Busting the Riskless-Rate Myth

Pensions and Investments editorialized about public plans needing to use lower interest rates for valuing their liabilities noting that:

Robert Novy-Marx, professor of business administration at the Simon Business School, University of Rochester, N.Y., in a September 2013 research paper, explained why risk-free benefits should be discounted in value at risk-free rates.

“Payment streams should be valued using discount rates that reflect the cash flows’ risks,” Mr. Novy-Marx wrote. The research paper was written for the Pension Research Council of the Wharton School and posted on the website of the Pension Benefit Guaranty Corp.

The economic concept is not new, even if it has been ignored by public pension systems.

Donald L. Kohn, then-vice chairman of the Federal Reserve Board of Governors, said in a 2008 speech to the National Conference on Public Employee Retirement Systems, that “public pension benefits are essentially bullet-proof promises to pay.” In the public sector, unlike in the private sector, “accrued benefits have turned out to be riskless obligations,” Mr. Kohn said. Among economists, the “only appropriate way to calculate the present value of a very-low-risk liability is to use a very-low-risk discount rate.”

Of course liability values for the vast majority of public pension systems in this country are severely understated (for political reasons) but the idea that these benefits are ‘bullet-proof’ is ridiculous.  Retirees in Prichard, Central FallsDetroit , and soon San Bernardino know about benefits being arbitrarily cut and it seems every state is targeting cost-of-living-adjustments, regardless of what any employee handbook (or law) might say.

There is a real reason for using lower earnings assumptions and it has to do with the math.

Four years ago I provided an example of the math as it relates to underfunded pensions but I will put it another way by looking at a simplified situation with a population of one – a retiree, hired at age 45, retired at age 65, and entitled to $10,000 per year for life.

If you were to get no earnings at all over the course of the retiree’s life you would need $200,000 assuming an expected life span of 20 years.

F0

 

Now assume you will get 8% earnings on the money you start off with based on your diligent saving to get that $98,181 into the plan.

F8

Now we get to the situation with public plans where, because of a series of actuarial games and outright reneging on contributions, many plans only have $50,000 to pay that retiree.  If the interest rate continues to be 8% instead of making 20 years of payments you will run out of money in year 7 with $224,572 needing to come from somewhere else (we will see below from where)  if all 20 payments are to made:

U8

.

To be able to pay that $10,000 annually over 10 years the interest rate would need to 19.426%:

U19

.

Turning to the accumulation stage the converse applies. Again assuming an 8% interest rate annual contributions of $2,145 would get us to the $98,181 that needs to be in the fund to pay out that $10,000 annually at retirement:

A8

Finally, the twist: If you assume 3.3% earnings on the trust during the accumulation period you will need to deposit $3,544 annually to get that same $98,181:

A3
But if you know you will be earning 8% then why contribute the $3,544 annually instead of the $2,145? Because that difference ($1,399 in this example) is not going toward paying for that one person’s benefit but rather toward making up the shortfall in earnings for other retirees so they get all 20 years of payments instead of being cut off at year 7.

It is because of the massive underfunding that public plans like New Jersery’s have developed which requires that interest rates be artificially adjusted downward if everyone is to be paid.  Nothing to do with that silly riskless-rate myth.

 

54 responses to this post.

  1. Posted by skip3house on December 29, 2015 at 12:49 pm

    Plain old arithmetic to the rescue. Case closed.

    Reply

  2. Posted by Anonymous on December 29, 2015 at 3:04 pm

    thats right its the union fault totally. heh

    Reply

  3. Posted by S Moderation Anonymous on December 29, 2015 at 6:51 pm

    Remember “Back to the Future” and “The Terminator”, the time travel paradox where you go back and meet your own mother? Or your own self?

    That’s how my head hurts when I try to compute compounded interest rates while contributing to and withdrawing from a retirement account. Good thing I have the pros at CalPERS doing it for me. (Sarchasm, TL, don’ have a cow.)

    Serious question, John: when CalPERS “assumes” a 7.5% discount rate, are they assuming 7.5% before or after some assumed inflation rate? Is it standard practice to include inflation into the ROI?

    Part two, it should be noted, at least as I understand what I have read lately, CalPERS does not just plan to decrease their nominal “discount rate”, which will increase their ARC; they plan to actually modify their asset mix to lower investment risks.

    Yeah, there goes my head again!!!

    Reply

    • I have no idea how any public plans calculate their liabilities. It’s not as if anyone audits MV factors so whatever comes out of the computer after they insert 7.5% into a field is what you get. I suspect nobody is even checking the numbers for fear of what they will find.

      Actuarial math is a fairly good tool for plans that do put in what they are supposed to but shortchanging the fund and then not making the adjustment I detail in this blog perverts the numbers. It’s surprising that the general public has not picked up on how so many plans are making double-digit investment earnings while making their normal cost contributions plus paying down any unfunded yet funding ratios keep going down. It’s all about this flaw in actuarial math that actuaries who value these plans refuse to consider (or even admit).

