Fair that Detroit bankrupcy will cut retiree pensions?

[actuarial]

401Kish accounts are the only way to go. The only reason that pensions seem better is that the risk appears to be transferred to the government/corporation.

As Detroit is now illustrating that transfer is really an illusion.

Detroit is not illustrating that the transfer is an illusion, it is illustrating that it's not a full transfer. The issue is far more complicated than what you've put here.

In a 401K plan, you cannot accumulate the type of lifetime pension that public pensions pay (if you make more than 50k-60k).

That's completely ignoring the longevity risk sharing, which can only be immunized with an annuity that is very costly and pushes the arrow even further in favor of public pensions.

The equation completely depends on how much collateral is set aside for the promise. In the US, the pension system IS very bunked in this regard, I'll grant you that.

 

[nehalem256]

Detroit is not illustrating that the transfer is an illusion, it is illustrating that it's not a full transfer. The issue is far more complicated than what you've put here.

In a 401K plan, you cannot accumulate the type of lifetime pension that public pensions pay (if you make more than 50k-60k).

Which is probably why said public pensions are bankrupting governments.

That's completely ignoring the longevity risk sharing, which can only be immunized with an annuity that is very costly and pushes the arrow even further in favor of public pensions.

Which is again probably why public pensions are bankrupting governments.

What I am saying is that a pension of equal benefits to a 401K should cost the same.

The real problem with 401Ks is that businesses will use them as an excuse not to contribute to a worker's retirement as was previously the case with pensions.

 

[actuarial]

Which is probably why said public pensions are bankrupting governments.

Only in so far as they weren't properly collateralized in the past.

Which is again probably why public pensions are bankrupting governments.

What I am saying is that a pension of equal benefits to a 401K should cost the same.

The real problem with 401Ks is that businesses will use them as an excuse not to contribute to a worker's retirement as was previously the case with pensions.

There is a significant difference in the 401ks are NOT pensions, and I disagree that they should cost the same. There is an inherent advantage to longevity risk pooling that you get in a pension plan that you don't get with a 401k.

Longevity risk pooling it not something that necessarily needs to bankrupt you. a 401k, built up and then withdrawn on its own, is a terrible vehicle for retirement savings, as it places an enormous gamble on the date you are going to die that you are unlikely to win.

 

[zephyrprime]

This is exactly how union guys pass unsustainable pension plans. They start mumbling something like "well it has compounding interest so the ROI is COP in the bond market today which will grow until China's LJZ reaches parity with the THO"
Rather than asking to see the numbers, people vote yes and move on.

If they saw the numbers, it wouldn't help them because most people suck at math.

 

[Patranus]

Since Detroit’s broke, will it be the first thing to go? No, according to state-appointed emergency manager Kevyn Orr.

“Nothing is for sale, including Howdy Doody,” Orr said during his first public comments on the bankruptcy during a Friday press conference.

http://detroit.cbslocal.com/2013/07...-will-not-sell-howdy-doody-during-bankruptcy/

Pathetic. Wish the world worked like this for everyone else.

 

[werepossum]

Only in so far as they weren't properly collateralized in the past.

There is a significant difference in the 401ks are NOT pensions, and I disagree that they should cost the same. There is an inherent advantage to longevity risk pooling that you get in a pension plan that you don't get with a 401k.

Longevity risk pooling it not something that necessarily needs to bankrupt you. a 401k, built up and then withdrawn on its own, is a terrible vehicle for retirement savings, as it places an enormous gamble on the date you are going to die that you are unlikely to win.

Two big advantages of a 401K though. First, it's real savings; pensions are often more promise than savings. (Which is understandable; if someone else has to pay your pension you can make it artificially high.) Second, assuming government doesn't seize it, one can pass the balance of a 401K to one's heirs on death; at best pensions offer spousal benefits.

Regarding Detroit, Mark Stein made me laugh: "If Barack Obama had a city, it would look like Detroit."

 

[Pulsar]

Sportage Spewed:

I'd have to see the fine print. Especially the details with the financials.
And their definition of "broke".
Certain political parties in power have a tendency with purposely screwing things up, to get their way or make some political point.
I assume this was the case here.
The whole thing stinks to high heaven.
And considering Emergency Manager Kevyn Orr is pocketing a cool mill for his efforts.
And considering who it was that appointed him to the job in the first place.
Beginning to smell the stench?


