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.
So....
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.
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