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Discussion: (15 comments)

  1. SeattleSam

    If private companies had the ability to make pension promises that could be fulfilled by forcibly taking funds from the public, they would offer similar lavish benefits.

  2. So what’s the argument they have good benefits,good for them.

  3. re: Pension Benefit Guaranty Corporation – a Federal govt agency

    The PBGC is not funded by general tax revenues. Its funds come from four sources:
    Insurance premiums paid by sponsors of defined benefit pension plans;
    Assets held by the pension plans it takes over;
    Recoveries of unfunded pension liabilities from plan sponsors’ bankruptcy estates;[4] and
    Investment income.

    maybe the states should join the private sector companies in getting “insurance”… :-)

    1. I agree on your last point.

  4. GoneWithTheWind

    This is a more complex issue then you express. First of all there is the politicians meddling, i.e. police and firemen get to retire 5-8 year earlier with the same retirement benifits. This money has to be made up by the taxpayer and creates the impression that ALL the retirees aren’t paying their own way. The second biggest fault in the system is that although the employee pays and must pay into the system every month the government does not! This is incredible and defies the power of compound interest. So after 30 years the government must pony up the equivalent of 30 years of contributions and interest compounded. This is just plain stupid. What most people don’t know is the public employee contributes their 6% and it is invested in their name a distinct account that they can track and know it’s exact value. This isn’t magic they really put the money in it really grew through investing and it really sits there with their name on it. At retirement the agency managing the account sets a monthly retirement based on their expected return on investment and the life expectancy tables. This is substantially the same as you can buy for yourself from an insurance company commonly known as an annuity. Except for the firemen and police the retiree is getting exactly what they paid for, no more, no less.
    The feeling the public has that the taxpayers are getting screwed is a result of the politicians meddling in the system and playing favorites (usually for union favors) and because the government does not put the money into the system when it should but waits until the final and total amount comes due. This problem could be fixed but as long as the politicians can dip their thumbs into the retirement pie it won’t be.

  5. The difference between private retirement plans and public pensions is huge – and its not entirely the public’s fault.

    You note how “to produce the same level of benefits with the same level of risk as a Wisconsin state worker receives, a private sector worker would need to invest almost 24% of his pay in a 401(k) holding government bonds. Since the typical private sector worker gets an employer 401(k) contribution of about 3% of pay, that’s a pretty big difference.”

    You choose a 401(k) because it’s the most popular option, and you choose bonds because they’re the safest investment, showing both how the private sector does it better, but the public sector does it risk-free. You do this, I think, to suggest that the private sector does it better. If that’s the case, then your conclusion is wrong.

    You suggest that the way way public companies do it is wrong because 1) it is unsustainable, and 2) it basically raids public funds. LarryG addresses point (2), and I understand your concerns about point (1), but you can’t be suggesting the the way the private sector does it is any better, can you?

    Public entities used to have actual retirement accounts that you contributed to, they had a defined appreciation, and a defined amount that the employee could take out. Then the privatization wave (mostly of the 80s) came around and companies moved their pension schemes to 401(k)’s en masse. The problem is that (1) your assuming investment in bonds artificially deflates your numbers… bonds rarely if ever outperform inflation. If you invest solely in bonds as a retirement method, you will LOSE money in the long run. Not to mention, first, that 401(k) tend to invest in funds either designed by the investment banks running the 401(k) specifically to invest in securities they need to get rid of, an second, then even when the investments under the 401(k) umbrella do outperform the market (or, for an even lower but more important threshold, inflation), most of these gains are wiped out my management fees administered by the investment banks who, again, run he funds. 401(k) are BAD. THEY DO NOT WORK.

    So then, invest in stocks, right? Well, problem (2) is that investment (see “trading”) is a zero-sum game. It literally is trading a limited set of pieces of paper between a limited number of people. Roughly 20% of investments made in the stocks, bonds, hedge funds (derivatives), etc. markets are actually profitable, while the other 80% end up losing to the market, or in real terms, either because of bad information, bad trading schemes, lack of inside information, or simply slower technology placing trades after the rest (see “high-speed trading”).

    The move to 401(k) has been a Republican scam through which their constituents have not just seen their income taxes massively decreased, but the profits of the financial services industry and CEO’s who no longer have to lose a little bit of money on pension plans skyrocket as real wages have stagnated.

    So, I understand your concerns about how unsustainable pension funds are these days, but privatizing them into 401(k) has been a recipe for disaster, profiting no one but the most wealthy and powerful. It is, frankly, theft by the financial services industry the AEI is largely funded by.

