Pensions - Why Isn't Time In the Market a Part of the Formula?

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billy269
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Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by billy269 » Fri Oct 18, 2019 2:14 pm

Something I have wondered a long time. Consider the following scenario:

I am a CalPERS member in my 20s on the 2% at 62 formula. If I work for 5 years at a $50k salary and become vested and leave, and I take my pension at 62, my $ will have been in the pension fund for 30+ years and I receive $5k per year (2%X5 yrs = 10% of highest salary) in retirement. There is no COLA on final salary from 30+ years ago, so what was $50k previously is greatly reduced due to inflation.

However, if I am an employee that starts working at 57 on the same salary, put in 5 years to become vested, and take my pension, my $ will have only been in the pension fund for 5 years and I still receive the same $5k per year as the previous example, and the inflation problem in the other example isn't applicable.

Seems like the young worker is getting the short end of the stick two times over. Am I not understanding something correctly? Why isn't "time in market" a third variable in pension formulas?

DavidW
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by DavidW » Fri Oct 18, 2019 2:22 pm

The intent of the pension is to retain workers and provide a retirement income. The formula works by keeping people and staff don’t leave for another employer.

Some people do what you say and prior to retiring, they return to a Calpers employer and end their career at the higher salary.

MarkRoulo
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by MarkRoulo » Fri Oct 18, 2019 2:26 pm

billy269 wrote:
Fri Oct 18, 2019 2:14 pm
Something I have wondered a long time. Consider the following scenario:

I am a CalPERS member in my 20s on the 2% at 62 formula. If I work for 5 years at a $50k salary and become vested and leave, and I take my pension at 62, my $ will have been in the pension fund for 30+ years and I receive $5k per year (2%X5 yrs = 10% of highest salary) in retirement. There is no COLA on final salary from 30+ years ago, so what was $50k previously is greatly reduced due to inflation.

However, if I am an employee that starts working at 57 on the same salary, put in 5 years to become vested, and take my pension, my $ will have only been in the pension fund for 5 years and I still receive the same $5k per year as the previous example, and the inflation problem in the other example isn't applicable.

Seems like the young worker is getting the short end of the stick two times over. Am I not understanding something correctly? Why isn't "time in market" a third variable in pension formulas?
Before we spend too much time trying to figure out WHY folks with 30 years of service time get the same pension benefits as those with 5, I'd like you to confirm that they DO.

I don't think they do.

The formulas here: https://calpensions.com/2014/07/07/brown-pension-reform-still-has-missing-pieces/ suggest that folks with 30 years of service credits get a lot more than folks with only five years of service credits. There may be nothing to explain.

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billy269
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by billy269 » Fri Oct 18, 2019 2:38 pm

MarkRoulo wrote:
Fri Oct 18, 2019 2:26 pm
billy269 wrote:
Fri Oct 18, 2019 2:14 pm
Something I have wondered a long time. Consider the following scenario:

I am a CalPERS member in my 20s on the 2% at 62 formula. If I work for 5 years at a $50k salary and become vested and leave, and I take my pension at 62, my $ will have been in the pension fund for 30+ years and I receive $5k per year (2%X5 yrs = 10% of highest salary) in retirement. There is no COLA on final salary from 30+ years ago, so what was $50k previously is greatly reduced due to inflation.

However, if I am an employee that starts working at 57 on the same salary, put in 5 years to become vested, and take my pension, my $ will have only been in the pension fund for 5 years and I still receive the same $5k per year as the previous example, and the inflation problem in the other example isn't applicable.

Seems like the young worker is getting the short end of the stick two times over. Am I not understanding something correctly? Why isn't "time in market" a third variable in pension formulas?
Before we spend too much time trying to figure out WHY folks with 30 years of service time get the same pension benefits as those with 5, I'd like you to confirm that they DO.

I don't think they do.

The formulas here: https://calpensions.com/2014/07/07/brown-pension-reform-still-has-missing-pieces/ suggest that folks with 30 years of service credits get a lot more than folks with only five years of service credits. There may be nothing to explain.
Of course people with 30 years of credits get more than those with 5, but in my example both workers have only 5 years of service credit.

welsie
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by welsie » Fri Oct 18, 2019 2:39 pm

Considering how underfunded PERS and STRS are, I don't think you are being short changed. Since your contributions don't fully fund your retirement it is California taxpayers who actually carrying the "time in market" balance forward in time. My city just increased sales taxes by 0.25% just to covers PERS funding shortfalls (apart from a lot of general fund monies that have already been spent on this issue).