      Reply

  4. Posted by S Moderation Anonymous on December 29, 2015 at 7:25 pm

    There was a faux pas in my last post. I caught it before posting but decided to leave it in anyway.

    I don’t think the discount rate and the assumed return on investment are the same thing, and not necessarily the same value.

    As I recall Novy-Marx and Rauh, the risk free rate (which is, what? 3% now, or less) should be used to determine the “value” of my future pension, but, so far as I know, none of the financial economists actually recommends investing any pension fund in 30 year Treasury bonds. They all assume part of future payouts will come from investment returns, but even IF for the foreseeable future, returns exceeded 8%, the correct discount rate used to value them is still the risk free rate.

    And as far as I know, they don’t suggest the ARC should be set at the risk free rate, either. We might as well stuff our money in a mattress.

    That said, I don’t envy CalPERS or the city or state governments, either. I apparently don’t share quite the disdain that some others do. For the most part, they are more inept or impotent than they are a CANCER. These guys are between a rock and a hard place. I expect CalPERS would be more than happy to go along with Brown’s quicker reduction in the rate, if not for the near term damage it would do to the cities.

    Reply

    • Posted by Tough Love on December 30, 2015 at 6:02 am

      The following is an appropriate way to look a it by way of a home mortgage example.

      Let’s assume you (RIGHT NOW) took out a $250,000 mortgage loan with a 4% interest rate and agree to pay off that mortgage loan over 30 years with level ANNUAL (for simplicity) payments at the end of each year for 30 years. Note that I assumed a 4% loan rate as that is commonplace today and reflects the return lenders feel is appropriate for a “secure” loan to a creditworthy borrower …. i.e., a loan secured by a residential mortgage that can be foreclosed upon in the unlikely event that loan payments are not made as promised.

      The level annual (end of year) payment to fully amortize that loan over the 30 years is $14,457.52.

      If this was your only debt, and someone asked you how much debt you had, you would likely say (on day one of your loan), $250,000. However, a person could conceivably say something else instead …. not mentioning $250,000, but saying that his/her “debt” is the promise to pay $14,457.52 at the end of each of the next 30 years. Of course we ARE AWARE that the present value of $14,457,52 payable at the end of each year for 30 years is indeed $250,000 if discounted using a 4% interest rate …. so there really is no “conflict” here.

      Now lets move to the end of the 5-th year (right after your 5-th payment has been made as scheduled). At that time, the outstanding balance on your mortgage is $225,856.61, and as before, you could describe your “debt” as $225,856.61 or alternatively, the promise to pay $14,457.52 at the end of each of the next 25 years. And again, there is no “conflict” because the present value of $14,457,52 payable at the end of each year for 25 years is indeed $225,856.61 if discounted using a 4% interest rate.

      But lets suppose that during those first five years you inherited a substantial sum of money (more than your mortgage balance) but instead of using it to pay off your mortgage, you decided to invest that money in a somewhat risky portfolio of 80% equities and 20% bonds, with an “expected” annual return of 7.9%. And let’s further suppose that (say by working with a spreadsheet) you determine and “allocate” the exact amount of that inheritance (now invested as described) necessary to “service” your mortgage loan …. i.e., generate $14,457,52 annually for exactly 25 years. Well, if those invested assets are “assumed” to earn 7.9%, that spreadsheet calculation shows that you only have to allocate $155,658.27 to generate the necessary $14,457.52 for exactly 25 more years (with that pot being exhausted at the end of the 25-th year).

      Having made that “investment’, when someone again asks at the end of the 5-th year how much debt you have, you can (as you did before) express that debt as the promise to pay $14,457.52 at the end of each of the next 25 years, or choose to state that debt in terms of it’s present value.

      Well ….. if you were the Lender listening in on this conversation, you would hope that your borrower would respond with $225,856,61 (because that amount IS the outstanding mortgage balance). But the borrower is now pondering …. is my debt (when expressed as a present value) the $225,856,61 or is it the $155,658,27, because THAT amount has been set aside with invested assets earmarked specifically to pay off this mortgage, and based on the expected investment return, it is SUFFICIENT to fully pay off that mortgage as agreed upon.

      I think you know where this is going …………..

      Essentially, ignoring the “risk” that those “investments” don’t pan out as expected (because Public Sector Pension Plans do not themselves ASSUME that “risk” but pass it through to Taxpayers), Public Sector pension Plans effectively RESPOND WITH and in practice OPERATE AS THOUGH …. our debt is $155,658.27.

      But is it $155,658.27 …….. or is it really $225,856.61 ?

      Reply

      • Posted by The Resident Nutcase on December 30, 2015 at 8:24 am

        Dear Lord… I couldn’t make it through your post out of sheer boredom.
        But I will just say…. Using your exact post … At least up until where I fell asleep……. Now let’s say you STOP making those payments…… What happens to your debt?
        But I think we all get the point!!!!
        Pay these people their money!!!
        Fund the god dam pensions!!!

        Reply

        • Posted by S Moderation Anonymous on December 30, 2015 at 9:02 am

          As John said, “because of a series of actuarial games or outright reneging on contributions” we only have half what we need to pay the retiree. (Or less)

          The actuarial part is very tricky.

