Government endorsed Ponzi pensions schemes

[vexed87]

One thing you have missed. They changed the date of pensionable age to to 65 but to 'state pension age' which as they will inevitably increase that I think would be how they get round the problem in most likelihood.

I'm spitting blood.

I'll be running a version of the PP, so 75% of my capital will be in cash, gold and bonds so I'm not particularly concerned about the volatility in the stock markets, hence wanting to take care of the money myself...

For those interested, in the end I have decided that I'm pretty healthy (good lifestyle choices etc) so I'm hoping to make it to pensionable age regardless of what the government decided to do. I will take my gravy if it's still on offer. Can't say I have a lot of faith in the government to deliver though, but as others have said, it's almost like an insurance policy. I'll leave the policy makers worry about whether the scheme will work or not and won't lose any more sleep over it.

[Summer]

Pensions are bullshit. Period. Its only good is when a dirt poor person gets their only income from it. On the contrary, what just might have made her dirt poor is the paying of pension payments right out of the yearly income.

[Lemon]

One thing you have missed. They changed the date of pensionable age to to 65 but to 'state pension age' which as they will inevitably increase that I think would be how they get round the problem in most likelihood.

I'm spitting blood.

I'll be running a version of the PP, so 75% of my capital will be in cash, gold and bonds so I'm not particularly concerned about the volatility in the stock markets, hence wanting to take care of the money myself...

For those interested, in the end I have decided that I'm pretty healthy (good lifestyle choices etc) so I'm hoping to make it to pensionable age regardless of what the government decided to do. I will take my gravy if it's still on offer. Can't say I have a lot of faith in the government to deliver though, but as others have said, it's almost like an insurance policy. I'll leave the policy makers worry about whether the scheme will work or not and won't lose any more sleep over it.

Yep. much the same here. The policy people have to be careful because it isn't like the NHS is a small employer. Lots of votes.

Looking into the new system for someone EREing it might work out slightly better than the old deal (bar the unfixed leave point). Because the real killer in it is to doctors who have their salary increase incrementally and no get an average of career pay rather than final salary based. If you are off after 5-10 years you don't feel that pain quite so much.

Oh but it is worth working like at least 1 day per 5 years to keep the thing indexing to inflation until you start claiming. But even I think I can manage that in retirement :p

[Ego]

I knew it was bad but did not know just how bad it actually is.

Paywall https://www.economist.com/finance-and-e ... lars-short



Illinois is the class dunce, with six languishing schemes. Chicago Municipal is just 25% funded and the actuaries warn that “the risk of insolvency for the fund has increased”. The actuaries of the Chicago police scheme warn that “this is a severely underfunded plan” with a shortfall of $10bn; the funded ratio is not projected to reach 50% until 2043.

And this is with record stock market returns. What happens during a downturn? How does this end?

[Mister Imperceptible]

https://www.illinoispolicy.org/illinois ... -services/

https://www.powrnow.net/wp-content/uplo ... Report.pdf

https://www.powrnow.net/wp-content/uplo ... nsight.pdf

In the next recession there will be mass insolvency.

It will be political suicide to slash benefits completely. More likely mass money printing and very high inflation.

Political candidates in both parties will become more and more extreme.

People will suggest that the solution to too much government management of funds will be.....even more government management of funds, and higher taxation. Higher taxation will discourage business investment (causing widespread unemployment) and crash property values, leading to a vicious cycle. Civil unrest.

Ever wonder where the returns for Warren Buffett and Jim Simons come from?

In one of his last great specials before dying, in 2004-2005 even before the 2007-2009 crisis, George Carlin summed it up neatly and beautifully, knowing what was coming:

https://m.youtube.com/watch?v=kJ4SSvVbhLw

[Seppia]

yes, it’s very bad.
I always mention this point as one of the main reasons why I wouldn’t want to be in the USA long term.
The solution will be kicking the can down the road as long as possible, then a mix of slashing benefits and bailouts.
I am not sure about the hyperinflation thing MI mentions, in Japan and Europe they’re trying to bring a tiny bit of inflation by massive money printing and they’ve been spectacularly unsuccessful.
But for sure it will be bad and the shortfall will be socialized (because in the USA, all the hardcore capitalist become surprisingly progressive when it’s to their benefit: see GFC or the very fiscally conservative Paul Ryans of the world passing a giant deficit exploding unfounded tax cut)

It’s a very simple issue: systems where there is no explosive population growth can live sustainably with high taxes and high benefits/spending or low taxes and low benefits/spending.

