Uhhhhh...pensions are a little underfunded...

Parent Cafe
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<p>I had a look at a 401K site and it said that there are a lot of different formulas. They most common (27%) is 100% match up to 6% of pay. The second most common (23%) is 50% match up to 6% of pay. I recall that my employer stopped contribution matches for several years when the economy wasn’t doing so well.</p>

<p>I have a pension from a large company. The cash value of the pension was about $3,000 in the mid-90.s The current cash value is about $500,000. I’m okay at trading but I don’t think that I could generate a 16,600% return in 20 years. I don’t think that it’s reasonable to require employers, public or private, to do the same either.</p>

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<p>Here in our locale, government employees often earn significantly more than private-sector employees with same job description. Government employees tend to be well-compensated, wage and benefitwise, and enjoy pension payments based upon their final year’s earnings (amount boosted by cashout of accumulated sick and vacation days, bonuses, etc.) Consequently, our government workers have outsized compensation, when considering work-hours, below par educational backgrounds, and often less than stellar work performances. (Locally we have many underperforming public employees, and even absentee “ghost” employees.) Meanwhile, public pensions are extremely underfunded here, and residents are facing higher taxes yet (already a high tax state).</p>

<p>Most private company employees are lucky to have a 401K plan.</p>

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<p>Most large employers do not provide 401k plans? </p>

<p>higgins- I have seen various studies on compensation between public and private compensation and they are all over the map. The consensus I see is that lower level government employees earn higher compensation than lower level private employees and that higher level government managers earn less than equivalent managers in the private sector. Yes I know you can list anecdotal examples of overpaid public sector managers.</p>

<p>My anecdotal information is that my family and friends must all have great jobs because all of them have better retirement and overall compensation in the private sector. They deserve it because they all work hard. None of them begrudge me either because they know I work hard also.</p>

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<p>bc- so if government actually made the 4% contribution all these years that is not out of line with what you posted for private companies. I bet if you compared only large private employers to government it would not be out of line at all.</p>

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<p>I have a 401k and a cash pension. This year the pension changed and they are not adding more cash to it. I keep and earn interest on what’s in my pension. They changed the 401k to make up for it. I currently put in six and they put in nine.</p>

<p>If the market does well this could work out great for me. If not, then the pension would do better.</p>

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<p>fendergirl- you will do fine if you can continue to place 15% of your salary into a diversified fund.</p>

<p>higgins you posted something I should comment on- the perception with public pensions is that all of them allow things like overtime going into the base formula, adding sick time to the salary etc. Most plans (all of them in NJ) do not allow those things but the perception is that they all do. In fact most people do not know employees contribute to the pension because most private plans do not require an employee contribution. </p>

<p>I have no issue if someone thinks there is a problem with the pension but I wish they would not listen to what some pol with an agenda says and do something as simple as read the public documents of the plans. Also ask if there is a problem what was the real cause.</p>

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<p>I have a pension and a 403b.</p>

<p>My employer contributes a lump sum each year based on a combination of years of service and employee’s age. Being a long time employee and OLD, that translates into 11% of salary for me. The balance in the plan is credited with 4% each year. Up until a few years ago, it had been 5%.</p>

<p>I contribute 15% of my salary to my 403b.</p>

<p>With SS, we should be OK. Hoping my health holds and I can work a few more years.</p>

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<p>higgins, do you live in MA?</p>

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<p>The site that I looked at was for companies that offered plans. I would guess that there are a lot of companies (typically small businesses) that don’t offer 401K plans because of the expenses or time involved. I did look for statistics on the percentage of companies that offer 401K plans but I didn’t find those statistics. A nicer statistic would be the percentage of private employees that are offered 401K plans. Employees usually have to be full-time and often have to work for a while before being offered a retirement plan. There are a lot of temporary, contract and part-time employees out there where employers are looking specifically to avoid paying benefits. I’m sure that you’ve seen many news stories on people working multiple part-time positions to make ends meet because employers want to be under some hour limit.</p>

