why defined benefit pensions are in trouble.

[charliebrown]

Dan Amerman lays this out very well.

http://danielamerman.com/aEight.htm

http://www.safehaven.com/article/216...ent-insolvency

He argues that with a defined benefit pensions a formula was created that includes
how much you contribute, the number of years you will contribute, the investment gain, the size of your pension and the number of years you will live.

With Zirp, and equities having a "lost decade" in equities, the "magic money machine" no longer works. Assuming an 8% APR pension holdings should have more than doubled between 2000 and 2011. Obviously they have not.

To make matters worse, make the amount of pension payable guaranteed by a state or local governement, and now the tax payer is on the hook for making the pension plan whole. It's just not going to work. I don't know the way out. Another
5 years of ZIRP and no equity growth and the problem just gets worse.

[don]

Re: why defined benefit pensions are in trouble.

The Federal Government's Deliberate Financial Destruction Of The States

It's really fairly straight forward if you have a knowledge of how finance and financial compounding works. It is strongly in the short term interests of politicians who are trying to win elections in two year election cycles, to massively intervene in the markets for the purportedly public good of keeping interest rates low and asset values high. Which is exactly why political pundits who know virtually nothing about economics and finance jump on the wagon and say, "yes, this is good for all of us!"

A lot of people do know better, however, particularly at the Treasury Department and the Federal Reserve. By deliberately having set a policy of keeping interest rates far below market for the last 10 years, as well as maintaining asset values at artificially high levels, the pension funds of the country are being systematically destroyed as a matter of federal policy. In other words, the feds are more than willing to throw every state government "under the bus" and destroy their long-term financial prospects, as long as it serves the short term interests of the federal politicians currently in power. This is a bi-partisan consensus, as it truly kicked into gear with a Republican administration and is being taken to all new levels by a Democratic administration, when it comes to massive monetary interventions to keep interest rates and asset prices at artificial levels.

Now let's consider another angle, and the eventual logical destination. Most states go bankrupt, as do many of the major corporations, unless a deal is worked out with the federal government for a bailout. The natural end result is that the power of the federal government (and the politicians who wield that power) rises to all new levels, as there is a consolidation of power.

Eventually, then, every major pension plan sponsor who would otherwise go into bankruptcy must more or less come hat in hand to the federal government, so the federal government will bail them out of the financial destruction that was inflicted upon them ... by the federal government itself.

http://www.financialsense.com/contri...ent-insolvency

[charliebrown]

Re: why defined benefit pensions are in trouble.

I copied the link to what you are saying.
The first link is even more interesting, because it asks the question, how can an economy that grows at 2% a year in real terms, have a return of 8% over the long term.

And the South shall rise again crosses my mind as far as the battle between the states and fed.

[charliebrown]

Re: why defined benefit pensions are in trouble.

Hmmm if we can identify a point in time when assets were fairly valued, then extrapolate using economic growth and inflation then we can estimate a fair price for assets in general (like the s&p). Maybe EJ has already done this with his real dow chart.

[flintlock]

Re: why defined benefit pensions are in trouble.

I met a good friend for dinner the other night who is a fire chief for a large county in my area. He said they were beginning to "mess" with their pension plans. Sounds like a lot of promises will be broken in this regard.

[dcarrigg]

Re: why defined benefit pensions are in trouble.

I met a good friend for dinner the other night who is a fire chief for a large county in my area. He said they were beginning to "mess" with their pension plans. Sounds like a lot of promises will be broken in this regard.

Yeah, in all of the hate and vitriol I read in the paper or hear on the radio over defined benefit pensions, there's never a mention of ZIRP.

Always it is singling out the one policeman who got a law degree then became a judge who pulls three pensions totaling 130k/year. Never does it mention that the median annual price is probably 20-something-k/year. Never does it mention that they were all based (and still make projections based on) 8% annual compounded returns. Never does it mention that the fed set the rates so low that this is impossible.

Never are the real culprits singled out. Not the six-figure culprits, mind you - the big-timers.

[lektrode]

Re: why defined benefit pensions are in trouble.

....never a mention of ZIRP.
.....
Never are the real culprits singled out. Not the six-figure culprits, mind you - the big-timers.

