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Pensions Going Bust



November 02, 2008 – Comments (2)

Mish has put together a post showing the degree of problems for pension plans.

I think many pension plans were already under funded prior to the stock crash.  Here's a summary:

San Diego's city pension seems to have lost about 20%.

Colorado PERA is down about 25%.

Illinois municipal pension down 21%.

Fresno county lost 1/3rd.

New York State down 20%.

Ick...  Before black October the average state fund was down about 15%...

Lots of these funds have an expectation that taxpayers pick up the difference.

My thoughts...  I haven't an much trust that there would be much a pension there for me by the time I get there and I am glad this crash has come much earlier then I expected.

The solution is to restructure pensions now to what could be sustainable, not ensure they completely crash.

Inflation builds completely insane beliefs.  I've always looked at a pension in a today's dollars kind of idea.  It is the only way they make sense to me.  So, say people work an average of 40 years and they put 10% into pension and the employer even matches that 10%.  Pensions need to pay out about 20 years.  So, 2 working years pays one year of pension.  (10 + 10) x 2 = 40% of pay, or 1% of pay for each year worked.  Now pensions work and you don't see the stupid, stupid, stupid, did I say stupid, risk taking that happened with people trying to make something out of nothing.

2 Comments – Post Your Own

#1) On November 02, 2008 at 8:16 PM, johnw106 (< 20) wrote:

This is another reason they should teach money management starting in grade school. Too many people have and are now growing up and entering the work force with the idea that the company or goverment will take care of their retirement for them. As we are seeing this can be a very bad idea.

Maybe some good will come out of all the pain and we will see a shift in the way we aproach teaching economics to our children in the future.

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#2) On November 03, 2008 at 3:35 PM, threepaweddog (28.28) wrote:

Good post. In addition to the public pension funds dropping in value, since TARP, I've been wondering about whether the federal government is politically "on the hook" for underfunded private pensions through the Pension Benefit Guarantee Corp (PBGC) too. Although not officially an insurer like the FDIC, it would be a really difficult politically to let underfunded corporate retirement plans go bankrupt when the feds have moved in to prop up Fannie and Freddie (also not government guaranteed entities) . And with some kind of mortgage rescue in the pipleline, saving a lot of people who shouldn't be saved, how, politically, could the governement let pensions fail.


Also, from an earnings perspective, how pension plan losses affect corporate profits, even in healthy companies, will be interesting during the next year? For example, a friend who works at Lockheed-Martin mentioned that their management said they would have to trim costs due to the need to re-fund the pension plan this year.  At the beginning of the year, the plan was only 96% funded.  I don't know what their asset allocation is, but you can be pretty sure it is much less than 96% funded now.


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