What kind of newfangled stupidity is this? Decades of mismanagement and you're trying to blame the problem on some weird Republican Conspiracy where the governor Snyder is just trying to sabotage the city and get Orr money?

You're going to assume that a political party broke the city on purpose?

Wow. Go back and get a grounding in reality.

 

[Pulsar]

http://detroit.cbslocal.com/2013/07...-will-not-sell-howdy-doody-during-bankruptcy/

Pathetic. Wish the world worked like this for everyone else.

It does, in a way. There are certain things that creditors can't touch when you and I declare bankruptcy. Section 9 works the same way.

Consider this. Forcing Detroit to sell their entire cultural heritage would allow them to operate for another couple months before being right back in the situation they are now - minus their culture.

It makes no sense. It's like being 20,000 in debt and selling your kitchen table. You didn't fix the problem and you don't have anywhere to eat anymore.

They need to fix the systemic issues. He's right to stand by the DIA.

 

[nehalem256]

Only in so far as they weren't properly collateralized in the past.

And how do you collateralize a promise of X% gains per year?

 

[actuarial]

And how do you collateralize a promise of X% gains per year?

Well that's a pretty vague question, but I'm assuming you're talking about cost of living adjustments? If so, the same way you would any other increasing liability.

I'm not saying this it's perfectly easy to determine accurate funding for pension plans (if it was, I wouldn't have a job), but if you look at the public pensions in Canada, which pre-fund their liability, it is far, far superior than anything anyone could do in a money purchase plan (401ks), EVEN IF things go tits up.

The probability of going poor is far higher in a 401k than in a funded pension plan.

 

[actuarial]

Two big advantages of a 401K though. First, it's real savings; pensions are often more promise than savings. (Which is understandable; if someone else has to pay your pension you can make it artificially high.) Second, assuming government doesn't seize it, one can pass the balance of a 401K to one's heirs on death; at best pensions offer spousal benefits.

Regarding Detroit, Mark Stein made me laugh: "If Barack Obama had a city, it would look like Detroit."

It's not just a promise if money is set aside. It's still savings with a promise against potential future shortfalls. But money has to be set aside for real (like we do in Canada) in an irrevocable trust. Most private pensions in the US are a mix of promise and savings like this. Real money exists, but it may not cover the entire benefit (though it is set aside based on a best estimate of covering the entire benefit). It is likely that more money has been set aside than in a 401k to start (statistically based on Defined Benefit vs Defined Contribution plan provisions on average), and also likely that the pension fund earns a greater return than your personal account would (studies in Canada show this, and the principles behind why substantially hold in the US post ERISA). So even if things go bad and your benefits are 'cut', there is still likely to be more money distributed to you than in a 401k situation.

You second 'benefit' of a 401k is not a benefit at all. What you've basically said is that you inaccurately guessed how long you would live, and lived below the standard of living you otherwise could have enjoyed. And what if you outlive your money?

 

[Darwin333]

http://money.cnn.com/2013/07/18/news/economy/detroit-bankruptcy/index.html?hpt=hp_t2

Detroit filed for bankruptcy Thursday afternoon, becoming the nation's largest public sector bankruptcy. The move could slash pension benefits to city workers and retirees, and leave investors holding the city's debt with only pennies on the dollar.


i can understand bondholders being shafted at pennies on the dollar.
and maybe even current workers for FUTURE pension promises.

but current retirees?!
i didnt even think it was possible?!

and i think obviously unfair!
they put in their time and work.

Math doesn't give a shit what anyone thinks is fair or unfair.

 

[the DRIZZLE]

I really don't know how these pension liabilities were set up or structured or whatever the terminology is, but I would hope that there would be a way that current retirees won't be affected. Those that are still working will take an enormous hit but that's far different from pulling the rug out from under people who have been dependent on those funds.

This whole situation is going to be very bad on many levels. Unfortunately, more than likely nothing will be learned from it.

They government employees union could have set up a self funded pension system that would have been insulated from this type of thing. However, the unions instead negotiated more generous pensions that would be payed out of future City revenues. They took a calculated risk on the City's future ability to pay just like the creditors did.

