How safe are pensions in the U.S.?

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Afty
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How safe are pensions in the U.S.?

Post by Afty » Thu Jun 13, 2019 1:25 am

I read a lot of articles about pensions failing, benefits getting cut, etc. But my understanding is that most pensions are guaranteed by the PBGC, so participants generally won’t lose their promised benefits if the company goes bankrupt or can’t meet their obligations. I am not sure about benefits getting cut and whether that is legal or happens in practice.

How risky are pensions really? It would seem to me that they are much less risky than defined contribution retirement plans, but that does not seem to be the popular opinion.

ShowMeTheER
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Re: How safe are pensions in the U.S.?

Post by ShowMeTheER » Thu Jun 13, 2019 5:00 am

Extremely safe, as far as what has already been earned/accrued. In fact, it is illegal in most cases to cut accrued benefits. Reductions to future accruals can/do take place but most often it’s misunderstood or misreported as ‘took my pension away’.

PBGC protection applies in most private sector situations and will protect pensions (up to a certain level). The cap usually only impacts relatively rich plans/participants, so it’s not a realistic concern to the vast majority.

The financial risk to the company/entity that sponsors... yes that is a bumpy ride. Most participants should simply be concerned with significant future cuts and/or freeze.

yousha
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Re: How safe are pensions in the U.S.?

Post by yousha » Thu Jun 13, 2019 5:07 am

Not too safe in California.

cherijoh
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Re: How safe are pensions in the U.S.?

Post by cherijoh » Thu Jun 13, 2019 5:56 am

Afty wrote:
Thu Jun 13, 2019 1:25 am
I read a lot of articles about pensions failing, benefits getting cut, etc. But my understanding is that most pensions are guaranteed by the PBGC, so participants generally won’t lose their promised benefits if the company goes bankrupt or can’t meet their obligations. I am not sure about benefits getting cut and whether that is legal or happens in practice.

How risky are pensions really? It would seem to me that they are much less risky than defined contribution retirement plans, but that does not seem to be the popular opinion.
Only private sector pensions are protected by PBGC. These plans are divided into single- and multi-company plans. Multi-company plans are mostly the result of collective bargaining (e.g., United Auto Workers, airline pilots union, etc). The single company pension guarantee fund is the healthiest, so only highly compensated employees whose pensions exceed the maximum benefit (based on age) would likely take a haircut on their benefit if their company went bankrupt. The multi-company fund is on shakier ground due to the number of high profile bankruptcies in certain industries.

Public sector pensions are not protected by PBGC. Their relative security varies widely, depending on the location and whether it is a city, county, or state pension. There are several examples of places where promises outstrip the localities ability to pay since they can only raise taxes so far. Detroit springs to mind, as does California since CALPERS got in trouble back in the Great Recession. But this varies a lot by location. The NC public pension fund was recently ranked 3rd strongest in the country at 93.9% funding which compares favorably with many private company pension's funding rates.

Another consideration is that there is no guarantee that a company will keep its pension plan until you are ready to retire. Lots of healthy companies are doing this and switching to a company contribution to the 401k plan which doesn't require an employee contribution (i.e., separate from company match).

A company is required to pay employees their accrued benefits but can freeze the pension at any time. (This is equivalent to what happens if you leave a company after being vested in the pension but before you retire). You are entitled to draw a pension in the future based on your years of service and salary at the time the pension gets frozen (for defined benefit plans) or you no longer add salary credits (but still accrue interest credits) on a Cash Balance pension.

That's why when I see someone who is in their 30's post that they will receive a $100K pension benefit, I caution them to not count their chickens before they hatch. DB pensions in particular gain most of their value in the employee's later years of service.

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jeffyscott
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Re: How safe are pensions in the U.S.?

Post by jeffyscott » Thu Jun 13, 2019 6:51 am

cherijoh wrote:
Thu Jun 13, 2019 5:56 am
Public sector pensions are not protected by PBGC. Their relative security varies widely, depending on the location and whether it is a city, county, or state pension. There are several examples of places where promises outstrip the localities ability to pay since they can only raise taxes so far. Detroit springs to mind, as does California since CALPERS got in trouble back in the Great Recession. But this varies a lot by location. The NC public pension fund was recently ranked 3rd strongest in the country at 93.9% funding which compares favorably with many private company pension's funding rates.
In addition to the localities "ability to pay", which as you indicate is really their ability to tax, there may be differences in the ability to not pay. Detroit as a city was able to go through bankruptcy, my understanding is a state can not do that or there is some question as to whether or not they can. Of course, the Federal government has an unlimited ability to pay, as it can create money at will, and probably about 0 ability to not pay.

From news reports, in Detroit the outcome for retirees was pensions cut by 4.5 percent, elimination of future cost-of-living adjustments and higher health-care expenses.

There may be differing levels of protection for state and local. I understand Illinois, while being the worst or among the worst funded, has constitutional protections. But then I think most state constitutions are far easier to change than the Federal constitution. Illinois is apparently already on their way to changing their constitutional flat income tax requirement. Some future change in political/popular will in that state could result in changes to pensions and/or other retiree benefits.
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cherijoh
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Re: How safe are pensions in the U.S.?

Post by cherijoh » Thu Jun 13, 2019 8:19 am

jeffyscott wrote:
Thu Jun 13, 2019 6:51 am
cherijoh wrote:
Thu Jun 13, 2019 5:56 am
Public sector pensions are not protected by PBGC. Their relative security varies widely, depending on the location and whether it is a city, county, or state pension. There are several examples of places where promises outstrip the localities ability to pay since they can only raise taxes so far. Detroit springs to mind, as does California since CALPERS got in trouble back in the Great Recession. But this varies a lot by location. The NC public pension fund was recently ranked 3rd strongest in the country at 93.9% funding which compares favorably with many private company pension's funding rates.
In addition to the localities "ability to pay", which as you indicate is really their ability to tax, there may be differences in the ability to not pay. Detroit as a city was able to go through bankruptcy, my understanding is a state can not do that or there is some question as to whether or not they can. Of course, the Federal government has an unlimited ability to pay, as it can create money at will, and probably about 0 ability to not pay.

From news reports, in Detroit the outcome for retirees was pensions cut by 4.5 percent, elimination of future cost-of-living adjustments and higher health-care expenses.

There may be differing levels of protection for state and local. I understand Illinois, while being the worst or among the worst funded, has constitutional protections. But then I think most state constitutions are far easier to change than the Federal constitution. Illinois is apparently already on their way to changing their constitutional flat income tax requirement. Some future change in political/popular will in that state could result in changes to pensions and/or other retiree benefits.
Good points.

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Stinky
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Re: How safe are pensions in the U.S.?

Post by Stinky » Thu Jun 13, 2019 9:54 am

cherijoh wrote:
Thu Jun 13, 2019 5:56 am

Another consideration is that there is no guarantee that a company will keep its pension plan until you are ready to retire. Lots of healthy companies are doing this and switching to a company contribution to the 401k plan which doesn't require an employee contribution (i.e., separate from company match).
This is one of the biggest “risks” in defined benefit pension plans. When I entered the business about 45 years ago, almost all employers in my industry offered a traditional defined benefit plan. Now, almost none do. My employer stopped the DB plan for new employees about 15 years ago.