          The reneging part is self explanatory.

          Reply

          • Posted by Sean on December 30, 2015 at 12:58 pm

            “The reneging part is self explanatory.”

            True enough, but what I want to know is: WHY were the payments not made? WHY did governments everywhere not make the required payments? Can we really believe that the entire reason was due to waste, fraud, or abuse? Was it ALL wasted on pet projects or unnecessary programs? Is there ANY part of the reneging due to the possibility that the promised benefits, and their required payments to fund them, were not affordable, even from the beginning? Is there ANY possibility that they were not affordable, and rather than face the music with massive tax hikes and/or benefit cuts, etc., politicians chose to extend and pretend? I’m betting that they didn’t just waste all the money on beer and strippers; well, maybe in Illinois…

            The reason I bring this up is it seems there is a general attitude that the promises were once very affordable, and that now, and only now, because of the years of underfunding, they are suddenly unsustainable. We all know that underpaying, for years, will positively and irreparably damage funding levels, but is this the REAL cause of the problem?

          • Posted by S Moderation Anonymous on December 30, 2015 at 1:47 pm

            As George Mallorca said, “Because it’s there.”

            Not to belabor the point, but that is why CalPERS now has plenary authority.

            1991, California

            “CalPERS has $62.4 billion in assets and is the biggest public employees’ pension fund in the United States.”

            “Under Wilson’s plan, the state would get at least $1.6 billion toward closing a $14.3-billion state budget deficit by redirecting money earmarked for CalPERS accounts that cover cost-of-living increases to pensioners.”

            (Funny, I had never heard this one before: “The governor also recommended arbitrarily raising projections of the annual profit on CalPERS’ investments to 9.5% from 8.5%.”)

            Fast forward to 2008-10. How many people borrowed from, or cleaned out, their IRAs and 401(k)?

            When a recession comes along, tax revenues are down, government expenses go UP during a recession, and there is a huge tempting pot of money.

            Schwarzenegger tried it too. He couldn’t touch it legally like Wilson did, but in 2010, he wanted to borrow 2 billion to help close a $19 Billion state budget gap. What could go wrong? (It didn’t happen.)

          • Posted by S Moderation Anonymous on December 30, 2015 at 2:17 pm

            How much easier, if you don’t have to “borrow” the money, but just don’t put it in in the first place?

            New Jersey 1995

            ” This is best illustrated by Mrs. Whitman’s decision to withhold billions of dollars that should be going into the public employee pension funds over the next few years, and using the bulk of that money to balance the state budget. Then, with an audacity that dazzles her supporters and even draws grudging admiration from opponents, Mrs. Whitman smiles and characterizes the withheld funds as savings.”
            (New York Times, Feb 22, 1995)

            If there is no law requiring the state to pony up, as California implemented after Wilson’s raid, then it’s easier to just not contribute in the first place. Or even if there IS a law requiring payment (that you wrote yourself) and later “discover” is unconstitutional.

          • Posted by Rex the WOnder Dog! on December 30, 2015 at 2:38 pm

            Not to belabor the point, but that is why CalPERS now has plenary authority.

            1991, California

            Not to belabor the point, but here is why CalTURDS has NO authority, credibility, integrity or reliability whatsoever;

            1999, California, SB400, aka “3%@50”.

            CalTURDS @135% funded level before SB400
            CalTURDS @95% funded level the second after SB400 passed

            CalTURDS @68 % funded level 2008 using 7.75% discountrate, 48% using 6.5% discount rate

            That is game, set and match Dougie 🙂

          • Posted by S Moderation Anonymous on December 30, 2015 at 3:08 pm

            “waste, fraud, or abuse?”

            I love that one. What politician hasn’t used that line only to learn, once he gets into office, that it’s just not that simple.

            “Is there ANY possibility that they were not affordable,”?

            I know this has been said before, but there is a difference between “unaffordable” pensions and “excessive” pensions, if that’s what your asking.

            I’m not making these numbers up, but I’m not looking them up either, so they’re guaranteed wrong, but close enough for an example. California has at least 200,000 state employees. Average pay is about $70,000 a year. IF California had a 3% match DC plan, it would need to pony up $420,000,000 a year.

            When, not if, normal business cycles cause unemployment to increase and tax revenues to decrease (while expenses are also increasing) that $420 mill will be tempting. Even more tempting will be the multi billion dollar fund that money is sitting in, trying to grow. We can just “borrow” a little now, and pay it back later.

            3% match, most people would not call excessive. But when the state is running a $14 billion deficit like Wilson had, or Schwarzenegger s $19 billion, it’s not really “affordable” either.

            We might as well just give up. We’re damned if we do and screwed if we don’t.

