Commentary | Why full funding of pensions is a waste of money

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Submitted by phaster on September 20, 2017 - 5:34pm

“100 percent funding isn’t critical to the healthy functioning of a public pension system”

this was a quote (thesis) in the op-ed section of the news paper which caught my eve,... reminded me of past piggington discussions for some reason

www.TinyURL.com/PensionRebuttal

Submitted by ucodegen on September 20, 2017 - 7:50pm.

Where do I start on the issue of full-funding on pensions. It is irresponsible not to properly fund them. The lack of funding ends up building up over time till there is a sufficient deficit that it will actually reduce basic services like police, parks and libraries.

BTW: I have always held that all pension structures should be done away with and that they should be replaced with IRAs and 503s (with mandatory contribution levels and inability to completely cash out early). IRAs and 503s need to have the same bankruptcy and liability protection that pensions have. The reason why I feel this way is that I have seen too much mismanagement of pension assets and poor investment decisions on the part of pension managers. These decisions end up putting the pensioners at risk, either in the near term or some time in the future.

The author of the article makes severe errors in the following statements (quotes) and then the author tries to use them to justify their position:

Imagine you sign a lease to rent an apartment or 12 months at $1,000 a month. Your ultimate obligation is $12,000, but should the landlord refuse to rent to you if you can’t show you have $12,000 available at the outset of the lease (100 percent funding)? No, the landlord simply wants assurance you can pay your rent
each month.

WRONG: When renting an apartment, either your credit score has to be good enough and have a reliable job with sufficient income or/and you have to prove you have sufficient funds to cover your lease payments for the period of the lease. I know because I don't show up on most credit reports because I rarely carry debt. I have had to prove that I have sufficient funds in the past (which was no problem).

If you’re a homeowner, you probably have a 30-year mortgage. Your mortgage allows you to own your home without fully funding the purchase. If, for example, you have a $300,000 home with a $150,000 mortgage, it might be said that your homeownership is at a 50 percent funded ratio. That’s not reckless; it’s prudent use of debt.

WRONG: The mortgage is secured by the house - it is fully funded by the property as well as the down payment. If there is a default on the mortgage payments, the bank gets to take the house and liquidate to cover the mortgage (debt obligation). It becomes a big mess when mortgage companies forget this concept.

Simply WOW!! - and not in a good way. The foundation of his argument is complete sand.

There are two strong reasons not to move to 100 percent funding.
First, doing so would require significant, unnecessary expense to employees, employers and taxpayers.

Wrong. What causes the significant and unnecessary expense are unfunded or incompletely funded mandates - including pensions. The institution then has to rely on deficit spending to cover the costs - and then carry the costs of borrowing the money on top of their current costs of their mandates. If the pension is fully funded, it is also bringing in money (it is not dead money, it is invested and getting a return). If you are borrowing money - you are paying someone else for its use and that costs gets added to the existing budget.

There are two strong reasons not to move to 100 percent funding.
Since public pensions can exist indefinitely at 70 percent or 80 percent funding, why not use those funds for more immediate needs?

A true deficit spender... OY VEY!

Ok, so what happens on a 70% funded pension when there is an economic downturn? and the 70% funded becomes 50% funded? or less? Who is the institution to turn to, the public is already being burdened by the downturn and can't afford further taxes.

Here is an interesting way to handle pensions:
http://money.cnn.com/2017/09/19/investin...

-- part of the reason why I think everything should go to 401k(s), 503b(s) is because of nuts like this. Get the money out of their hands, out of the politicians hands and the hands of everyone else that don't have a truly vested interest in the well being of the pensioner.

-- sorry for the rant. When it comes to retirement funding, I tend to be a flaming militant advocate. One of the places I used to work had a pension, I was given the option of cashing out for a cost of about 12% of face value. The pension assets were going to be accruing at a rate of about 1.5% from the date the cash out option was given, to my retirement date. On the first year of cashing out, I already covered the 12% cash out cost. The remaining 1.5% gains have already been covered too. I still have more than 10 years left for growth.

Submitted by outtamojo on September 21, 2017 - 10:47am.

I live in fear that someday the hospital where I earned my pension will be taken over by one of the church affiliated hospital chains.

Submitted by gzz on September 21, 2017 - 9:20pm.

I agree with you about ending defined benefit. No new public employees should be added to it. 98% of the private sector has already done this.

