The "Next Bail Out"....Pension Losses Approaching $1 Trillion....
- Thread starter libertad
- Start date
The article linked to makes an illogical leap from pension funds being in trouble, for various reasons, to the statement "defined benefit plans must go". This is not logical. There is nothing wrong with the concept of defined benefit plans, but like defined contribution plans the actuarial assumptions have to be correct and adjusted from time to time. Certainly the antics of state legislators and Unions together with inappropriate actuarial assumptions and inadequate regulation of investment banks, hedgefunds, and fraud have created problems for some pension plans. But to conclude, from that, that the concept of defined benefit plans is therefore flawed is just not logical. Defined benefit plans have both advantages and disadvantages compared to defined contribution plans and any logical discussion of the merits of these plans must assume the absence of malfeasance.
That was such a clever turn of phrase that I shared it with my office mate.
i found this PBS Frontline documentary very interesting, spends the
first 20 mins discussing Ch 11 and explains how the 401K came into
being because of accounting (?) changes that 2 companies wanted
'Can You Afford to Retire ?': http://www.pbs.org/wgbh/pages/frontline/retirement/
first 20 mins discussing Ch 11 and explains how the 401K came into
being because of accounting (?) changes that 2 companies wanted
'Can You Afford to Retire ?': http://www.pbs.org/wgbh/pages/frontline/retirement/
Very interesting, Wallace. Below is a link to a graph posted by PORT1385 here at ET. the link is http://www.elitetrader.com/vb/showthread.php?s=&threadid=149744&perpage=6&pagenumber=1
This graph shows the S&P 500 composite 10-year Annualized Rate of Return Excluding Dividends and adjusted for inflation. One look at this graph tells you immediately why defined contribution plans are not dependable as retirement plans and should only be used to supplement a defined benefit retirement plan. Defined benefit plans when appropriately designed and funded are far superior to defined contribution plans. This is because in a defined benefit plan the contributions of many are combined in one pool. This acts as a buffer against up and down markets. Another important feature is that those who die relatively young subsidize those who live unusually long. And this latter feature translates into real savings, because one has to contribute less per month in a defined benefit plan than into a defined contribution plan to guaranty the
same benefit for life. The tradeoff of course is that in a defined benefit plan one does not leave an estate to ones heirs, whereas in a defined contribution plan, any unused portion of the plan passes to heirs. But the graph that i provided the link to above clearly shows why individual 401K plans can not be relied upon for retirement unless they are considerably over-funded. Certainly there is no question that they are unsuitable for the vast majority of the financially-unsophisticated US workforce for anything other than a supplemental plan.
I have made this point many times here on ET, usually in forums devoted to blasting the US Social Security system. In reality Social Security is a wonderful example of a well-thought-out defined benefit plan that now requires only very minor tweaking to make it sound into the foreseeable future. The problems with social security are political. Just as a corporation has difficulty resisting the temptation to borrow from its pension plan when it notes the large amount of money accumulated there, so too the US government has used the Social Security Trust Fund as a credit line that is borrowed from at sub-market interest rates. This is a problem. But the idea behind Social Security is sound, and were it not for politics there would be no problem keeping it sound in perpetuity.
This graph shows the S&P 500 composite 10-year Annualized Rate of Return Excluding Dividends and adjusted for inflation. One look at this graph tells you immediately why defined contribution plans are not dependable as retirement plans and should only be used to supplement a defined benefit retirement plan. Defined benefit plans when appropriately designed and funded are far superior to defined contribution plans. This is because in a defined benefit plan the contributions of many are combined in one pool. This acts as a buffer against up and down markets. Another important feature is that those who die relatively young subsidize those who live unusually long. And this latter feature translates into real savings, because one has to contribute less per month in a defined benefit plan than into a defined contribution plan to guaranty the
same benefit for life. The tradeoff of course is that in a defined benefit plan one does not leave an estate to ones heirs, whereas in a defined contribution plan, any unused portion of the plan passes to heirs. But the graph that i provided the link to above clearly shows why individual 401K plans can not be relied upon for retirement unless they are considerably over-funded. Certainly there is no question that they are unsuitable for the vast majority of the financially-unsophisticated US workforce for anything other than a supplemental plan.
I have made this point many times here on ET, usually in forums devoted to blasting the US Social Security system. In reality Social Security is a wonderful example of a well-thought-out defined benefit plan that now requires only very minor tweaking to make it sound into the foreseeable future. The problems with social security are political. Just as a corporation has difficulty resisting the temptation to borrow from its pension plan when it notes the large amount of money accumulated there, so too the US government has used the Social Security Trust Fund as a credit line that is borrowed from at sub-market interest rates. This is a problem. But the idea behind Social Security is sound, and were it not for politics there would be no problem keeping it sound in perpetuity.
It is logical - if you assume it will never be possible to eliminate accounting chicanery or political and union machinations. From a "see the world as it is" perspective, I can see the validity of claiming all such plans are doomed to fail.
In the US there is also a Health Benefit plan constructed along the same lines as Social Security. It is flipping from surplus to deficit this fiscal year - and despite being smaller in size than Social Security it will take much more than a "minor tweak" to keep it running.
If Social Security had used the decades of surplus to actually invest in something, it would actually have value in the mythical lock box and the story would be much different.