I expect that few of the folks entering the work force today will still be accruing DB plan benefits when they retire. Maybe some government employees, but almost no private sector folks.
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Valuethinker
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Re: How safe are pensions in the U.S.?

Post by Valuethinker » Thu Jun 13, 2019 10:14 am

Afty wrote:
Thu Jun 13, 2019 1:25 am
I read a lot of articles about pensions failing, benefits getting cut, etc. But my understanding is that most pensions are guaranteed by the PBGC, so participants generally won’t lose their promised benefits if the company goes bankrupt or can’t meet their obligations. I am not sure about benefits getting cut and whether that is legal or happens in practice.

How risky are pensions really? It would seem to me that they are much less risky than defined contribution retirement plans, but that does not seem to be the popular opinion.
This is the overall position as I understand it (not being US based):

1. Private sector pensions that fall under PBGC (single employer) are reasonably safe EXCEPT

- the PBGC is running a deficit and AFAIK US Congress has not made any moves to address that (but in principle the deficit is not so large that it cannot be addressed/ tweaked)
- there are significant benefit cuts for the more highly paid if your scheme is taken over - airline pilots are particular aggrieved I believe

2. Those under the PBGC multi-employer scheme are facing a significant fiscal crisis. The PBGC website warns you of that. You might want to speak to your Union representative (if appropriate) or Congressional representative's office.

3. If you have a Defined Benefit scheme with an employer it may well be converted into a "Cash Balance Plan". I am not clear about the consequences of this but if that's a risk you should find out about the consequences.

4. US Federal Government employee pensions are fairly secure, AFAIK.

5. US state and local government pensions are under varying degrees of threat. Don't assume your benefits will continue without any change or amendment, based on recent defaults & renegotiations.

megabad
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Re: How safe are pensions in the U.S.?

Post by megabad » Thu Jun 13, 2019 1:19 pm

Afty wrote:
Thu Jun 13, 2019 1:25 am
I read a lot of articles about pensions failing, benefits getting cut, etc. But my understanding is that most pensions are guaranteed by the PBGC, so participants generally won’t lose their promised benefits if the company goes bankrupt or can’t meet their obligations.
Just to be clear here--this is not true. PBGC does not in any way guarantee that you will receive your "promised" benefits. In fact, plans taken over by PBGC usually receive major cuts to benefits for many participants (but not all).
Afty wrote:
Thu Jun 13, 2019 1:25 am
I am not sure about benefits getting cut and whether that is legal or happens in practice.
Google is your friend here. This happens very regularly in various capacities.
Afty wrote:
Thu Jun 13, 2019 1:25 am
How risky are pensions really? It would seem to me that they are much less risky than defined contribution retirement plans, but that does not seem to be the popular opinion.
Typically, I would say that the holdings of most pension funds are significantly riskier than any index fund portfolio I would design inside of a qualified retirement plan. However, since pensions are potentially backed by the provider, the risk is almost entirely dependent on the economics and politics of the provider.

On a scale from most safe to least safe:
1) FERS federal pension
2) States w/pensions >90% funded
3) States w/pensions >70% funded AND economic growth
4) Other state pensions
5) PBGC backed pensions
6) other private pensions

I would value options 4,5, and 6 at zero in all my retirement projections if I was less than 50. If I was 70, I would value them all fully.

Bobby206
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Re: How safe are pensions in the U.S.?

Post by Bobby206 » Thu Jun 13, 2019 1:29 pm

I'd guess all pensions will eventually get cut. Also social security. Hopefully it's just small trims to all rather than major cuts. Just a guess.

cherijoh
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Re: How safe are pensions in the U.S.?

Post by cherijoh » Thu Jun 13, 2019 2:34 pm

Valuethinker wrote:
Thu Jun 13, 2019 10:14 am
Afty wrote:
Thu Jun 13, 2019 1:25 am
This is the overall position as I understand it (not being US based):

1. Private sector pensions that fall under PBGC (single employer) are reasonably safe EXCEPT

- the PBGC is running a deficit and AFAIK US Congress has not made any moves to address that (but in principle the deficit is not so large that it cannot be addressed/ tweaked)
- there are significant benefit cuts for the more highly paid if your scheme is taken over - airline pilots are particular aggrieved I believe <-- Yes, airline pilots who worked for airlines that went bankrupt face a triple whammy:
  • They are in a multi-employer plan which is on shakier ground (as you note below)
  • They are highly compensated
  • They are required to retire at an early age and PBGC penalizes the benefit based on how early you start drawing it


2. Those under the PBGC multi-employer scheme are facing a significant fiscal crisis. The PBGC website warns you of that. You might want to speak to your Union representative (if appropriate) or Congressional representative's office.

3. If you have a Defined Benefit scheme with an employer it may well be converted into a "Cash Balance Plan". I am not clear about the consequences of this but if that's a risk you should find out about the consequences. <-- ERISA doesn't allow you to lose accrued pension benefits, but most of the benefit accrual for DB pensions occur in the last few years before retirement (because of the way the benefit is calculated using years of service and salary). For Cash Balance plans you get x% of salary each year and then earnings credits based on some treasury rate, so pensions increase in a more straight line fashion - so older workers lose out. Cash balance plans are portable (like 401-k plans), so younger job hoppers get an advantage.

4. US Federal Government employee pensions are fairly secure, AFAIK. <-- Yes; Federal pensions were modified sometime in the 80s(?) to move from Civil Service to FERS; retirees under FERS get a smaller pension, but get matching on their contributions to TSP.

5. US state and local government pensions are under varying degrees of threat. Don't assume your benefits will continue without any change or amendment, based on recent defaults & renegotiations.

ZLMARK
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Re: How safe are pensions in the U.S.?

Post by ZLMARK » Thu Jun 13, 2019 3:32 pm

Pensions USA. Pretty bad shape. Here in Colorado, PERA is 60% funded. California's CALPERS the same, approx. 60% funded.
In the PBS piece I'm providing watch Kentucky-13% funded. Many other states are in trouble also. PERA and CALPERS hand
out some extremely generous pensions. The ticket $100k if you are a fireman in California??? Nothing like Social Security.
If you have a pension and it is solvent be thankful!

https://www.youtube.com/watch?v=MDhUc59YUy0

Broken Man 1999
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Re: How safe are pensions in the U.S.?

Post by Broken Man 1999 » Thu Jun 13, 2019 4:27 pm

Some state pension plans are moving to 401k plans for new employees, rather than defined benefit plans. Going forward they will have a better handle on their pension plan expenses.

State, county, municipal workers will over time see their pensions change, or possibly even be discontinued, shades of corporate America.

Broken Man 1999
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Watty
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Re: How safe are pensions in the U.S.?

Post by Watty » Thu Jun 13, 2019 4:52 pm

One thing that has not been mentioned is that even if things work out OK with the pension and it pays out as promised if it is not fully adjusted for inflation then that can quickly drop in value.

During the high inflation years between 1975 and 1985 the value of a dollar dropped by about 50%.

ychuck46
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Re: How safe are pensions in the U.S.?