I do not agree about 100% funding of pension obligations. It would be highly pro cyclical, as pension assets would appreciate without contributions in a boom, but require government cuts or tax increases in a recession.

Submitted by ucodegen on September 22, 2017 - 7:53pm.

gzz wrote:
I agree with you about ending defined benefit. No new public employees should be added to it. 98% of the private sector has already done this.

I do not agree about 100% funding of pension obligations. It would be highly pro cyclical, as pension assets would appreciate without contributions in a boom, but require government cuts or tax increases in a recession.


The problem with this statement is that a pension is working to satisfy a defined benefit. Whether or not you are fully funded, it will be highly cyclical. Not fully funding is like using leverage on an asset. The problem is that on a partially funded benefit system, it is much more sensitive to downturns (ie leverages on downturns). The 'tax increase' option is not present on a downturn when trying to handle the under funding.

Lets take a look from another 'angle'. That of one's own retirement. If I have set aside more than enough to satisfy my retirement needs (ie pension requirements), would an economic downturn adversely affect me more, simply because I currently have all of my retirement funding requirements satisfied? No it will not. The full to over-funding of my retirement means that I can weather a downturn. If the combined contributions and growth in my retirement assets ends up meaning that I have fully funded my projected costs to 130%, that means I can weather a 20% drop in asset values without any difficulty. If you are funded to the point that most to all of the money you pull from retirement is only in the form of dividends from companies etc - a downturn on 'asset value' or capitalization is less of a concern. ie: min(4% asset, 50% yr growth) per year pull from retirement assets. It would be similar to how a pension handles the same situation. NOTE: the historical multi-year average S&P return has exceeded 10%. If I take a position of using only 4% of this and re-investing the remaining 6+%, I am well secured. Take it from a yet different angle - If I take a 'FlyerInHi' approach and have multiple rentals that cover my expected costs nearly twice over - how much of a problem would a real-estate downturn really mean? Particularly if I take the excess and continually re-invest in new rental units? I have no plan to liquidate the rentals because I have no need to and don't need to take the capital loss. If a pension is sufficiently large and well managed, it may even be possible to make the pension self funded.

The real problems when fully funding a pension, is the politician's desire to grab money - including money that is earmarked to continue funding the pension - for other purposes and growth in pension obligations (we have all this money so why don't we allow all gov employees to fully vest to 80% of salary after first year of employment). It has nothing to do with downturns and has plenty to do with human political nature. It comes down to willpower.

Submitted by phaster on October 1, 2017 - 6:10pm.

ucodegen wrote:

The real problems when fully funding a pension, is the politician's desire to grab money - including money that is earmarked to continue funding the pension - for other purposes and growth in pension obligations (we have all this money so why don't we allow all gov employees to fully vest to 80% of salary after first year of employment). It has nothing to do with downturns and has plenty to do with human political nature. It comes down to willpower.

Said another way, the weak link is human nature.

The psychology of most to "justify" decisions is gut feelings. Using basic "math" analysis is way down the list.

WRT the matter @ hand,... California public pension recipients and politicians blame the markets and wall street bankers to rally the faithful. The scapegoating strategy mostly works! By beating up on other institutions this keeps supporters (and the general public) from focusing too closely on fact that politicians and public employee union officials created the financial problem.

FYI the same week the "pension" op-ed was in the paper, another math related story was in the news.

Quote:

Scripps Study (There’s A Chance Climate Change Can Wipe Out Humans By 2050)

http://www.kpbs.org/news/2017/sep/15/scr...

http://www.sandiegouniontribune.com/news...

This news story was on the back pages.

As I see things, the op-ed illustrates an entitlement mentality that politicians and public employee union officials have about pensions. The root cause being the DELUSION they have, which is the math will somehow work!

The lack of press interest about the Scripps study IMHO illustrates DENIAL of "basic" math. In other words the study shows that we as a species have damaged the environment.

Bottom line, we are heading toward tough times because too many are mathematically illiterate AND self serving.

Submitted by ucodegen on October 2, 2017 - 6:31pm.

phaster wrote:

WRT the matter @ hand,... California public pension recipients and politicians blame the markets and wall street bankers to rally the faithful. The scapegoating strategy mostly works! By beating up on other institutions this keeps supporters (and the general public) from focusing too closely on fact that politicians and public employee union officials created the financial problem.