So I think you are thinking about this incorrectly, since PERS is not fully funded this is more of a take from Peter to pay Paul scenario where you are funding someone else's retirement with your contributions.

The "time in market" is actuarial wishful thinking which is funded by taxpayers, not you.

By the way, the take from Peter to pay Paul is more obvious when you consider a myriad of changes that have occurred in STRS and PERS in the last decade. STRS was 2% at 60 through 2012, now it is 2% at 62, which included a lot of other changes (going from high 5 to last 3, you can't buy air time anymore, etc.) So in all these instances, the better benefit of previous members are being paid out by current members. It is not like they all paid in extra to retain these benefits, it wasn't fully funded then...it isn't now. The different is who gets what. Unions bargain over a lot of things, new workers pensions are easy to offer up when most of the workers aren't new.

retired@50
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by retired@50 » Fri Oct 18, 2019 5:33 pm

billy269 wrote:
Fri Oct 18, 2019 2:14 pm
Something I have wondered a long time. Consider the following scenario:

I am a CalPERS member in my 20s on the 2% at 62 formula. If I work for 5 years at a $50k salary and become vested and leave, and I take my pension at 62, my $ will have been in the pension fund for 30+ years and I receive $5k per year (2%X5 yrs = 10% of highest salary) in retirement. There is no COLA on final salary from 30+ years ago, so what was $50k previously is greatly reduced due to inflation.

However, if I am an employee that starts working at 57 on the same salary, put in 5 years to become vested, and take my pension, my $ will have only been in the pension fund for 5 years and I still receive the same $5k per year as the previous example, and the inflation problem in the other example isn't applicable.

Seems like the young worker is getting the short end of the stick two times over. Am I not understanding something correctly? Why isn't "time in market" a third variable in pension formulas?
Do young workers who leave have the option to take a lump sum instead of waiting until 62 years old? If so, they should take it and invest it for themselves. I did this when I left a Megacorp job in my early 40s. Regards,

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by Grt2bOutdoors » Fri Oct 18, 2019 5:41 pm

billy269 wrote:
Fri Oct 18, 2019 2:14 pm
Something I have wondered a long time. Consider the following scenario:

Seems like the young worker is getting the short end of the stick two times over. Am I not understanding something correctly? Why isn't "time in market" a third variable in pension formulas?
Pensions are a form of golden handcuffs. Stay in long enough and you collect a larger percentage of final pay, leave early and get the stick.
It's a benefit enticing you to stay. That said "what about if time in the market" was a third variable and what if the market underperforms between the time you leave and the time you take the pension? Are you so willing to risk having less come retirement?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by Stinky » Fri Oct 18, 2019 6:07 pm

Old style defined benefit pensions such as offered by CalPERS were conceived at a time when employees stayed with a single employer for an entire career. They worked well for long-service employees; not so well for short timers.

Most private employers have moved away from DB plans to DC plans like 401(k). These work better for employees who move from job to job during their career. Government employees are among the few who still have DB plans.

OP, I’m sorry, but the situation you have is the way that it is. It may not seem fair to you as a 20-something. But it will be attractive to you if you stay in CalPERS for your entire career.
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by mnnice » Fri Oct 18, 2019 9:44 pm

retired@50 wrote:
Fri Oct 18, 2019 5:33 pm
billy269 wrote:
Fri Oct 18, 2019 2:14 pm
Something I have wondered a long time. Consider the following scenario:

I am a CalPERS member in my 20s on the 2% at 62 formula. If I work for 5 years at a $50k salary and become vested and leave, and I take my pension at 62, my $ will have been in the pension fund for 30+ years and I receive $5k per year (2%X5 yrs = 10% of highest salary) in retirement. There is no COLA on final salary from 30+ years ago, so what was $50k previously is greatly reduced due to inflation.

However, if I am an employee that starts working at 57 on the same salary, put in 5 years to become vested, and take my pension, my $ will have only been in the pension fund for 5 years and I still receive the same $5k per year as the previous example, and the inflation problem in the other example isn't applicable.

