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Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so. In a world where interest rates are being pushed lower eve

Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so. In a world where interest rates are being pushed lower every year, pensions are basically forced to move to riskier assets to deliver the same nominal return. (This is, in fact, one of the main points of lower interest rates.) Because pensions are not marketable instruments, it's also not possible for these risks to be priced in. (If a bond had, say, a 50% chance of default, its price on the market would also decrease, pushing up its effective yield. It seems pensions are more of an instrument that is doomed to fail, and expecting them to hold up to their promises is going to lead to a lot of pain for either retirees, or the current and future workers supporting them.

throw0101a 7y ago
> Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so. That is traditionally what most people mean by "pension", but it is DB pensions aren't the only kind. There are also defined contribution (DC) pensions: * https://en.wikipedia.org/wiki/Defined_contribution_plan https://en.wikipedia.org/wiki/Defined_contribution_plan
mrfredward 7y ago
In the past, responsibly run pension funds projected a conservative rate of return to account for these risks. The problem isn't the financial model of pensions, but the politics of it. Lowering the expected rate of return of a pension fund causes a huge increase in the funding requirements that are calculated, and a suddenly appearing budget problem such as this is bad news for people's political careers. The same problem exists in the private sector. Changing the model to project a lower rate of return hurts profit numbers in the near term and makes a huge liability appear on the balance sheet, so executives will kick the can down the road as much as they can. The problem is only worse with public sector pensions because of regulatory differences.
- Kalium 7y ago
  Another wrinkle is that in the private sector, the entity can go bankrupt and that's that. In the public sector, the government entity is almost certainly on the hook forever.

throw0101a 7y ago

> Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so. That is traditionally what most people mean by "pension", but it is DB pensions aren't the only kind. There are also defined contribution (DC) pensions: * https://en.wikipedia.org/wiki/Defined_contribution_plan https://en.wikipedia.org/wiki/Defined_contribution_plan

mrfredward 7y ago

In the past, responsibly run pension funds projected a conservative rate of return to account for these risks. The problem isn't the financial model of pensions, but the politics of it. Lowering the expected rate of return of a pension fund causes a huge increase in the funding requirements that are calculated, and a suddenly appearing budget problem such as this is bad news for people's political careers. The same problem exists in the private sector. Changing the model to project a lower rate of return hurts profit numbers in the near term and makes a huge liability appear on the balance sheet, so executives will kick the can down the road as much as they can. The problem is only worse with public sector pensions because of regulatory differences.

Kalium 7y ago
Another wrinkle is that in the private sector, the entity can go bankrupt and that's that. In the public sector, the government entity is almost certainly on the hook forever.