          • Posted by Tough Love on December 30, 2015 at 3:15 pm

            SMD,

            Why not back up a step FURTHER so that not of these “problems” arise in the first place …………… by not granting Public sector DB pensions that are so grossly excessive (especially in your Sate of CA) that to fully fund over the worker’s career (using appropriate assumptions, ala those used by Moody’s and REQUIRED of Private Sector Plans) requires a level annual %-of-pay total (ee + er) contribution TYPICALLY between 40% and 60% of pay …… when today’s PRIVATE Sector workers rarely get more than a 3%-4% of pay contribution employer into a 401K Plan plus their employer’s 6.2% of pay SS contribution on their behalf ?

          • Posted by S Moderation Anonymous on December 30, 2015 at 3:42 pm

            Are pensions excessive?

            I have usually heard the rule of thumb that to retire with reasonable security, one should save 10% of income beginning at age 25. To retire in comfort, make it 15%. To retire in style, 20%.

            I ran a couple of on line calculators approximating my own experience.
            Assuming age 25 start, retiring at 62 with 82 expected departure from this mortal coil. .

            3% inflation, 7% ROI during accumulation, 5% ROI during retirement, I would need to invest 15% of income in order to receive 75% of final salary, with COLA increases, till the day I die.

            That’s fairly close to what I’m receiving. In real life, with a 401(k) the ROI would not be guaranteed, and I would not have the advantage of shared mortality risk.

            And, according to the Biggs study, for the more highly educated categories, total compensation, therefore by definition, pensions, are NOT excessive. For the lower ranks, mule skinners and the like, pensions are much higher than would be received in the private sector. Where the average is, is anyone’s opinion.

          • Posted by S Moderation Anonymous on December 30, 2015 at 3:57 pm

            For comparison, a short while back we discussed cities with mostly contracted services and no DB pensions. Lafayette California is a relatively wealthy community with a small population and, as I recall, only about 30 full time employees. Most services are contracted. The permanent employees are mostly management types and seem to be well paid. They have a DC plan with an automatic 10% employer contribution. IF the employee wishes to increase his DC, the employer will match up to another 5%. Is that excessive?

            (Looking at the payroll data, it is surprising to see that several employees apparently opted NOT to take advantage of the optional 5% match.) That would seem like a no brainer.

          • Posted by Tough Love on December 30, 2015 at 4:14 pm

            Quoting SMD ….

            “The permanent employees are mostly management types and seem to be well paid. They have a DC plan with an automatic 10% employer contribution. IF the employee wishes to increase his DC, the employer will match up to another 5%. Is that excessive?”

            Unless they are NOT in Social Security, or their wages are less than their Private Sector counterparts, YES that is “excessive” because I’m sure most are getting the15% maximum via putting in 5% (to get the extra 5% match) and on an apples-to-apples basis, the Taxpayers paying for this typically only get a 3% to 4% employer “match”.

            Public Sector workers are not “special” and deserving of a better deal …..on the Taxpayers’ dime.

            The Taxpayer’s obligation is to compensate “fairly” … which as you know, I equate to paying what a Private Sector worker would get in a comparable position), and NOT to belabor …. gee, are we adequately providing for our workers’ retirement security.

          • Posted by S Moderation Anonymous on December 30, 2015 at 4:41 pm

            “Why not back up a step FURTHER…”?

            One might ask.

            Why not? As I’ve mentioned before, full disclosure, I don’t have a dog in this hunt. And public sector DB pensions do seem to be slowly following private DBs into extinction. Obviously way to slowly for some.

            If by some miracle California state went DC for new hires, in a fund managed by the state, that fund would be huge. Not nearly as huge as CalPERS present fund, but huge enough to be a temptation during any recession. Huge enough for taxpayers to wonder why their taxes are so high while the state is sitting on billion$ in their DC fund. Big enough for Ed Ring to complain about the effect the fund is having on markets with one board exerting so much discretion in investments.

            Huge enough probably to blame the damn unions for any decrease in revenue due to normal business cycles and credit the private sector for the inevitable rebound.

            The Reed proposal, now apparently dead, would limit government contributions to new employees’ retirement benefits to 11 percent of base compensation. The percentage would rise to 13 percent for safety employees. As I understand, he’s talking 11% max in a DC plan. If California ever does go DC, what would be a safe bet for the employer match?

            Bueller?

            Bueller?

            Even without the damn unions, I would bet on an 11% match (to attract and retain those in the highest educated positions without having to increase their present day salary any more than necessary. And, of course, the mule skinners would get the same11% match, because that’s “fair”.

            And? In the opinion of some, the damn cops would STILL be overpaid.

          • Posted by Tough Love on December 30, 2015 at 4:56 pm

            Quoting SMD …… “If by some miracle California state went DC for new hires”

            Anyone with any financial acumen KNOWS that to truly and permanently fix the pension mess spreading across America, DC Plans (comparable to those now employed in the Private Sector) must REPLACE Public Sector DB Plans for the FUTURE service of all CURRENT (not just “new”) workers ….. notwithstanding the myriad of legal barriers that have been put in place to stop such changes by those now benefiting from the current structure.

            P.S. If the DC Plan were in the form of individual account 401k-Plans (or the Gov’t equivalent), no, the “Government” CANNOT take that money as it is legally OWNED by (with ownership IN THE NAME OF) the Plan participant.
            ——————

            Sounds like you’re back to your focus-redirecting “peripherals” …… AGAIN.