Seems like the young worker is getting the short end of the stick two times over. Am I not understanding something correctly? Why isn't "time in market" a third variable in pension formulas?
Do young workers who leave have the option to take a lump sum instead of waiting until 62 years old? If so, they should take it and invest it for themselves. I did this when I left a Megacorp job in my early 40s. Regards,
Except with public pensions you generally only get your contributions back typically half of the balance.

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by Klewles » Sat Oct 19, 2019 3:57 am

billy269 wrote:
Fri Oct 18, 2019 2:14 pm
Do young workers who leave have the option to take a lump sum instead of waiting until 62 years old?
Yes. Or they can leave the lump sum on deposit with CalPERS, up to age 70.5, and earn 6% interest on it (tax deferred). The decision to take the lump sum (plus interest) can be made at any time prior to age 70.5.

The amount of the lump sum is the employEE contributions made during employment, plus interest at 6% annually. EmployER contributions are not included. The employEE contributions that figure into the lump sum are those defined by CalPERS for the specific plan. For recent employees (PEPRA), the CalPERS-defined employEE contribution rate is typically one-half the normal rate of the plan. The actual contribution by an employee may be different as a result of collective bargaining (e.g., the employER may agree to pay some portion of the CalPERS-defined employEE contribution); regardless, it is the CalPERS-defined employEE contribution that figures into the lump sum.

For details, see the CalPERS Refund Election Package.
billy269 wrote:
Fri Oct 18, 2019 2:14 pm
If so, they should take it and invest it for themselves.
Hard to beat 6% interest, tax-deferred. I'd leave it.

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by MathIsMyWayr » Sat Oct 19, 2019 4:26 am

My wild guess about why there are many things unreasonable with pension formulae is that they want to make it simple enough to explain to financially unsophisticated (prospective) employees. They were formulated in the days of pencils and yellow pads. Pensions are unsustainable for long life expectancy and are becoming dinosaurs.

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by strafe » Sat Oct 19, 2019 4:54 am

OP-
You’ve highlighted what I consider to be one of the fundamental problems with traditional defined benefit pensions.

Cash balance pension address this flaw by using a notional account balance and defined rate of return.

Another solution would be to make defined benefit plans portable across employers.

To keep this actionable-- my advice is to explore rollover options if you leave a defined benefit plan early in your career.

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by firebirdparts » Sat Oct 19, 2019 8:13 am

strafe wrote:
Sat Oct 19, 2019 4:54 am
OP-
You’ve highlighted what I consider to be one of the fundamental problems with traditional defined benefit pensions.
It was a feature. If you are an employer, why would you give money away to somebody who’s not working? They’re not crazy.
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F150HD
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by F150HD » Sat Oct 19, 2019 8:21 am

sounds like a pretty good question to me (OP)

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Klewles
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by Klewles » Sun Oct 20, 2019 1:00 am

strafe wrote:
Sat Oct 19, 2019 4:54 am
Cash balance pension address this flaw by using a notional account balance and defined rate of return.
The lump-sum option of CalPERS is essentially a cash-balance plan, with a notional balance (the defined employEE contributions plus interest) and a defined rate of return (6%). But it doesn't result in a pension (annuity), only a lump sum. (See my post above, Sat Oct 19, 2019 1:57 am)
strafe wrote:
Sat Oct 19, 2019 4:54 am
To keep this actionable-- my advice is to explore rollover options if you leave a defined benefit plan early in your career.
Sorry to disagree, but in the OP's case I'd advise the opposite: leave your balance on deposit with CalPERS. First, if you ever take another job with a CalPERS employer, you'll get credit for the years already worked; those will be lost if you withdraw (i.e. rollover) and you'll start the new job with 0 years credit. Second, even if you never take another CalPERS job, 6% fixed rate of return is very good in today's world -- you'd be hard-pressed to do that well in any rollover option. If in the future the return becomes unattractive you can rollover then.

I'd also advise OP to read the CalPERS Refund Election Package before deciding. It's short and to the point.

Caveat that these suggestions are CalPERS-specific and don't necessarily apply to other pension plans.

