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.
— 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.