          • Posted by S Moderation Anonymous on December 30, 2015 at 6:10 pm

            “Sounds like you’re back to your focus-redirecting “peripherals” …… AGAIN.”

            Can the attitude, please.

            Government workers may not be special or deserving of anything more than the private sector, but they do, at least for now, live by different rules.

            I can’t find the relevant article, but there was a crisis, in LA, I believe, years ago when employees found out the 457(b)s they had were technically owned by the provider, and possibly subject to debtor liens in bankruptcy. It appears federal law has since changed to require the funds be held in trust. (For government plans.)

            Apparently not so for private 457(b)s:

            “Non-governmental 457 plans must remain unfunded. Plan assets are not held in trust for employees, but remain the property of the employer (available to its general creditors in the event of litigation or bankruptcy).”

            (IRS)
            ……………………………………
            Who knows what form future DC plans may take?

          • Posted by S Moderation Anonymous on December 30, 2015 at 6:40 pm

            “The Orange County, Calif., fiscal disaster may have seriously damaged the 457 plan as a defined contribution plan for public employees.

            Employees participating in an Orange County 457 plan apparently have lost 10% of the assets in the plan, and may lose as much as 22%. They have stopped contributing to the plan, causing it severe cash flow problems, said some labor leaders.

            The losses have brought home to many public employees the flaws in the 457 plan, where all of the assets belong to the employer until the employee retires.”

            (pionline, February 20, 1995)

            Starting on January 1, 1997, “New section 457(g) now requires that all
            amounts deferred under eligible section 457(b) plans of state and local government
            employers be set aside in trust for the exclusive benefit of plan participants.”

            Who knows what future DC plans will look like?
            ……………………………
            Point #2 was, at the time (1995), OC had over $16b in their DB fund, and over a Billion in the 457.

            Certainly much more today. No matter who “owns” it, and even if the entire fund was in one large fund managed by the county (as opposed to individual 401(k)s) During budget shortages, concerned taxpayers will point to that fund and wonder why they are still paying taxes. It’s the American Way.

          • Posted by Tough Love on December 30, 2015 at 7:05 pm

            Quoting SMD …. “Can the attitude, please.”

            No “attitude” just honest commentary with CORRECT mathematical examples…… and I’m surprised the you didn’t label my above Mortgage example with your classic “GIGO”, even though I doubt that you could follow it let alone understand the underlying calculations.

            Congratulations in not sticking your foot in your mouth (again) by doing so.
            ————————————–

            The following link briefly describes the differences between the 3 common types of DC Plans:

            http://finance.zacks.com/comparison-contrast-401k-403b-457b-8941.html

            While I’m not familiar with the intricacies of 457(b) Plans, I would be surprised if such Plans cannot be LEGALLY structured in a manner in which it is impossible (barring criminal theft of funds) for the Gov’t sponsor to seize such funds or redirect them to other purposes.

            You continue to struggle mightily to advocate against any TRUE approach to REAL Public Sector pension reform.

          • Posted by S Moderation Anonymous on December 30, 2015 at 7:34 pm

            Moderation is moderate in all things. It’s eponymous.

            Nothing mathematically wrong with your mortgage example.

            Except it doesn’t actually have anything to do with the risk free rate.

            Or the Annual Required Contribution.

            Or the reneging on contributions.

            No GIGO, though. Credit where credit is due.

          • Posted by Tough Love on December 30, 2015 at 8:15 pm

            Quoting SMD …..

            “Except it doesn’t actually have anything to do with the risk free rate. ”

            Not specifically, the “risk-free” rate being closer to 3%.

            The 7.9% was (obviously) chosen because 7.9% is the interest rate that NJ uses for BOTH the investment return assumption AND as the rate used to discount Plan liabilities (i.e., estimated future pension payouts) to the valuation date, and the 4% was chosen because it is consistent with both the rate that Private Sector Plans MUST use in Plan valuations, as well as the rate Moody’s uses to evaluate the credit worthiness of Government entities.

            The “point” of my example was to demonstrate HOW those with a vested interest in continuing the current structure manipulate reality, and ignore “risk” for self-interested reason, as well as to demonstrate than MAGNITUDE of that obfuscation.
            ———————————————–

            Quoting SMD ….. “Or the Annual Required Contribution. ”

            Oh indeed that example does. Because NJ’s “official” Plan valuations use the 7.9% rate to determine the “ARC” (thereby IGNORING investment “risk’ that worldwide investors are regularly obligated to deal with) they develop irrational ARCs non-responsive to the TRUE cost of the promises and risks associated with assets invested to fund those promises. By showing the Present Values at BOTH 4% and 7.9%, my example gives a measure of that deception.

            With $155,658.27 / $225,856.61 = 68.9% NJ’s “official” practice understate true costs by over 31%.

            Such accounting practices, if used in the Private Sector, would most certainly result in those in charge being fired, and likely charged with Sarbanes-Oxley/SEC violations.

