9 ms·

OTOH, how to fund pensions properly is a solved problem. A properly managed pension fund will have fully funded (with a high degree of certainty) a pensioners'

by wahern 8y ago

OTOH, how to fund pensions properly is a solved problem. A properly managed pension fund will have fully funded (with a high degree of certainty) a pensioners' expected payout by the time he retires, and indeed have fully funded accrued liabilities at every point in his career. It's just a matter of relying on a conservative rate of return with a proven track record. Something like 4-6% per annum, IIRC. We know this because of the 200+ years of commercial and regulatory experience with insurance, especially life insurance. People trust their life insurance and annuity policies will pay out because politicians from 100 years ago bequeathed to us a reliable regulatory framework (forged by multiple crises) that penalizes insurers from being "innovative" with the bottom line. That same discipline can and is used for pensions, just not for public pensions at the state level because state governments are often exempt from regulations controlling private actors. Do we know how to do the same for infrastructure, especially large infrastructure projects? Infrastructure needs and costs are much more dynamic, which makes it easier to fudge numbers and avoid accountability--now and later.

jeffbax 8y ago
Except for when the pension and budget planners plan around 10% returns that don't happen, or the planners make really bad bets for a whole lot of people that will never meet expectations but the money is owed and has to come from somewhere (ultimately the taxpayers)
- azernik 8y ago
  "It's just a matter of relying on a conservative rate of return with a proven track record."
  - Spooky23 8y ago
    Responsible states have managed to figure out this problem.
    - jeffbax 8y ago
      I think you are over-estimating how many responsible states there are: https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/04/the-state-pension-funding-gap-2016 https://www.pewtrusts.org/en/research-and-analysis/issue-bri... > The funding gap for the state pension plans studied reached $1.4 trillion in 2016—an increase of $295 billion from 2015. State contribution policies proved insufficient to deal with the unfunded liabilities already on the books. Even if all assumptions had been met, the funding gap would have grown by $13 billion. Instead, investments fell short of assumptions for the second year in a row, leaving state pension debt at historic highs. > Other measures of fiscal vulnerability also show cause for concern. The gap between returns on safe investments and state pension plan investment assumptions was the highest in decades. Independent analyses suggest that states can assume returns of about 6.5 percent a year for at least the next 10 years; 5 percent or lower returns are a real possibility over the next 20 years.7 While strong investment performance in 2017 would lower reported unfunded liabilities in the short term, measures of plan cash flow show that state pension plans increasingly depend on investment performance to keep assets from declining. All of these measures show that plans are more vulnerable to volatility than in the recent past, which could have an adverse impact on funds in the future. Meanwhile in California, and probably all the other underwater states soon enough: https://reason.com/blog/2017/10/05/pension-costs-are-forcing-cities-to-cut https://reason.com/blog/2017/10/05/pension-costs-are-forcing... > California public pension plans are funded on the basis of policies and assumptions that can delay recognition of their true cost. Even with this delay, local and state governments are facing increasingly higher pension costs—costs that are certain to continue their rise over the next one to two decades, even under assumptions that critics regard as optimistic. As budgets are squeezed, what are state and local governments cutting? Core services, including higher education, social services, public assistance, welfare, recreation and libraries, health, public works, and in some cases, public safety. There's a deep irony in re-electing Jerry Brown to fix the problem he made in the 70s with his giveaways to the public sector, which will be paid for by the private sector who generally is compensated much much less.
      - Spooky23 8y ago
        You're over-estimating the liability outside of truly screwed places like Illinois. Many states can and will screw over the employees. California needs a constitutional change, as pensions is just one of a bunch of issues that will kill the golden goose. Unions are getting killed right now -- the real boogeyman is the braindead propositions that tie the hands of the government. The Reason article to linked to is a great example of overplaying it: "Using data from Merritt Research Services, Governing Magazine determined that American cities with a population of more than 500,000 spend, on average, about a quarter of their budgets on debt service—including payments to pension system and other so-called "legacy costs" like retired public workers' health care costs." It's kind of disingenuous to portray debt service budgeting as pension costs and neglect to mention things like... bond payments. The far bigger problem is health costs, which need to be addressed at the national level. Much of the actual cost growth is in increasing health costs, especially for police/fire people who tend to retire young and may be receiving benefits for a decade or more before Medicare kicks in.
SilasX 8y ago
People still scream bloody murder about the Post Office being required to fund its pensions and avoid these catastrophes.
- r00fus 8y ago
  No the screaming was about politicians who required the Post Office to fund it's pensions, then went and used that fact to claim the Post Office is mismanaged and we should outsource that basic function.
