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One State Pension Plan



November 26, 2008 – Comments (4)

Mish has a very good post looking at New Jersey's finances, which are dire due to $60 billion in underfunding of pension funds.

About 25 years ago I already concluded that pensions were unsustainable and indeed, as a very young adult, in the 1980s, I lobbied for sustainable pensions.  I have no idea what happened in the US, but in Canada the financial commitments increased by allowing early retirement benefits to start at age 60.

I always looked at it this way.  When I was in school I was taught nonsense.  We have social programs and the government pays people a pension when they get old so we have much smaller families.  In developing countries people have large families so the burden of supporting aging parents is spread out, or so the story went.

Well, I never saw how a black box called government would lessen the burden of an aging population if we had smaller families.  If government has a population base that has small families and expects to pay a pension, well, the burden is enormous and there is no magic in that black box.

I've been saying for sometime now that existing pension plan truly can only afford to pay half of what they've promised, and the numbers are bang on with New Jersey, the plan is underfunded by half.  Further, they expect a rate of return of 8.25%.

Everyone expects to come out net ahead, however, the reality is that when add the vast numbers of middlemen (the fund managers) to picture, you should expect to underperform the average by the cost of all the fund managers.

4 Comments – Post Your Own

#1) On November 26, 2008 at 7:16 AM, TMFBent (99.38) wrote:

Pension shortfalls are one of the primary reasons I haven't been buying "cheap" largecaps with old-fashioned, defined pension benefit plans. They're going to have to pack away a lot of cash into those programs to make up for their equities losses and bad bond debts, and that cash is going to come right out of the shareholders' stream.

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#2) On November 26, 2008 at 10:45 AM, johnw106 (< 20) wrote:

Everyone complains about social security. Ditto for pension plans and 401k's. Savings accounts and CD's are out due to inflation. Or so the story goes.

If all of these are so bad then how is a person supposed to save up for retirement?

I see alot of people knocking these types of plans but no one ever offers a viable alternative.

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#3) On November 26, 2008 at 11:03 AM, ByrneShill (82.66) wrote:

Hey dwot, where do you see pensions? Around here the only people with pensions are govt employees, and those pensions are kinda secure, since those govt can squeeze me out of everything I got anytime they want (that's called taxing). Furthermore, the provincial employees pensions are kinda small and not indexed, so the burden kinda goes on its own. Only the federal and muni employees have nice enough pensions to live from them.

I don't know anyone in the private sector who's got a pension. Everyone I know has either a defined-contribution plan, or nothing at all and must manage their RRSP on their own.

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#4) On November 26, 2008 at 11:31 AM, jesusfreakinco (28.28) wrote:

Imagine what will happen to Michigan, when the Big 3's pensions get whacked.  It will not be a pretty picture....

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