While the real world has switched from defined benefit pension plans to defined contribution plans (e.g. IRAs, 401k), much of government still uses defined benefit plans where retirees receive regular pension checks based on a formula. The problem today is that many public systems are underfunded and are having difficulties remaining viable. The economic crisis is a culprit in that there are fewer people working and contributing, but more importantly the assets of the plans, such as bonds, are earning less. This is the money that is used to pay retirees. One solution is to increase the rate the plans collect from governments to fund the pension system (i.e. the percentage of wages), but that competes with other uses of tax dollars such as roads and schools.
Government pension plans have a host of political problems associated with them. However, the biggest problem faced by these pension plans today is that the investment return (interest, dividends, etc.) they can earn in the market on their assets is low and headed lower. This problem is the result of Ben Bernanke’s low interest rate policy. Like everyone else, pension plans earn little interest income on bonds and as a result they have less money to pay retirees. Initially, this was not a problem because most of the plans have long term investments at higher rates of return. However, with rates remaining low the earning power of the pensions assets continues to slip. Some states such as Pennsylvania are already in deep trouble. Most state and union pension plans, as well as health care plans for retirees are underfunded.
Every economic crisis tends to reduce government tax revenue, but in the past pension plans could find high yield investment opportunities and hedge their bets by investing in a big assortment of these investments. With contribution rates now near their maximum sustainable levels and the army of government retirees growing how much longer can such plans survive Bernanke’s low interest rate policy?
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A problem is that when these plans were started people retired at age 65 and collected for 2 -3 years. Now the government employees retire in their early 60’s if not their late 50’s and collect for 2 -3 decades.
Local governments cannot afford to pay and provide medical coverage for people for thirty years after they retire. Businesses realized this long ago and went to 401Ks, the municipalities need to do the same and force people to take responsibility for themselves.
How about changing the federal, state and local government use corporate pension accounting instead of the much less stringent government accounting to compute the funding of their pension systems?
Excellent article … it shows very clearly how the Keynesians have been hoist with their own petard. Or should I say “heist”.
I will be happy to see the arrogant and bullying unions denied their defined pensions, but in the short term I fear the desperation of politicians who will do practically anything to keep the unions happy, who are after all the biggest troublemakers, kingmakers and wild cards in most elections. Already where I live, taxes are going up, the roads are crumbling and snowplowing and garbage collection are being targeted for cutbacks. This is directly traceable to pension shortfalls. The unions will not give up as long as they think that there is still a single untaxed dime out there in private citizens’ hands.
Will even the government-subsidized turn on Bernanke?
When he turns to his sole supporters will he find that these beneficiaries of the counterfeit operation are untrustworthy, lying criminals with no conscience?
I have many freinds that are public servants and I can tell you that none plan to work past 52. The ones in public safety are multi-millionaires when you put a value on the projected payment stream they will receive. Our state also has a program called the drop which allows them to bank 5yrs worth of pension payments while they are working. This program pays 8% on the accumulated balance. For my public safety freinds this can amount to anywhere from $400k to $700k lump sum payment on the day of retirement. Even better, the money is given to them tax free and it can thus be rolled over into an IRA account or they can take it immediate and pay the income taxes on it.
What gets me about these pensions and especially the drop, is that there is no way anyone in the private sector could save the amount of money necessary in one of the governments approved tax deferred retirement programs to come close to what the state has to put away annually for these benefits. I estimate for my public safety freinds that one would need to put away on average roughly $75k/yr for every year they work. In reality the contributions for them are made in the later years so the annual contributions are probably closer to $140k or more for the last 10yrs to retirement.
In the mean time my real estate value continues to decline while my taxes continue to go up to support this nonsense.
doesn’t it make you want to scream
public service salaries should be published with the liability of their annuities included
then we can watch them scream
In 30 years when my five kids start retiring, who is more likely to have a retirement above poverty level, the two with federal government jobs or the three who don’t?
‘Retirement,’ in the sense of former employees being paid for past service, will not exist 30 years from now. Fortunately for your children, you had the foresight to have a large family.
So low interest rates discourage lending?
If you were only allowed to work for a penny an hour, with prices staying as they are, would you bother? Of course banks don’t wanna lend out money if rates are low.
The idea behind the low rates is this: The problem is a lack of desire to borrow, not a lack of desire to lend.
Low rates encourage the destruction of capital.