 

[Patranus]

It does, in a way. There are certain things that creditors can't touch when you and I declare bankruptcy. Section 9 works the same way.

Consider this. Forcing Detroit to sell their entire cultural heritage would allow them to operate for another couple months before being right back in the situation they are now - minus their culture.

It makes no sense. It's like being 20,000 in debt and selling your kitchen table. You didn't fix the problem and you don't have anywhere to eat anymore.

They need to fix the systemic issues. He's right to stand by the DIA.

Huh?

Its not about operating for another couple months. It about making those who lent you money whole.

 

[Darwin333]

Wow dude, get butt raped by a government employee or something?

You should just write these retirees a "budget"...that'll solve everything.

The fact of the matter is that many .gov pensions have been/are knowingly and willfully using very fuzzy math. Over many years the unmet expectations (because they were never feasible to begin with) continues to add up and when you are on the wrong side of it compounding is a bitch.

There are tons of pensions nationwide that mathematically will fail at some point. Yes it will suck for a lot of people and no its not fair but the people that promised them that they would receive those benefits lied to them.

 

[werepossum]

It's not just a promise if money is set aside. It's still savings with a promise against potential future shortfalls. But money has to be set aside for real (like we do in Canada) in an irrevocable trust. Most private pensions in the US are a mix of promise and savings like this. Real money exists, but it may not cover the entire benefit (though it is set aside based on a best estimate of covering the entire benefit). It is likely that more money has been set aside than in a 401k to start (statistically based on Defined Benefit vs Defined Contribution plan provisions on average), and also likely that the pension fund earns a greater return than your personal account would (studies in Canada show this, and the principles behind why substantially hold in the US post ERISA). So even if things go bad and your benefits are 'cut', there is still likely to be more money distributed to you than in a 401k situation.

You second 'benefit' of a 401k is not a benefit at all. What you've basically said is that you inaccurately guessed how long you would live, and lived below the standard of living you otherwise could have enjoyed. And what if you outlive your money?

I think you'll concede that pension managers very seldom guess exactly how much money will be needed now each year to guarantee the pension stays solvent at the end of a lifetime. If they estimate low, the fund crashes or must be bailed out. If they estimate high, then money that could have gone to workers or stockholders (or to the company itself for expansion or improvement) is tied up in a pension fund. In reality pension managers usually estimate low because the pain of funding them is immediate and ongoing whereas the problem of insufficient funding is greatly delayed and becomes someone else's problem. Rosy predictions make life more pleasant for them.

The second benefit reveals a disconnect between our ideas of retirement. You obviously believe that the purpose of retirement is to have as much money as possible, to live as high a lifestyle as possible and expire as your bank account is bottoming out. I have no inherent problem with that view, but it's just a preference. Many of us are looking to have enough money and prefer to leave something behind.

 

[Fern]

Pensions are funded by employee contributions.

No, I don't think so.

Detroit has two plans. One is a Defined Benefit Plan ("DBP") and the other is a Defined Contribution Plan ("DCP"). There is no obligation for any govt employee to participate in the DCP.

I have never seen a DBP that had employee contributions. I'm not going to research it, but I don't think that is allowed under US law. This would be the pension plan that would be 'cut'. This is the traditional type of pension plan (meaning typically very generous), and most of us will never benefit from one. I know I won't.

The Pension Benefit & Guarantee Corp ("PB&GC") may become involved and may have some type insurance that helps retirees. I just don't know if the PB&GC covers govt type DBP's. (I'm going to guess the PB&GC doesn't cover this plan because it seems obviously so underfunded).

The DCP shouldn't lose any money. I.e., the employees lose nothing here (unless a small employer matching share that has not yet been deposited). DCP are fully funded and are the legal property of the employee.

So no, the part of the pension plan we're talking isn't/wasn't funded by the employees.

Fern

 

[Zebo]

Some judge today said it's against Michigan constitution for them to declare bankruptcy. Guess They will have Michigan pay for it with tax increases.