FYI the same week the "pension" op-ed was in the paper, another math related story was in the news.

Quote:

Scripps Study (There’s A Chance Climate Change Can Wipe Out Humans By 2050)

http://www.kpbs.org/news/2017/sep/15/scr...

http://www.sandiegouniontribune.com/news...

This news story was on the back pages.

As I see things, the op-ed illustrates an entitlement mentality that politicians and public employee union officials have about pensions. The root cause being the DELUSION they have, which is the math will somehow work!


That is a strange 'pivot'. The problem is that math is ACTUALLY showing the AGW people wrong, and I don't see any math in your references... but the AGW proponents don't want to see the math, so they keep shouting that there is a consensus. Science does not use consensus - but politicians do.

Here is a little exercise WRT AGW. Build a table - MS eXcel helps. Down the left side - top 3 global warming gasses, downward strongest to weakest. Across the top, name of gas, chemical formula, atomic weight, relative global warming strength when compared to weakest of the 3, PPM on average (some of the gasses are highly variable) and finally weighted PPM using weakest gas as a basis. Fill in the table and take a look at the results.

The AGW proponents bring up that Roger Revelle showed that CO2 is a greenhouse gas, what they fail to mention is his warning about jumping to conclusions on CO2.

PS: I graduated from Revelle College, UCSD, I have met and talked with Roger Revelle a long time ago and I used to work at SIO a long time ago.

PPS: You can cheat and look the answers and numbers up when filling in the table.

Submitted by njtosd on October 2, 2017 - 9:05pm.

Ucodegen - Interesting:
https://www.acs.org/content/acs/en/clima...

All those vaping people should be ashamed of themselves ;)

Submitted by ucodegen on October 2, 2017 - 10:38pm.

njtosd wrote:
Ucodegen - Interesting:
https://www.acs.org/content/acs/en/clima...

All those vaping people should be ashamed of themselves ;)


I think the vaping people should be ashamed for a different reason - taking poisons into your body under the false belief that because they are 'vaping' instead of 'smoking', that it is somehow much healthier.

As for the article link, I have a problem with the statement:

However, water vapor does not control the Earth’s temperature, but is instead controlled by the temperature.

Which is horribly inaccurate. Water vapor does both. It is the self regulating part of the equation. Water has two aspects to its behavior. As a gas, it is a very strong global warming gas, ie positive feedback, however as a mist or cloud - it is global cooling, ie negative feedback. Topping it off, in transition between being a positive feedback gas to a negative feedback mist/cloud- water releases a considerable amount of heat energy out into space. Because it is very light as a gas, only methane poses a potential problem to water releasing its energy when doing the phase transition between gas to mist or cloud. To heat up 1 gram/1cc of water 1 degree C, it takes 1 Calorie. To turn the same amount of water into a gas, it takes 540 Calories - this gets released when water condenses. To raise the temperature of 1 gram of dry air at sea level, by one degree Centigrade only takes 0.24 Calories. That means that in 1 gram of water-gas condensing in the upper atmosphere and releasing its energy into space and forming a cloud, more than 2160grams of air will be cooled 1 degree C (actually the number is half that because the radiation pattern on condensation is spherical). Considering that dry air is about 21% oxygen and 78% nitrogen - average atomic weight is about 0.78 * 14 + 0.22 * 16 = 14.44 grams per mole. At standard temp/pressure, one mole of gas occupies 22.4 liters of space. That means the evap/condensation of 1 gram of water can cool 1080g / 14.44g * 22.4 = 1675.35 liters of dry air (I used the 50% spherical thermal radiation space-vs-re-emit to earth on condensation here ). 1 liter occupies a cube of 10 cm on a side or 1 cubic decimeter. That means 1675.35 liters occupies about 1.19 cubic meters. The end result being that the evap/condensation of 1 gram of water can cool 1.19 cubic meters of dry air by 1 degree Centigrade. For the SAE people, 1 cubic meter is slightly larger than 1 cubic yard. 1.19 cubic meters is about 1.5 cubic yards. That is why water/humidity is not only driven by the temperature, but can also drive and regulate the temperature.

This is also why when looking for inhabited planets, it is often considered that water is a prerequisite for life.

NOTE: The claim that water accounts for 60% is also horribly inaccurate. If you did the suggested spreadsheet, you would get an idea of the actual numbers.

