Home › Forums › Other › My next door neighbor was a cop, still under 60, been retired for more than 5 yrs
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June 15, 2012 at 1:16 AM #745791June 15, 2012 at 1:43 AM #745793CA renterParticipant
Pri,
A while back, I asked the “pension haters” to offer a plan that would help get our state’s finances in order. I had offered up a plan of my own that would largely fix our budget problems.
NOT ONE of the “pension haters” has offered a solution or a plan, much less a solution/plan that would actually work.
So far, you have not offered anything but more of the same, “I hate DB pension plans because I/many private sector employees don’t get one ourselves…blah, blah, blah.” As mentioned before, the pension issue is just the tip of the iceberg, and even if we converted everyone to a 401k plan, we would still have a budget crisis. Most people would still be paying the same (or more) in taxes, and getting the same (or less/lower quality) service.
So…aside from pensions (which would not be significant enough to really affect our budget), which specific cuts would you make, and/or which taxes would you raise? Try to be productive for a change.
June 15, 2012 at 8:15 AM #745800SK in CVParticipant[quote=harvey]
The use of the term “funding” is unclear to me here. Are we talking about making the required contributions? (I thought you were.)[/quote]
A little lesson on the difference between defined benefit plans and defined contribution plans…
DC plans are pretty simple. A specific dollar amount based on compensation is contributed to the plan each year. Each employee has an account balance. Risks of investment loss flow to participants.
Defined benefit plans (also sometimes referred to “target benefit” plans) provide a stream of annual pension payments to retirees at a specific retirement age. Funding is based on actuarial and other assumptions required to reach that target benefit.
Example: 30 year old employee earning $50K a year, with a target annual benefit of 2% of comp at 65 years of age. Actuaries compute how much is needed today in order to fund a $1,000 a year, 35 years from now, over the employees expected life. Assumptions have to be made about life expectancy, and pre and post retirement rate of return. Sounds a bit complicated, but it’s not, and annuity companies do this all the time, they’re very good at it. This amount would be the annual “normal cost”.
Where it gets a little more complicated is where the target benefit is based on final year of pay, and has COL adjustments, and vesting schedules. Employees do not have accounts, the fund, in total, needs to be sufficient to fund retirement benefits for all employees.
Each year, the total required to fund all current employees is computed. The difference between funds in the plan and the required funds is the pension liability for the year. (I won’t get into the details here, but some of that pension liability flows to the P&L, and some may not flow to the current P&L, as in cases of funding based on changes to plan design. Those changes may result in required funding for past service costs, which normally get amortized.)
If there are no changes to the plan, and the plan investment scheme meets the expected rate of return, generally the funding for the year will be the normal cost. That’s the amount the employer is required to contribute for the year. It is not a precise number, but actuaries really do know what they’re doing. It will be pretty damn close.
If investment results vary from the expected rate of return, the current required contribution will vary accordingly. During the roughly 15 years from 1990 forward, investment returns were generally significantly higher than expected, resulting in required contributions being significantly lower than normal costs. Employers (cities, counties, police departments, etc, in addition to private companies) had lower, sometimes significantly lower, current costs as a result of these higher returns. In some cases, some employers had no required contributions.
In other words, the annual costs for defined benefit plans were as low as zero. That’s significant savings versus defined contribution plans. Employers did NOTHING wrong by contributing zero. They didn’t skip required contributions. There were NO required contributions. The plans were fully funded. Plan sponsors saved millions of dollars as a result of these higher investment returns. Employees got nothing extra.
Then the shit hit the fan a few years ago, when investment returns were sharply negative. The required amount to fund all future payments was computed just as it had been in the past, but the fund balances at year end were signficantly lower than the required funding. Employers (plan sponsors) were required to make up that difference. That’s what caused the crisis.
There are all kinds of peripheral stuff that has also happened. For instances, plan sponsors at times negotiated retirement plan benefit increases, in leiu of current comp increases (See SDPD), which was easy since plans were already over-funded, those benefit increases were almost free. Seemed like a good idea at the time. But when investment losses hit the funds, those previously free or low cost increases, exacerbated the underfunding problems.
I hopefully didn’t skip anything terribly important. I think I hit most of the basics on how the plans work. Please excuse typos, if any, it’s a bitch typing all this crap on my phone.