 

[Fern]

I think you'll concede that pension managers very seldom guess exactly how much money will be needed now each year to guarantee the pension stays solvent at the end of a lifetime. If they estimate low, the fund crashes or must be bailed out. If they estimate high, then money that could have gone to workers or stockholders (or to the company itself for expansion or improvement) is tied up in a pension fund. In reality pension managers usually estimate low because the pain of funding them is immediate and ongoing whereas the problem of insufficient funding is greatly delayed and becomes someone else's problem. Rosy predictions make life more pleasant for them.
-snip-

I do not consider myself a pension expert, but have come across pension issues in my 35+ years as a tax professional.

I believe the problem we're looking at here is one particular to govt (gold plated) plans. I won't go on again about how these people greedily voted/bargained themselves excessively high and unrealistic benefits (even though I'd like to). (The issue angers me).

If this pension plan were private (i.e., like an IBM or Ford plan) it would be governed by law that would not allow it to be unfunded. The PB&GC oversees such plans. I have seen Fortune 500 go bankrupt and the staff of the PB&GC roll in like the FBI with warrants etc and seize records. They have considerable power as federal agents. If the pension was underfunded, or assets are missing, somebody may well go to fed prison. This I have personally seen back in the mid-80's.

I believe govt plans are exempt from oversight by the PB&GC.

----------
Draw up your personal financial plan for next year. Pencil in that you will make $10,000,000 and have it to spend. Now when next year gets here and there is no $10,000,000 what happens? You don't get to spend the $10 M.

That's what these azzholes did. And now they're whining they don't have the $10M.

Fern

 

[Darwin333]

Huh?

Its not about operating for another couple months. It about making those who lent you money whole.

Huh?

Bankruptcy is in the constitution for a reason, those who lent the money knew very well the risks of lending said money. Its sorta how "lending" works...

Lending is quite literally an investment and investments by very nature carry an inherent risk, some more than others obviously, of a loss up to and even more than the amount invested.

 

[Patranus]

Huh?

Bankruptcy is in the constitution for a reason, those who lent the money knew very well the risks of lending said money. Its sorta how "lending" works...

Lending is quite literally an investment and investments by very nature carry an inherent risk, some more than others obviously, of a loss up to and even more than the amount invested.

Yes, and since the city has assets which can make debtors whole, those assets should be auctioned off.

 

[Darwin333]

I do not consider myself a pension expert, but have come across pension issues in my 35+ years as a tax professional.

I believe the problem we're looking at here is one particular to govt (gold plated) plans. I won't go on again about how these people greedily voted/bargained themselves excessively high and unrealistic benefits (even though I'd like to). (The issue angers me).

If this pension plan were private (i.e., like an IBM or Ford plan) it would be governed by law that would not allow it to be unfunded. The PB&GC oversees such plans. I have seen Fortune 500 go bankrupt and the staff of the PB&GC roll in like the FBI with warrants etc and seize records. They have considerable power as federal agents. If the pension was underfunded, or assets are missing, somebody may well go to fed prison. This I have personally seen back in the mid-80's.

I believe govt plans are exempt from oversight by the PB&GC.

----------
Draw up your personal financial plan for next year. Pencil in that you will make $10,000,000 and have it to spend. Now when next year gets here and there is no $10,000,000 what happens? You don't get to spend the $10 M.

That's what these azzholes did. And now they're whining they don't have the $10M.

Fern

You are correct, the .gov gets to basically commit accounting fraud that if and when the exact same thing in the private industry happens people go to jail (as they should).

But the issue is far worse than the simple analogy you gave. A lot of these pensions funding was based on absurd shit like perpetual, every single year, 8% gains from investments. That just doesn't happen every single year over the course of decades in the real world, everyone knows this and so did they. As I stated in a previous post and something that I am sure you are very familiar with, compounding works equally in both directions. It is absolutely great when the compounding is in the direction you want it to be but an absolute bitch when it goes the other way.

Just to illustrate the absurdity:

Pension fund X must make at least 8% a year from its investments every year basically forever.

If their investments for whatever reason don't make them any money for a single year (0 lost, 0 gained) they must make a 16% return the next year to be back on track. 8% a year forever is already absurd and completely unrealistic but remember we are investing so what happens if one year you lose 8%? This is where the compounding starts to really bite you in the ass and all of this was very well known by the people that negotiated for these deals and promised them to their members. Fortunately for the people doing the negotiating on both sides (union and .gov), they knew that by the time the math caught up that they would be long gone from their positions with someone else left holding the bag.