As I said: MATH!
oh yeah, and a bit of chemistry, some physics.

Submitted by harvey on October 4, 2017 - 11:08am.

Can we at least agree that underfunded pensions are caused by human activity?

Submitted by ucodegen on October 4, 2017 - 1:34pm.

harvey wrote:
Can we at least agree that underfunded pensions are caused by human activity?

I thought it was lack of human activity that caused underfunded pensions, or 'active avoidance'.

Submitted by phaster on October 7, 2017 - 8:05am.

ucodegen wrote:
phaster wrote:

WRT the matter @ hand,... California public pension recipients and politicians blame the markets and wall street bankers to rally the faithful. The scapegoating strategy mostly works! By beating up on other institutions this keeps supporters (and the general public) from focusing too closely on fact that politicians and public employee union officials created the financial problem.

FYI the same week the "pension" op-ed was in the paper, another math related story was in the news.

Quote:

Scripps Study (There’s A Chance Climate Change Can Wipe Out Humans By 2050)

http://www.kpbs.org/news/2017/sep/15/scr...

http://www.sandiegouniontribune.com/news...

This news story was on the back pages.

As I see things, the op-ed illustrates an entitlement mentality that politicians and public employee union officials have about pensions. The root cause being the DELUSION they have, which is the math will somehow work!


That is a strange 'pivot'. The problem is that math is ACTUALLY showing the AGW people wrong, and I don't see any math in your references... but the AGW proponents don't want to see the math, so they keep shouting that there is a consensus. Science does not use consensus - but politicians do.

Here is a little exercise WRT AGW. Build a table - MS eXcel helps. Down the left side - top 3 global warming gasses, downward strongest to weakest. Across the top, name of gas, chemical formula, atomic weight, relative global warming strength when compared to weakest of the 3, PPM on average (some of the gasses are highly variable) and finally weighted PPM using weakest gas as a basis. Fill in the table and take a look at the results.

The AGW proponents bring up that Roger Revelle showed that CO2 is a greenhouse gas, what they fail to mention is his warning about jumping to conclusions on CO2.

PS: I graduated from Revelle College, UCSD, I have met and talked with Roger Revelle a long time ago and I used to work at SIO a long time ago.

PPS: You can cheat and look the answers and numbers up when filling in the table.

funny you mentioned revelle @ UCSD, he taught an undergrad seminar/thesis class that I took a year before he died

the class was offered/designed to expose undergrads on the science track (i.e. physics) to have an understanding of the policy side (i.e. political science) AND VICE VERSA

I was a undergrad double major, so figured (back then) it would be kinda neat to have the guy who started UCSD as an instructor to get his take on the two different POV

anyway during a discussion revelle mentioned the big unknown [AT THE TIME] was aerosols (i.e. water vapor AKA "clouds") which varied albedo/reflectivity,... that in turn has an influence on the environment (i.e. temperature),... I also learned back then, math models are NOT perfect (i.e. always a work in progress)

some years after the class, read about the concept of "global dimming" matter of fact the same guy (Ramanathan) who wrote the recent scripps report (mentioned in the news)

https://scripps.ucsd.edu/news/new-climat...

also wrote a paper on the topic of "dimming" (years ago!)

https://link.springer.com/chapter/10.100...

(for context see "NOVA" PBS transcript where "Ramanathan" appears)

http://www.pbs.org/wgbh/nova/transcripts...

when I mentioned "math" I was pondering the topic of "risk" w/ in the system (i.e. various knock on effects)

FWIW that is how I also approach "investing"

basically WRT the way public pension portfolios are managed and the way the scripps report presented itself, I see trouble ahead because I question the "margin of safety"

https://www.amazon.com/Margin-Safety-Ris...

in other words there are huge downside consequence of mis-managing public pension portfolios (like wise w/ climate change),... as I see things various short term "gain" payoff(s) (for a select few) are an over all loser gamble (WRT "punishments") in the long run

Submitted by phaster on October 7, 2017 - 8:53am.

ucodegen wrote:
harvey wrote:
Can we at least agree that underfunded pensions are caused by human activity?

I thought it was lack of human activity that caused underfunded pensions, or 'active avoidance'.

unwritten city policy?

www.TinyURL.com/SanDiegoSpikingPension

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