randomguy wrote: ↑
Thu Dec 06, 2018 8:41 pm
willthrill81 wrote: ↑
Thu Dec 06, 2018 8:32 pm
The problem is that many (most?) pensions were underfunded due to overly optimistic return projections by those running them. The only solutions are to (1) reduce benefits, which may not be feasible, (2) increase current contributions, or (3) both.
The underfunded pensions i am aware of are result of a combo of
a) lack on contributions
b) benefit inflation because returns have been good
not optimistic returns.
B is sort of a freebie for ceos and politications because the cost doesnt show up until they are long gone
There are lots of fun ways to screw this up -
1) Prudence dictates that, if you're going to guarantee something with either the taxpayer or the PBGC as the backstop, you should be conservative when projecting costs for a given level of benefits, eg. assume 75th percentile longevity and 25th percentile returns or something like that. Or, you can lie to yourself or the public about the costs for a given level of benefits by assuming average-or-worse longevity for beneficiaries and average-or-[much-]better returns on investments from the outset.
2) Contracts can be written poorly, either by mistake or on purpose. So make sure there's a way for future beneficiaries to totally invalidate the assumptions baked into your plan with regards to the level of benefits that beneficiaries will receive by 'spiking' overtime over whatever period the salary on which benefits will be based is averaged.
3) Institutional investors have access to index funds with phenomenally low expense ratios from a variety of providers covering more or less all your bases - domestic and international equities, domestic and international nominal bonds, inflation-indexed fixed income securities, real estate, and so on. Eschew this Boglehead nonsense and instead hire some high-priced hedge fund managers to build complex and expensive portfolios that end up under-performing the market.
4) As you mentioned, you can look backward at a recent period of above-historical-average performance and project it forward indefinitely, using this projection to either revise contributions down or revise benefits up; CalPERS [in]famously did this in 1999.
5) During a recession when business income or tax receipts are low, 'raid' the pension fund (either directly with withdrawals or indirectly by omitting or cutting payments into the system).
Extra bonus points: guilt trip the next generation about how 'we' (they) can't break promises 'we' (actually we this time) made years before they were born, if they suggest anything other than 'us' (them) paying extra to make up for the shortfall.