June 15, 2012 at 10:32 AM #745821Dazed and ConfusedParticipantThanks to SK for summarizing funding considerations for a DB plan. Pretty amazing that you can do something like that over your phone. I would like to emphasize one of your points where you say that plan sponsors negotiated retirement plan increases in lieu of current compensation increases and the impact on benefit and funding obligations. In 1999, Gray Davis signed SB 400 which effectively doubled the retirement benefit to be paid to state workers, allegedly based on actuarial forecasts predicting that no additional contributions would ever be required because investment returns were going to be so high. This benefit increase applied to past service, a point which cannot be overemphasized in its impact on the funding. The truth of what the actuaries told the politicians is debated, there are certainly several parties with an interest in CYA here, but the bottom line is that benefits were increased substantially with retroactive application.
SB400 pension boost: uncanny forecast unheeded
It is probably a waste of time to talk to a partisan like CAR where he/she has resorted to the favorite union tactic of calling people “haters” in an attempt to devalue their viewpoints. However, I note that the unions have really missed an opportunity to take the higher ground and retain allies among the moderates who are not already committed on the public employee pension issue (there may be 2 or 3 of us left). If the unions had been smart, they would have disavowed abuses like spiking, fraudulent disability pensions, double dipping, and offered to give back the gifted benefits increase from 1999 with respect to at least the retroactive portion (that was a gift because when the work was done under those contracts, the benefits were at the bargained for lower rate). These practices also skew the actuarial funding assumptions.
CAR’s point about what to cut in legitimate in that there will be pain for all. Inevitably. And this even ties in to real estate because taxes are going to go up even if benefits to state employees are reduced, the numbers just are that bad.
June 15, 2012 at 3:23 PM #745848no_such_realityParticipantCAR, the plan is very simple, the Union’s must accept a reduction in their retirement benefit. A further conversion to 401K style plan eliminates the long term risk to the taxpayer.
June 15, 2012 at 4:01 PM #745851anParticipant[quote=no_such_reality]CAR, the plan is very simple, the Union’s must accept a reduction in their retirement benefit. A further conversion to 401K style plan eliminates the long term risk to the taxpayer.[/quote]
That’s too simple. Something must be wrong with that plan.June 15, 2012 at 11:20 PM #745873CA renterParticipant[quote=no_such_reality]CAR, the plan is very simple, the Union’s must accept a reduction in their retirement benefit. A further conversion to 401K style plan eliminates the long term risk to the taxpayer.[/quote]
Once again, because you apparently missed it…
Even if you converted everyone over to a 401k plan, there would still be a budget crisis. The pensions are NOT the primary reason for the budget crisis. We have a budget crisis primarily because revenues went down (and we have a “pension crisis” because of investment losses, not because of “greedy union workers”).
Now, what are your suggestions for fixing our budget? Remember, pensions are just the tip of the iceberg and changing/reducing pension benefits would NOT fix our budget problems.
June 16, 2012 at 1:43 AM #745875CA renterParticipant[quote=Dazed and Confused]Thanks to SK for summarizing funding considerations for a DB plan. Pretty amazing that you can do something like that over your phone. I would like to emphasize one of your points where you say that plan sponsors negotiated retirement plan increases in lieu of current compensation increases and the impact on benefit and funding obligations. In 1999, Gray Davis signed SB 400 which effectively doubled the retirement benefit to be paid to state workers, allegedly based on actuarial forecasts predicting that no additional contributions would ever be required because investment returns were going to be so high. This benefit increase applied to past service, a point which cannot be overemphasized in its impact on the funding. The truth of what the actuaries told the politicians is debated, there are certainly several parties with an interest in CYA here, but the bottom line is that benefits were increased substantially with retroactive application.
It is probably a waste of time to talk to a partisan like CAR where he/she has resorted to the favorite union tactic of calling people “haters” in an attempt to devalue their viewpoints. However, I note that the unions have really missed an opportunity to take the higher ground and retain allies among the moderates who are not already committed on the public employee pension issue (there may be 2 or 3 of us left). If the unions had been smart, they would have disavowed abuses like spiking, fraudulent disability pensions, double dipping, and offered to give back the gifted benefits increase from 1999 with respect to at least the retroactive portion (that was a gift because when the work was done under those contracts, the benefits were at the bargained for lower rate). These practices also skew the actuarial funding assumptions.