    Your subliminal suggestion that 401(K) is the way to do things simply doesn’t pass the smell test. Public pension funds are truly the only reasonable method, meaning they need to be massively reformed. How would an ideal pension fund operate? This is what the public should really be debating. I suggest: (1) Contributions of roughly 10-20% of income, the same amount I contribute to my 401(K). (2) A portion of the larger pool of contributions should be invested BY A FUND MANAGER HIRED BY THAT COMPANY and not outsourced to a fund run by an investment bank. COMPANIES NEED TO HIRE THESE BRILLIANT ECONOMISTS SO THAT WALL STREET FIRMS DON’T GET THEM FIRST. (3) Pay-outs should occur over a limited period of time… we do have social security (which also deserved reform). Furthermore, contracts generally must be read and signed by all new employees, and it should take the consent of current and living retired employees to change those contracts. Yes, this gives special consideration to employee unions. And despite how powerful unions can be, they are rarely more powerful than their employee’s employer. Reforms negotiated with unions are not just possible, but fair, if we care enough. See how the city of San Jose, CA was able to negotiate pension reforms of about 20% with their unions, and how Jerry Brow was able to do a similar thing with California unions.

    1. The point of expressing the public employee’s DB pension benefit in terms of the contributions required to produce an equivalent benefit using a 401(k) wasn’t to express a policy preference for 401(k)s — it was simply to put things in terms that would be understandable to people, since most people have 401(k)s.

      I’ll leave many of your points regarding 401(k)s — Republican scam and the rest. They DO have significant problems, but problems that can (and to a degree are) being addressed.

      1. In theory – this is a question – wouldn’t larger investment pools tend to have the same effect as larger health care pools in how they accommodate risk and adverse individual stocks/bonds?

        In other words, are State Level or Corporate level investments with larger pools “better” than individual 401Ks?

        The Fed Govt TSP allows employees to invest in categorized “tranches” (maybe not he right word) – like stocks or bonds or Tnotes or small cap, about 7 I think but each fund is a managed fund rather than a self-directed fund. they publish their rates of returns on a daily,monthly, annual basis.

        1. In general the answer is no. Larger pools DO have smaller administrative costs; the TSP is very low cost compared to a typical 401(k) plan in terms of fees. But large size doesn’t reduce risk for a pension the way it does for insurers. Obviously you want to be diversified, since that does reduce risk without impacting returns, but even small investors can purchase highly diversified mutual funds.

          1. re: self-directed verses professional manager…

            re: diversified

            what’s the best option to make competent decisions about diversification.

            the TSP managers provide their results for all to see… right?

            isn’t that better than doing it yourself or paying someone a bunch of bucks to do it?

          2. LarryG, TSP doesn’t have managers, or at least not active ones. Their funds are all index funds that passively follow, say, the S&P 500. Since almost no one can reliably beat the index, the idea is simply to minimize costs. Public employee DB plans DO use a lot of active management, but it’s not clear how much higher returns they generate than simply holding index funds. But active management does generate massive fees for the managers, which is why you see scandals like the recent one for CalPERS or previous pay-to-play scandals in New York.

    2. GoneWithTheWind

      When I worked in the private sector typical 401k contribution by the employer was 6% and I could (and did) contribute 9%. In addition to this the employer had a profit sharing plan which was a substantial amount of money from the employer which became part of my retirement plan.

      1. Andrew Biggs

        That’s a very, very good match. The typical match, even for professional employees, is around 6 percent.

        1. GoneWithTheWind

          The chart you linked to was not factual. I think what it intended to show was how much an employer “did” contribute to the 401k NOT how much it “could” contribute. And I think this chart misleads because in 401k the employee has to contribute and the employer “matches” that amount. It is typical that lower wage employees choose not to contribut the max to their 401k and thus the matching amount by the employer is less. I hope that explanation made sense. The bottom line is that had the employee contributed 6% in most cases the employer would have matched the 6%.

          1. Andrew Biggs

            A good point. But focusing on contributions by pay level, or looking only at higher-paid professions where people are more likely to contribute, doesn’t show a much different story. Also, in comparing public/private pay, you want to compare what’s actually paid; for public employees, we can determine the value of their pensions. For private workers we’d want to do the same thing. Granted, the private workers probably would improve their pay if they maxed out their employer matches, but it wouldn’t change the overall story much at all.

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