EA4: Interest Perspective

Much more on the 2017 Enrolled Actuaries meeting in the next week of blogs, including the situation with church plans and cities that tried going from DB to hybrid plans, but first a game-changer for me on interest rates.

From the second general session on Setting an Expected Return Assumption there was this chart:

It was during those years when interest rates were at a 5000 year high that ERISA came in and retirement policy was legislated in the United States.

Then in the final general session Léon Zijlmans described the Collective Defined Contribution concept that the Dutch had taken up which included this chart:

The Dutch Way is unlikely to catch on here but the aha moment came when Mr. Zijlmans was asked what interest rate was used to determine those funding ratios.

The answer: 1.2%.

 

15 responses to this post.

  1. Posted by Anonymous on April 6, 2017 at 5:28 pm

    The Public Sector Union/Politician (meaning Elected Official) cabal is “responsible” for this by being able to get away with promising WAY too much by grossly understating the true cost via the use of far higher than appropriate or reasonable interest rates. Had the Taxpayers been told the TRUE expected cost, they NEVER would have allowed this level of promised pensions, routinely 2 to 4 times (4 to 6 times for safety workers) greater in “value upon retirement”* than those of comparable Private Sector workers who retire at the SAME age, with the SAME pay, and SAME years of service.

    Taxpayers …… do not forget, while the Unions/Politicians are to “blame”, it’s the Public Sector WORKERS that have been and still are the financial beneficiaries of that Union/Politician collusion, so THAT is where the Taxpayers must go to right this wrong …. via VERY material reductions in these promised pensions, NOT via tax increases or further reductions in services.
    —————————-

    * “value upon retirement” encompasses not just the much greater Public Sector pension plan per-year-of-service “formula-factors”, but also the significant incremental cost of retiring with full/unreduced pensions at ages 5 to10 years younger than their Private Sector counterparts, and up until the recent suspension in NJ, the incremental cost of COLA-increases.

    Reply

    • Posted by PS Drone on April 7, 2017 at 4:44 pm

      Welcome back TL. This board has been mediocre at best without your detailed commentary. Unfortunately, I am afraid that rational/logical solutions to the NJ, IL, CA, CT, KY, PA and assorted other state and local pension plans will not be forthcoming due to the historical, ongoing and never-to-be-ended corruption and lying of politicians of all stripe. The unions merely took advantage of that which was given to them in exchange for their political support. The creation of the satanic politician/union cabal goes all the way back to 1962 when JFK issued an executive order allowing federal employees to unionize in recompense for union support for his narrow victory over Nixon. Couple that decades old mutually supportive relationship with the never ending and eminently successful PR campaign waged by our 7×24 “heroic” uniformed public workers and we have the mess that we now have. I consider much of the largesse to be grand theft perpetrated on the private sector taxpayer by the cabal. The only solution is the fiscal collapse of many, many funds around the country. It does not have to be this way, but America only knows greed and “me first” now so I am afraid that fund bankruptcy is the only solution.

      Reply

      • Posted by Anonymous on April 7, 2017 at 5:05 pm

        It’s going to get a lot worse for NJ’s Local Property tax payers if S3040/A99 becomes law. The Local Police, Fire (where a “paid” force), and non-safety workers couldn’t care less how high property taxes go as long as they get all that has been …… unnecessarily, unjustly, and unsustainably ……. promised.

        The greed and arrogance of Public Sectors workers is palpable.

        Reply

    • Posted by S Moderation Douglas on April 8, 2017 at 5:00 pm

      “full/unreduced pensions at ages 5 to10 years younger than their Private Sector counterparts, and up until the recent suspension in NJ, the incremental cost of COLA-increases.”

      What, pray tell, is a “full/unreduced pension?
      And compared to what?

      The max formula now for California miscellaneous workers is 2%@62.
      Another graduated formula, at age 50, the multiplier is 1%, at 65 and over, it is 2.5%

      A worker with thirty years service and fifty thousand dollar final salary would receive $15,000 off he retired at fifty…$30,000 if he retired at sixty two, or $37,500 if retiring at sixty five or older.

      What, in this case, is “full retirement age”? And which is the “full/unreduced” pension?

      For California Highway Patrol, the new max formula is 2.7%@57. At age 50, the multiplier is 1.426%

      A CHP officer with thirty years service and final salary of one hundred thousand dollars would receive $42,780 year if retiring at age fifty or $81,000 if retiring at age fifty seven or older.