        • Posted by Tough Love on December 30, 2015 at 4:19 pm

          Quoting The Resident Nutcase ….. “Dear Lord… I couldn’t make it through your post out of sheer boredom.”

          That comment was directed at those WITH the intellect to understand it.

          Reply

          • Posted by Sean on December 30, 2015 at 4:49 pm

            “Quoting The Resident Nutcase ….. “Dear Lord… I couldn’t make it through your post out of sheer boredom.”

            That comment was directed at those WITH the intellect to understand it.”

            Nutcase seems to have the same formula for all of his responses:

            1. Start with a hateful attack on the person’s comments, and how it was a waste of his time to read it.
            2. Then, contribute zero to the conversation.
            3. Finish with a nasty assertion that it’s all very simple: Pay him HIS damn money.

            Other than vitriol, not much to offer…

          • Posted by The Resident Nutcase on December 30, 2015 at 8:21 pm

            Sean,
            You’re new here…… I am not. Relax! Learn the rules of the road…..

          • Posted by Tough Love on December 30, 2015 at 8:34 pm

            The Resident Nutcase,

            You have turned any normal/appropriate ….”rules of the road” …. completely on it’s head.

      • Posted by dentss dunnigan on December 30, 2015 at 10:14 am

        TL …I show with a loan of 250K for a 30 yr monthly payment is 1193.54 per mo…over 30 years total interest payment is 179,673. total payment is 429,673 ….no?

        Reply

        • Posted by Tough Love on December 30, 2015 at 2:31 pm

          Yes, using a 4% interest rate, your figures are correct.

          For simplicity, in my above comment I assumed (and stated) that the mortgage was paid off with 30 (end of year) ANNUAL payments rather than 360 (end of month) MONTHLY payments. While a loan can be structured any way agreeable to the lender and borrower, residential mortgages are most often self amortizing over 15 to 30 years of monthly payments.

          Reply

  5. Posted by Sean on December 30, 2015 at 8:37 pm

    Nutcase:

    “Sean,
    You’re new here…… I am not. Relax! Learn the rules of the road…..”

    Ok my man. I’ll try. You are STILL my favorite, of all those posting!

    Reply

    • Posted by Tough Love on December 30, 2015 at 8:48 pm

      Oh ….. and I thought I was …… LOL.

      Reply

      • Posted by Sean on December 30, 2015 at 11:22 pm

        Ha ha. I mean, as for the “opposing side.” You are most definitely the champ of our side (the correct side), but I just love Nutcase’s spirit. He takes no prisoners, makes no apologies, and doesn’t give a damn about being diplomatic. I love it!

        Reply

        • Posted by Tough Love on December 31, 2015 at 12:15 am

          FWIW, Illinois certainly has rivaled NJ in granted excessive pensions ….. seems to be a race (of stupidity) as to which State can become insolvent first.

          I recently read about the dire straights of the Chicago Teacher’s pension Plan, as well as it’s VERY VERY generous pension package. Boy, are THEY in for a rude awakening in just a few years.

          Reply

          • Posted by Sean on December 31, 2015 at 3:01 am

            I know. I remember, WAY back when I first started teaching, when all of my peers were pissed off because the district had the nerve to ask us teachers to pay in more for our platinum health insurance. When I say, “more,” I’m talking like, maybe $55 per month more, bringing my grand total to about $100 bucks and change for zero deductible, zero co pay, zero prescription drug costs…for myself, and my wife and two sons. I just couldn’t believe it. I was very naive, because I was THRILLED to have that kind of coverage for so little.

            Then, to start off every year with ten free sick days, sprinkled on top of all kinds of days off…

            Anyway, in case anyone has interest, here is a link to Wirepoints top ten stories of 2015. TL, I noticed some of your comments on some of these.

            ALL of these stories are great, but story #4 (“Open mic delivers priceless audio sample of Chicago area government culture”) is priceless. Thankfully, MOST government workers don’t fall into this category, but everyone knows some sh*t bag like those caught on tape. One of the best parts of the article was the first comment posted by a guy who grew up in a family of these clowns.

            http://www.wirepoints.com/our-ten-most-popular-stories-of-2015/

          • Posted by Tough Love on December 31, 2015 at 4:50 am

            Sean,

            Very interesting, especially your #4 which I hadn’t seen before. Do you know if there was any investigation …….. perhaps taking away their keys to that private room? Heavens, can you imagine if cameras were secretly hidden in the bowels of these agencies to video this stuff ?

            And I see that across several of the others, SMD was quite freely commenting with the same “peripherals”, always looking to re-direct the discussion to minutia and AWAY from the urgent need to VERY materially reduce the Future service pensions & benefits of all CURRENT workers. Heck, maybe Public Sector workers retire 10.36431865 years before Private Sector workers …..or is that 10.36431864 years ?

            Of course only reducing FUTURE service accruals in pension/benefit hell-holes like Ill & NJ won’t be enough, but it’s a start, and might stop the digging of the financial hole (in which we now find ourselves) deeper every day.

