‘Uninvested’ by Bobby Monks despaired of the rise of Defined Contribution (DC) plans in the private sector while an issue paper out of the Manhattan Institute sees DC Plans as cost-effective. Both provide some interesting information (which I excerpt below) but both miss THE major point as to why Defined Benefit (DB) plans dominate in the public sector:
Archive for the ‘Public Pensions – General’ Category
New Jersey Senate President Steve Sweeney proposed what he said was not a bailout for public pensions in this country. Rather the federal government will give to those other states who have deliberately underfunded their defined benefit plans $1 trillion so they can consider that money as an asset in determining what is euphemistically called their ‘Annual Required Contribution’ (ARC).
Among the warped thinking that would germinate such an absurd plan, by far the most dangerous is:
As if a federal bailout were a given for anyone feckless enough to need one.
Other disturbing aspects:
Mary Williams Walsh just reported that:
A judge in Chicago ruled on Friday that a plan to change city workers’ pensions was unconstitutional in a case being closely watched for its effect on the city’s uncertain finances.
The ruling, by Judge Rita M. Novak of the Cook County Circuit Court, is viewed as a setback to Mayor Rahm Emanuel’s efforts to rein in costs and rescue the city’s credit rating. Officials in the mayor’s office said the city would appeal.
“While we are disappointed by the trial court’s ruling, we have always recognized that this matter will ultimately be resolved by the Illinois Supreme Court,” said Chicago’s corporation counsel, Stephen Patton, in a statement. “We now look forward to having our arguments heard there.”
Last year, the city negotiated labor agreements to strengthen two of its pension plans, those for laborers and general municipal workers. The agreements called for reducing the cost-of-living increases that retirees receive each year, increasing workers’ mandatory contributions to the funds and strengthening the city’s pledge to step up its own contributions. In the past, the state Legislature has told Chicago what to contribute, and it has set the required amounts well below the actual cost of the pensions, putting the system into serious jeopardy.
Of the 31 unions whose members were to be affected by the changes, 28 had approved it. But the others sued.
How similar is this to the situation in New Jersey where we have seen:
I finished California Dreaming and the suggested solution for their public pension crisis is similar to what Christie is looking to push in New Jersey:
- Freeze the current Defined Benefit plans
- Set up 401(k) plans with profit sharing for everybody
- Use the savings to fund the massive shortfalls developed under the Defined Benefit system
My problem with that (in both states) comes down to:
- There won’t be any savings. Contributions for the current Defined Benefit system have been ridiculously understated (which is the main reason for the massive shortfalls that developed) so a Defined Contribution plan that provides substantially lower contributions would still cost about the same for governments;
- The transparency of Defined Contribution plans would make it a tough sell to public workers; and
- Private sector workers were fooled into accepting 401(k) plans in the 1980s and look where they are.
In any case it was a useful read and below are notable excerpts:
I am halfway through this book and it works as a good primer on the California pension system though the alarm the author seeks to blare is lost on this New Jerseyan. With plans that are 79% funded officially (64% under Moody’s rules) with fairly steady contribution sources from those localities not in bankruptcy Lawrence J. McQuillan first needs to hammer home the 80% Pension Funding Standard Myth before proceeding with his vivisection. No such detour is necessary when discussing a system at a 32.6% funded ratio.
There will be selected excerpts from the book in the next blog but, for now, the sub-chapter on pages 58 through 61 on “The Role Played by Accountants, Actuaries, and Auditors in the Downward Descent’ is basically what this blog is all about so here it is in its entirety:
The Pew Charitable Trusts (Pew) released their 2013 update* on the funding gap of 238 selected state pension plans, pegging it at $968 billion, based on those quaint numbers they claim to have taken from official actuarial reports and CAFRs. A lot of people are going to accept Pew’s figures as fact, but are they? I looked at the reports from which New Jersey’s numbers were supposed to have been taken as well as checking over the numbers for all the states for reasonableness and found several troubling inconsistencies.
I recently came across the L.A. Theatre Works George Bernard Shaw Collection and it has monopolized my ipod for 5 hours so far*. Among the gems (this from The Doctor’s Dilemma Act I):
The actual text:
RIDGEON So that’s why they made me a knight! And that’s the medical profession!
SIR PATRICK. And a very good profession, too, my lad. When you know as much as I know of the ignorance and superstition of the patients, you’ll wonder that we’re half as good as we are.
RIDGEON. We’re not a profession: we’re a conspiracy.
SIR PATRICK. All professions are conspiracies against the laity. And we can’t all be geniuses like you. Every fool can get ill; but every fool can’t be a good doctor: there are not enough good ones to go round. And for all you know, Bloomfield Bonington kills less people than you do.
RIDGEON. Oh, very likely. But he really ought to know the difference between a vaccine and an anti-toxin. Stimulate the phagocytes! The vaccine doesn’t affect the phagocytes at all. He’s all wrong: hopelessly, dangerously wrong. To put a tube of serum into his hands is murder: simple murder.
Which I related to public plan actuaries and recent events: