[quote=sdduuuude]
Also, we are suggesting that putting new employees on a defined benefit plan only poses a risk for the future, give that we have seen this epic failure of the investments. Just put them on a 401K, negotiate a salary + employer 401K contribution, get out of the investment business and move on.[/quote]
Defined benefit plans used to be the model. Both private and public employers are moving towards defined contribution plans. Both may be short sighted. Big corporate entities moved away from defined benefit plans primarily because the cost of what they promised employees increased faster than the actuarial assumptions accounted for.
If you remember a few years ago when the auto industry was in massive trouble. The promised retirement benefits cost them more than they could afford. But it wasn’t monthly pensions. It was health care. More than once over the last 30 years, they had pension trusts that were actually over-funded, and they made deals with the unions to take that money back. Then the cost of health care spiraled up and out of control, and they were no longer over-funded.
The same thing has happened with many public retirement plans. We know that CalPERS was on target to be over-funded. And that was with very small contributions from both the state and the employees. So the earnings assumptions were actually smaller that actuals. Some plans had such outstanding investment performance than no contributions were required by either the state or the employees for many many years. Not even what is considered “normal costs”. Investment earnings covered both the projected future costs and the additional costs added each year. We didn’t hear any complaints those years about the high cost of public sector retirement benefits. Those savings weren’t set aside, they were spent elsewhere, or exactly like the tax cuts of almost a decade ago, returned to taxpayers in the form of lower tax rates.
My point is, in addition to risk, there is also a potentially huge benefit to defined benefit plans. (Ford, GM and Chrysler wouldn’t have had financial calamities they had, if the increase in the health care cost portion of the promised retirement benefits hadn’t far exceeded the outstanding investment performance of their retirement trusts) We had a once in 3 generations crash that the economy still hasn’t recovered from. Predictable? Maybe. But that was the cause of the problems with the public sector retirement pension shortfall. Not the overly generous pensions.