Instead, we should encourage the building and accumulation of capital.
Only free market driven rates can encourage the building of wealth.
No, It don’t discourage lending if there is a reason to borrow. But with so many out of work and the additional cost of doing business and the lack of markets most could not qualify for a loan nor do they have a good prospect of paying the loan back.
With the policies that this government has followed for the last half century which has driven most production jobs overseas there is not much of a prospect of well paying unless you work for the government for some of the financial companies ore some unions. Go to work for the government (union) retire early fifty, start collecting retirement, get another job from the government work to 60′s retire and draw a second retirement and get medical insurance out of this world that no small company can come any where matching.
Thank you for writing of pension income agree wholeheartedly that the mysterious pension formulas as more transient workforce create for stressful retirement planning. Public (and private for that matter) pensions are not separate funds per say but most often pay-as-you-go so the individuals working today pay the pensions for the retirees currently collecting pension.
This system works perfectly except when unemployment rates climb and fewer individuals rely on pensions from employers these days as well. Increasing payroll deductions to cover the pension shortfall only creates for more economic pressure and downward trend in quality of living standards.
Well funded Well managed and Well maintained public pensions afford individuals the security of income they need to take the business risks necessary in capitalist marketplace.
And how exactly does one ensure that the pension is “well managed”?
The muni market recognizes this pension problem and the yields on any pension obligation/revenue bond are higher than Calif and Illy debt. People are dumping these bonds. I’ve heard lots of talk that once there is a default that these pension obligations will be re-negotiated (lower) so the debt can be repaid. Its just a matter of time.
I want sanity to prevail. Its insane what the unions and govt workers say
to justify their greed.
The end result,in the near future,will be that the value of pensions and the various “saving for retirement plans” will be greatly diminished because of the inflation of the money supply. Mr.Bernanke’s ideas of flooding the market with more and more worthless fiat currency will eventually lead to a tremendous loss of the purchasing power of pension checks. Sure,the pensions will probably be paid,as will Social Security payouts, but the checks won’t be able to even buy a cup of coffee. Then what?
Good old-fashioned rioting in the streets. And it gets even better: by that point, the government won’t be able to pay people to protect it.
Post-collapse Soviet pensions buying power on the way.
Where will Bernanke hide? We know why!!!!!
The president of the Dallas Fed blames Ron Paul for the fiscal crisis! LOL
When they start pointing fingers at each other, it must be a sign that the unholy alliance of Fed and Congress is breaking up.
He is however a hundred times more honest than that mendacious clown The Ben Bernank who had the nerve to tell 60 Minutes “we’re not printing money”. Not that it matters whether these people are honest or not, the ending will still be exactly the same.
The pension plan is the most unfunded and ruinous program of all the “developed” world.
From Germany, France, England to the USA, all social security is underfunded and will cost much more to the world governments than all wars fought to date.
Simply put, it’s a generational ponzi scheme that has come to it’s death and there is no way that this pyramid scheme can be revived. They will tax us more, they will increase the contributions to the scheme and they will inflate the currency like there is no tomorrow.
This is a complete disaster.
agreed, but what can we do beyond unloading on blogs?
There’s probably not much we can do except wait for the fiscal day of reckoning to arrive, which it surely will.
They were in denial about the automaker’s economic woes until the situation became so dire they could no longer ignore it, the same will happen here. Until borrowing becomes cost prohibitive and the Ponzi scheme called social security implodes there’s not a lot we can do.
We never have the political will in this country to act on anything that negatively affects voters until the problem is so big that it can no longer be ignored.
I for one cannot not wait until the fiscal day of reckoning arrives. Then all the sacred cows and special interest and welfare minded constituents will finally be told NO! in no uncertain terms.
“From Germany, France, England to the USA, all social security is underfunded and will cost much more to the world governments than all wars fought to date.” — My understanding is that social security in the US (and other countries) is not funded by a separate account. There is no SS account.
Thus, as others have pointed out earlier, the ‘money’ people put into the ‘fund’ disappeared immediately into general revenues. The ‘fund’ is just a tax.
There is a way to make these pension funds viable. [Though the public ones are outright theft and should be abolished, anyway.] Which is to apply actuarial principles to the payouts.
A pensioner would no longer be ‘guaranteed’ to receive a set amount. The amount he would receive per month would depend on the present value of the fund, the number of pensioners, the number of contributors, and the closeness to retirement age of the contributors.
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