  - wahern 8y ago
    I think one side of the aisle is definitely more to blame than the other for this manufactured controversy, but to be fair the Democrats also intentionally conflate the pension and healthcare liabilities, for somewhat similar reasons as the Republicans. Democrats have put themselves in the position of implicitly defending pay-go funding for pensions because they don't want to spook public sector unions at the state level where pay-go is the norm. (At the federal level the USPS was the outlier for using pay-go, rather than fully funding liabilities.) It's indefensible policy wise. The USPS is capable of fully funding the pension liabilities and are making solid progress. It's the healthcare liabilities which are bankrupting them, but Congress has prohibited them from cutting retiree healthcare benefits even though the USPS deliberately (and smartly) negotiated for that flexibility in the union contracts.
  - stale2002 8y ago
    But the fact that these liabilities weren't already funded is proof that it was mismanaged. The funding part is fixed now but the fact that it wasn't funded already is a problem.
    - barry-cotter 8y ago
      Before the USPS was treated as the civil service, with unfounded liabilities being paid out of current taxation, like social security. Now they want the USPS to act like a private company and fund its own liabilities. If you change the rules you should not expect an organisation that was fine under the old rules to be fine under the new ones, especially immediately.
AmVess 8y ago
There are many fixes. The employees at a company I used to work for funded their own pension, with company contributions up to some thousands a year per person. The plan was fully funded, too...meaning that it would never run out of money.
- caseysoftware 8y ago
  The point is that many cities did not fund their pension funds to the levels required. Further, as cities employees (often unions) negotiated better payments and a lower retirement age - because, it's all later! - the gap got bigger and bigger.
- TheBeardKing 8y ago
  The US government did that as well back in the 80s when it converted from CSRS to FERS. The unfunded obligation of the old system is something like $800 billion and won't be settled until 2090. The new system is a mix of SS, defined benefit, and defined contribution and is expected to stay solvent indefinitely. New federal employees hired after 2013 got screwed, however, as they upped their contribution rate to cover the massive problem CSRS caused.
AnthonyMouse 8y ago
> OTOH, how to fund pensions properly is a solved problem. There is another fine way to handle it, which is to use a defined contribution plan rather than a defined benefit plan. The problem for a lot of states is that it's already too late for any of that. It isn't that we don't know how to do it right, it's that they've been doing it wrong for 50 years and now the account has insufficient funds to cash the checks. The states essentially borrowed billions of dollars from their pensions without any available future revenue source from which to pay that amount of money back. So now they have two problems. The first is that if they don't want to be having this problem indefinitely they have to start contributing more than they have to the retirement funds of the current government employees, which means raising taxes or cutting spending (or, similar but different, reducing the number of government employees). And the second is that they have to either pay the shortfall for the existing pensions out of current revenues, which means raising taxes or cutting spending again, or they're filing for bankruptcy. But nobody ever likes any of those options.
- Spooky23 8y ago
  It’s not that simple at all. Sovereign entities like state governments have the option of simply not paying creditors. Bonds get renegotiated, pensioners get scrip instead of cash. Ultimately, these impossible obligations that US government subdivisions have will be paid for via inflation. The US has the unique ability to tax wealth globally via the dollar. Cities go bankrupt, states and territories do not. Pension obligations are generally state obligations.
  - gameshot911 8y ago
    >The US has the unique ability to tax wealth globally via the dollar Cool thought, and sounds pretty good as someone who lives in the US. Guess there are certain perks to being the world superpower.
    - kaibee 8y ago
      This works fine but you can only do it if there are large foreign reserves of your currency. Now, since foreign reserves of USD are massive, we can print a lot of money (relatively) before it becomes a problem, but it isn't like this exempts you from market effects. The reason foreign reserves of USD are so high in the first place is that we usually do this very little.
ericd 8y ago
Is 4-6%/yr considered conservative? The personal safe withdrawal rate from the Trinity study was 4% for the rest of someone's life, assuming normal age of retirement, but pension funds have to last longer than 30 years. And there are rumblings from many reputable corners, including Vanguard, that they think 4% may be an optimistic assumption given current valuations.
- tmorton 8y ago
  The Trinity study was about an individual's savings. A group, like a pension fund, has different requirements. The reason is mortality. Let's say an individual has a 20% chance of reaching age 90. They are not willing to take the risk of being 90 and broke, so they need to save for ages 90-95. With a large group of people, mortality is much more predictable. The ones that die early collect less, so the lucky few that live a long time can collect more. To learn more about this, the term to look for is "mortality credit".
  - ericd 8y ago
    Fair, as long as withdrawal rate isn't based on an assumption of 6% annual growth of the underlying investments.

