take it on (with cuts in benefits). In Canada (Nortel, once the largest company) there is no protection. UK there is some.

Public sector it looks highly dependent on the entity providing the pension and economic health even 30-40 years out.

I still say it's generally better to be in the DB pension if it is offered, but I recognize there is this (new) element of risk.

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Re: Pensions vs personal investing: Pensions win???

Post by Bylo Selhi » Wed Jan 23, 2013 4:38 pm

Valuethinker wrote:In Canada (Nortel, once the largest company) there is no protection.
It varies by province, e.g. in Ontario: Pension Benefits Guarantee Fund (PBGF)
provides protection, subject to specific maximums and specific exclusions, to Ontario members and beneficiaries of privately sponsored single-employer defined benefit pension plans in the event of plan sponsor insolvency. The PBGF is governed by the Pension Benefits Act and Regulations, and is administered by the Superintendent of the Financial Services Commission of Ontario.

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