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Pension Conservation



December 04, 2010 – Comments (11)

Pray tell where does one invest over $100 billion dollars and expect 8%?  For that matter where do you invest and expect even 5%?

I am not actively investing right now, I do not have the time to follow the market and the huge debt load of the world suggests that market voilatility is going to continue to be huge and the risks are much higher.  I managed a 200% return in the 15 months prior to my exit and I have chosen other investment avenues, like the home I bought a year and half ago that is mortgage-free and generating me 5% on the entire price from the suite and I live in it for free.  With the rent I don't have to pay it is more like 10%.

So, there would be part of my point, I have managed to find a fairly secure good return on investment, but my personal investments are like a drop of water in a bucket compared to a $100 billion dollar investment fund.  I can guarantee if just 10 people did what I did here there would be downward pressure on rent, (and upward pressure on home prices, so I am covered).  The reality of a big fund, it can never do what an individual can do because it is too big and any activity it is involved in moves prices up or down the supply and demand curve depending on whether the fund is buying or selling.

So, I am reading about CalSTERs reducing its long term increase expectations from 8% to 7.75% and rejecting moving it to 7.5%, which is still extremely optimistic. 

My comments on my last pension post I stated: "You actually need to pay about 15% and have a matching employer contribution of about 15% to pay for it," in reference to a pension that pays up to 80% of wages.

CalSTERs pays up to 100% of wages.  The public contributions to CalSTERs are outrageous.  

In the fiscal year ending in June of last year, CalSTRS received $5.3 billion in contributions based on nearly 21 percent of teacher pay — 8 percent of pay from teachers, 8.25 percent of pay from districts and 4.5 percent from the state.

As I stated in my comments in that last pension post as well, "now I am going to argue that an employer contributing 15% of wages for a pension in itself is obscene.  Even an employer contribution of 11% is extreme."  Add up last year's public contributions to CalSTERS, 12.75%, which in my opinion is between extreme and outrageous.  This contribution is based on CalSTERS earning 8%.

Now, here is the magic manipulation of numbers that have failed the informed consent for the authorization of past pension agreements.  In simple terms informed consent is that you understand what it is you are agreeing to.  I doubt very much that taxpayers and elected officials and those on the employer side of these pension agreements truly understood them.  I was always good at math, but I'd say that until I did third year calculus in university that I really didn't have an appreciation for the fluidity of numbers as opposed the static principles that are constantly employed, of which CalSTERS is a prime example of ignoring "fluidity" in favor of static.  

So, just what is happening in CalSTERS?  Ekkk!

CalSTRS, seriously underfunded, was expected to run out of money in about 35 years under the previous earning forecast. To reach full funding, annual contributions needed to be increased by two-thirds, 13.9 percent of pay.

To me this mean that the maximum pension should be 60% based on that 8% annual return projection, and this is my "static" calculation, 100% is three thirds and if they need contributions two thirds more, that is five thirds.  Take the 100% payout and divide it into five parts, each part is 20%.  They paid for 3 parts out of 5, which means the maximum should be 60%. 

But, it gets worse:

Now dropping the earning forecast to 7.75 percent increases the need for an additional contribution to 15.1 percent of pay. At the same time, the base or “normal” contribution increases from 17.3 to 17.7 percent of pay.


What is the true level of funding required to pay these benefits if a realistic rate of return on investment is employed?  

In reality, the largest part of this underfunding is because of the past years of only paying a pittance in relative to what you get out.  The older you are are, the greater the degree of unfair transfer of wealth you are receiving from young.  You can not mathematically in any way shape or form show that you indeed paid for the pension you receive.

And the solution that is constantly being endorse is to grandfather the benefits to those who made the least contribution towards their benefit and move new workers away from a defined benefit plan, but it seems their plan is set up that they actually pay in more then they get because of continued gouging of the employer's contribution from those who paid so little.

Rosey had another blog recently which looked at deficits.  I applaud what he says:

If there's one thing he gets totally right, it's the notion that everyone, EVERYONE, needs to give up something and we need to pull together to make this work.  Divided We Stand Divided We Fall, and that notion is the problem with American politics and American attitudes. 

Too many are trying to hang onto theirs while supporting someone else loses theirs.  He's dead right on this comment and it needs to be uttered in far greater detail.  I'm a little surprised the Dems aren't using Kennedy's, "Ask not what your country can do for you, but what you can do for your country."

I maintain that I'd rather be a part of fixing the problem into something fair and sustainable.

I think it is a shame that we had people like Greenspan and a whole self-serving group make decisions that ought to be illegal and essential took away the foundation of sound personal financial planning and indeed, sound government budgets.

If interest rates had not gone down to the crazy low levels home prices would not have bubbled to the degree that they did, businesses would not have loaded up on debt as they have, governments would have had to control spending as debt interest would have been recognized as unsustainable long ago and it would have forced reasonable budget adjustments years ago.  