Post by ychuck46 » Thu Jun 13, 2019 4:54 pm

As far as corporate pensions go, how much do you trust CEOs and companies to keep their promises? That's what I thought.

And while some states such as IL have been atrocious at funding their public pensions, preferring to spend any $ earmarked for that on more "deserving" people, others such as NY (surprisingly) have done a good job at funding that portion of their liabilities. Bottom line, you are better rolling the dice with a public pension than you are with private.

SovereignInvestor
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Re: How safe are pensions in the U.S.?

Post by SovereignInvestor » Thu Jun 13, 2019 5:58 pm

Single employer corporate pensions are the safest of private ones.

There are 4 main types

1) Single employer plan (SEP)
2) Multi employer plan (MEP)
3) state or local government
4) Federal

Federal are bulletproof. 

For SEP plan ERISA and Pension protection act force employers to discount liabilities at conservative A-Rated bond rate which is in the 4% range now. Any shortfall must be amortized over a period of time, I think 7 years. If the funding percentage using that conservative target dips below 80% the plan cannot expand benefits and below 60% it must freeze. These are also back stopped by PBGC up to about 60K or half the HCE threshhold. These are usually safe and that's why they've been eliminated since full funding them is expensive!  IMO it doesn't really make sense for a non financial company to.be in the business of taking on massive investment and longevity risk, insurance companies are better suited for this.  Hence switch to.401ks...and if employees want guaranteed income then annuities come in.

Also many pensions were written in the 1980s or so. To get the 8-9% return to fund the plan and make it affordable employers could just buy treasurys with no risk. Since mid 1990s when interest rates plunged many had to take a lot of equity risk to.get the 8-9% returns. Then two crashes of stocks in 2000-02 and 2008 caused them to moss their return targets.

But most comments on here suggest over 8% stock returns is way too high. Vanguard forecasts in the 5% range. The A rated long corporates are barely 3.5%. When a fund has half in bonds aND assumes 7.5%/ year total returns (many plans Stull use 8%) that is just way too high. 4-5% would be more realistic based in vanguard forecasts.

MEPs are very shaky.  There is no such regulations for rate of.return and the average plan uses a ridiculous 7.5% or so expected rate of return to discount liabilities.

This IMO is borderline fraudulent because they typically are 50/50 stocks and bonds.  With most bonds barely yielding 3% and average expense fee ratio of investments of about 30 bps or so.  These 7.5% return assumptions bank on stocks returning about 13% annually which has never happened over any long term period like 30 years. Using 9% long term returns historically which many think are high one would expected 5-6% or so returns. This is why these plans are never funded bevause they assume they will earn more and when they keep missing the target the funding never gets to 100% like it should.

These MEP plans are so shaky there are active bailouts lobbied for in Congress such as Butch Lewis bill.

MEP are plagued by some having certain employers go bankrupt so old liabilities from failed companies are.placed on new companies sometimes. 

These are only guaranteed by PBGC up to around 12K I think and even that is running out of money.  Many people have seen massive cuts hence asking for bailouts.

There is issue to bail these out because then current members in unions can ask for massive raises in benefits in lieu of more cash wages and employers can grant them and never fund them knowing they'd be bailed out. Morale hazard to the extreme. Some of the reform bill proposals involve tightening funding requirements but that would make many more insolvent. If shaky employers have to raise contributions then it may bankrupt them which hurts everyone.

Local and state ones ones have same issue as MEP but they are more stable with bjgger revenue base from taxpayers.  They use unrealistic 7%+ expected returns to discount which won't happen so they tend to be underfunded.  But most states have benefits enshrined as protected in state constitution so they can't be cut unless in bankruptcy.


The reason why single employer "corporate" plans have been frozen and eliminate to.new employees is because they are very expensive because they are most honest about the true cost.

The government and MEP ones are using unrealistically high assumptions of 7%+ returns which makes them require less contributions and then when the return isn't hit (unless stocks return like 13%/year indefinitely) the funding will come in worse and there will be a "crisis".

Single employers can't fudge the numbers with unrealistically high returns so they'd have to put in so much money it's unaffordable.


Ie: if one uses a 4% return assumption and wants to give.employee 50% salary at 65 the single employer may need to fund on average 20% of employee salary every year of work.  If they use 7% assumption they may only need to.fund it with 10% of salary.  These are fake numbers but convey the incentive to overstate returns.

Local governments are definitionally dramatically understating the cost of employer benefit when they overstate the returns. There is incentives for everyone to do.this unforrunately as taxpayes are.told they're affordable, pensioners know the future taxpayers will cover any shortfall and since this makes funding cost low they can ask for more benefits, and politicians love this bevause it makes benefit appear cheaper and then any shortfall hits when they're out of office. This is why the crisis is so big...there's huge incentive for everyone to not fund plan and be too optimistic short of government regulations like on ERISA SEP plans.


I worked as pension valuation analyst for brief period years ago. I hope people find this actionable..if someone is.relying on a MEP plan, short of.bailouts they are very shaky and many plans have seen benefits cut even to retirees in last few years after Treasury department authorized more flexibility to do.so.in 2014. Even if they show decent funding it is only as good as the assumptions behind it.


SEP plans are generally safe and have good backstop from PBGC. Local government plans good unless bankruptcy is risk. Federal is as safe as US credit.
Last edited by SovereignInvestor on Thu Jun 13, 2019 6:30 pm, edited 5 times in total.

anonenigma
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Re: How safe are pensions in the U.S.?

Post by anonenigma » Thu Jun 13, 2019 6:02 pm

yousha wrote:
Thu Jun 13, 2019 5:07 am
Not too safe in California.
On what basis do you make this statement?

Moderators? Speculation and politics here. Not actionable.

sport
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Re: How safe are pensions in the U.S.?

Post by sport » Thu Jun 13, 2019 6:06 pm

There was just a Frontline program on PBS called "The Pension Gamble". It is worth watching. They concentrated on the public pensions in Kentucky. It was not a pretty story.

SovereignInvestor
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Re: How safe are pensions in the U.S.?

Post by SovereignInvestor » Thu Jun 13, 2019 6:07 pm

CALPERS has a funding ratio below 71% so it is not that safe. But better than many.

https://capitolweekly.net/forget-naysay ... unds-fine/

NJ funding ratio is in the 30% range.

The funding ratio uses the expected rate of return. The alarming thing is when you see a low funding ratio for a state like NJ, that is assuming they hit the 7% or so rate or return target. If they hit it, then they'd on lly have about 30% of the money to.cover benefits. If stocks don't go up 11% per year and they only get say 5% return in long run, then the true funding is less.than 30%.

Can't just use funding ratios.in isolation, they are only as good as the return assumptions behind them.

If every plan assumes 20% annual investment returns not a single.one would be underfunded.

If they all wanted to be risk free and assumed 2.7% returns like 30 Year treasury yield it's likely a majority of states would be below 50% funded.

wtjbatman
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Re: How safe are pensions in the U.S.?

Post by wtjbatman » Thu Jun 13, 2019 6:42 pm

As a LEO I participate in Missouri's state pension, and they recently announced it is 95.6% funded. But I suppose it just depends on where you live and what type of pension you are participating in!