by wahern 8y ago

jeffbax 8y ago

Except for when the pension and budget planners plan around 10% returns that don't happen, or the planners make really bad bets for a whole lot of people that will never meet expectations but the money is owed and has to come from somewhere (ultimately the taxpayers)

azernik 8y ago
"It's just a matter of relying on a conservative rate of return with a proven track record."
- Spooky23 8y ago
  Responsible states have managed to figure out this problem.
  - jeffbax 8y ago
    I think you are over-estimating how many responsible states there are: https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/04/the-state-pension-funding-gap-2016 https://www.pewtrusts.org/en/research-and-analysis/issue-bri... > The funding gap for the state pension plans studied reached $1.4 trillion in 2016—an increase of $295 billion from 2015. State contribution policies proved insufficient to deal with the unfunded liabilities already on the books. Even if all assumptions had been met, the funding gap would have grown by $13 billion. Instead, investments fell short of assumptions for the second year in a row, leaving state pension debt at historic highs. > Other measures of fiscal vulnerability also show cause for concern. The gap between returns on safe investments and state pension plan investment assumptions was the highest in decades. Independent analyses suggest that states can assume returns of about 6.5 percent a year for at least the next 10 years; 5 percent or lower returns are a real possibility over the next 20 years.7 While strong investment performance in 2017 would lower reported unfunded liabilities in the short term, measures of plan cash flow show that state pension plans increasingly depend on investment performance to keep assets from declining. All of these measures show that plans are more vulnerable to volatility than in the recent past, which could have an adverse impact on funds in the future. Meanwhile in California, and probably all the other underwater states soon enough: https://reason.com/blog/2017/10/05/pension-costs-are-forcing-cities-to-cut https://reason.com/blog/2017/10/05/pension-costs-are-forcing... > California public pension plans are funded on the basis of policies and assumptions that can delay recognition of their true cost. Even with this delay, local and state governments are facing increasingly higher pension costs—costs that are certain to continue their rise over the next one to two decades, even under assumptions that critics regard as optimistic. As budgets are squeezed, what are state and local governments cutting? Core services, including higher education, social services, public assistance, welfare, recreation and libraries, health, public works, and in some cases, public safety. There's a deep irony in re-electing Jerry Brown to fix the problem he made in the 70s with his giveaways to the public sector, which will be paid for by the private sector who generally is compensated much much less.
    - Spooky23 8y ago
      You're over-estimating the liability outside of truly screwed places like Illinois. Many states can and will screw over the employees. California needs a constitutional change, as pensions is just one of a bunch of issues that will kill the golden goose. Unions are getting killed right now -- the real boogeyman is the braindead propositions that tie the hands of the government. The Reason article to linked to is a great example of overplaying it: "Using data from Merritt Research Services, Governing Magazine determined that American cities with a population of more than 500,000 spend, on average, about a quarter of their budgets on debt service—including payments to pension system and other so-called "legacy costs" like retired public workers' health care costs." It's kind of disingenuous to portray debt service budgeting as pension costs and neglect to mention things like... bond payments. The far bigger problem is health costs, which need to be addressed at the national level. Much of the actual cost growth is in increasing health costs, especially for police/fire people who tend to retire young and may be receiving benefits for a decade or more before Medicare kicks in.