      What is *full retirement age”? and is $43k not “reduced” compared to $81k, for the same number of years of service?

      Compared to what? We’ve been here before… Sample teamster pensions:

      New Jersey (Local 177)
      $3,700 for 25-at-55.
      $3,700 for 30-and-out at any age.

      New York City (Local 804)
      $3,100 for 25-and-out at any age.
      $3,600 for 25-at-55, or 30-and-out at any age.

      “30-and-out at any age” sounds like an “unreduced pension” and available at age fifty, or less.

      Trouble with public pensions is they are not all the same, but the formulas are accessible.
      Trouble with private pensions is they are not all the same, and it is very difficult to find the information for comparison.

      Not to worry, all one needs to do is make some “assumptions”, and compare to those “alternative facts”.

      Under the category of  “I’m as mad as hell, and I’m not going to take this anymore!”, what would you think if I told you that the 1999 California law, SB 400, “raised pensions benefits for state workers by a whopping 50%, and made the hike retroactive.”?

      What if I told you, it’s not really true?

      So, imagine if you read that in 2004, Orange County increased pensions by 62%. Would you be “mad as hell”, or would you actually research the increase, and find that the 62% was, like the “50% increase”, comparing the *names* of two graduated formulas. The misleading information for many of theses “mad as hell” headlines is possible only because many of the public formulas ARE reduced at lower retirement ages.

      And now, “Anonymous” is GIGO also.
      …………….
      Also, with the exception of some safety workers, public employees do not retire 5 to 10 years younger than their Private Sector counterparts.

      Reply

  2. Posted by George on April 7, 2017 at 5:44 pm

    They have fully funded pensions using a 1.2% discount assumption for liabilities, how can they also afford modern airports and high speed rail and ect? What exactly are they sacrificing to have this pension scheme?

    Reply

    • Posted by PS Drone on April 7, 2017 at 5:57 pm

      Except for the present day MENA refugee issue, Holland has no “sub-culture” problem (as the US has) where a large percentage of (otherwise able bodied) citizens consume but do not produce.

      Reply

  3. Posted by Anonymous on April 8, 2017 at 7:55 pm

    SMD, a “What, pray tell, is a “full/unreduced pension”

    By “full/unreduced pension” at say age 55 I mean that 100% of formula benefits accrued to that age can be received beginning at age 55. Essentially it means that age 55 is the Plan’s “Normal Retirement Age” (NRA).

    Most Private Sector pensions have a NRA of age 65, and if one chooses to retire and begin collecting your pension at an age younger than age 65, your pension will be actuarially reduced by a % (usually 4% to 5%) for EACH year of age that you retire befor your Plan’s NRA.

    E.g. If a Private Sector Plan has an NRA of age 65 and used a 5% reduction % for younger age retirements, a worker who retires at age 55 would get his/her pension reduced by (65-55)x5%=50%….YUP, 50%.

    Public Sector workers deserve no better ……….. we don’t work for YOU.
    *******************************************

    Quoting SMD … “The max formula now for California miscellaneous workers is 2%@62.”

    False (or at least materially misleading). Your statement is true ONLY for those hired since 2011 (?). All those hired in earlier years continue to accrue pensions at the earlier higher rate for the remainder of their careers (30+ years for some)…… effectively making the financial impact of CA’s 2011 pension changes almost negligible for 20+ years.

    And again, by full/unreduced retirement (or full retirement age), I simply mean the YOUNGEST age at which the formula-accrued benefits can begin to be collected WITHOUT an actuarial reduction.
    ***********************************************

    Quoting SMD …”“30-and-out at any age” sounds like an “unreduced pension” and available at age fifty, or less. ”

    Correct. Some (typically Safety worker) pension Plans define that “full/unreduced age” in terms of a service duration such as 30 years … regardless of how old one is at that age. That’s why we occasionally hear of Police/Firemen retiring (again with actuarially UNREDECED pensions) in their late 40s. If you are hired at 18, add 30 years and you’re only 48. Or say hired at 23, work 25 years, but buy 5 years of “airtime” (almost always for a sum FAR FAR less than it’s correct value), you also get to 30 year’s service.