The unions that were supposed to be looking out for their members flat out lied to them, as did the .gov asshole and everyone else who was involved with the deals and had even a basic understanding of math and investing.

 

[Darwin333]

Yes, and since the city has assets which can make debtors whole, those assets should be auctioned off.

First and foremost, says who?

Secondly, ok the city has all of its assets auctioned off and that money covers half of what they owe to the pension fund, bondholders are still hosed and now the city has absolutely no way to recuperate.

Is that what you are really suggesting?

Once again, there is a reason that filing bankruptcy doesn't mean that you will quite literally be thrown out on the streets without even the clothes on your back. I do believe that debtors prisons were alive and well before the revolutionary war though, perhaps the founders should have left well enough alone?

Edit: I completely passed over the topic of collateral. Were said assets listed as collateral for the loans? If they were then you are absolutely correct. However, if the loans were unsecured by collateral (and both lender and borrower know this very well when they ink the deal) why in the name of fuck should the debtor have to "collateralize" the loan after the fact? We are getting into the topic of contracts now and how, it seems, you think they should be changeable by a single party after the fact. Sorry bud, ain't the way it works.

 

[Patranus]

First and foremost, says who?

Common sense.

Secondly, ok the city has all of its assets auctioned off and that money covers half of what they owe to the pension fund, bondholders are still hosed and now the city has absolutely no way to recuperate.

Bond holders are first in line. Pension funds are near the end.

Once again, there is a reason that filing bankruptcy doesn't mean that you will quite literally be thrown out on the streets without even the clothes on your back. I do believe that debtors prisons were alive and well before the revolutionary war though, perhaps the founders should have left well enough alone?

How does 'art' or empty buildings help the city recover after the fact?

Edit: I completely passed over the topic of collateral. Were said assets listed as collateral for the loans? If they were then you are absolutely correct. However, if the loans were unsecured by collateral (and both lender and borrower know this very well when they ink the deal) why in the name of fuck should the debtor have to "collateralize" the loan after the fact? We are getting into the topic of contracts now and how, it seems, you think they should be changeable by a single party after the fact. Sorry bud, ain't the way it works.

Unsecured Detroit bonds are backed by “full faith and credit” of Detroit.
Detroit has a means to pay back (some) of that debt in good "faith".

 

[actuarial]

I think you'll concede that pension managers very seldom guess exactly how much money will be needed now each year to guarantee the pension stays solvent at the end of a lifetime. If they estimate low, the fund crashes or must be bailed out. If they estimate high, then money that could have gone to workers or stockholders (or to the company itself for expansion or improvement) is tied up in a pension fund. In reality pension managers usually estimate low because the pain of funding them is immediate and ongoing whereas the problem of insufficient funding is greatly delayed and becomes someone else's problem. Rosy predictions make life more pleasant for them.

It depends on how low the estimates are as to whether the funds crash out. It also depends whether there is a long enough time frame to smooth out the bumps and bruises. I don't think we're too far in our opinions on how public pensions have historically been treated (not as a rule, but certainly on average). It's why there's been a big push to completely rethink pensions and how they should be funded. A system having (even significant) problems doesn't mean another broken system is better though.

We haven't had it around long enough to really see, but 'personal investment account' style retirement is going to cause far more problems than the current pension crises over the next 15-20 years.

The second benefit reveals a disconnect between our ideas of retirement. You obviously believe that the purpose of retirement is to have as much money as possible, to live as high a lifestyle as possible and expire as your bank account is bottoming out. I have no inherent problem with that view, but it's just a preference. Many of us are looking to have enough money and prefer to leave something behind.

I feel that was as well, and was probably too strong in my retort. I certainly want to leave something for my kids, and 401ks are good for that only if you die before you run out of money. Receiving a pension, you can always put away part of your payments as inheritance (and choose a form of payment that provides for your dependents after your death) if you want to only use what you need. You can also save money on the side in addition to your pension contributions if those are your wishes.

The one thing I don't want to do is become a burden on my children, and I can promise you that far more people with 401ks as their entire pension savings are going to be a burden on their children than will be leaving something as inheritance.