SilasX 8y ago

People still scream bloody murder about the Post Office being required to fund its pensions and avoid these catastrophes.

r00fus 8y ago
No the screaming was about politicians who required the Post Office to fund it's pensions, then went and used that fact to claim the Post Office is mismanaged and we should outsource that basic function.
- wahern 8y ago
  I think one side of the aisle is definitely more to blame than the other for this manufactured controversy, but to be fair the Democrats also intentionally conflate the pension and healthcare liabilities, for somewhat similar reasons as the Republicans. Democrats have put themselves in the position of implicitly defending pay-go funding for pensions because they don't want to spook public sector unions at the state level where pay-go is the norm. (At the federal level the USPS was the outlier for using pay-go, rather than fully funding liabilities.) It's indefensible policy wise. The USPS is capable of fully funding the pension liabilities and are making solid progress. It's the healthcare liabilities which are bankrupting them, but Congress has prohibited them from cutting retiree healthcare benefits even though the USPS deliberately (and smartly) negotiated for that flexibility in the union contracts.
- stale2002 8y ago
  But the fact that these liabilities weren't already funded is proof that it was mismanaged. The funding part is fixed now but the fact that it wasn't funded already is a problem.
  - barry-cotter 8y ago
    Before the USPS was treated as the civil service, with unfounded liabilities being paid out of current taxation, like social security. Now they want the USPS to act like a private company and fund its own liabilities. If you change the rules you should not expect an organisation that was fine under the old rules to be fine under the new ones, especially immediately.

AmVess 8y ago

There are many fixes. The employees at a company I used to work for funded their own pension, with company contributions up to some thousands a year per person. The plan was fully funded, too...meaning that it would never run out of money.

caseysoftware 8y ago
The point is that many cities did not fund their pension funds to the levels required. Further, as cities employees (often unions) negotiated better payments and a lower retirement age - because, it's all later! - the gap got bigger and bigger.
TheBeardKing 8y ago
The US government did that as well back in the 80s when it converted from CSRS to FERS. The unfunded obligation of the old system is something like $800 billion and won't be settled until 2090. The new system is a mix of SS, defined benefit, and defined contribution and is expected to stay solvent indefinitely. New federal employees hired after 2013 got screwed, however, as they upped their contribution rate to cover the massive problem CSRS caused.

AnthonyMouse 8y ago

> OTOH, how to fund pensions properly is a solved problem. There is another fine way to handle it, which is to use a defined contribution plan rather than a defined benefit plan. The problem for a lot of states is that it's already too late for any of that. It isn't that we don't know how to do it right, it's that they've been doing it wrong for 50 years and now the account has insufficient funds to cash the checks. The states essentially borrowed billions of dollars from their pensions without any available future revenue source from which to pay that amount of money back. So now they have two problems. The first is that if they don't want to be having this problem indefinitely they have to start contributing more than they have to the retirement funds of the current government employees, which means raising taxes or cutting spending (or, similar but different, reducing the number of government employees). And the second is that they have to either pay the shortfall for the existing pensions out of current revenues, which means raising taxes or cutting spending again, or they're filing for bankruptcy. But nobody ever likes any of those options.

Spooky23 8y ago
It’s not that simple at all. Sovereign entities like state governments have the option of simply not paying creditors. Bonds get renegotiated, pensioners get scrip instead of cash. Ultimately, these impossible obligations that US government subdivisions have will be paid for via inflation. The US has the unique ability to tax wealth globally via the dollar. Cities go bankrupt, states and territories do not. Pension obligations are generally state obligations.
- gameshot911 8y ago
  >The US has the unique ability to tax wealth globally via the dollar Cool thought, and sounds pretty good as someone who lives in the US. Guess there are certain perks to being the world superpower.
  - kaibee 8y ago
    This works fine but you can only do it if there are large foreign reserves of your currency. Now, since foreign reserves of USD are massive, we can print a lot of money (relatively) before it becomes a problem, but it isn't like this exempts you from market effects. The reason foreign reserves of USD are so high in the first place is that we usually do this very little.

ericd 8y ago

Is 4-6%/yr considered conservative? The personal safe withdrawal rate from the Trinity study was 4% for the rest of someone's life, assuming normal age of retirement, but pension funds have to last longer than 30 years. And there are rumblings from many reputable corners, including Vanguard, that they think 4% may be an optimistic assumption given current valuations.

tmorton 8y ago
The Trinity study was about an individual's savings. A group, like a pension fund, has different requirements. The reason is mortality. Let's say an individual has a 20% chance of reaching age 90. They are not willing to take the risk of being 90 and broke, so they need to save for ages 90-95. With a large group of people, mortality is much more predictable. The ones that die early collect less, so the lucky few that live a long time can collect more. To learn more about this, the term to look for is "mortality credit".
- ericd 8y ago
  Fair, as long as withdrawal rate isn't based on an assumption of 6% annual growth of the underlying investments.