          • Posted by S Moderation Anonymous on December 31, 2015 at 8:22 am

            Sometimes, I almost pity you. There are several sources which say that non safety public workers retire at the average age of 60. There are Gallup polls that say Americans as a whole have retired at the average age of 60 for the last decade. Before that, the average age was below 60.
            Not 10 years early.
            Not 15 years early.

            The average age for safety retirements is somewhere between 53 and 57.

            It wasn’t even you who made the original claim, but the evidence clearly shows the claim is false.

            You were caught in a lie, and it wasn’t even your own lie to begin with. You never brought one shred of evidence to support 10 years, and didn’t even try for the 15.

            If you don’t want to discuss minutiae, don’t lie about minutiae.

            When I start my own blog. You can’t play.

            No criers.

            No liars.

          • Posted by Tough Love on December 31, 2015 at 12:58 pm

            SMD, Don’t wet your pants……

            I cycled back to ………. how much earlier (or not) Public Sector workers retire than Private Sector workers ……… because as I scanned the comments attached to the linked 10 Wirepoints blog articles, I saw that you had the same spirited discussion (argument ?) with other commentators. You stand your ground even with someone DIRECTLY working in a position to know the facts, and not rely on “studies”……. commendable, or stubbornness and arrogance driven by self-interest?

            In the 3-rd (of the 10) Wirepoints blog-posts “New Workers Subsidizing Illinois’ Surging $100,000/Year Pension Club – WP Original”, you had a spirited conversation with commentator Steve-oh, where at one point, you said ……
            —————————————————————–
            “On average……. “private sector workers/taxpayers” do not work an extra 10 years or more. True, safety employees retire earlier (many of those have MANDATORY retirement at 55), but most public workers retire at about the same age as everyone else. “Average U.S. Retirement Age Rises to 62” Gallup, April 28, 2014. Typical records for the last few years show miscellaneous public workers retire at roughly 60 (and rising). Same as private sector. ”

            and Steve-oh responded (at November 6th, 2015 at 6:38 am) ….
            ——————————————————————————-
            “Those average retirement ages are not correct. My profession is one of administering retirement plans of private sector ‘ers — 401(k) and DB plans both. Many private sector workers do not have enough money for any type of comfortable retmt at age 62, often they have even been laid off and must make ends meet by getting a much lower-paid job. It’s not good out there S Mod. And the govt workers DO have a comfortable retmt usually in their early 50s for police & fire, and late 50s for teachers and administrators. That’s what I was referring to for the Big Picture. Studies of this topic are never accurate. The bottom line is that govt workers can retire much earlier and with VASTLY more financial comfort. Period”
            —————————————————————————

            I’ve had similar discussion with you, particularly challenging with your position that the average Private Sector worker “retires” at age 60 (more recently rising to 62, I believe you added). While in the Financial Service field but not as directly linked with participants (as Steve-oh) to know exact retirement age patterns, I’m more than close enough to know that believing that at age 60, Private Sector workers “retire” IN THE SAME SENSE that PUBLIC Sector workers “retire” is a load of BS.

            The latter (Public Sector workers) most often “retire” with an extraordinarily generous pension (if there for a full career) and free or heavily subsidized retiree healthcare. It’s only the extremely lucky Private Sector worker that can “retire” at age 60 with retirement income and subsidized healthcare anywhere near that which is ROUTINE for PUBLIC Sector retirees. While I have no studies to quote, by experience, I’m quite confident in saying that a large portion of Private Sector workers categorized as “retired” in such studies are not “retired” of their own free will, but simply are out of work and have given up looking with few prospects.

            Even putting aside the MUCH great pension & benefits waiting for PUBLIC Sector “retiree” at age 60 (55 more typical for police), that PRIVATE Sector can or DO “retire” at age 60 ON THE SAME voluntary terms, is a load of bull.

          • Posted by S Moderation Anonymous on December 31, 2015 at 2:16 pm

            Steve-oh: “Many private sector workers do not have enough money for any type of comfortable retmt at age 62, ”

            Saints preserve us from anecdotal information. Did Steve-oh supply any corroborating evidence? His experience in his company is not necessarily typical of anything.

            Is “many” private sector workers some new economic terminology like “typical” NJ safety workers?

            In my experience, at CalTRANS, typical retirement age is around 65. My sister and her husband retired at 56 and 58, respectively, from private sector IT jobs. That’s anecdotal.

            Yes, I know that about half the country has virtually no retirement savings and no defined benefit plan. Yet most manage to retire. And according to their own statements to Gallup, they have retired at 60.

            If your big picture is that they didn’t really want to retire, then just say they never retire. Until then the data speaks for itself.

            Typical financial industry retirement calculators say that to retire with security, one should save 10% of income from an early age. To retire in comfort, save 15%. To retire in style, 20%. Biggs and Richwine say that the average public sector worker earns 12% less than the equivalent private sector. Therefore, the private sector earns 13.636 percent more than the public sector. If he chooses to spend that money as he earns it, then at 60, complain he can’t really afford to retire, who’s fault is that?