CAR’s point about what to cut in legitimate in that there will be pain for all. Inevitably. And this even ties in to real estate because taxes are going to go up even if benefits to state employees are reduced, the numbers just are that bad.[/quote]
Dazed and Confused,
I only call people “haters” when they use vitriolic, emotionally-based, ignorant arguments in the debate about public employees and government budgets.
Every pro-union/govt worker poster here has disavowed abuses where govt workers are concerned. Not a single person has come out in defense of these scammers. As a matter of fact, most public union members hate these people even more that you (or any “haters”) do because their abuses make it into the newspapers and make the Joe Sixpacks out there think that the outliers are the norm, and that all govt workers are abusers. That is absolutely not the case. Most govt workers are extremely honest and hard-working.
Many union members did come out against the retroactive pension increases. BTW, it was not even close to a doubling of the pension benefits, even in the most extreme cases, and employees made other concessions in pay and benefits in order to get the pension benefit increases. Like you’ve said, politicians were told that these increases would not cost taxpayers a dime because the pension funds were doing so well. They were foolish to believe it, but that is what they were told.
I personally have advocated for a pension calculation that averages the annual pay *over the entire career* of the employee, much less the last 1-3 years, and would have only allowed the new increases to apply to the years in which these benefits were paid for (this is based on a 3% formula).
If you take the time to read the post where I made recommendations to fix our budget, you’ll see that I made no exception for govt workers when it comes to cutting costs.
Now, what are YOU (and those who are whining about govt pensions) willing to sacrifice in order to get our budget under control? Why should public employees be the only ones to sacrifice? Our shortfalls have much more to do with lower tax revenue than with pension costs. Are people willing to walk the walk, or do they expect others to make sacrifices so that they don’t have to.
You probably missed it because of the silence in the MSM on this issue, but govt unions have been making many concessions over the past few years. They are one of the few entities who have done so. Everybody else needs to step up to the plate, too. The burden cannot be borne by public sector workers, alone.
June 16, 2012 at 7:46 AM #745889no_such_realityParticipantThis thread is about pensions, not the entire budget.
Its a classic tactic to delay.
[quote=CA renter][quote=no_such_reality]CAR, the plan is very simple, the Union’s must accept a reduction in their retirement benefit. A further conversion to 401K style plan eliminates the long term risk to the taxpayer.[/quote]
Once again, because you apparently missed it…
Even if you converted everyone over to a 401k plan, there would still be a budget crisis. The pensions are NOT the primary reason for the budget crisis. We have a budget crisis primarily because revenues went down (and we have a “pension crisis” because of investment losses, not because of “greedy union workers”).
Now, what are your suggestions for fixing our budget? Remember, pensions are just the tip of the iceberg and changing/reducing pension benefits would NOT fix our budget problems.[/quote]
June 16, 2012 at 4:15 PM #745915garysearsParticipantI’m glad I stopped in and found this thread today! Maybe someone already addressed it but I would like to raise an issue.
If “retirement” is a modern industrial invention that is not sustainable, I am fine with that. Work and be productive as long as possible? No problem. I would love to be able to do productive work for as long as possible.
What am I going to be employed doing? Umm…Big Problem! Given the current number of jobs and employment to population ratio, what happens as that number approaches 1.0? It is not even possible. I mean, retirees are fighting with teenagers for under the table and min wage jobs NOW. Look at age discrimination. If you lose your job and you are in your 50s and not an executive, you are really screwed.
I simply don’t think there is enough productive work for all of us to do. Nor do I think retirement for everyone is possible. Rock, meet hard place.
June 17, 2012 at 12:24 AM #745940ArrayaParticipantretirement is not possible with modern financial civilization once growth stops. Industrial is another matter altogether. Basing any society on perpetual growth is doomed to fail and EVERYthing in a capitalist society is heavily contingent on perpetual growth. Once that stops then look out – which is where we are about at in history. The end of growth based economics. First we need to go through the cannible stage of capitalism – where it has to eat itself to survive. It wont be pretty. Of course I saying this on a finance board is akin to speaking in tongues. We probably can handle a stagnation for some time but not a contraction, which will eventually come. Watch the canary in the coal mine greece to see the future. It’s all c-c-c-connected
June 17, 2012 at 2:41 AM #745942CA renterParticipant+1 on both Arraya’s and Gary’s posts.