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by Northern Flicker » Sun Oct 20, 2019 1:29 am

The pension primarily is an employee benefit, not primarily an investment account.
Index fund investor since 1987.

strafe
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by strafe » Sun Oct 20, 2019 4:41 am

firebirdparts wrote:
Sat Oct 19, 2019 8:13 am
strafe wrote:
Sat Oct 19, 2019 4:54 am
OP-
You’ve highlighted what I consider to be one of the fundamental problems with traditional defined benefit pensions.
It was a feature. If you are an employer, why would you give money away to somebody who’s not working? They’re not crazy.
It is crazy. Consider the OP's example.

Employee A - Hired at age 25 - eligible for retirement in 37 years.

Employee B - Hired at age 57 - eligible for retirement in 5 years.

Both do the same job, earn the same income ($50,000/yr), and will be eligible for the same pension benefit ($5k per year, wage base not adjusted for inflation, at age 62) if they leave after 5 years.

The differences are that:
-the present value of the contributions needed to fund Employee A's pension is a fraction of that of Employee B.
-Employee A had the potential to stay for 37 years; Employee B was predictably retiring in 5 years

strafe
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by strafe » Sun Oct 20, 2019 4:53 am

Klewles wrote:
Sun Oct 20, 2019 1:00 am
strafe wrote:
Sat Oct 19, 2019 4:54 am
Cash balance pension address this flaw by using a notional account balance and defined rate of return.
The lump-sum option of CalPERS is essentially a cash-balance plan, with a notional balance (the defined employEE contributions plus interest) and a defined rate of return (6%). But it doesn't result in a pension (annuity), only a lump sum. (See my post above, Sat Oct 19, 2019 1:57 am)
Sort of. This is only a refund of employEE contributions w/ interest.
A cash balance plan includes employER contributions and typically allows for annuitization.

strafe wrote:
Sat Oct 19, 2019 4:54 am
To keep this actionable-- my advice is to explore rollover options if you leave a defined benefit plan early in your career.
Sorry to disagree, but in the OP's case I'd advise the opposite: leave your balance on deposit with CalPERS. First, if you ever take another job with a CalPERS employer, you'll get credit for the years already worked; those will be lost if you withdraw (i.e. rollover) and you'll start the new job with 0 years credit. Second, even if you never take another CalPERS job, 6% fixed rate of return is very good in today's world -- you'd be hard-pressed to do that well in any rollover option. If in the future the return becomes unattractive you can rollover then.

I'd also advise OP to read the CalPERS Refund Election Package before deciding. It's short and to the point.

Caveat that these suggestions are CalPERS-specific and don't necessarily apply to other pension plans.
You missed my point. As with most major decisions in life, it's foolish not to explore one's options to understand the pros/cons of any alternatives. You're laying out exactly the kind of detailed exploration/analysis that is necessary. I think that means you agree with me. :sharebeer

The OP's question was a hypothetical using CalPERS as an example. The caveat bears repeating.

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by mesaverde » Sun Oct 20, 2019 6:17 pm

OP: I'm a teacher and have noticed this as well. If you don't anticipate staying for the long term it isn't such a bad thing. Most likely your contributions to the plan earn interest annually. The interest rate is probably more or less equivalent to the rate of inflation, so you could view the pension contributions as a bond-like portion of your overall portfolio and take on more risk elsewhere in your portfolio.
"Learn from the past, live in the present, plan for the future"

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by Zedon » Sun Oct 20, 2019 7:17 pm

The Pension is the biggest benefit for working for the CA govt along with the health insurance, it's not the pay. They are trying to keep you with them. That money is not the same as putting it in an IRA. I have been with CA for 20 years and think it would be foolish of me to leave at this point. Those first 5 years are where you need to decide if it's for you. Luckily I really like what I do. At 20 years, my lump sum payout would be only $123k. And that would be taxed.

Once I hit my retirement age I will have 30 years and I will get a guaranteed 60% of my last pay for the rest of my life plus some inflationary adjustment. I'll take that over all the rest of my investments combined. Hard to walk away.

What you could do is just come back for a couple of years as you approach retirement and the new pay would lock in for all the time you have with the state. Although that seems like a lot of extra work and planning for a small chunk.

