Do You Have Enough Money To Retire?

[PGreen]

No, I'm serious.

Do you know, that here is a pension funding crisis, which is particularly acute in the United States, where state and local governments’ defined benefit pension plans are underfunded by more than $4 trillion, putting at risk the financial security of approximately 8 million retirees and 14 million workers.

This fact scares me a lot.

 

[Remodeling Maidiac]

I did, then I got divorced.

 

[Toro]

No, I'm serious.

Do you know, that here is a pension funding crisis, which is particularly acute in the United States, where state and local governments’ defined benefit pension plans are underfunded by more than $4 trillion, putting at risk the financial security of approximately 8 million retirees and 14 million workers.

This fact scares me a lot.

It's not $4 trillion. It's more like $1 trillion.

Still a lot though.

The $4 trillion comes from a study which discounted the actuarial liabilities by the local bond interest rate. That is hyper-conservative, and not used by anyone in the pension business.

 

[g5000]

Yep. Illinois, Connecticut, New York, and California are facing the biggest public employee pension fund shortages.

All thanks to the global derivatives bubble and its inflated ROI estimates.

In a moment, someone is going to come along and blame liberals for the public employee funds being broke. But before they do, it should be noted as historical fact that even Republican Governors increased benefits or decreased the employee defined contribution during the craze.

It's a real shit sandwich, and everyone has to take a bite.

 

[Toro]

Yep. Illinois, Connecticut, New York, and California are facing the biggest public employee pension fund shortages.

All thanks to the global derivatives bubble and its inflated ROI estimates.

In a moment, someone is going to come along and blame liberals for the public employee funds being broke. But before they do, it should be noted as historical fact that even Republican Governors increased benefits or decreased the employee defined contribution during the craze.

The main reason why pension plans are underfunded is because they haven't been funded enough, full stop. Whether that's because public employees were promised too much or politicians refused to fund their promises - and it is both - public pension plans are not in trouble because of their investments.

That's also true for return assumptions. Returns of pension plans over the past 30 years have met or slightly exceeded the actuarial assumptions. Today, the assumptions are too high, but asset markets will fall one day, and expected returns will rise once again.

 

[Toddsterpatriot]

Yep. Illinois, Connecticut, New York, and California are facing the biggest public employee pension fund shortages.

All thanks to the global derivatives bubble and its inflated ROI estimates.

In a moment, someone is going to come along and blame liberals for the public employee funds being broke. But before they do, it should be noted as historical fact that even Republican Governors increased benefits or decreased the employee defined contribution during the craze.

It's a real shit sandwich, and everyone has to take a bite.

All thanks to the global derivatives bubble

What is a global derivatives bubble?

 

[Siete]

Yep. Illinois, Connecticut, New York, and California are facing the biggest public employee pension fund shortages.

All thanks to the global derivatives bubble and its inflated ROI estimates.

In a moment, someone is going to come along and blame liberals for the public employee funds being broke. But before they do, it should be noted as historical fact that even Republican Governors increased benefits or decreased the employee defined contribution during the craze.

It's a real shit sandwich, and everyone has to take a bite.

All thanks to the global derivatives bubble

What is a global derivatives bubble?

someone farts during a hurricane, you bet your $ the fart survives for a week..

 

[bendog]

Yep. Illinois, Connecticut, New York, and California are facing the biggest public employee pension fund shortages.

All thanks to the global derivatives bubble and its inflated ROI estimates.

In a moment, someone is going to come along and blame liberals for the public employee funds being broke. But before they do, it should be noted as historical fact that even Republican Governors increased benefits or decreased the employee defined contribution during the craze.

The main reason why pension plans are underfunded is because they haven't been funded enough, full stop. Whether that's because public employees were promised too much or politicians refused to fund their promises - and it is both - public pension plans are not in trouble because of their investments.

That's also true for return assumptions. Returns of pension plans over the past 30 years have met or slightly exceeded the actuarial assumptions. Today, the assumptions are too high, but asset markets will fall one day, and expected returns will rise once again.

I think g5000 essentially said that. Rates of Return were overestimated following the lovely Slick years. It seems to me that in my state the pension fund has made up its losses in the credit debacle, and is prolly showing a 5% or so return even figuring in those years. And, contributions were set too low, even as benefits were expanded. Here, the gop was the culprit, though a gop governor also increased employer and employee contributions, with the result that while the situation is still bad, it could be worse.

 

[Toro]

I think g5000 essentially said that. Rates of Return were overestimated following the lovely Slick years. It seems to me that in my state the pension fund has made up its losses in the credit debacle, and is prolly showing a 5% or so return even figuring in those years. And, contributions were set too low, even as benefits were expanded. Here, the gop was the culprit, though a gop governor also increased employer and employee contributions, with the result that while the situation is still bad, it could be worse.

