NYT - Bad Math and a Coming Public Pension Crisis

[a1smith]

NYT (7/8/2015) - Bad Math and a Coming Public Pension Crisis

After Mr. Palermo dug into the numbers, he found that the actuary — the person who advises pension plan trustees about how much money to set aside — was using a mortality table from 1971 that showed La Grange’s roughly 100 police officers and firefighters were expected to die, on average, before reaching 75, compared with 79 under a more recent table.

It is only the second time in recent memory that the Actuarial Standards Board has held a public hearing, an indication of the gravity of the nation’s pension woes. State and local governments have promised several trillion dollars’ worth of benefits to retirees — the exact amount is in dispute. Now, with large numbers of public workers retiring, the money set aside is turning out to be at least a trillion dollars short.

The power of compound interest (COLA) is a major factor in SS and pension funding shortfalls; the other factor is the increasing life expectancy of people.  Just as SS is talking about paying out only 75% of benefits starting in 2033 (Status Of The Social Security And Medicare Programs) it seems pretty clear that the same thing will happen with pensions.

So, a reduced pension (if you even have one these days) is something to consider when planning for retirement.  Another thing to consider is that life expectancies continue to improve so even using your life expectancy in a current actuarial table may be non-conservative.

For someone planning to FIRE very early the SS and pension values would be low to non-existent so maybe they are not affected other than the longer life expectancy.  However, many posters on this forum talk about having SS, pension or both in their plans.

[mancityfan]

I plan (expect) to eventually claim a pension and social security. I am 51 and a teacher who will put in 20-25 years into my state system/pension plan by the time I am done. Sadly, I feel the people most affected will be the younger folks behind me, as adjustments are made to state pensions and social security. I may well be impacted also, but I am saving and investing as much as I can to make sure that I can still look forward to a good retirement. In my view, the whole issue of SS is an area of tremendous fear mongering and hyperbole. With regard to state pensions though, I foresee that in the next decade there will be some very prominent cases showing just how poorly many state pension systems have been managed, and frankly raided and underfunded. Those who do receive state pensions may get very little sympathy for their plight (despite paying into their plan for decades) as they will inevitably be portrayed as "moochers", the most common political strategy used to deflect from the financial mismanagement by the politicians themselves.

[hodedofome]

We can always count on politicians to over promise and under deliver, and pensions are included in that. Assuming they can always produce an 8% return and people die when the pension needs them to...There's just no margin for error.

I don't count on SS or a pension in my planning, and I would advise others to do the same. I know there will be some benefit by the time I'm there, but it's anyone's guess as to how much is left for me.


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[J]

The entire concept of a fixed-benefit pension seems ridiculous.  "No matter what the market does or how much money was put away on your behalf, you'll get a guaranteed amount."  That's a fast recipe for going bankrupt, and sure enough every other pension plan has a perpetual shortage; the private ones just fail, and the public ones pull the difference from the no-limit credit card of government budgets (and still often end up reducing benefits, when they can without getting sued).

Here's a completely sensible pension plan that will never wind up in financial difficulties: "We're going to put away X for you every year into a sane index fund, vesting over (insert pension period here), to a maximum of (amount needed for a comfortable retirement income). Whatever that fund makes, you get as your retirement."

[mrpercentage]

So, a reduced pension (if you even have one these days) is something to consider when planning for retirement.  Another thing to consider is that life expectancies continue to improve so even using your life expectancy in a current actuarial table may be non-conservative.

This idea sucks. I mean a pension costs about 9% of gross income. Honestly, I don't even know that many people who 401k 9%. Leaves me thinking I really would be better off investing it myself if they would match it like they do a pension. As I see it, 9% is taken without choice and I will not see interest or a match for the first five years then not seeing full interest or match until 10 years. Then add in social security taking away 6% of my pay. Put the two together and thats 15% of my gross-- would it really do better than me investing 15% the entire time myself-- I have serious doubts. With my pension in the same pool with other peoples pension (and the same with social security) people-who-know-how-to-game-the-system and take more then they should be able to--it leads to a possibility of giving my money to someone else and them saying "oops we didn't fund it right; instead of, we took your money and gave it to them."

I mean, people do understand that pensions come at a really high cost to the employee as well right. The way the public talks about it you would think that they just give us money. Nope. If I quit at 4 years they would give me exactly what I put in and not a dime more. 9% of my pay the whole time and not a single dime more. I hope people understand that when they talk about pensions as if it was a gift of some kind

[asiljoy]

I mean, people do understand that pensions come at a really high cost to the employee as well right. The way the public talks about it you would think that they just give us money. Nope. If I quit at 4 years they would give me exactly what I put in and not a dime more. 9% of my pay the whole time and not a single dime more. I hope people understand that when they talk about pensions as if it was a gift of some kind

I had no idea. Thanks for the info.