In my youth my long term personal economic plan was to first get a home paid for and then save for retirement.  Once you retire your taxes decline and the money you had paid into home/retirement is no longer needed so you should be able to live on about 60-65% of income without a change in lifestyle.  Then you make lifestyle adjustments to reduce your cost of living, such as downsizing your home.  Maybe if you live in a place with a very high cost of living you move to a place with a more reasonable cost of living.  If I still was a home owner in Vancouver just moving 30 minutes further out would free up huge equity.  Indeed, even renting 30 minutes further out is much less costly.  By the time you retire you are no longer supporting a family so it just always seemed to me that if you set your affairs in order you would be comfortable on half your working income.

These unsustainable and grossly generous pension plans gave people reasons to not take responsibility for retirement planning.   And indeed, the masses of early retirees is evidence of the over generousity of the plans.  Lots of people figure out they don't really need that 70 or 80 or 90% of income to retire.  Granted in the last two years there is an opposite economic early retirement, people laid off that can't find a job and need an income so they opt for early retirement.  But, if budgets weren't being cut to the bone on paying wages to redirect the money to pensions a lot more of these people would still be employed.


11 Comments – Post Your Own

#1) On December 04, 2010 at 10:48 AM, tomlongrpv (63.35) wrote:

CalStrs' investment assumptions are pretty similar to CALPERS and over the long time both funds do achieve the assumed result. 

The beneficiaries of these plans are typically not eligible for Social Security.  Their public pensions are a substitute for social security.  Looked at in that way the contributions and benefits are not all that remarkable.  Over 75% of CALPERS' beneficiaries get $36,000 per year or less in benefits.  The average benefit for retired city workers in my California coastal city is a little over $1,000 per month.  Calstrs benefits are likely similar to CALPERS.  They areally aren't that big or that costly when you consider the cost of living in California and when you consider that the beneficiaries don't get Social Security.

Many CALPERS and Calstrs beneficiaries will have nothing more than Medicare when they retire.  That's nowhere near the benefit you have with a single payor system in Canada.  Retired people in the US have much higher health care out of pocket expenses.

With all due respect, it seems you don't really know much about Calstrs or other pension funds.  You might want to learn more before you blog about them.  

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#2) On December 04, 2010 at 1:23 PM, rd80 (95.74) wrote:

The beneficiaries of these plans are typically not eligible for Social Security.

Whether or not plan beneficiaries are eligle for Social Security is irrelevant to whether or not the pension plan is being adequately funded or using appropriate return assumptions.

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#3) On December 04, 2010 at 2:24 PM, tomlongrpv (63.35) wrote:

rd80  Agreed.  But whether or not the beneficiaries are eligible for Social Security IS relevant to whether or not the plans are "grossly generous" as dwot suggests.  In addition, we need ro remember that the employer and employee sides of Social Security cost over 12% such that a private employer with a 401k likely spend as much as the rates dwot is quoting above.  And if one moves public employees to 401ks they will likely want to be put on Social Security too and there won't be much saving.

A lot of these plans, CALPERS being one, are still collecting more in contributions than they are paying out and despite some underfunding because of current investment losses they are still actuarily sound.  The chicken little "it's running out of money" preditions are just like similar preductions about Social Security made many years ago and are likely riddled with similar false assumptions and excessive worry.  Many of these plans were overfunded in the past and some of the same people now complaining about underfunding wanted to bleed off the surpluses.  Thankfully that wasn't done.

dwot also amazingly assumes that the pension funds don't have economines of scale and actually get smaller returns than individual investors.  Not true if one does apples to apples comparisons of investments with similar risk.  Pension funds pay way less in expenses and transactional fees as a percent of assets than the rest of us.  And they know how to manage their sales so as to not unduly affect the market price.  CALPERS losses in 2008-2009 were way less than my own and I am sure that is true for many people.  The current returns in 2010 are above the assumptions for many of the funds I am sure.  And the funds are looking at a much longer time horizon than most of us are.



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#4) On December 04, 2010 at 4:12 PM, rd80 (95.74) wrote:

dwot also amazingly assumes that the pension funds don't have economines of scale and actually get smaller returns than individual investors.

Those economies of scale also come with challenges.  A $100 billion fund can't buy enough of a small or micro cap stock to move the needle - individuals can and, as dwot notes, a huge fund moves the market in all but the biggest of large caps when it buys and sells - it simply can't get in and out of positions as cleanly as an individual.

As to costs, economies of scale help when compared to a small mutual fund, but with today's low commission rates, an individual can run his or her personal stock portfolio for peanuts.  I've paid exactly zero in management and transaction fees on my stock portfolio over the past three years.  Since CALPERS and CalSTRS have staff to pay, statements to generate and regs to comply with, I'm betting their expenses are > 0. 