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by rkhusky » Mon Oct 21, 2019 8:43 am

strafe wrote:
Sun Oct 20, 2019 4:41 am
firebirdparts wrote:
Sat Oct 19, 2019 8:13 am
strafe wrote:
Sat Oct 19, 2019 4:54 am
OP-
You’ve highlighted what I consider to be one of the fundamental problems with traditional defined benefit pensions.
It was a feature. If you are an employer, why would you give money away to somebody who’s not working? They’re not crazy.
It is crazy. Consider the OP's example.

Employee A - Hired at age 25 - eligible for retirement in 37 years.

Employee B - Hired at age 57 - eligible for retirement in 5 years.

Both do the same job, earn the same income ($50,000/yr), and will be eligible for the same pension benefit ($5k per year, wage base not adjusted for inflation, at age 62) if they leave after 5 years.

The differences are that:
-the present value of the contributions needed to fund Employee A's pension is a fraction of that of Employee B.
-Employee A had the potential to stay for 37 years; Employee B was predictably retiring in 5 years
OP knows the rules and so can make an informed choice on employment decision. No one is forcing him to remain in the job. The lack of inflation adjustment for the time period between separation and age 62 is not unusual.

FoolMeOnce
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by FoolMeOnce » Mon Oct 21, 2019 9:44 am

rkhusky wrote:
Mon Oct 21, 2019 8:43 am
strafe wrote:
Sun Oct 20, 2019 4:41 am
firebirdparts wrote:
Sat Oct 19, 2019 8:13 am
strafe wrote:
Sat Oct 19, 2019 4:54 am
OP-
You’ve highlighted what I consider to be one of the fundamental problems with traditional defined benefit pensions.
It was a feature. If you are an employer, why would you give money away to somebody who’s not working? They’re not crazy.
It is crazy. Consider the OP's example.

Employee A - Hired at age 25 - eligible for retirement in 37 years.

Employee B - Hired at age 57 - eligible for retirement in 5 years.

Both do the same job, earn the same income ($50,000/yr), and will be eligible for the same pension benefit ($5k per year, wage base not adjusted for inflation, at age 62) if they leave after 5 years.

The differences are that:
-the present value of the contributions needed to fund Employee A's pension is a fraction of that of Employee B.
-Employee A had the potential to stay for 37 years; Employee B was predictably retiring in 5 years
OP knows the rules and so can make an informed choice on employment decision. No one is forcing him to remain in the job. The lack of inflation adjustment for the time period between separation and age 62 is not unusual.
Yep, that's how Illinois' main pension works. No inflation adjustment to final average salary if you leave before retirement eligibility. You can then claim you annuity at age 60 and get annual COL adjustments from there. Staying employed and receiving salary increases is the way to keep up with inflation.

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by rich126 » Mon Oct 21, 2019 10:02 am

Because benefits aren't necessary done for equality, fairness, they are done to hire and retain workers.

Unfortunately most employers have done away with pensions and many other items that would retain any form of loyalty. Where I'm at now they have gotten rid of pensions and also any vestment requirement of 401Ks. From my perspective that just means once I see something better I want to do, I'm out the door. If they want me to stay they need to provide some incentive, unfortunately now, many jobs are rather interchangeable, especially in the tech/defense sector. That is both good and bad but overall I think it is bad, especially for the employer.

I suppose they could change it such that if you leave, you lose it completely? Not sure the legality of that but I think the old federal retirement pension system (CSRS) was like that. People would call it "golden handcuffs" since it was so good (2% per year times # of years) you didn't want to leave but if you did leave, I think you got nothing. And anyplace that gives you 70% of your pay after 35 years is exceptionally rare in today's USA.

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by Stinky » Mon Oct 21, 2019 10:45 am

rich126 wrote:
Mon Oct 21, 2019 10:02 am
Because benefits aren't necessary done for equality, fairness, they are done to hire and retain workers.
Bingo!
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by firebirdparts » Tue Oct 22, 2019 9:11 am

I'll say it again: They're not crazy.
A fool and your money are soon partners

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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by Valuethinker » Tue Oct 22, 2019 10:25 am

rich126 wrote:
Mon Oct 21, 2019 10:02 am
Because benefits aren't necessary done for equality, fairness, they are done to hire and retain workers.