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fortfun
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Re: How safe are pensions in the U.S.?

Post by fortfun » Thu Jun 13, 2019 6:49 pm

Afty wrote:
Thu Jun 13, 2019 1:25 am
I read a lot of articles about pensions failing, benefits getting cut, etc. But my understanding is that most pensions are guaranteed by the PBGC, so participants generally won’t lose their promised benefits if the company goes bankrupt or can’t meet their obligations. I am not sure about benefits getting cut and whether that is legal or happens in practice.

How risky are pensions really? It would seem to me that they are much less risky than defined contribution retirement plans, but that does not seem to be the popular opinion.
Many are underfunded but have made corrections. Colorado is well underfunded but we are only at risk of losing our COLA. It has already dropped from 3% to 1.5% Sadly, new employees will be paying the price to keep the current retirees payed (many more years of service and higher contributions).

fposte
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Re: How safe are pensions in the U.S.?

Post by fposte » Thu Jun 13, 2019 7:00 pm

Illinois, which is trapped between the rock of a very underfunded pension and the hard place of state constitutional protection, is doing new kinds of buyout offers. I'm eligible for a partial one--trade my 3% compounded annual COLA for a lump sum (it was about 25% of my current total lump sum value) plus COLA of 1.5%, no compounding, every year. Haven't crunched the numbers yet.

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Stinky
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Re: How safe are pensions in the U.S.?

Post by Stinky » Thu Jun 13, 2019 9:31 pm

fposte wrote:
Thu Jun 13, 2019 7:00 pm
Illinois, which is trapped between the rock of a very underfunded pension and the hard place of state constitutional protection, is doing new kinds of buyout offers. I'm eligible for a partial one--trade my 3% compounded annual COLA for a lump sum (it was about 25% of my current total lump sum value) plus COLA of 1.5%, no compounding, every year. Haven't crunched the numbers yet.
Your situation brings to mind the old saying, “A bird in the hand is worth two in the bush.”

You have a tough decision. Let us know what you decide.
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WS1
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Re: How safe are pensions in the U.S.?

Post by WS1 » Thu Jun 13, 2019 10:00 pm

Watty wrote:
Thu Jun 13, 2019 4:52 pm
One thing that has not been mentioned is that even if things work out OK with the pension and it pays out as promised if it is not fully adjusted for inflation then that can quickly drop in value.

During the high inflation years between 1975 and 1985 the value of a dollar dropped by about 50%.
For real. I work for a “good state” and not only do I have to wait 5 years for my first COLA but the adjustment is only half the CPI with a max increase of 2%

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JoMoney
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Re: How safe are pensions in the U.S.?

Post by JoMoney » Thu Jun 13, 2019 10:01 pm

Afty wrote:
Thu Jun 13, 2019 1:25 am
... How risky are pensions really? It would seem to me that they are much less risky than defined contribution retirement plans, but that does not seem to be the popular opinion.
It depends.
At risk of what, to who? Defined contribution plans were a great way to transfer the risk from the company onto the employees.
A defined contribution plan/401k's money is held in trust for the beneficiary separate from the assets of the company, can be withdrawn or rolled over to another account, and bequeathed to someone else if/when they pass on. The funds are at risk from economic factors, but so are those in defined benefit plans (there's just a veil between the beneficiary and the counterparty paying them).
Without specifics, it would be extremely hard to compare the investment risks of an under-funded pension using over-paid active hedge fund style management relative to someone that had super-funded their 401k with a liability matched TIPS ladder.
Defined contribution plans are prone to being mis-managed, people not saving enough, cashing them out early, etc...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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catdude
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Re: How safe are pensions in the U.S.?

Post by catdude » Fri Jun 14, 2019 12:51 am

Here's a good resource for keeping tabs on pensions...

http://www.pensiontsunami.com
catdude | | "Only in America." (Yogi Berra, after being told that the mayor of Catholic Dublin was Jewish)

finite_difference
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Re: How safe are pensions in the U.S.?

Post by finite_difference » Fri Jun 14, 2019 7:07 am

cherijoh wrote:
Thu Jun 13, 2019 8:19 am
jeffyscott wrote:
Thu Jun 13, 2019 6:51 am
cherijoh wrote:
Thu Jun 13, 2019 5:56 am
Public sector pensions are not protected by PBGC. Their relative security varies widely, depending on the location and whether it is a city, county, or state pension. There are several examples of places where promises outstrip the localities ability to pay since they can only raise taxes so far. Detroit springs to mind, as does California since CALPERS got in trouble back in the Great Recession. But this varies a lot by location. The NC public pension fund was recently ranked 3rd strongest in the country at 93.9% funding which compares favorably with many private company pension's funding rates.
In addition to the localities "ability to pay", which as you indicate is really their ability to tax, there may be differences in the ability to not pay. Detroit as a city was able to go through bankruptcy, my understanding is a state can not do that or there is some question as to whether or not they can. Of course, the Federal government has an unlimited ability to pay, as it can create money at will, and probably about 0 ability to not pay.

From news reports, in Detroit the outcome for retirees was pensions cut by 4.5 percent, elimination of future cost-of-living adjustments and higher health-care expenses.

There may be differing levels of protection for state and local. I understand Illinois, while being the worst or among the worst funded, has constitutional protections. But then I think most state constitutions are far easier to change than the Federal constitution. Illinois is apparently already on their way to changing their constitutional flat income tax requirement. Some future change in political/popular will in that state could result in changes to pensions and/or other retiree benefits.
Good points.
The US Federal government does not have completely unlimited ability to pay. Printing money causes inflation. Nations have had to decrease their pension benefits.

However, I would argue the US Federal government has been prudent with its pensions; some US states have not.

If only Bogle had fixed our pension system as well!
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

cheezit
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Re: How safe are pensions in the U.S.?

Post by cheezit » Fri Jun 14, 2019 9:40 am

anonenigma wrote:
Thu Jun 13, 2019 6:02 pm
yousha wrote:
Thu Jun 13, 2019 5:07 am
Not too safe in California.
On what basis do you make this statement?

Moderators? Speculation and politics here. Not actionable.

Cuts to public employee pensions in California have already happened and continue to happen, typically in the form of a haircut when insolvent municipalities or joint powers authorities stop making payments and CALPERS takes over the plan. The East San Gabriel consortium is the most recent example that comes to mind; part of the reduction in benefits was later walked back, but it was still a ~60% haircut!

Additionally, calling this non-actionable is simply wrong. The action for the prospective retiree to take is to reduce their reliance on their future pension benefits to fund their retirement, for instance by increasing their savings rate outside of the pension.

SovereignInvestor
Posts: 372
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Re: How safe are pensions in the U.S.?

Post by SovereignInvestor » Fri Jun 14, 2019 2:33 pm

The underlying theme here is to be conservative with ones expectation of returns.

The pensions funds generally are using 7%-8% expected returns which are higher than junk bond yields. Aren't the pensions supposed to be "risk free" for retirees?

The pension system is the complete opppsote of BH style.