    That another financial pick-pocketing of the taxpayers.
    **************************

    And no, no “alternative facts” nor “assumptions”, just a commonsense explanation for those whose brains are properly functioning and who don’t have an “agenda”.

    Reply

    • Posted by S Moderation Douglas on April 8, 2017 at 11:12 pm

      My pension formula is 2%@55

      1) With 30 years at age 55, I would receive 60% of FAS
      2) With 30 years at age 50, I would receive 42.78% of FAS
      3) With 30 years at age 63+, I would receive 72.54%

      Question… Which of these is “full retirement age”?

      Question… Is this pension not “reduced” for early retirement?

      Question… There are literally hundreds of different public sector pension formulas… And hundreds more different private formulas. Which ones did you use for your calculations?

      Question… Private sector companies can negotiate with their unions to reduce pension formulas, or switch to DC systems, with the trade-off of higher wages. How is that addressed in your assumptions?

      With eighty plus percent of public employees in DB pensions with hundreds of different formulas, and fewer than twenty percent of private workers in DBs with hundreds more formulas, where do you get the data for your comparisons? Some pilots are said to fly by the “seat of their pants”. Is that where you get your assumptions?

      You once said that NO doctors get DB pensions. A quick Web search proved you wrong. You said that NJ private sector road construction crews earned less than state workers and definitely did not receive DB pensions. Wrong again.

      Norman Rockwell said he didn’t paint American Life the way it was, but “I paint life as I would like it to be.”

      You can make assumptions of either/both public or private pensions, and then compare those two visions, but it is still GIGO. You can’t make this stuff up.

      Reply

      • Posted by Anonymous on April 9, 2017 at 1:01 am

        The operative word was “unreduced”, and the VERY obvious “point” was that Public Sector workers get to retire WITHOUT an actuarial reduction in payout at much younger ages than those who work in the Private Sector …….. that there is ZERO justification for this difference, and that it exists simply because it just one more of the many PUBLIC Sector advantages that the Public Sector Unions have BOUGHT from our Elected Officials with BRIBES disguised as campaign contributions and election support..

        The “full” was not intended to mean that it was the maximum possible pension (for a given salary level)…. only that there would be no reduction in payout for retiring at a young age.

        ************************
        Quoting SMD ……

        “Question… Private sector companies can negotiate with their unions to reduce pension formulas, or switch to DC systems, with the trade-off of higher wages. How is that addressed in your assumptions?”

        Likely because you (like most Public Sector workers) belong (or belonged in your case as a retiree) to a Union, you think only in such terms, and that Union membership is commonplace in the Private Sector. It’s not, and per the BLS in 2016, only 6.4% of Private Sector workers belong to Unions.

        So no, in the VAST majority of cases in the Private Sector, management simply “DICTATES” ……. your DB pension (and yes, INCLUDING CURRENT workers) is being frozen as of the end of this year, and replaced with a (typically 3% of pay) 401K (or Cash balance) Plan …. ALWAYS worth far less than the frozen Final-Average-Salary DB Plan (which itself is rarely more than half as generous as those typically Granted Public Sector workers). And no, I’ve never seen such a Plan change (and I’ve seen many) accompanied by a salary increase.

        SMD, you live in a make-believe world.

        The only thing that I will concede is that I am not familiar with how that TINY 6% “Unionized” segment of Private employers handle such Plan changes.
        ********************************

        Quoting SMD…………

        “You once said that NO doctors get DB pensions. A quick Web search proved you wrong. You said that NJ private sector road construction crews earned less than state workers and definitely did not receive DB pensions. Wrong again. ”

        Both of those situation involve Unionized Private Sector workers.

        As I stated above, Unionized PRIVATE Sector workers being such a small (6.4%) segment of all Private Sector workers, they are not on mind when commenting online ………….. and your focusing on this very small segment in trying to refute the overall accuracy of my commentary is disingenuous and misleading.

        Reply

        • Posted by S Moderation Douglas on April 9, 2017 at 7:42 am

          Retiring at 63, which I would call full retirement age, yields 73% of FAS. Retiring at 50 yields 43%. How is that not an actuarial reduction?

          The biggest difference in both pay and pensions is not between union/non-union. The biggest difference, in the private sector, is between large employer (over 500 employees) and small employer (fewer than 100).