What happened was in the late 90s, pensions were returning 12%-13% a year, and had been for years, due both to powerful bull markets in both stocks and bonds. Actuarial liabilities - the assumed rate of return - was generally between 8% and 8.5%, which had been the returns for the prior 50 years from a 60% stock / 40% bond portfolio. Because pensions were earning way more than their required returns, politicians started lowering contributions to pension plans, thinking the 12%-13% returns would last forever. That way, they could give tax cuts or spend the money on something else.

After the tech bubble and then the housing bubbles collapsed, returns over the prior decade had been awful, such that one could look back 20 or 30 years and see relatively low returns. However, assets were dirt cheap. Stocks were trading at multiple lows that hadn't been seen since the early 1980s. Thus, future returns were bound to be much higher. But many people assumed, like in the late 1990s, that the recent past would repeat itself forever. Instead, we had a powerful rally, and pension plans have earned returns of 11%-13% per year since 2008.

There are going to be bankruptcies in some public pension plans, no doubt about it. And there need to be some reforms. But it is not as dire as some people proclaim. That's how you get the $4 trillion liability number tossed out in the public domain.

 

[RKMBrown]

No, I'm serious.

Do you know, that here is a pension funding crisis, which is particularly acute in the United States, where state and local governments’ defined benefit pension plans are underfunded by more than $4 trillion, putting at risk the financial security of approximately 8 million retirees and 14 million workers.

This fact scares me a lot.

Don't worry our government can deem it's debt void, or just take the money from the taxpayers to bail out their pension funds.

 

[bendog]

I think g5000 essentially said that. Rates of Return were overestimated following the lovely Slick years. It seems to me that in my state the pension fund has made up its losses in the credit debacle, and is prolly showing a 5% or so return even figuring in those years. And, contributions were set too low, even as benefits were expanded. Here, the gop was the culprit, though a gop governor also increased employer and employee contributions, with the result that while the situation is still bad, it could be worse.

What happened was in the late 90s, pensions were returning 12%-13% a year, and had been for years, due both to powerful bull markets in both stocks and bonds. Actuarial liabilities - the assumed rate of return - was generally between 8% and 8.5%, which had been the returns for the prior 50 years from a 60% stock / 40% bond portfolio. Because pensions were earning way more than their required returns, politicians started lowering contributions to pension plans, thinking the 12%-13% returns would last forever. That way, they could give tax cuts or spend the money on something else.

After the tech bubble and then the housing bubbles collapsed, returns over the prior decade had been awful, such that one could look back 20 or 30 years and see relatively low returns. However, assets were dirt cheap. Stocks were trading at multiple lows that hadn't been seen since the early 1980s. Thus, future returns were bound to be much higher. But many people assumed, like in the late 1990s, that the recent past would repeat itself forever. Instead, we had a powerful rally, and pension plans have earned returns of 11%-13% per year since 2008.

There are going to be bankruptcies in some public pension plans, no doubt about it. And there need to be some reforms. But it is not as dire as some people proclaim. That's how you get the $4 trillion liability number tossed out in the public domain.

I don't think mine is headed towards bankruptcy, but I suspect a benefit cut of 1/3 is possible. Are you saying that 8-8.5% returns are a reasonable estimate? I agree that basic fallacy was assuming the 11-13%.

 

[Toro]

I don't think mine is headed towards bankruptcy, but I suspect a benefit cut of 1/3 is possible. Are you saying that 8-8.5% returns are a reasonable estimate? I agree that basic fallacy was assuming the 11-13%.

I don't know your fund, so I cannot say. However, I think from here, returns in pension funds are likely to be around 6% over the next few decades. But that may not be as bad as you think. Here's why.

Most funds use a smoothing mechanism, usually over several year, to avoid excessive changes in contribution rates since liabilities - what funds are expected to pay out - do not fluctuate much. This causes funds to understate actual values during bull markets, as we have had over the past five years.

Here's a simple example. If four years ago, your pension fund was worth $80, three years ago it was worth $90, two years ago $100, last year $110, and today $120, a simple five-year smoothing would say that your pension was worth $100. If the liabilities of the fund were $110, that means that your fund would be ~10% underfunded ($100/$110). That would make it difficult to pay out all the promises over time. However, because actual rates of return are off actual dollar amounts, not smoothed estimates, your fund would actually be slightly less than 10% over-funded ($120/$110), meaning the return can be lower to pay out all future promises.