US Federal government has unlimited ability to pay. It owns it's own currency.

The US has ran the biggest deficits this past decade in history and interest rates are the lowest ever.

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aspirit
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Re: How safe are pensions in the U.S.?

Post by aspirit » Fri Jun 14, 2019 5:02 pm

finite_difference wrote:
Fri Jun 14, 2019 7:07 am
cherijoh wrote:
Thu Jun 13, 2019 8:19 am
jeffyscott wrote:
Thu Jun 13, 2019 6:51 am
cherijoh wrote:
Thu Jun 13, 2019 5:56 am
Public sector pensions are not protected by PBGC. Their relative security varies widely, depending on the location and whether it is a city, county, or state pension. There are several examples of places where promises outstrip the localities ability to pay since they can only raise taxes so far. Detroit springs to mind, as does California since CALPERS got in trouble back in the Great Recession. But this varies a lot by location. The NC public pension fund was recently ranked 3rd strongest in the country at 93.9% funding which compares favorably with many private company pension's funding rates.
In addition to the localities "ability to pay", which as you indicate is really their ability to tax, there may be differences in the ability to not pay. Detroit as a city was able to go through bankruptcy, my understanding is a state can not do that or there is some question as to whether or not they can. Of course, the Federal government has an unlimited ability to pay, as it can create money at will, and probably about 0 ability to not pay.

From news reports, in Detroit the outcome for retirees was pensions cut by 4.5 percent, elimination of future cost-of-living adjustments and higher health-care expenses.

There may be differing levels of protection for state and local. I understand Illinois, while being the worst or among the worst funded, has constitutional protections. But then I think most state constitutions are far easier to change than the Federal constitution. Illinois is apparently already on their way to changing their constitutional flat income tax requirement. Some future change in political/popular will in that state could result in changes to pensions and/or other retiree benefits.
Good points.
The US Federal government does not have completely unlimited ability to pay . Printing money causes inflation. Nations have had to decrease their pension benefits.

However, I would argue the US Federal government has been prudent with its pensions; some US states have not.

If only Bogle had fixed our pension system as well!
Greenspan disagrees with your above bolded in blue premise
Watch the guests reaction to Greenspans statement! rotflmao
Right here: https://www.youtube.com/watch?v=q6vi528gseA

Yes, it's as Greenspans mentioned before whilst in office,... a conundrum. :mrgreen:

I too believe printing currency causes unrecognized inflationary upswings. Despite currency recirculation/destruction/& creation. Others do not believe it.
They believe .gov statitions. :?
I do not.

As most here recognize, current .gov pensions have changed markedly.
They've (.gov supporters) finally recognized the terms are unsustainable.
Time & tides wait for no one. A man has to know his limitations. | "Give me control of a nation's money and I care not who makes it's laws" | — Mayer Amschel Bauer Rothschild ~

Cody6136
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Re: How safe are pensions in the U.S.?

Post by Cody6136 » Fri Jun 14, 2019 5:36 pm

sport wrote:
Thu Jun 13, 2019 6:06 pm
There was just a Frontline program on PBS called "The Pension Gamble". It is worth watching. They concentrated on the public pensions in Kentucky. It was not a pretty story.

I watched it and thought that Martin Smith did a tremendous job. I am ordering and reading the book about Kentucky's plan.

The book is here. Worth clicking on to see the graphic, if no other reason:

https://www.amazon.com/Kentucky-Fried-P ... way&sr=8-3

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Nate79
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Re: How safe are pensions in the U.S.?

Post by Nate79 » Fri Jun 14, 2019 8:25 pm

Here is a site with a list of multiemployer plans that have applied over the last few years to the Treasury Dept to cut the pension benefits of retirees. Many have been approved
http://www.pensionrights.org/publicatio ... n-reform-a

NYCwriter
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Re: How safe are pensions in the U.S.?

Post by NYCwriter » Fri Jun 14, 2019 8:39 pm

After my late father left war service he worked most of his adult life for an industrial mnfg company with a good pension plan. Then Halliburton under CEO Dick Cheney bought the company and used a legal loophole to squeeze the pension fund dry, and dumped the shell. Dad never got over it.

Here in NY, the public pensions are notoriously mismanaged, but it's one of the few perks available for public service employees. Those that earn higher salaries (not me) can reap benefits after a lengthy service. Public sector is really the last bulwark, but a disappearing one.

anonenigma
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Re: How safe are pensions in the U.S.?

Post by anonenigma » Fri Jun 14, 2019 9:18 pm

cheezit wrote:
Fri Jun 14, 2019 9:40 am
anonenigma wrote:
Thu Jun 13, 2019 6:02 pm
yousha wrote:
Thu Jun 13, 2019 5:07 am
Not too safe in California.
On what basis do you make this statement?

Moderators? Speculation and politics here. Not actionable.

Cuts to public employee pensions in California have already happened and continue to happen, typically in the form of a haircut when insolvent municipalities or joint powers authorities stop making payments and CALPERS takes over the plan. The East San Gabriel consortium is the most recent example that comes to mind; part of the reduction in benefits was later walked back, but it was still a ~60% haircut!

Additionally, calling this non-actionable is simply wrong. The action for the prospective retiree to take is to reduce their reliance on their future pension benefits to fund their retirement, for instance by increasing their savings rate outside of the pension.
That's not how the question was asked (very general, not actionable). It sounded like an invitation to get people riled up. Had it been framed the way you suggested, I wouldn't have had a problem with it.

In California, there have been issues with local pensions managed through CalPERS, but the CalPERS for state employees, UC Retirement System and CalSTRS are guaranteed by the state. They may not be in great shape due to 2008-10 crash, but the state is obligated to make good if the systems fail. In the case of CalSTRS, a refinancing plan was enacted in 2014 and is designed to have the system fully funded by 2046. Governor Newsom's new budget pays down some of the unfunded liability for both CalSTRS and CalPERS.

Ron Ronnerson
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Re: How safe are pensions in the U.S.?

Post by Ron Ronnerson » Fri Jun 14, 2019 10:26 pm

anonenigma wrote:
Fri Jun 14, 2019 9:18 pm
cheezit wrote:
Fri Jun 14, 2019 9:40 am
anonenigma wrote:
Thu Jun 13, 2019 6:02 pm
yousha wrote:
Thu Jun 13, 2019 5:07 am
Not too safe in California.
On what basis do you make this statement?

Moderators? Speculation and politics here. Not actionable.

Cuts to public employee pensions in California have already happened and continue to happen, typically in the form of a haircut when insolvent municipalities or joint powers authorities stop making payments and CALPERS takes over the plan. The East San Gabriel consortium is the most recent example that comes to mind; part of the reduction in benefits was later walked back, but it was still a ~60% haircut!

Additionally, calling this non-actionable is simply wrong. The action for the prospective retiree to take is to reduce their reliance on their future pension benefits to fund their retirement, for instance by increasing their savings rate outside of the pension.
That's not how the question was asked (very general, not actionable). It sounded like an invitation to get people riled up. Had it been framed the way you suggested, I wouldn't have had a problem with it.