Unfortunately most employers have done away with pensions and many other items that would retain any form of loyalty. Where I'm at now they have gotten rid of pensions and also any vestment requirement of 401Ks. From my perspective that just means once I see something better I want to do, I'm out the door. If they want me to stay they need to provide some incentive, unfortunately now, many jobs are rather interchangeable, especially in the tech/defense sector. That is both good and bad but overall I think it is bad, especially for the employer.

I suppose they could change it such that if you leave, you lose it completely? Not sure the legality of that but I think the old federal retirement pension system (CSRS) was like that. People would call it "golden handcuffs" since it was so good (2% per year times # of years) you didn't want to leave but if you did leave, I think you got nothing. And anyplace that gives you 70% of your pay after 35 years is exceptionally rare in today's USA.
It's worth knowing why the US has an employer provided healthcare model

(this is not unusual. Similar models are used in France, Germany & Switzerland, for example; the British/ Swedish/ Canadian model of a single payer healthcare system is actually rarer. However if you are uninsured by your employer in the former countries, there are government regulated plans that you must join- as I understand the system - so quite similar to a fully implemented ACA).

During WW2 wages were controlled to prevent vital workers being "stolen" by other employers. Also as part of general restrictions on prices & the associated rationing. With something like 19 million (?) men and women in uniform plus 100%+ production rates in critical industries, there were no meaningful labour surpluses.

To attract and retain workers, US employers offered free healthcare, as a benefit not covered by wage restrictions.

In time, it became a key union demand. Part of what unions offered as a benefit of membership was the negotiation of good benefits with employers.

Over to pensions. You can see where this goes? It was another key benefit negotiated by unions.

But Final Salary/ Defined Benefit pension schemes favour long and continuous service and rising pay and seniority. Bad luck if you take years out to raise a family, care for elderly parent or dependent, etc. Broadly that meant it tended to discriminate against women (and, arguably, against minorities less likely to have that sort of long service job (I have not researched that last point)).

The world changed. Companies now are in permanent turmoil, takeover, rationalisation, expansion etc. The pace of business life has just picked up so fast - product cycles for models of cars which once were say 5 years now seem to be closer to 3 years. That's true of most consumer products.

Thus employee tenure in years may be shorter per employer (not sure of the numbers on that).

By contrast many public sector jobs, long tenure of service, experience are important assets. Think more experienced teachers, police, firefighters etc. (there are downsides with this, too, in terms of organisational adaption to changing circumstances, individual motivation etc.).

The 401k seemed to fit that corporate world need better. A world where people drop in and out of the workforce, and are mobile between employers. Giving each employee ownership of their savings, and portability between employers. Unfortunately there have been implementation issues - re cost, diversification, etc. Of course lobbying by various special interest groups affected how the system evolved.

Partly due to human nature, the new benefits system just does not equal the old Final Salary/ Defined Benefit system. People do not value $1 of pension benefit as much as they should - so rather than a system where everyone + employer puts in at least 15% of gross, employer contributions were cut (and even abolished) and employee contributions languish at levels far too low. Australia is an example of a 401k type system that requires a high percentage contribution (by the employer) - mandates it. But even there costs have been too high and there have been other issues, as I understand it.

One solution, applied in Netherlands and UK public sector, is Career Average Salary schemes. This puts less emphasis on your final salary (typically final 3 or 5 years average in USA I believe). Schemes are legally indexed to inflation up to a certain percentage. Moving employers does not cost you, because your entitlement to pension is a fixed percentage of each year's salary (say 2%).

However this would still put risk on the employer - risk of portfolio returns not meeting the financial obligations of the DB scheme - we see with the deficit of the PBGC, and of public sector DB schemes, how big the problem can be (for Final Salary schemes).

So AFAIK it has not really been adopted in the USA.

