Arnold Kling  

A scam Elliot Spitzer Won't Touch

Murray Edelman and the Myth of... Questions About Blogging...

The New York Times reports on the New York City pension fund.

Ms. Stark said that she was sure of the pension funds’ health because the city was contributing responsibly to them every year, and because she was confident that the investments in the funds would meet their targets of 8 percent average annual returns over the long haul. Many other public plans have investments targets in this range...

Asked why the pension funds appeared to be fully funded back in 1999, when they were swollen with gains from the stock market boom, and still appear to be almost fully funded now — after losing billions of dollars in the stock market and granting billions of dollars worth of new benefits — she said that the numbers were “smoothed” to avoid short-term fluctuations. She also noted that the city had been increasing its annual contributions in recent years.

If you assume 8 percent annual returns, many things are possible. Until the actual returns come in.

Defined-benefit pension plans, in which the pension provider bears all of the risk of a shortfall in returns relative to expectations, are not viable. They are disappearing from the private sector. The only way that they remain in the public sector is through accounting chicanery.

Comments and Sharing

COMMENTS (6 to date)
meep writes:

Actually, DB plans can be quite viable, if one sets up modest benefits and expectations. If DB plans are not viable, then neither are DC (defined contribution) plans, in terms that one will not be able to retire due to the risks inherent in the DC plans.

In both cases, risks are there and need to be managed. The reasons that most DB plans have done poorly are many, but the main trap killing public pensions is the easy temptation to sweeten the benefits, by allowing =way= too early retirement (50s is much too young, and the early retirement penalty is often way too low in actuarial terms) and by pushing costs to much later in the funding cycle, where the costs ramp up very quickly as the employee nears retirement. There are several funding methods, some of which are more stable than others. Private companies tend to have trouble because they take actuarial gains, such as a few good years of investment returns, and use that as an excuse to not have to contribute more for that year. Then comes the inevitable market fall and they're required to make extra contributions just at a time when they can least afford it. And then there's the PBGC, the last guarantor of private DB pensions... an invitation to moral hazard if ever there was.

The public pensions are very dangerous animals, because of the political pressures involved, and because if the public pensions fail, those to blame for that failure tend to be long gone. Public employees should never have been allowed to unionize - they can strike in more than one way, in that they can create a powerful voting bloc to ensure that pols keep sweetening their benefits. Eventually reality will hit, and taxes can cover the shortfall only so much before the remainder of voters will decide that they will not support those benefits any more. And because it's the government, they can simply vote to cut pension payments and there will be little legal recourse for those who find their retirement benefits are much lower than originally promised.

John Thacker writes:

If DB plans are not viable, then neither are DC (defined contribution) plans, in terms that one will not be able to retire due to the risks inherent in the DC plans.

Well, at least the defined contribution plans tend to be less likely to have sudden shocks for the worker, outside of completely horrible and ridiculous things like Enron encouraging workers to invest their retirement in their own company.

Timothy writes:

DC plans are also portable, which is a nice feature, because only people in the public sector spend an entire career with one company anymore.

dearieme writes:

Don't worry, the "obesity epidemic" will save the day by shortening lives. Won't it?

Counter Trey writes:

You are absolutely correct in saying that Spitzer won't touch this scandal, but you didn't say why he won't.

He won't touch it because he wouldn't want to upset the unions and their members who are not only the beneficiaries of these funds, but the voters and contributors that will buy him the Governor's office.

Bill T writes:

Numerous studies indicate that DC plans/401(k)s do not provide enough $$$ to sustain a retired person for 20 years. Eventually, the retiree will depend on public welfare.

Even worse, people are not even close to saving enough in their 401(k) to retire for 5 years.

Retirees need a minimal standard of living. My guess is approximately $25k. Either the corporations pay for it or the taxpayers pay for it later.

The PPA of 2006 provides greater flexibility for 401(k)s. However, cash balance plans will provide greater security than the 401(k) and reduce the employer liability as compared to the traditional DB plans. Corporations that seek to eliminate their traditonal DB plans should seriously consider the cash balance plans for the following reasons:
1. recruitment and retention
2. tax incentives

Comments for this entry have been closed
Return to top