In California, there have been issues with local pensions managed through CalPERS, but the CalPERS for state employees, UC Retirement System and CalSTRS are guaranteed by the state. They may not be in great shape due to 2008-10 crash, but the state is obligated to make good if the systems fail. In the case of CalSTRS, a refinancing plan was enacted in 2014 and is designed to have the system fully funded by 2046. Governor Newsom's new budget pays down some of the unfunded liability for both CalSTRS and CalPERS.
I agree with this comment. I’m a member of CalSTRS so I'm familiar with its situation more than other systems. While it is true that this (CalSTRS) system is under-funded at the moment, that doesn’t tell the whole picture. 5 years ago, these were the approximate contribution rates:
Employers: 8%
Employees: 8%
State: 4.5%

Here are the contribution rates now:
Employers: 18%
Employees: 10%
State: 10%

These are the likely contribution rates in a couple of years:
Employers: 20%
Employees: 10%
State: 11%

As of a few years ago, the benefit structure was changed so it is quite a bit less generous to new employees. CalSTRS also lowered their expected rate of return as of a couple of years ago.

To me, it seems that some concrete steps have been taken to address the shortfall. Before these changes, I was expecting that I’d get maybe half my pension in retirement. Now, I’m planning as if I’ll get 75% (though hoping for all of it, of course).

I think people should look at the particulars of their pension system. Is it guaranteed? If so, by whom? What is the funding level? Is anything being done about the shortfall if it exists? Depending on the answers to these types of questions, perhaps count on 0 to 100% of the pension being there when it’s time.

For the sake of being financially prepared and taking appropriate actions, I think people would benefit from trying to get a sense of how reliable/healthy their expected pension is looking. It is definitely actionable but, unfortunately, this topic tends to get dragged into political discussions. Perhaps, if we're careful here, we can avoid that. I really do think there is something to be gained from the discussion.

mancich
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Re: How safe are pensions in the U.S.?

Post by mancich » Sat Jun 15, 2019 5:12 am

ychuck46 wrote:
Thu Jun 13, 2019 4:54 pm
As far as corporate pensions go, how much do you trust CEOs and companies to keep their promises? That's what I thought.
+1000 I agree, and don't trust them at all. Yet another reason I plan to take the lump sum when I retire. I'm fortunate my pension has that option. I'll take it, roll it to an IRA, and manage it myself, thank you very much. I trust Megacorp as far as I can throw it.. :D

SovereignInvestor
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Re: How safe are pensions in the U.S.?

Post by SovereignInvestor » Sat Jun 15, 2019 6:55 am

mancich wrote:
Sat Jun 15, 2019 5:12 am
ychuck46 wrote:
Thu Jun 13, 2019 4:54 pm
As far as corporate pensions go, how much do you trust CEOs and companies to keep their promises? That's what I thought.
+1000 I agree, and don't trust them at all. Yet another reason I plan to take the lump sum when I retire. I'm fortunate my pension has that option. I'll take it, roll it to an IRA, and manage it myself, thank you very much. I trust Megacorp as far as I can throw it.. :D
But mega corps or single employer private plans have the most strongest ERISA\PPA funding rules and must use the most conservative investment returns, shortfall amortization and have PBGC backstop up to around 60K, over 4x greater than MEP plans.

One can trust public plans more but the fact is short of constitutionally guaranteed benefits, the funding is much looser and laxer.

The funding of the average S&P 500 corporation plan is much greater than the funding of average state pension and the corporations use conservstive discount rates in the 4% range while states generally still use at least 7%, which is like a junk.bond rate.

https://www.bloomberg.com/graphics/2018 ... ng-ratios/

As of YE 2017 median state pension is 73.7% funded with generally very aggressive investment return assumptions for discounting.


As of YE 2017 average corporate US pension funding was 84.6%

https://www.plansponsor.com/2018-pensio ... -december/

Average discount rate for corporate plans was 3.9%. The average state uses about 7%.


Would you rather get a pension from a corporation when PBGC guarantees it for aroundg 60K a year and it is 85% funded and must assume very low 3.9% investment returns for discounting or a plan that is only 73.7% funded under the assumptook the 50/50 ot 60/40 portfolio returns 7% per year?

SovereignInvestor
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Re: How safe are pensions in the U.S.?

Post by SovereignInvestor » Sat Jun 15, 2019 7:08 am

[Discussion of potential future legislation removed by Moderator Misenplace.]

There's a reason why most SEP corporations froze out pensions...good luck finding them when you assume you only get 3.9% investment return. They require. A lot of money.

When MEP can pretend like 60/40 portfolio (many only have 40 or 50% stocks) can somehow get 7% or more annually even net of 30 bps or so fees...they can pretend like they can put such a tiny amount there to fund it
..so it's no wonder so many have and will continue to be insolvent.

The only plans that are not blowing up are single employer large.corporate ones...the only ones that don't implocitly assume the stock market will provide 13% annual returns to make them funded.

ModifiedDuration
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Re: How safe are pensions in the U.S.?

Post by ModifiedDuration » Sat Jun 15, 2019 7:47 am

SovereignInvestor wrote:
Sat Jun 15, 2019 6:55 am

Would you rather get a pension from a corporation when PBGC guarantees it for aroundg 60K a year and it is 85% funded and must assume very low 3.9% investment returns for discounting or a plan that is only 73.7% funded under the assumptook the 50/50 ot 60/40 portfolio returns 7% per year?
The discount rate is the rate used to determine the present value of future pension liabilities.

The assumed investment rate of return is the rate used to determine the investment income that the plan assets will generate in the future.

These are two distinctly different parts of the actuarial assumptions used to determine the funding level of a plan.

In other words, the discount rate is NOT the assumed investment rate for plan assets.

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jeffyscott
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Re: How safe are pensions in the U.S.?

Post by jeffyscott » Sat Jun 15, 2019 7:55 am

Ron Ronnerson wrote:
Fri Jun 14, 2019 10:26 pm
I agree with this comment. I’m a member of CalSTRS so I'm familiar with its situation more than other systems. While it is true that this (CalSTRS) system is under-funded at the moment, that doesn’t tell the whole picture. 5 years ago, these were the approximate contribution rates:
Employers: 8%
Employees: 8%
State: 4.5%

Here are the contribution rates now:
Employers: 18%
Employees: 10%
State: 10%

These are the likely contribution rates in a couple of years:
Employers: 20%
Employees: 10%
State: 11%

As of a few years ago, the benefit structure was changed so it is quite a bit less generous to new employees. CalSTRS also lowered their expected rate of return as of a couple of years ago.
Are you saying that currently employees have 10% deducted from pay and their employer puts in 18% of pay and the state also puts in 10%? This would make the total pension plan cost 38% of payroll :!: . For comparison my state has a "fully" funded system (7% return assumption) and the total cost is 12-13% of payroll (with employees paying 1/2). Of course, benefits are likely more modest than whatever CA is promising. Also all employees here are in SS, so that is another 10.6% that goes toward funding retirement benefits, making the total about 23% of payroll.
To me, it seems that some concrete steps have been taken to address the shortfall. Before these changes, I was expecting that I’d get maybe half my pension in retirement. Now, I’m planning as if I’ll get 75% (though hoping for all of it, of course).