After playing CAPS, a fund simulator game and running my own portfolio for several years, I'm absolutely convinced an individual investor who's willing to spend some time with research can beat the broad market indices.  A $100 billion pension fund needs to hold so many positions that it can hardly do anything other than match the broad market.

It's been fun and we've added a few dimes from the Fool's pocket for the Thurgood Marshall Academy.

Have a nice weekend.

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#5) On December 04, 2010 at 6:06 PM, tomlongrpv (63.35) wrote:

rd80 I doubt most people can beat the pension funds.  Whether or not they beat the indices, they take fewer risks.  And they can diversify and invest in things you and I cannot invest in as a practical matter.  Sure--you and a small number (very small based on your score here) of more savvy individual investors can beat the pension funds, but not most people. 

My own assumed return on my retirement portfolio for planning purposes is 8%.  I am not at that looking at the last 3 or even 5 years, but I am actually at over 16% annualized rate of return over the last 10 years. So even if we think that pension funds are unable to replicate the returns some of us get (and I am not convinced of that yet) 7.75% assumed return looks reasonable to me.

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#6) On December 04, 2010 at 7:21 PM, dwot (29.30) wrote:

Tom you use irrelevant arguments that do not deal with the facts but deal with fantasy and wishes. 

You go on about facts, so I search them and I find a pension that you whine isn't generous pays up to 100% of wages.  And you try to suggest that I am the one that isn't objective or understands the facts?  What you don't supply with your whining that 3/4rds make less then $36k, is the work history and what the wages were.  My pension from working here in the north will be far less then $36k but it will have to with the work history, not that the plan was inadequate, indeed, the plan is grossly generous as are the pension you whine that I don't understand.

Returns may end up being better then I expect because of devaluation of currency and essentially devaluation of debt and saving, but with that comes a devaluation of buying power.

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#7) On December 05, 2010 at 12:21 AM, tomlongrpv (63.35) wrote:

dwot  With all due respect it seems you have little or no understanding of how the pension funds actually work or what they pay for.  $1,000 a month (the approximate average pension in my city) may be a King's ransom in Canada, but it is poverty in California.  And it is less than the Social Security benefits of most people.  Calling such a plan "grossly generous" makes no sense.

The Calstrs and CALPERS pensions are based on work history so again your comments make no sense. The formulas directly relate the size of the pension to the number of years worked and the salary earned.  Again, it would help you to discuss the issue better if you were to research how the funds operate.

I actually know people who handle investments for Calstrs and CALPERS and have some understanding of how the systems work.  You really have no such understanding.  My comments seem "irrelevant" to you because they don't seem to fit with your preconceptions, but that's because you don't really know what you are talking about.



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#8) On December 05, 2010 at 1:21 AM, dwot (29.30) wrote:

Calipers pays 100% of your highest year of earnings for those who work 40 years and are age 63 at retirement.  That is grossly generous. 

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#9) On December 05, 2010 at 9:11 PM, tomlongrpv (63.35) wrote:

dwot  CALPERS has a bunch of different formulas.  You are describing one of them I think.  And no, compared to a combination of social security and 401ks for private employees that formula is not as generous as you think it is.  In any event the vast majority of the beneficiaries are getting $3,000 or less per month and the average in my city is about $1,000.  Police and fire get higher pensions, but given what they do in their jobs I doubt most people would consider their pensions to be "grossly generous."

Again, these "grossly generous" pensions have to cover health care costs meaning essentially all costs if you retire before you are eligible for Medicare at 65 and some pretty large premiums and co-payments with Medicare depending on where you live.  These "gorssly generous" pension payments are actually poverty level in some cases unless the retirees move. 

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#10) On December 07, 2010 at 3:30 PM, Schmacko (91.58) wrote:

From the CalSTRS website:

CalSTRS Is Main Retirement Income

The CalSTRS pension is the primary source of retirement income as California’s educators do not pay into or receive Social Security for their public school employment.

Of the 12,568 California educators who retired in fiscal year 2007-08, the median number of years on the job was 29 years. The average CalSTRS pension was $48,180 per year, which was about 62 percent of the average highest salary.

It also states that of the current 224,000 benefits receipients approx 3,100 (little under 1.5%) receive benefits of over $100,000 annually.

If you take the avg CalSTRs pension of $48,180 and divide it by 12 you get a monthly pension check of $4015.

The maximum Social Security payout for 2010 for workers hitting full retirement age of 66 is $2346.

So on average CalSTRs is paying out over $1600 more in benefits than the maximum social security pays out.  In that light the fact that CalSTRs pensioners aren't receiving social security doesn't seem so bad.  It's possible 401k contributions/dispersions could make up that $1600+ gap, but I still think on average it would imply that CalSTRs pensions are better than the national average retirement plan.  Whether that makes it grossly generous or not is kind of irrelevant.  The problem with defined benefit pensions plans is that a) employees generally draw out in pensions much more than they contributed and b) they can be pretty easy to game, which leads right back to problem a).

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