[mrpercentage]

I mean, people do understand that pensions come at a really high cost to the employee as well right. The way the public talks about it you would think that they just give us money. Nope. If I quit at 4 years they would give me exactly what I put in and not a dime more. 9% of my pay the whole time and not a single dime more. I hope people understand that when they talk about pensions as if it was a gift of some kind

I had no idea. Thanks for the info.

That is for Arizona to be exact.

[mancityfan]

As a teacher I would love to have the option to not contribute to the state pension plan, and invest independently. However, this is not possible where I am (Maryland) so I will no doubt be reminded just how "lucky" I am to have a pension when my time comes, even though I have funded it myself and it is certainly at risk of being changed/downgraded in the future. I will forever be portrayed as a "mooching" teacher who is "lucky" to get a pension. Sigh.

[cjottawa]

Article of relevance: https://www.americanprogressaction.org/issues/economy/report/2012/02/01/11058/in-defense-of-defined-benefit-pensions/

TL;DR: a well managed DB pension plan costs less to administer than a DC pension or 401k plan; money goes into a pool and is invested in a diversified basket of assets. With a DC plan, you have to send out regular performance reports which differ for every employee (think of the cost of those customized reports) and you give them the option of choosing what funds they want.

I'd argue that most people (MMMers aside) aren't qualified or emotionally prepared to make investment decisions, resulting in bad choices (buying on euphoria, selling on panic) which ultimately costs the taxpayer more as they seek more in government entitlements due to pension shortfalls.

For every complex problem there is an answer that is clear, simple, and wrong. - H. L. Mencken

[Retire-Canada]

My GF has a DB pension. I have nothing, but my personal investments.

I go back and forth over who has the better deal. I definitely have a ton more flexibility and she has a ton more security once she hits 55.

If you want to retire early her plan sucks, but if you are fine with a more traditional retirement age it is pretty sweet.

For most people the DB pension is a better idea. No management effort on the contributor's part and reliable source of income once you stop working.

[Yankuba]

As a teacher I would love to have the option to not contribute to the state pension plan, and invest independently. However, this is not possible where I am (Maryland) so I will no doubt be reminded just how "lucky" I am to have a pension when my time comes, even though I have funded it myself and it is certainly at risk of being changed/downgraded in the future. I will forever be portrayed as a "mooching" teacher who is "lucky" to get a pension. Sigh.

What percentage of your pension consists of your contributions plus their growth? I'm sure it is a lot less than 100%

[beltim]

As a teacher I would love to have the option to not contribute to the state pension plan, and invest independently. However, this is not possible where I am (Maryland) so I will no doubt be reminded just how "lucky" I am to have a pension when my time comes, even though I have funded it myself and it is certainly at risk of being changed/downgraded in the future. I will forever be portrayed as a "mooching" teacher who is "lucky" to get a pension. Sigh.

What percentage of your pension consists of your contributions plus their growth? I'm sure it is a lot less than 100%

This depends a ton on the state and lots of other factors. For states that have opted out of social security for their pension systems, the average state pays less than they would for social security, while the employee pays a lot more. See table 4 at http://www.massbudget.org/report_window.php?loc=Pension_3_11.html

[CommonCents]

As a teacher I would love to have the option to not contribute to the state pension plan, and invest independently. However, this is not possible where I am (Maryland) so I will no doubt be reminded just how "lucky" I am to have a pension when my time comes, even though I have funded it myself and it is certainly at risk of being changed/downgraded in the future. I will forever be portrayed as a "mooching" teacher who is "lucky" to get a pension. Sigh.

What percentage of your pension consists of your contributions plus their growth? I'm sure it is a lot less than 100%

This depends a ton on the state and lots of other factors. For states that have opted out of social security for their pension systems, the average state pays less than they would for social security, while the employee pays a lot more. See table 4 at http://www.massbudget.org/report_window.php?loc=Pension_3_11.html

Also consider that the salaries for these positions are often substantially lower than in the private sector, in part for the pension benefit. 

[Cassie]

People  choose to work for less $ in exchange for a pension later but somehow others see that as being given something. Also there is a  lot of crap to put up with when you work for the government. 

[Scandium]

Article of relevance: https://www.americanprogressaction.org/issues/economy/report/2012/02/01/11058/in-defense-of-defined-benefit-pensions/

TL;DR: a well managed DB pension plan costs less to administer than a DC pension or 401k plan; money goes into a pool and is invested in a diversified basket of assets. With a DC plan, you have to send out regular performance reports which differ for every employee (think of the cost of those customized reports) and you give them the option of choosing what funds they want.

