Sunday, December 28, 2014

Pensions

That which cannot be sustained will not be sustained.

According the to the Daily Caller, Congress passed a law that provides a legal basis for cutting the pension benefits of workers who have already retired.

Under the law, “plans that estimate they won’t have enough money to pay 100 percent of benefits within 15 or 20 years can cut benefits,” but not for retirees who are 80 or older, or those who are on disability. Cuts would also be phased in gradually, so retirees between the ages of 75 and 79 would face smaller cuts than those under 75.

About five percent of the US population is over 80 years of age.  Half of that five percent will die within five years.  So any plans that "grandfather" people over 80 are of limited scope and rapidly extinguish due to mortality.


“Participants would have to be given the right to vote on cuts before the benefit reductions could be implemented,” claims the website Business Insurance, but “the U.S. Treasury Department could override the vote” if the plan in question is deemed “systemically important” to the health of the PBGC.

The article is guilty of a head-fake.  It implies that the legislation will primarily impact those pensions associated with mining, construction trades and some manufacturing sectors.

 Many public pension plans are seriously underfunded.

The Illinois state pension plan is only 39% funded.
Kentucky's is 44% funded.
Connecticut's is 49% funded.
Half of the states are below 70% funded.
Various municipal and "teacher" pensions are in equal or worse shape.

The tides effect all boats


Two factors make "catch-up" plans a losing proposition.

The Baby Boomers worked jobs that typically had defined benefits pensions. Those pension plan administrators were able to enforce savings because the workers never saw the money.  It was skimmed before it came close to payroll.  Much of those monies were invested in the stock market.   This resulted in a multi-decade rising tide for the stock market.

That trend is now going into reverse.  The Baby Boomers are retiring and the pension funds are tipping into a liquidation mode.  More sellers and fewer buyers means equity prices will go in the toilet.

The second factor is that few younger workers have the luxury of a defined benefit retirement plan.  For a thousand different reasons these younger workers are not directing money into the stock markets.  Again, fewer buyers.

Actuarial accountants formerly used 80% funding as a bellwether of pension health.  There are reasons why this number is way too accommodating.  One of the underlying assumptions was that there would be a steady stream of younger workers coming into the bottom of the plan thereby providing a continuous flow of money while "things were sorted out".  Those younger workers are now being diverted into defined contribution plans. 

Social Security


It is human nature to use previous efforts as a template for the next challenge.  A fisherman builds his next boat the same way as the last one...if he did not drown.

Who can doubt that this legislation will be the template for any Social Security reforms we might see in the future.  In fact, they tipped their hand by including provisions for "disability". 

Editorializing


I think planning ahead and preparing is a good thing.  I think the proposed changes will be painful for many people but they will not be as cataclysmic as walking out to the mailbox and getting no check.  And that is exactly the prospect that many people would face if Congress sits on its hands.

Part of me feels vindicated.  Mrs ERJ and I saved and lived well within our footprint.  Many of our coworkers took out home equity loans to purchase time-shares and finance cruises and such.  They slept well knowing that their futures were secured by the unshakable fiscal strength of governmental units and the well-starched backbones of elected officials.  What could go wrong?

Pensions, Part II

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