Another feature of the old DB schemes, which is not mandatory in the USA AFAIK, is survivor pensions. Minimum in law in UK is 50%. Posters have stated here a number of times how they have experience of families where the pension recipient chose 0% survivor benefit, and they are dead, and their spouses are in severe financial trouble. We are all planning to live forever, or die trying, but I can say my father died suddenly and without warning - the 60% survivor pension is of great comfort to my mother.
Last edited by Valuethinker on Tue Oct 22, 2019 10:40 am, edited 2 times in total.

rich126
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by rich126 » Tue Oct 22, 2019 10:38 am

Valuethinker wrote:
Tue Oct 22, 2019 10:25 am


It's worth knowing why the US has an employer provided healthcare model

(this is not unusual. Similar models are used in France, Germany & Switzerland, for example; the British/ Swedish/ Canadian model of a single payer healthcare system is actually rarer. However if you are uninsured by your employer in the former countries, there are government regulated plans that you must join- as I understand the system - so quite similar to a fully implemented ACA).

....
Interesting.

I'm not someone who likes changing jobs since I find it stressful. I need to prove my skills all over again. Usually I either leave within 18 months or stay for 5+ years. However, if companies don't give me any real incentive to stay, then once I decide I don't like the job or can find something better, then there is no reason for me to stay. My current situation requires a year stay due to relocation benefits but after that I'm most likely gone because I realize going back to an old job isn't want I really wanted.

Now if there were stock options, vacation incentives, pension plan/vesting, etc. then maybe I would reconsider but most companies have set up a situation where they don't cultivate any loyalty. Fortunately my skills are such that even in my 50s finding a new job won't be hard, finding the right job may be difficult.

And I've never been the type of person who has gone to any manager and said "Hey I need xyz to stay.". I just watch, observe and then make my decision and give them the letter of resignation. In fact the one thing I've probably have complained the most about would be "I'm bored." I try to be careful there because "boredom != Need to work more than 40 hrs". Boredom to a tech person means they are under utilize and want a challenging job and the freedom to do it.

Unfortunately many large corporations, especially in the defense sector, don't really want highly skilled people, they just want average bodies that will churn the hours and eventually get the job done. The people who can improve things, want to do things faster, I don't think are valued. At least not in my experiences. And I'm not referring people who want to "rock the boat".

Anyhow, sorry, got off topic here!

Valuethinker
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by Valuethinker » Tue Oct 22, 2019 10:44 am

rich126 wrote:
Tue Oct 22, 2019 10:38 am
Valuethinker wrote:
Tue Oct 22, 2019 10:25 am


It's worth knowing why the US has an employer provided healthcare model

(this is not unusual. Similar models are used in France, Germany & Switzerland, for example; the British/ Swedish/ Canadian model of a single payer healthcare system is actually rarer. However if you are uninsured by your employer in the former countries, there are government regulated plans that you must join- as I understand the system - so quite similar to a fully implemented ACA).

....
Interesting.

I'm not someone who likes changing jobs since I find it stressful. I need to prove my skills all over again. Usually I either leave within 18 months or stay for 5+ years. However, if companies don't give me any real incentive to stay, then once I decide I don't like the job or can find something better, then there is no reason for me to stay. My current situation requires a year stay due to relocation benefits but after that I'm most likely gone because I realize going back to an old job isn't want I really wanted.

Now if there were stock options, vacation incentives, pension plan/vesting, etc. then maybe I would reconsider but most companies have set up a situation where they don't cultivate any loyalty. Fortunately my skills are such that even in my 50s finding a new job won't be hard, finding the right job may be difficult.

And I've never been the type of person who has gone to any manager and said "Hey I need xyz to stay.". I just watch, observe and then make my decision and give them the letter of resignation. In fact the one thing I've probably have complained the most about would be "I'm bored." I try to be careful there because "boredom != Need to work more than 40 hrs". Boredom to a tech person means they are under utilize and want a challenging job and the freedom to do it.

Unfortunately many large corporations, especially in the defense sector, don't really want highly skilled people, they just want average bodies that will churn the hours and eventually get the job done. The people who can improve things, want to do things faster, I don't think are valued. At least not in my experiences. And I'm not referring people who want to "rock the boat".

Anyhow, sorry, got off topic here!
The overriding issue for my friends in the USA seems to be the healthcare situation. These are all folks over 50, one has had a condition since teenagerhood. They cannot move employers, easily. One friend stays in the Federal Civil Service for just this reason.

Pensions are a relatively small issue except for those employed by State & Local governments that still have DB schemes. I don't think those in the private sector still do.

