“You might think that underfunding pension plans is the sole purview of unscrupulous local and state governments. Unfortunately, irrational optimism, an inability to accurately plan for the future, and avarice are all very human weaknesses exhibited by people in all walks of life—even faith-based and church-affiliated hospitals and charities. . . .It’s interesting that charities and governments are ripping employees off on pensions worse than private businesses. The answer to this apparent puzzle isn’t that corporate CEOs are somehow more virtuous than men of the cloth or big city politicians; it’s that we have tough laws governing corporate pensions and weaker ones when it comes to charities and governments. We’ll also take this occasion to remind our readers why we think defined contribution pensions are the best bet for workers today. There are no pension programs that are totally risk free, or course. Life just doesn’t work that way. But too many people continue to underestimate the risk of defined benefit plans in a turbulent economic and political landscape.”
American Interest via Instapundit
32 comments:
Unfortunately, irrational optimism, an inability to accurately plan for the future, and avarice are all very human weaknesses exhibited by people in all walks of life
This ^ and the inability to rationally use or understand MATH and refuse to accept the mathematical results of a DBP. Wishful thinking and mathematics going head to head.....Math wins!!
This the key line here is:
The answer to this apparent puzzle isn’t that corporate CEOs are somehow more virtuous than men of the cloth or big city politicians; it’s that we have tough laws governing corporate pensions
It would seem tougher regulations rather than private enterprise virtuousness are the relevant difference. Better regulations for the government and non-profit sector would obviously help.
Fixed payment pensions are having trouble also because interest rates are being held down, so nobody can make the income from the funding they did to pay the obligations.
Look for even well funded pensions to go belly up.
Companies can then offload their pensions on the federal pension guarantee system, and the latter is entitled to limit payouts to a reasonable amount on higher pensions.
So unions get a haircut, in particular, when that happens.
That ought to be extended to government pension systems, and everybody ought to offload their pensions.
I had a discussion last week with someone complaining that the USPS was being treated unfairly by Congress regarding pension funding ... all because as of 2006 they had to comply with the same ERISA rules as private companies.
There is no way I would trust my employer, private or public with my retirement plan. Throughout my career, when offered, I always turned down retirement benefits for taking the money now, which I invested well enough to allow me to retire at 50 which I then didn't do. I bought my first income property at 30, just 7 years after being homeless, and never looked back. If I had accepted the retirement benefits instead, I still wouldn't be able to retire. I don't trust other people to cover my ass, and never have, and I also don't want the responsibility of handling anyone else's retirement.
rh, qualified DB plans come with caps on payments. (Qualified, in this case, means that they meat certain requirements to make the eligible for PBGC coverage and certain tax benefits.)
Most executives are in non-qualified plans, which are NOT insured by the PBGC, and subject to loss if the sponsoring entity goes belly-up.
The only advantage is taxes, and over the long run you can get that back with better returns and then some, plus you lose liquidity, and opportunity cost.
It seems unfair to me that there is a tax break for these accounts and nothing for those of us who do our own saving and investing. Again we reward dependency.
bagoh20 said...
There is no way I would trust my employer... with my retirement plan.
Knowing what I know about your employer, I don't blame you!
All this proves is how infested government has been in the financial system and in particular the a lack of successive or successful budgets from this administration are rearing their heads. In fact by avoiding putting forth budgets and having unfettered spending, this is the peril we are now put in.
It would seem tougher regulations rather than private enterprise virtuousness are the relevant difference. Better regulations for the government and non-profit sector would obviously help.
Really? Which regulations would you enact that aren't covered in the horrible law known as Dodd-Frank or the Glass-Steigal act, you stupid socialist monkey. You would rather encapsulate the flow of wealth and capture it so that government hold a tighter reign on it than letting the private sector know how to better handle it.
The only people that I felt good about setting up DBPs (defined benefit plans) were those in closely held family type corporations or businesses. Mostly doctors, lawyers, architectural firms, ranching family corps where the owners and their family were the sole or main employees. These people don't mind fully funding their plans since the money is basically going from one pocket to the other with some pretty good tax advantages. In addition they can chose some rather strict vesting schedules that will eliminate any part time employees or those without longevity.
Even so. With the declining returns on investment the annual nut that had to be put into the plans became unsustainable for some of those private plans.
A DBP plan for individual employees is not always a good thing since you lose control of your ability to invest in your own interests. You don't get to chose what investments you would like and are stuck with the 'pool'. A qualified plan is even worse since the limitations on what types of vehicles can be used for investments create a portfolio that is not that great for the younger and perhaps more aggressive investor employee.
The problem with such a plan, like CalPers, is that their investment return assumptions are completely unrealistic compared to the reality of the return on investments. To be real, they would have to dramatically increase the employee contribution AND the employer contribution. The employees would squeal like the scalded piggy wiggys that they are and the employers (taxpayers) are already groaning under the load.
The entire thing is completely unsustainable as it is, and no one has the political guts or balls to get real.
Who has your retirement right now? Do you trust them, do you even know them? It's kind of important stuff.
The best solution is eliminating defined benefit plans altogether. Those who designed them didn't understand the risks, and naturally neither do the beneficiaries. Everyone should have control of their own assets, and if the company / jurisdiction can't afford it they cannot afford those employees.
I notice unions are not mentioned.
Good point, Ed.
DBQ, is there a book you recommend for total novices on personal finance?
rh:
"That ought to be extended to government pension systems, and everybody ought to offload their pensions."
Since bago's been talking about how screwed up LA is, I'm wondering what happens if and when the unions default on their pension obligations. Bago, is there a projected date how long it can go on like it is?
Just as long as you good people are willing to bail us out. Without California, the Dems would never win another Presidential election ever, so we're feeling pretty safe right now.
