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.
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