I think people should look at the particulars of their pension system. Is it guaranteed? If so, by whom? What is the funding level? Is anything being done about the shortfall if it exists? Depending on the answers to these types of questions, perhaps count on 0 to 100% of the pension being there when it’s time.
Yes, in my case 100% funded with a 7% assumed rate of return, pension not indexed to inflation (pension will increase only if actual returns exceed 5% and those increases can be taken back). So I assume I will get 100%, but no increases.

The same sort of thing should be done with SS. My worst-case assumptions are 75% of promised benefits and 75% of inflation for increases.
Time is your friend; impulse is your enemy. - John C. Bogle

RobLyons
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Re: How safe are pensions in the U.S.?

Post by RobLyons » Sat Jun 15, 2019 8:51 am

Personal experience here. Over the past 5 years, our pension system (at very large, financially stable healthcare organization) was modified twice. First, the annual return on current holdings was reduced from 6.5% guaranteed return to 5% for all employees.
Secondly, a new pension system was created for employees hired on or after Jan 1 2016.
Here's the breakdown of both systems:


New pension
Age plus years of service
Annual credit as a percentage of base pay

less than 35 - 4% of pay
35 to 44 - 5% of pay
45 to 54 - 6% of pay
55 to 59 - 7% of pay
60 to 64 - 8% of pay
65 to 69 - 9% of pay
70 or more - 10% of pay


Grandfathered pension (mine)
Age plus years of service
Annual allocation as a percentage of pay

less than 30 - 5% of pay
30 to 39 - 6% of pay
40 to 44 - 7% of pay
45 to 49 - 8% of pay
50 to 54 - 9% of pay
55 to 59 - 10% of pay
60 to 64 - 11% of pay
65 to 69 - 12% of pay
70 to 74 - 13% of pay
75 to 79 - 14% of pay
80 or more - 15% of pay



This leads me to believe 3 things.
1.) On a positive note, there does not appear to be any plans to scrap either pension plan.
2.) More changes could be on the way. I don't expect the 5% guaranteed return to be there forever.
3.) No pension is safe
"Great parenting sets the foundation for a better world"

Ron Ronnerson
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Re: How safe are pensions in the U.S.?

Post by Ron Ronnerson » Sat Jun 15, 2019 8:51 am

jeffyscott wrote:
Sat Jun 15, 2019 7:55 am
Are you saying that currently employees have 10% deducted from pay and their employer puts in 18% of pay and the state also puts in 10%? This would make the total pension plan cost 38% of payroll :!: . For comparison my state has a "fully" funded system (7% return assumption) and the total cost is 12-13% of payroll (with employees paying 1/2). Of course, benefits are likely more modest than whatever CA is promising. Also all employees here are in SS, so that is another 10.6% that goes toward funding retirement benefits, making the total about 23% of payroll...

Yes, in my case 100% funded with a 7% assumed rate of return, pension not indexed to inflation (pension will increase only if actual returns exceed 5% and those increases can be taken back). So I assume I will get 100%, but no increases.
Yes, the total pension plan contribution rates for CalSTRS from all parties has gone from 16% a few years ago to 38% now. It is expected to continue to rise. CalSTRS was affected by the Great Recession (and the recession prior to that one) and currently has a shortfall. To address it, they have raised contribution rates significantly, lowered benefits for new employees (and made some other reforms that affected current employees too), and lowered the expected rate of return from 7.5 to 7%. Here is a link to the funding plan (it's fairly short): https://www.calstrs.com/calstrs-funding-plan

So, looking at the current funding level alone doesn't tell the whole picture. On the current trajectory, the funding levels are expected to improve for CalSTRS in the years ahead and the system is expected to be fully funded in another couple of decades. For other pension systems, it could be the opposite. Basically, I think it's good to step back and look at the long-term outlook.

The CalSTRS system does have inflation protection and benefits are likely higher than for people in many other states. However, the cost of living in certain parts of California is hard for many to wrap their heads around as well. So, just add a zero at the end of whatever number you think is reasonable to account for those differences. I say this (mostly) in jest. However, the concept of looking at trajectories is my point, even though the dollar amounts in question will vary depending on location.

SovereignInvestor
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Re: How safe are pensions in the U.S.?

Post by SovereignInvestor » Sat Jun 15, 2019 9:15 am

ModifiedDuration wrote:
Sat Jun 15, 2019 7:47 am
SovereignInvestor wrote:
Sat Jun 15, 2019 6:55 am

Would you rather get a pension from a corporation when PBGC guarantees it for aroundg 60K a year and it is 85% funded and must assume very low 3.9% investment returns for discounting or a plan that is only 73.7% funded under the assumptook the 50/50 ot 60/40 portfolio returns 7% per year?
The discount rate is the rate used to determine the present value of future pension liabilities.

The assumed investment rate of return is the rate used to determine the investment income that the plan assets will generate in the future.

These are two distinctly different parts of the actuarial assumptions used to determine the funding level of a plan.

In other words, the discount rate is NOT the assumed investment rate for plan assets.
The private SEP discount liabilities by discount rate to present value. The assumed return is used for expensing the pension on a normalized basis each year. If they assume high returns then the average expensed annual amount will be lower. But funding is based off discount rate per ERISA and PPA.

For governmen and MEP plans they are discounting liabilities as expected rate of return so it is used for funding.


Think about it....you compare current assets which is market value or some smoothed historical average....versus present value of liability. The ratio of assets to liability in present value is funding ratio.

Return on asset has nothing to do with funding since assets are taken as is and not really adjusted. A rate only affects funding in terms of how liabilities are discounted. For SEP plans the discount rate affects funding because it affects liabilities. For government and MEP plans they are funded using expected return in plan assets as liability discount rate.

https://www.njspotlight.com/stories/18/ ... -the-same/

My point remains. Governments and MEPS are using 7-8% rate of return assumptions for funding. So those funding numbers are way overstated if you think 7-8% is too high. This is because they DISCOUNT at the assumed rate of return in plan assets

Corporations use around 4.0% for funding as that is their discount rate. And ERISA/PPA mandate using that conservative rate for discounting and not a subjective expected return on assets. The Expected ROA is only used for expensing.

It is much riskier to use 7-8% for discounting for funding ratios as MEP and governments use, than corporations who use 4.0% roughly.

So corporate plans are conservatively funded...BUT we can say they are under expensed. They will tend to show actuarial losses which don't flow through as operating income...maybe shareholders should care but it doesn't make the pensions less safe.

petulant
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Re: How safe are pensions in the U.S.?

Post by petulant » Sat Jun 15, 2019 9:40 am

Stinky wrote:
Thu Jun 13, 2019 9:54 am
cherijoh wrote:
Thu Jun 13, 2019 5:56 am

Another consideration is that there is no guarantee that a company will keep its pension plan until you are ready to retire. Lots of healthy companies are doing this and switching to a company contribution to the 401k plan which doesn't require an employee contribution (i.e., separate from company match).
This is one of the biggest “risks” in defined benefit pension plans. When I entered the business about 45 years ago, almost all employers in my industry offered a traditional defined benefit plan. Now, almost none do. My employer stopped the DB plan for new employees about 15 years ago.