"...but we 'saved the banking system' and we 'saved the auto unions' and we saved the states/municipal (unions) and we saved or created 'new' jobs...."

meanwhile they gut the value of the rest of our _savings_ and i find it hard to get all choked up when i hear about teachers (not to pick on them for any particular reason, mind you) retiring after 25-30years on a measly 5grand/month (PLUS socsec?)

at what point will the state/municipal pensions be dumped into the pbgc.gov system? (like the over-promised/under-funded private sectors)

[Munger]

Re: why defined benefit pensions are in trouble.

Hmmm if we can identify a point in time when assets were fairly valued, then extrapolate using economic growth and inflation then we can estimate a fair price for assets in general (like the s&p). Maybe EJ has already done this with his real S&P chart.

Three independent and well-respected ways to valuate the stock market:

(1) The Cyclically Adjusted Price-to-Earning Ratio (CAPE or PE/10 -- Current Price / 10 year average of earnings; Schiller, Buffet, and Graham's preferred metric);
(2) Tobin's Q (total replacement cost for SP500 vs current market price); and
(3) Total Market Cap as a percentage of GDP.

All are in agreement -- stocks are currently Modestly to Significantly Overvalued.

http://www.multpl.com/
http://www.gurufocus.com/stock-market-valuations.php
http://gregmankiw.blogspot.com/search?q=tobin


Long term average (150 years) = 16



Ratio = Total Market Cap / GDP Valuation
Ratio < 50% Significantly Undervalued
50% < Ratio < 75% Modestly Undervalued
75% < Ratio < 90% Fair Valued
90% < Ratio < 115% Modestly Overvalued
Ratio > 115% Significantly Overvalued
Where are we today (07/09/2011)? Ratio = 97.6%, Modestly Overvalued

[dcarrigg]

Re: why defined benefit pensions are in trouble.

"...but we 'saved the banking system' and we 'saved the auto unions' and we saved the states/municipal (unions) and we saved or created 'new' jobs...."

meanwhile they gut the value of the rest of our _savings_ and i find it hard to get all choked up when i hear about teachers (not to pick on them for any particular reason, mind you) retiring after 25-30years on a measly 5grand/month (PLUS socsec?)

at what point will the state/municipal pensions be dumped into the pbgc.gov system? (like the over-promised/under-funded private sectors)

Eh, they're overvalued the same way. The 'keepers' maintain over-optimistic valuations. Still, I have been arguing over and over again that the teacher is not the villan here. They are not the villans even when they continue to argue for what they were promised.

The villans are the fed and the banks who, in pushing for intrest rates so low, willfully and knowingly created insolvent pension funds. ZIRP makes sure of that. Argue with it all you want; the truth cannot be cast away.

[mooncliff]

Re: why defined benefit pensions are in trouble.

If there is no cheap oil, there is no growth (unless we can cut energy use even faster), and if there is no growth, there is no return on investment. And beware of nominal versus real. And dont forget to take into account demographics.

Japan's GDP may appear to be stagnant, but since the workforce is shrinking, the actual productivity growth this last decade has been 30%... about the same as the US with its growing population of workers... It is so very easy to be misled by raw figures. I work half as much as I used to, but earn about the same, and the purchasing power of the yen has doubled, so looking just at the numbers would be very misleading.

[sunskyfan]

Re: why defined benefit pensions are in trouble.

Coming to terms with a Zero Sum situation is tough. How can everyone produce for 40 years saving 10% of their production and then expect to not produce for 20 years or more at the level of consumption they had at the end of that 40 years? Yes the number for savings is at least 50% as in a couple works and one of them puts back ALL of their production. How many people does that apply?

I have to also laugh as ideas about raising the retirement age is the fix or even a stop gap. You have to give these poor 70 year folks a job too.

[don]

Re: why defined benefit pensions are in trouble.

I have to also laugh as ideas about raising the retirement age is the fix or even a stop gap. You have to give these poor 70 year folks a job too.

On our recent trip to Florida my wife got into a conversation with a woman at a local dog park. They sketched in what both were doing, the woman adding she was looking for needed work, concerned her resources were being drawn down too low by medical costs. Her age:72.