<p>I think that the bigger problem with pensions is the promise part - you can’t guarantee the return and that the Federal Reserve keeping interest rates in the basement means that pension firms have to go out on the risk curve which can be fun in a bull market but painful when the punchbowl is taken away. The Federal Reserve Board is already discussing that in their meetings. I think that the Chairman is going to stick to unemployment targets and I think that it’s going to take a long time to get to those targets if we ever do so I think that QE will go on for at least 2013 and I’d guess 2014 too.</p>

<p>Now, do those 4% contributions and the employee contributions provide enough for the pension promises made? Maybe we could look at the math.</p>

<p>Let’s say that a worker contributes 15% of their income (employee + employer contributions) at $100K. So that’s 0.15 * $100,000 * 30 years or $450,000. If they retire at 70% (I have no idea what retirement payouts are like so I’m just picking a number), that runs out in 7 years. That’s just a straightline computation which doesn’t include income but you may have observed that real returns are hard to come by without risk and that many actually have had negative returns over long periods of time. Perhaps assuming that rates of return of 8% make the pension math possible but I think that those kinds of returns are difficult without a lot of risk - risk that pension funds probably shouldn’t take on.</p>

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<p>Large, private employers often use a lot of contractors that employ temporary workers so there are a lot of workers attached to large private employers that don’t get any retirement benefits.</p>

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<p>They are still far too generous IMO, although I say that as a taxpayer and not a state employee. </p>

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<p>Well, we live in the “land of federal government employees” who all seem to get to retire happily and securely at 55 while I, a privately employed person, get constantly reminded that I should work to full retirement age…and beyond if I can. Really ticks me off.</p>

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<p>In NJ the State was supposed to contribute 4% of an employees compensation for the pension. As most are aware they missed that for 20+ years. In NJ there is a 401k type option for higher education the employee contributes 5% and the State match is 8%. Teachers while employed locally are supposed to have their pension also 4% funded by the State. It was a move to assist with property taxes. Employees over the years have had to contribute anywhere from 3.5 to 7%. >>>>>>></p>

<p>And the majority of them probably ***** about it.</p>

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<p>I don’t know how you can say that.</p>

<p>I had a look at the $SPX. The $SPX has been in a range from 800 to 1,600 since 1997. If you had done the dollar-cost-average thing in that period, then your average cost would be about 1,200 and your average gains would be about 33%. BTW, that would be your max gains unless you started after 2009. You could have negative returns too if you started in some years where the market was near local tops.</p>

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<p>If a person saves 15,000 a year for 30 years and receives a 4 percent return, that person will have about 900,000 in assets after 30 years. Retiring at 65 after working for a company or govt body, and receiving a pension of 70,000 a year, that money should last 18 years or so. The money would last until the person is 83. Some people are going to live more, some less. This is reasonable.</p>

<p>During the 80’s and 90’s returns were much better. The historical stock market return is close to 10 percent. </p>

<p>This is where we get into trouble. If the person above makes 9 percent on his money instead of 4 percent, after 30 years instead of having 900000, that person has 2.3 million. </p>

<p>So now pension funding needs are a lot less. The funding becomes less. You don’t need to put away 15,000 a year. Now you just need to save 7,000. If you already put away 15,000 a year for 15 years, you don’t have to continue funding that pension at all. You are covered. That might have been NJ’s thinking at first.</p>

<p>As a company or govt entity, on average I only need 900,000. So, I use 9 percent, instead of 4 percent. Historically itis doable. Now contributions to pension plans can be less. For the govt, this means more money can be spent in different areas.</p>

<p>For companies, there is also more money that can be spent in different areas. More money can be returned to shareholders. More likely, top executives can be paid more. Earnings are higher with a 9 percent expectation. Stocks are worth more.</p>

<p>When the 9 percent returns don’t occur, everything works in reverse.
Expecting 9 percent returns wasn’t necessarily nefarious. It was based on history. The problem is people don’t think about context. Why 9 percent returns may not happen going forward. But reading posts throughout the years, you can see that posters don’t always think about context. </p>