Think Germany/France/Scandinavia for the former or HK/Singapore for the latter.
The USA has decided to fight a war with math by being a low tax/high benefits-spending country.
So it has a massive military, generous pension systems, etc, but of course taxes have been going nowhere but down.
Good luck

[Mister Imperceptible]

I would look at the Americans who make $50k a year buying $70k trucks or luxury cars and ask if we more resemble the austere Singaporeans or the profligate South Americans to see whether or not we are on the path to becoming a banana republic.

Unless we have a Great Awakening or something (figuratively speaking, a little).

[7Wannabe5]

Eh, one of my sisters works in the Illinois/Chicago system and I was shocked when she showed me her pension plan. It was literally the equivalent of having something like $1.5 million in investments. However, it is important to note that I was shocked, because her pension plan is definitely the exception rather than the rule in 21st century United States. My take is that for the most part the trend over the last 40 or 50 years (since the days when my working class grandmother was able to take me along on 2 week vacation at company sponsored lakeside resort) has definitely been towards low tax/ low benefit model. The only very notable exception being the effect demographics has had on basic "we won't throw bleeding people out on to the curb" medical provision policy. Even there, it's not that individuals are getting more benefits on average; it's just that our adults are older and sicker on average, and our children are relatively poorer (compared to average working adult)on average than in the 1960/70s.

[Laura Ingalls]

https://taxfoundation.org/state-pension ... ding-2019/

They are not all awful. One of the two I am vested in is funded at 103%. As of 10-31-2019 it’s year to date return 15.7%.

[Riggerjack]

Doom glasses off:

Oh, no! But your best posts are done with the doomer glasses on!

Let me ask a few questions.

Would you feel better if your pension scheme were fully, 103% funded? Why? What risks would this cover? What risks would this hide? How significantly different from the current situation would you then be in?

Look at MI's classic worst case scenario. If that happens, how much does being fully funded at present, help?

What I am trying to get at, is when considering doomer scenarios, as many of us are prone to do; it is best to consider how the 0.01% weather that storm, and how you can do the same.

Hint: if you think it's with more financialized capital (stocks, bonds, passive investments in general) you have come to a different conclusion than I have, and I'm interested in your thoughts.

[Seppia]

Would you feel better if your pension scheme were fully, 103% funded? —> Of course

Why? —> Because said funds would not be fighting a war against math


What risks would this cover? —> the certainty of the funds becoming insolvent

What risks would this hide? —> none. Pension funds are not supposed to be insurance against the zombie apocalypse

How significantly different from the current situation would you then be in? —> people with non-underfunded pensions would stand a great chance of seeing the promises they were made fulfilled.

Look at MI's classic worst case scenario. If that happens, how much does being fully funded at present, help? —> it would help more than an underfunded plan for sure. This said, one should always try to build a more resilient lifestyle regardless.

[Riggerjack]

seppia, I am always a bit surprised/amused at your take on.my posts. Thank you.

[Seppia]

I don't know, I'm not tyting to be a pita but yor take sounded to me like "doesn't make a huge difference if pension funds are 30% funded or 103% funded" (I'm simplifying), which sounded a bit... confounding?

I'm sorry if coming across as an asshole

[Mister Imperceptible]

What I think RJ is saying is that Wisconsin won’t be 103% funded for long if we have a major recession/depression and a devaluation to boot.

[Laura Ingalls]

What I think RJ is saying is that Wisconsin won’t be 103% funded for long if we have a major recession/depression and a devaluation to boot.

It will stay fully funded. It is structurally different than most and pensions actually get smaller if we have a protracted recession.

