[quote=gzz]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.[/quote]
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.