Different industries vary in their tendency to want change, disruption, new approaches and employees that will bring the same. A friend of mine works in the space industry - the length of time it takes to get something technically certified for use in space means that the technology really lags the civilian world - if your phone crashes you reboot it, it's very different if you are in the middle of a spacewalk! He has basically supported the same subsystem for 25+ years.

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iceport
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by iceport » Tue Oct 22, 2019 11:21 am

billy269 wrote:
Fri Oct 18, 2019 2:14 pm
Something I have wondered a long time. Consider the following scenario:

I am a CalPERS member in my 20s on the 2% at 62 formula. If I work for 5 years at a $50k salary and become vested and leave, and I take my pension at 62, my $ will have been in the pension fund for 30+ years and I receive $5k per year (2%X5 yrs = 10% of highest salary) in retirement. There is no COLA on final salary from 30+ years ago, so what was $50k previously is greatly reduced due to inflation.

However, if I am an employee that starts working at 57 on the same salary, put in 5 years to become vested, and take my pension, my $ will have only been in the pension fund for 5 years and I still receive the same $5k per year as the previous example, and the inflation problem in the other example isn't applicable.

Seems like the young worker is getting the short end of the stick two times over. Am I not understanding something correctly? Why isn't "time in market" a third variable in pension formulas?
I think you have a common misconception: That a pension *payment* is in some way determined or influenced by a pension *fund* or how it performs. In fact, a pension obligation stands on its own, completely apart from the performance of a pension fund, or even its existence.

As others have noted, pensions are intended to attract and retain talented employees. They need to be recognized as a part of the total compensation package. As such, they are part of the compensation agreement between the employer and employee. For defined benefit pensions, the obligation to pay a pension is wholly independent of the pension fund. In fact, a pension fund isn't even required. Just as wages are paid out of operating budgets, delayed compensation in the form of pension payments could also be paid out of operating budgets. That's not very wise, but it's certainly feasible.

For decades after my state started promising pensions, there was no pension fund. That wasn't very smart, as a pension fund happens to be an extremely effective way to help defray the cost of pension liabilities, given the long time frames involved, both before and after payouts start. But the fact remains that pension promises are legal commitments for services rendered, regardless of the performance — or even the very existence — of a pension fund.

So how long contributions to the pension fund, paid by you or your employer on your behalf, have been in the market is irrelevant. The relevant metric is how long you have been with the employer. That is the primary goal of a pension.
"Discipline matters more than allocation.” ─William Bernstein

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kenyan
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by kenyan » Tue Oct 22, 2019 4:57 pm

The CalPERS/CalSTRS pensions (and many other government-sponsored pensions) are not solvent on their own, and the obligation formulas are not based upon actuarially sound math - at least compared to what could exist in the private sector. They don't need to be, as they have a very large backstop.
Retirement investing is a marathon.

texasdiver
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Re: Pensions - Why Isn't Time In the Market a Part of the Formula?

Post by texasdiver » Wed Oct 23, 2019 11:39 am

What the OP is talking about is a very real issue that I'm acutely aware of as a member of two different pension plans from two previous careers. What happens is that inflation erodes pension benefits before they are obtained. To provide an illustration:

Person A: Works as a teacher from age 25-35 at the average salary of $25,000 and then works in another career for the next 30 years and retires at age 65 with a pension of $25,000 x 2% x 10 years = $5,000 per year.

Person B Works in another career from age 25 -55 and works as a teacher for 10 years from ages 55 -65 at the average salary of $80,000 which is the same salary as person B in real (inflation-adjusted dollars). Person B retires at age 65 with a pension of $80,000 x 2% x 10 years = $16,000.

Two identical teachers both worked for 10 years and earned the same inflation-adjusted teacher salary. One earns a $5,000 a year pension, the other earns a $16,000 a year pension.

The only way to adjust for this is to scrap the average salary calculation in the pension formula and replace it with something like a job classification formula that is the same for everyone: Grade 1 teacher (0-5 years experience, Grade 2 teacher (5-10 years experience) etc. etc. So a year of teaching in 1980 earns the same pension benefit as a year of teaching in 2020.

What this means in real life is that you are much better taking retirement benefits early in your career in the form of individual savings like 401k while you are much better off taking a pension you earn late in life when your salary is high.

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