I'd argue that most people (MMMers aside) aren't qualified or emotionally prepared to make investment decisions, resulting in bad choices (buying on euphoria, selling on panic) which ultimately costs the taxpayer more as they seek more in government entitlements due to pension shortfalls.

For every complex problem there is an answer that is clear, simple, and wrong. - H. L. Mencken

I've yet to read it, but what? 401ks cost more because paperwork? Really, how? They have heard of these "computers" right? They can do magic stuff like this quite easily. I don't know the last time I got a performance report from my 401k plan, nor do I care. I think they send emails. And they have a website if I want to check it.

Considering the average worker these days have something like a dozen or more jobs over their life time I think it's good we're moving away from pensions. How would you even deal with that many? "Oh the pension from this place I worked for 4 years will give me $17.94/ month in retirement, great!"

edit: oh, they also say DB plans are better because of "professional management". Haha, yeah that always works out great! If only I could have a politically appointed fund manager to run my investments, what a dream..

[sethdrebitko]

I mean, people do understand that pensions come at a really high cost to the employee as well right. The way the public talks about it you would think that they just give us money. Nope. If I quit at 4 years they would give me exactly what I put in and not a dime more. 9% of my pay the whole time and not a single dime more. I hope people understand that when they talk about pensions as if it was a gift of some kind

It is a bit tough to blanket hate or love them. Take my wife for example. At her tier in New York state she only has to contribute to her pension for 20 years. After that she no longer contributes any source of income. On top of that after a certain period of time working at the state she can leave retiring with pay. She has a pretty sweet, but also stupid set up.

[a1smith]

So, a reduced pension (if you even have one these days) is something to consider when planning for retirement.  Another thing to consider is that life expectancies continue to improve so even using your life expectancy in a current actuarial table may be non-conservative.

This idea sucks. I mean a pension costs about 9% of gross income. Honestly, I don't even know that many people who 401k 9%. Leaves me thinking I really would be better off investing it myself if they would match it like they do a pension. As I see it, 9% is taken without choice and I will not see interest or a match for the first five years then not seeing full interest or match until 10 years. Then add in social security taking away 6% of my pay. Put the two together and thats 15% of my gross-- would it really do better than me investing 15% the entire time myself-- I have serious doubts. With my pension in the same pool with other peoples pension (and the same with social security) people-who-know-how-to-game-the-system and take more then they should be able to--it leads to a possibility of giving my money to someone else and them saying "oops we didn't fund it right; instead of, we took your money and gave it to them."

I mean, people do understand that pensions come at a really high cost to the employee as well right. The way the public talks about it you would think that they just give us money. Nope. If I quit at 4 years they would give me exactly what I put in and not a dime more. 9% of my pay the whole time and not a single dime more. I hope people understand that when they talk about pensions as if it was a gift of some kind

Interesting info.  Your pension works a lot different than mine.  I have private (company) pension which initially was structured in the "traditional" sense - your pension benefit accrued slowly at first and then its value increased faster the closer you got to retirement.  There was a second component that you could contribute to and you would get an additional amount if you did that.

Well, a while back, that pension was frozen at its current vested value and continued with a pension where the benefits increased in straight line fashion.  So, for people that were close to retirement, instead of getting the original rapid benefit increase they now had a slower constant rate of benefit increase.  A lot of companies did this conversion, IBM being one of the first.  You can read more here - Retirement Heist  Someone, not at IBM, who did actuarial science as a hobby!!! discovered the gory details of how it worked.

Then, the straight line pension plan was frozen as well a few years later.  So, now I have the frozen value of those two pensions.  If I start collecting at 62 or later the amount is the same; if I start collecting earlier then the amount is reduced by some age factor.  I don't know the exact numbers but from initial plan at time of hire to final result it is probably at least a 50% decrease.  So, my experience, in addition to what the article mentions, led to my comment about planning for possible reductions.  Luckily, I have both DB and DC (401k) and my 401k is a very good plan - no admin fees, low ER, and good fund choices.

DB plans are basically on their way out; DC plans place the risk on the employee rather than the company/government.  In another thread, I saw someone post that new teachers in Michigan no longer have a pension, only a 403b.  Most private companies only have 401k now.

[mrpercentage]

Im going to look deeper into this. Im glad this came up. I should know exactly whats going on with my pension like I would any other investment.

Right now I only really know what it costs me, and what others say it has cashed out for.

I don't want to spread any false assumptions. I can tell you that it is not free. It takes more from me than most people I know invest total. Pension aside I also invest in deferred comp, and a Roth, and do a little mad money in stocks. Honestly Im probably doing a little too much and should consolidate my investments