It has different risks. If the US dollar becomes completely worthless it is a different more systemic problem

[BMF1102]

@ LI What is different about your pension that will keep it fully funded?

[Laura Ingalls]

@BMF

The amount promised is not static and based on actual returns of the underlining pension investments. If the market tanks in 2020 my balance goes down just like a regular IRA.

The fund is required to be fully funded as part of the state constitution. This has kept it from being underfunded to finance other stuff. Contribution rates have been raised.

Traditionally it has also been very well managed.

[George the original one]

The amount promised is not static and based on actual returns of the underlining pension investments. If the market tanks in 2020 my balance goes down just like a regular IRA.

This is the case in Oregon as well; the IAP is nothing more than an IRA or 401k with no matching funds. The state, however, has a large overhang from when it was a traditional pension up until 2003 (of which there are two flavors).

The original flavor get better benefits than the second flavor. I believe the number of employees eligible for retiring with that original flavor pension (hired prior to 1996) have peaked and we're now on the slow decline of their numbers until 2035-2040 [note: I'm in that group and will begin receiving benefits in a year]. Numbers of employees eligible for the second flavor of pension have not yet peaked and the last of them won't be out of the system until 2050 or so... it is highly likely those who can't exit sooner will get the shaft at some point because of political pressure for the state to not fund the obligation through tax increases.

On the other hand, the state is doing well financially due to population increase and that will undoubtedly benefit the pension system because the cost of the pension will not be so evident even without tax increases. Oregon tax funding is complicated as property taxes go into one pot that is divvied up amongst the local governments while income tax goes into the state's pot. Local government employee pension dues are paid from the property tax pot and there really isn't much room for expansion without selling bonds. State employee pension dues are paid from the income tax pot, so the state has more flexibility to raise funds. The pension system, however, is a state entity with fiduciary responsibilities, so charge rates based on each entity's population of eligible employees rather than lumping all the employees together. This means that Podunk school district where the teachers stay employed until they need a wheelchair are charged very high rates compared to the large suburban school district where the young teachers go through the revolving door and say "screw this, I'm going to become a corporate trainer". Thus there's a bad rural vs. urban divide in how tax dollars are spent.

[BMF1102]

LI - Ah yes that makes sense.
I have not heard of a pension working that way, is it still a "defined benefit plan"?

My pension benefit when I hit retirement age is 1% a month of the total dollar amount I have accumulated in my career. Which is 12% a year and the fund has only had single digit returns the 6 years I've been in it. Which obviously leads to it being underfunded... currently around 60%. Which is why I plan for it to be the cherry on top (if it's still there) when i get to that age.

As GTOO mentions about his, my pension also has 2 flavors currently. Those who had their 78 points prior to 2009 were able to retire when they hit 80 points. Then the rest who now need 90 points and a minimum age of 58.

[Riggerjack]

I don't know, I'm not tyting to be a pita but yor take sounded to me like "doesn't make a huge difference if pension funds are 30% funded or 103% funded" (I'm simplifying), which sounded a bit... confounding?

I'm sorry, I didn't mean to cause any confusion. I was trying to say, under the circumstances described, would it matter what the funding level was today?

Not that I consider that scenario to be likely, but I don't consider it zero, either. So I appease my doomer nature by fully exploring the doom scenario. Then I identify key indicators that this is becoming a more likely scenario, and what the best actions to take would be. Then I don't worry about it again. If said scenario comes about, I know what to do, so what is there to worry about?

This is what I was encouraging.

But your post started at this is unlikely, and if it happens, a pension isn't the tool to use anyway, so don't worry about it.

As often happens, you and I reach the same place by vastly different routes. I find this both surprising and amusing.

And to get back on the subject:
These unfunded and underfunded pensions folks are worried about, what would happen when the fund ran dry? How would we pay ongoing expenses, without a fund saved up?

Hint: We have no fund saved up for national defense, roads, or for that matter, the vast majority of the promises of politicians. How do we pay for those? Could that be the future? How much of a disaster would that cause?