I expect that few of the folks entering the work force today will still be accruing DB plan benefits when they retire. Maybe some government employees, but almost no private sector folks.
Exactly. The thing is, the optimum strategy for an employee under pensions and 401(k) plans are different. Under a pension with a traditional formula (some function of years of service and salary), the employee typically accrues the most benefits during the later working years closer to retirement. The future pension benefits are sooner and the employee's salary is the highest it has ever been. The employee can virtually ignore saving in early years as long as they stay at the company long enough to accrue a decent pension. Under a 401(k), however, the employee has the most benefits from saving early in life so that those investments compound. So the risk is that the employee starts off with a DB/pension plan, saves little, the plan gets cancelled for new benefits, and the employee has a limited window to play catch-up with 401(k) contributions.

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Stinky
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Re: How safe are pensions in the U.S.?

Post by Stinky » Sat Jun 15, 2019 10:15 am

petulant wrote:
Sat Jun 15, 2019 9:40 am

Exactly. The thing is, the optimum strategy for an employee under pensions and 401(k) plans are different. Under a pension with a traditional formula (some function of years of service and salary), the employee typically accrues the most benefits during the later working years closer to retirement. The future pension benefits are sooner and the employee's salary is the highest it has ever been. The employee can virtually ignore saving in early years as long as they stay at the company long enough to accrue a decent pension. Under a 401(k), however, the employee has the most benefits from saving early in life so that those investments compound. So the risk is that the employee starts off with a DB/pension plan, saves little, the plan gets cancelled for new benefits, and the employee has a limited window to play catch-up with 401(k) contributions.
Very interesting point! You’re exactly right.

I was always under a DB plan during my working career, and didn’t make good use of my 401k until I was 40 or so, so I never had to think of it in that way. However, I would advise my adult children to think about their retirement savings in this way.
It's a GREAT day to be alive - Travis Tritt

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jeffyscott
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Re: How safe are pensions in the U.S.?

Post by jeffyscott » Sat Jun 15, 2019 10:27 am

Ron Ronnerson wrote:
Sat Jun 15, 2019 8:51 am
The CalSTRS system does have inflation protection and benefits are likely higher than for people in many other states. However, the cost of living in certain parts of California is hard for many to wrap their heads around as well. So, just add a zero at the end of whatever number you think is reasonable to account for those differences. I say this (mostly) in jest. However, the concept of looking at trajectories is my point, even though the dollar amounts in question will vary depending on location.
As far as the dollar amount of the benefits being higher, that should not affect the percentage of payroll required to fund it, as the pension benefits are based on years of service and pay and contributions are a percent of that pay.
Time is your friend; impulse is your enemy. - John C. Bogle

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jeffyscott
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Re: How safe are pensions in the U.S.?

Post by jeffyscott » Sat Jun 15, 2019 10:39 am

SovereignInvestor wrote:
Sat Jun 15, 2019 9:15 am
My point remains. Governments and MEPS are using 7-8% rate of return assumptions for funding. So those funding numbers are way overstated if you think 7-8% is too high. This is because they DISCOUNT at the assumed rate of return in plan assets

Corporations use around 4.0% for funding as that is their discount rate. And ERISA/PPA mandate using that conservative rate for discounting and not a subjective expected return on assets. The Expected ROA is only used for expensing.
Is there any easy way to determine the difference. For example if a system is 100% funded at an assumed rate of return (and discount rate) of 7%, what would the funding ratio be at an assumed rate of return (and discount rate) of, say, 4-5%?
Time is your friend; impulse is your enemy. - John C. Bogle

retire2022
Posts: 858
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: How safe are pensions in the U.S.?

Post by retire2022 » Sat Jun 15, 2019 11:09 am

All my understanding cities like Detroit and states are different bond ratings, where as the former (cities) are riskier and less regulated than states.

Could someone explain this further?

Ron Ronnerson
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Location: Bay Area

Re: How safe are pensions in the U.S.?

Post by Ron Ronnerson » Sat Jun 15, 2019 11:11 am

jeffyscott wrote:
Sat Jun 15, 2019 10:27 am
Ron Ronnerson wrote:
Sat Jun 15, 2019 8:51 am
The CalSTRS system does have inflation protection and benefits are likely higher than for people in many other states. However, the cost of living in certain parts of California is hard for many to wrap their heads around as well. So, just add a zero at the end of whatever number you think is reasonable to account for those differences. I say this (mostly) in jest. However, the concept of looking at trajectories is my point, even though the dollar amounts in question will vary depending on location.
As far as the dollar amount of the benefits being higher, that should not affect the percentage of payroll required to fund it, as the pension benefits are based on years of service and pay and contributions are a percent of that pay.
I tend to agree with you. CalSTRS was fully funded around the year 2000. The contribution levels were a lot lower back then as well. Then we had a recession occur. This was followed a short while later by a really big recession (another thread about the severity of which that seems to have become active again recently: viewtopic.php?f=10&t=207809).

By 2010, the not-so-long-ago fully-funded system looked to be in considerably worse shape. To close the gap that occurred, measures have been taken. I've read that the percentages that are being contributed should go down once the system is in good shape again. I can't comment as to exactly why the situation is different in your state. It's probably a combination of factors. You did say that 23% of payroll was being directed toward retirement benefits where you are. Up until 5 years ago, the number was 18% for CalSTRS members. Perhaps, over many years, 5% can make a big difference. Also, CalSTRS offers inflation protection.

In any case, many pension systems were affected by the recessions which occurred last decade and saw their funding levels drop a lot. However, how they've reacted since that time has varied quite a bit. Some have done very little to address the shortfall. CalSTRS now has 38% of payroll going toward it with plans to continue raising rates. Meanwhile, they've also cut benefits (mostly for new employees) and lowered their expected return. That's certainly not doing nothing. My assessment is that I can count on my pension now to a greater extent than I could a few years ago.

mac808
Posts: 508
Joined: Mon Sep 19, 2011 8:45 pm

Re: How safe are pensions in the U.S.?

Post by mac808 » Sat Jun 15, 2019 11:24 am

State and local public pensions in the worst funded states are likely to be cut in the decades ahead. Even those that are "constitutionally protected" are likely to be impacted in a restructuring or bankruptcy process similar to what we see occurring in Puerto Rico right now. That's the bad news (for those involved). The good news is that the cuts needed aren't catastrophic. Detroit is a good case study. As another poster noted about Detroit, "the outcome for retirees was pensions cut by 4.5 percent, elimination of future cost-of-living adjustments and higher health-care expenses."

I will add that I don't see this as an inherently partisan political issue but rather a fiscal issue stemming from poor leadership which has affected both "blue" states (Illinois) and "red" states (Kentucky) alike. The people who make it partisan are often trying to distract from the poor fiscal leadership (of all parties and ideologies) responsible. It's actionable in the sense that I have advised future retirees to mark down the expected income from their pension by 10-35% depending on their pension's funding level and the state's underlying fiscal stability (as reflected by the bond markets). To me that's a practical and non-partisan approach that we as Bogleheads could adopt to help people plan for the future.

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