June 18, 2012 at 10:24 AM #746023Allan from FallbrookParticipant[quote=Arraya]retirement is not possible with modern financial civilization once growth stops. Industrial is another matter altogether. Basing any society on perpetual growth is doomed to fail and EVERYthing in a capitalist society is heavily contingent on perpetual growth. Once that stops then look out – which is where we are about at in history. The end of growth based economics. First we need to go through the cannible stage of capitalism – where it has to eat itself to survive. It wont be pretty. Of course I saying this on a finance board is akin to speaking in tongues. We probably can handle a stagnation for some time but not a contraction, which will eventually come. Watch the canary in the coal mine greece to see the future. It’s all c-c-c-connected[/quote]
Arraya: So, if I interpret your posting correctly, I should go short on the S&P 500 and long on 12ga ammo?
June 18, 2012 at 10:29 AM #746024Allan from FallbrookParticipant[quote=CA renter]+1 on both Arraya’s and Gary’s posts.[/quote]
CAR: Hey, kudos to you for maintaining your decorum throughout the discussion.
I wanted to ask if you’d seen the statistics about Wisconsin union membership rates dropping, after enactment of Gov. Walker’s Act 10? http://www.thegatewaypundit.com/2012/05/no-wonder-they-hate-him-wisconsin-union-loses-half-of-membership-following-walkers-law/
When it becomes apparent to even Jerry Brown that things need to change, well, you don’t need to be a weatherman to know which way the wind is blowing.
June 18, 2012 at 7:01 PM #746058AnonymousGuest[quote=SK in CV]A little lesson on the difference between defined benefit plans and defined contribution plans…
[…]
Then the shit hit the fan a few years ago, when investment returns were sharply negative. The required amount to fund all future payments was computed just as it had been in the past, but the fund balances at year end were signficantly lower than the required funding. Employers (plan sponsors) were required to make up that difference. That’s what caused the crisis.
[…][/quote]
I don’t disagree with anything in your explanation above. But there are a couple of observations that I think are interesting and relevant:
#1: The explanation offers no hint as to who is responsible for the crisis. (In fact the explanation actually emphasizes that the employers did nothing wrong.) Sure the market crashed, but that happens. It has happened before and will happen again. Was no one responsible for recognizing this basic risk? Did anybody do anything wrong?
It is difficult to accept that we have a crisis of this magnitude, in a system that is specifically designed to mitigate risk, and somehow nobody is to blame.
#2: We could easily take the explanation above, change a few words here and there, and replace “pensions” with “mortgage backed securities.” In other words, there was a financial model that supposedly managed risk, the model blew up, and there were massive losses.
Remember those AAA rated securities?
It’s interesting that you mention that “annuity companies do this all the time, they’re very good at it.” Remember AIG, one of the largest annuity companies in the world?
Two phrases stand out in the explanation that are noteworthy: The word “assumptions” along with the the term “fully funded.” Both are central to the problem. Who defined the standard for “fully funded?” Because, obviously, the accounts were not funded well enough to weather a downturn (and a downturn that wasn’t terribly big by historical standards.) It seems that fully funded isn’t really “fully” funded after all.
The pension system is using the term “fully funded” to mean “we are comfortable with the risk.”
It’s easy to be comfortable with risk when you can just pass it off to someone else.
I don’t see any fundamental difference between the root cause of the pension crisis and mortgage crisis. Both were based upon flawed financial models that failed to predict certain events. Both were supposedly based on systems designed to mitigate risk, something they completely failed to do. And both were based on the desire to get more out of the system without putting more in (some call this “greed.”)
And that gets to the crux of it: Who bears the risk? Why is so much of the public-sector compensation system set up so that all long-term risk in their retirement portfolios is borne by the taxpayer?
[quote=Dazed and Confused]It is probably a waste of time to talk to a partisan like CAR where he/she has resorted to the favorite union tactic of calling people “haters” in an attempt to devalue their viewpoints.[/quote]
I don’t mind if someone calls me a “hater,” provided they understand what it is I “hate.” I don’t have a problem with any retirement system per se, as long as the true cost is transparent and the full risks are borne by the participants who reap the rewards.
I’m not a “pension hater” but I am a bailout hater, because that’s the issue here. We are talking about government backstops and taxpayer-funded bailouts for a minority of the population.
It’s no different from the many other bailouts that have occurred as a result of the financial crisis (actually there is a difference, most everybody else that has been bailed-out is required to pay it back…)
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