<p>Anyway, if you use 9 percent and the returns are 5 percent, you are going to be short. A lot.</p>

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30 years ago, $15K would have been 60% of my gross salary.</p>

<p>This is not a realistic scenario.</p>

<p>More likely, if a person was saving 15%/year that person will have only 300-400K. That’s, what, a $25K/year annuity?</p>

<p>That doesn’t compare to some getting 70 or 80% of their last year’s pay.</p>

<p>For many years, the teacher’s union in my town (and I assume many others) had a clause that they could boost their pay by $5K/year when they announced they were going to retire in three years. This gave them an extra $15K up front, and boosted their pension by $4k/year (for long-time employees) for life. That’s well over $100K extra for an additional contribution to the pension fund of about $1000. Pretty sweet deal.</p>

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<p>It is the concept. I was using another poster’s numbers. </p>

<p>If you cut the numbers in half, the concept holds. It doesnt matter what the dollar numbers are. If you are expecting 9 percent returns and act accordingly, and the returns are 5.6 percent, you are in trouble.</p>

<p>What I wrote is what happens. The numbers are examples.</p>

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<p>The padding of income is a different issue. Should not be allowed.</p>

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<p>I can only use my history as an example of why I believe the pension issue is manufactured (at least in NJ).</p>

<p>Over the course of my 33+ years I was to contribute varying amounts between 3.5 to 7% of my pay into the pension the State was to contribute 4%. If I was to retire at the end of this year my pension would be $55 000 give or take a few dollars. Over this same 33+ years I have placed 2% of my salary into a deferred compensation plan with no match. That plan has a value of slightly over $200,000 today. I am not a professional investor. If you assume that my returns are more or less what the pension would earn since 1980 that means the pension as a plan would have a value of some where around $1million. If you assume an average return of 3.5% from now until the average age of death for a 56 year old that amount should be more than enough to fund my pension until I die. Return to historical averages and it is even easier.</p>

<p>Problem my pension was not funded at around 10% of my salary as promised because one of the parties did not keep their part of the contract and now want to say it is my fault.</p>

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<p>There clearly have been pension problems:</p>

<p>“We are committed to finding additional ways to eliminate costs in state government and end abuses within the system,” said Governor Patrick. “I’m proud to sign this third phase of comprehensive pension reform legislation that will improve the public’s trust in government and ensure the pension system’s economic sustainability for future generations.”</p>

<p>Coupled with the initial two phases of reform, this comprehensive package is expected to save taxpayers more than $5 billion over 30 years, including an estimated $2 billion for cities and towns across the Commonwealth.</p>

<p>[Governor</a> Patrick Signs Pension Reform Legislation; Saving MA $5 Billion](<a href=“http://www.newenglandpost.com/2011/11/19/governor-patrick-signs-pension-reform-legislation-saving-ma-5-billion/#]Governor”>http://www.newenglandpost.com/2011/11/19/governor-patrick-signs-pension-reform-legislation-saving-ma-5-billion/#)</p>

<p>I don’t think that these bills really address some of the other problems like patronage positions, no-show jobs and jobs that pay well above comparable jobs. The Patrick administration has had a number of embarrassments in these areas.</p>

<p>If pensions are comparable to 401Ks, then why not just go with 401Ks?</p>

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<p>In NJ the pensions that allow padding, double dipping and retirement before 50 are in better shape than the one’s that do not have those issues. The sole reason is that those funds did not miss as many tears of missed employer contributions.</p>

<p>All of those issues were used by the pols to show how greedy the employees were -the truth is that it was used to sell a fix against people it did not apply to. The legislation did not remove any of those issues.</p>

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<p>Tom1944, when your pension was no longer funded by the govt, was it overfunded at that time?</p>

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<p>bc- one study I once read was that converting to 401k type plans would cost the government more for at least 10 years that a 401k. After 10 years the savings would start. No pol thinks 10 years down the road.</p>