          According to BLS, in Dec. 2016, total employer compensation costs for private industry workers averaged $32.76 per hour. Total employer compensation costs for state and local government workers averaged $47.85 per hour.

          This leads to the infamous Brietbart-ian apples/oranges misquote “state/local workers earn 46% more than the private sector.”

          Guess what? When BLS averages compensation of only those private enterprises with over 500 employees, total compensation is $47.17 per hour (service) or $53 per hour (goods producing.) Either of which is, like public workers, “46% more than the (average) private sector.”

          And,

          Workers in large (500+) establishments are more than twice as likely to have DB pensions than the “average” worker.

          I say your assumptions of either/both public or private pensions are disingenuous and misleading.

          Still GIGO.

          Reply

          • Posted by Anonymous on April 9, 2017 at 1:48 pm

            Quoting ….

            “Retiring at 63, which I would call full retirement age, yields 73% of FAS. Retiring at 50 yields 43%. How is that not an actuarial reduction?”

            Wow, you try to put yourself out there a “knowledgeable” and ask that question ?

            ******************************************************************

            Assuming the 50 year-old has (as of that age) an “accrued” a pension equal to 43% of his then Final Average Salary (FAS), AND, can retire at that age and begin collecting that 43% of his/her FAS, his/her pension is not being “actuarially reduced” (because he is able to begin collecting that pension at such a young age).

            ONLY when the accrued pension (the 43% of FAS above) is reduced to a lower amount (because of retirement at a very young age) is it considered an “acturarially reduced” pension.

            A pension being “actuarially reduced” has absolute NOTHING to do with the fact that if one works for more years, the pension would grow to a larger amount.

            ***************************************

            Social Security provides an easily understood analogy.

            If your Normal (or “full”) retirement age is 66 and you elect to retire at age 66, you will receive 100% of your SS pension (called the Primary Insurance Amount) earned from work through age 66.

            However, if you decide to elect an early SS retirement at say 62, you will receive only 75%* of your SS pension earned from work through age 62. The 100%-75%=25% is properly called an “actuarial reduction” for early collection of benefits.

            * The percentage reduction is 5/9 of 1% per month for the first 36 months and 5/12 of 1% for each additional month.
            **************************************************************
            **************************************************************

            Quoting SMD,

            The biggest difference in both pay and pensions is not between union/non-union. The biggest difference, in the private sector, is between large employer (over 500 employees) and small employer (fewer than 100). ”

            Of how obvious you are in omitting mentioning the really BIG difference … that being between comparable PUBLIC and PRIVATE sector worker pensions.

            ***************************************************************
            ***************************************************************

            Quoting SMD,

            “Workers in large (500+) establishments are more than twice as likely to have DB pensions than the “average” worker. ”

            That’s true, but not uncharacteristically, you chose to omit including that the percentage of Public Sector employers with Final Average Salary DB pensions is many multiples of that of the Fortune 500 Private Sector employers.

            And let’s not forget that in the Public Sector VERY VERY few DB pension have been frozen, while MOST in the Private Sector (Including the Fortune 500) HAVE been frozen, so saying that workers in a Fortune 500 “have DB pensions” most often means that they have PAST accruals (under now frozen Plans) that will grow no larger.

            Yup SMD. you are a master of distortion, omission of pertinent facts, and twisting the truth.

  4. Posted by S Moderation Douglas on April 9, 2017 at 5:10 pm

    “As I stated above, Unionized PRIVATE Sector workers being such a small (6.4%) segment of all Private Sector workers, they are not on mind when commenting online ……”

    Still crackin’ me up, Love. What IS on your mind when commenting online? You sounded quite emphatic, CAPS LOCK and all, when you called me a fool/liar. Didn’t occur to you to verify your “opinion”?

    What else is not on your mind?

    Things haven’t changed much.

    TL, saepe errat, non dubitas

    Reply

    • Posted by Anonymous on April 9, 2017 at 5:43 pm

      No, You’re cracking yourself up ………… because you’re making believe you are knowledgeable in a field in which you really have VERY limited knowledge.

      I laughed when realizing you didn’t even know what a “actuarial reduction” meant, after YEARS of your posts on pensions.

      Reply

    • Posted by Anonymous on April 9, 2017 at 5:46 pm

      SMD,

      You be better off consulting in your field of endeavor before you retired … changing light bulbs.

      Reply

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