          • Posted by S Moderation Anonymous on December 31, 2015 at 2:22 pm

            And, in case anyone here is new and still managed to get this far down the posts; safety workers were not included in the study.

            And, in New Jersey, public workers make 23% more in total compensation.

            What WOULD you do with 23% more?

          • Posted by Tough Love on December 31, 2015 at 3:21 pm

            SMD,

            Like I said above ….. don’t wet you pants.

            And as Mr. Bury stated in his latest Blog-post ………..

            “You cannot legislate or adjudicate money into existence especially in the highest taxed state in the nation.”

            In short order, it’s all going to blow up ………… due to the insatiable greed, arrogance, and Taxpayer-be-damned attitude of the Public Sector Unions/Workers, and the self-interest of our elected officials in (a) granting such grossly excessive pensions in the first place, and (b) refusing to FREEZE or very maternally reduce them for the future service of all CURRENT workers.

          • Posted by S Moderation Anonymous on December 31, 2015 at 5:57 pm

            Omitting material facts?

            And………

            Wait for it…….

            “outright reneging on contributions”

          • Posted by S Moderation Anonymous on December 31, 2015 at 7:07 pm

            We’ve got to maternally reduce them for the future service of all CURRENT workers!!!

            https://www.google.com/search?q=rosanna+rosanna+danna&oq=ros&aqs=chrome.0.69i59j0j69i57j0j69i60.2275j0j4&sourceid=chrome-mobile&ie=UTF-8#imgrc=8uKpJpRdyZgHAM%3A

            What? Materially? Oh! Nevermind………..

          • Posted by Tough Love on December 31, 2015 at 7:14 pm

            SMD …… end of year Blues ?

      • Posted by The Resident Nutcase on December 31, 2015 at 9:19 am

        TL….. Like a lost puppy looking for affection wherever she can get it. Ugh…. I feel so sorry for ya…… Well….. Not really.

        Reply

        • Posted by Tough Love on December 31, 2015 at 1:04 pm

          Quoting from Sean’s earlier comment:

          Nutcase seems to have the same formula for all of his responses:

          1. Start with a hateful attack on the person’s comments, and how it was a waste of his time to read it.
          2. Then, contribute zero to the conversation.
          3. Finish with a nasty assertion that it’s all very simple: Pay him HIS damn money.

          Other than vitriol, not much to offer…

          Reply

    • Posted by The Resident Nutcase on December 31, 2015 at 9:16 am

      I stopped taking this place serious long ago. There’s no point to it actually. One side lays out their opinion sprinkled with a fact… The opposing side does the same. At the end of the day…. We disagree. I come here honestly for the main blog postings by John. My posts have become pure entertainment. TL was great to read….. But is getting too boring and repetitive as of late. But now,… I have you Sean. So, thanks for that.

      Reply

      • Posted by Sean on January 1, 2016 at 9:54 pm

        You’re welcome, my man! On top of that, I think you just summed everything up quite nicely. In the end, there really is no real point to it actually, as you stated. None of us are going to change our beliefs/attitudes about the causes and solutions to this massive problem. Sadly, it will get solved “on its own” with much suffering before, during, and after.

        Reply

  6. Posted by Tough Love on December 31, 2015 at 7:19 pm

    From the Wall Street Journal …….. http://www.wsj.com/articles/states-pension-woes-split-democrats-and-union-allies-1451434368

    “States’ Pension Woes Split Democrats and Union Allies

    Left-leaning politicians are increasingly supporting more aggressive revamps of retirement benefits despite opposition from labor officials”
    ——————————–

    And the walls come tumbling down……..

    ———————————-

    Happy New Year everyone (yup everyone) …. time to get dressed for dinner.

    Reply

  7. Posted by S and P 500 on January 1, 2016 at 7:04 pm

    I assume that public workers won’t mind paying exorbitant tuition to send their kids to college. Colleges have very big pension bills, too. I can’t believe tuition at Penn State is $18K a year. That’s even more than UCLA ( where Janet Napolitano is working on pension reform). Public workers are not on top of the food chain if their entitled kids want to go to college.

    Reply

  8. […] that end….. If those individuals are out there and wish to put forward their views (of which I have been skeptical) and possibly support their position with any academic papers that represent their opinions (and […]

    Reply

  9. These sorts of illustrations are useful when, as stated above, “you know you will be earning 8%…” But the point is that going forward, you don’t know what sort of return you’ll receive but you DO know what kind of benefits you’re promising. Discounting those benefits using an interest rate commensurate with their risk gives the value of the promise that you have made, which is not to pay full benefits IF the plan’s assets return 8%, but to pay regardless of what the plan’s assets return. That promise has a real value to the participants and a real cost to the sponsor. It’s not hard to show this using put options, which represent the sponsor/taxpayer’s promise to make additional contributions if the plan’s assets return below the assumed level. If you calculate the “full cost” of the plan — the initial contribution plus the contingent liability to contribute additional funds if needed — you get a total cost that’s basically identical to what “market valuation” using a risk-adjusted discount rate would show.

    Reply

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