"This land is your land
This land is my land
From California
to the New York island..."
California:
"Outsized pension costs now drive the states’ fiscal crises, even before health reform puts more pressure on the states. Federal aid already amounts to almost 30% of states’ total revenues, the Senate report adds.
“By standard accounting methods, some state pension funds will run out of assets within as little as five years,” the Senate report said. “When the states with the worst pension systems come knocking at Washington’s door for a bailout, it will ultimately be taxpayers in more prudent states who will pay for the recklessness of the negligent states.”
It's much much worse in our one-party state: Read the article if you like the horror genre.
http://www.foxbusiness.com/government/2013/06/11/california-on-brink-pension-crisis/
"Just as long as you good people are willing to bail us out. Without California, the Dems would never win another Presidential election ever, so we're feeling pretty safe right now.
All one big happy family :)
Incidentally, California government has a nearly unbroken record of lying about its finances huge on the over-confident side, so whenever you hear that we are doing OK or as recently we have turned a deficit into a surplus, you can just laugh. Even when the numbers are really bad, they always end up later to be even worse than reported.
I heard Rush L. say today that the Obamcare website was forecasted to cost $93 million, but ended up costing $634 million. Not bad.
I really don't even understand how you can spend $1 million building a website. Everything you need already exists, and a website is the most easily of scalable of things you could ever build. $634 million? And it doesn't work as good as this blog. Have you seen the staff person on Fox who has been trying to create an account for over a week now? Dead site.
You see, bagho, it is all the Republicans fault. The backward Republican-led states that refused to cooperate and sign up to go live with their state exchanges. What a bummer to have to deal with those guys, resisting progress that way. Universal healthcare is inevitable, everybody knows that, it is axiomatic, yet there they are resisting. Were it not for those dunderhead dummkopf troglodytes
riding the brakes the whole way we'd be able to get somewhere.
Always tossing a sabot, as it were, into the works. The trials we've had to deal with at the hands of these people, it's outrageous.
I've always believed that non-qualified deferred compensation plans funded by cash-value life ins or annuities is the best way to go for those in a position to install them or benefit from them. First, from the corporations pv for key employees in large corporations one can selectively discriminate, own the policy with options to transfer ownership at retirement of employees and be assured a funding mechanism is in place; for self-employed who are "C" corps or LLCs they work well also. as the "employee" and the corp are effectively one and the same, while not having to worry about standard vesting rules for other employees as in 401k, etc.
I'm not going to name the author of this piece, just say that it is the best succinct summary of how things work I've read this year:
I don't think enough people realize that private business pays for everything. The excess prodcutive output of people working voluntarily and cooperatively in businesses pays for everything else. Everything the government does for you as well as everything you buy yourself starts out as private business productivity. It's the engine of it all. Consequently, whether you believe in big government or small, you should still recognize that supporting business is not only necessary, but primary. And what most of us want in the way of support is to be left alone, to be allowed to run without our shoes tied together. We know how to do our jobs, and if we don't some other business will replace us. Of course, we need roads, courts, police, and stability, etc., but that's rarely the focus of our government today. Handling those responsibilities has taken a back seat to taking care of the special interests, friends and supporters who just happen to be somehow related to those services. The efficiency or quality of the service is just a vehicle - virtually an excuse - to distribute money and power. Maybe it was always so, but citizens should always be fighting to cull the fox population, and protect the health of the golden geese. I don't see any interest in doing that at all on one entire side of the political spectrum, and much of the other side only talks about it.
Anyone who has been paying attention here at LLL will know who wrote it. It is a masterwork.
I need a vacation.
I really don't even understand how you can spend $1 million building a website.
You'll spend a heck of a lot more than that if you want it to be able to do data-intensive work for tens of thousands of simultaneous users.
The major expense for something like Obamacare is doing to be on the data management side. Health care data is a gigantic mess. There are umpteen-zillion different standards and formats, thousands upon thousands of regulations and laws (some of which carry criminal penalties for breaking)... and all of it is in constant flux as companies, doctors, bureaucrats and politicians make changes.
If you said the project had a billion-dollar budget spread over ten years I'd still be skeptical the end result would do what Obamacare promised to do.
But Revenant, the current system that already cost $634 million doesn't attempt to handle all that stuff. It's much less ambitious, or should be. At this point it's only trying to create records in the data base for accounts that include the user's information, and which plan they choose after asking a series of questions and providing some basic choices. A little more data, but not much more complex at this point than an account on Amazon. On top of that, it's not even getting through the account creation process which has been standardized for years.
"However, computer experts say the website has major flaws.
“It wasn’t designed well, it wasn’t implemented well, and it looks like nobody tested it,” said Luke Chung, an online database programmer.
Chung supports the new health care law but said it was not the demand that is crashing the site. He thinks the entire website needs a complete overhaul.
It’s not even close. It’s not even ready for beta testing for my book. I would be ashamed and embarrassed if my organization delivered something like that,” he said."
http://www.cbsnews.com/8301-505269_162-57606633/obamacare-website-looks-like-nobody-tested-it-programmer-says/
What do you want to bet that most of that $634 million didn't go to creating the site at all. We'll find that out in the near future I'm sure, and there will be shrugs. Very serious shrugs.
Lets go April. I'm thinking a nice 3 day drive around the Big Island of Hawaii in a convertible, with tunes tumbling out across the roadside in our wake.
Aridog, Thanks.
Only if we can play Cee lo!
Big Island sounds nice. Sadly, I am chained to the state for the next few busy months. I have work and installation commitments.
I might have to settle for Las Vegas in January. I'll be there 26-30th ish.
I could be wrong, bago, but my impression is that it also handled the heavy lifting of verifying records and matching applicants to insurers.
If it *didn't* do that then I absolutely agree that that kind of money is crazy. :)
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