Posted on 04/10/2013 6:22:33 AM PDT by SeekAndFind
It has been said that an actuary is someone who really wanted to be an accountant but didn't have the personality for it. See who's laughing now. Things are starting to get very interesting, actuarially-speaking.
Federal bankruptcy judge Christopher Klein ruled on April 1 that Stockton, Calif., can file for bankruptcy via Chapter 9 (Chapter 11's ugly cousin). The ruling may start the actuarial dominoes falling across the country, because Stockton's predicament stems from financial assumptions that are hardly restricted to one improvident California municipality.
Stockton may expose the little-known but biggest lie in global finance: pension funds' expected rate of return. It turns out that the California Public Employees' Retirement System, or Calpers, is Stockton's largest creditor and is owed some $900 million. But in the likelihood that U.S. bankruptcy law trumps California pension law, Calpers might not ever be fully repaid.
So what? Calpers has $255 billion in assets to cover present and future pension obligations for its 1.6 million members. Yes, but . . . in March, Calpers Chief Actuary Alan Milligan published a report suggesting that various state employee and school pension funds are only 62%-68% funded 10 years out and only 79%-86% funded 30 years out. Mr. Milligan then proposed—and Calpers approved—raising state employer contributions to the pension fund by 50% over the next six years to return to full funding. That is money these towns and school systems don't really have. Even with the fee raise, the goal of being fully funded is wishful thinking.
Pension math is more art than science. Actuaries guess, er, compute how much money is needed today based on life expectancies of retirees as well as the expected investment return on the pension portfolio. Shortfalls, or "underfunded pension liabilities," need to be made up by employers
(Excerpt) Read more at online.wsj.com ...
That always fixes everything.
For so many years, 6-8% has been used for growth projection assumptions--perhaps even more in some cases. Those numbers have not consistently been available since the mid-1990's.
Who cares, you won't be around when the fit hits the shan and the American people are too dumb to know any different. /sarc
RE: For so many years, 6-8% has been used for growth projection assumptions
And what do they base this assumption on?
Take 60% of what you were “promised”,
or get 0% of what you were “promised”.
I believe those figures are based upon the average historical growth in equities (somewhere around 7%).
Extrapolating, a conservative investment in an index fund should generate about 7% annually, doubling your principle investment about every 10 years (Rule of 72). Unfortunately, I don't think the stock market's been anywhere near this level on either the current 5- or 10-year return rate.
So, why not put the money into the S&P 500 and be done with it?
I don’t think CA has even bothered to make the most obvious and easy of reforms. For example, end the practice of allowing pension “spiking” whereby retiring employees sell back accumulated sick and vacation time, which is then counted as salary for the pension calculation. And AFAIK there is no limit to how much sick and vacation time can be accrued. People take full advantage of this and end up with pensions greater than their final year salary.
That's probably the most sensible way to handle such large sums of OPM, but I'm sure pension managers can't help but get "cute" with it. They'll move assets around to diversify, or maybe try to time the market to avoid big down years, or maybe even try to chase returns...investing in "green energy" and other trendy positions.
Another good post, SeekAndFind.
I’ve been telling my cow-orkers this for a while; the pension system will collapse and anyone relying on it will become part of the new proletariat who rises up to TAKE what they ARE DUE.
I have no idea why people continue to make unrealistic promises. I guess human beings never learn.
Yep, the looting of the public treasury continues, secured by the collateral of your family home, your car, your business, and everything else they can think to seize to make good the promises of people who never had to pay the bill in the first place.
Every city budget should run exactly one year with the only liabilities at the end being bonded debt used for construction of city projects. End all benefits for all government employees - give them a set salary, let them buy whatever they wish with their money - health insurance, pensions, sick days, family leave, whatever.
“RE: For so many years, 6-8% has been used for growth projection assumptions
And what do they base this assumption on?”
I received a letter and a check from a former employer when I was in my mid 50’s. It seems the employer had decided to cash out its pension plan. The check covered the equivalent of 3 years worth of benefits. My life expectancy per the actuarial tables at age 65 is 17 years. It seems Mr. Boehner slipped a provision in a bill in the mid 2000’s allowing private pension plans to use an 8% discount rate when calculating payouts when ending plans. Of course it doesn’t matter that there is no place I could invest the lump sum and realize a guaranteed 8% annual return.
At that point I knew the Republican Party was a tool of multinational corporations. It has zero interest in the average citizen and when given a choice between supporting the goals of big donors or protecting the rights of citizens it will always choose the former.
When I joined the former employer (nonunion salaried employee in a “right to work state”) I accepted the lowest salary I was offered at the time (i had 3 competing offers) because the employer had good benefits and a good reputation for treating employees well. It also had a reputation for paying low salaries but it was understood the benefits offset the lower pay. I viewed employment as a contract. I performed my job in exchange for salary and benefits, with some of the benefits (pension) delayed to a future date. Whether or not the corporation put aside the savings on my lower than market salary isn’t the point. It was their obligation to provide the benefit if I performed in my job.
Many private companies failed to set aside sufficient funds to pay employee benefits resulting in the unfunded pension liability situation which is similar to the issue in the public sector. Essentially Congress has allowed the employer to escape paying a substantial amount of the deferred benefits. This is equivalent to stealing the work I performed in exchange for these benefits. This is one more example that contract law no longer exists in the politicized legal environment. Just as the federal government stole from the GM bondholders to benefit the unions during the bankruptcy, in this instance Congress is allowing big corporations to pay out pension benefits for pennies on the dollar. The result is higher reported profits and increased bonuses for current management at the expense of those who did not receive full compensation for their labor.
“...my cow-orkers...”
So, exactly how does one “ork” a cow?
Sorry, had to be done. :)
Ouch! That’s gonna leave a scar. That’s what I have been predicting. They are pissing off people with the skills, knowledge, wherewithal, finances, etc to damage those in high places who think they are safe.
The school teachers may be somewhat docile but fireman and policeman are not, throw in many gov.con workers who know things and there will be trouble.
I think the elites plan on heading to the bunkers while topside burns for a few weeks, then come out with all their new toys when there is much smaller population to deal with, but I am half crazy so who knows?
Ask Dilbert - he coined the term
Yes. Absolutely.
Actually, the rational thing to do is pension “adjustments”. That is, start the cutting by looking at the pensions that are being paid compared to equivalent pensions in solvent markets.
If they average pension for a given type of job around the US is $40,000, but in a few states it is over $100,000, it would not be unreasonable to cut it to the national average, then make an upward adjustment, a COLA, based on the local economy. So instead of $100,000 a year, they get perhaps $43,000.
Just doing this, many pension funds would quickly become far more solvent.
Vacation and sick leave payouts aren't the big problem. What really hurts is the end of career salary spikes if allowed, lack of matching contributions, and crappy investment decisions.
Dunno. Seems like if someone sells back $30K worth of leave x 90% (public safety pension), thats an additional $27K per year of pension for life. That increment is larger than the entire annual pension many private sector works end up getting.
For a public employee making $60-$80/hr, it’s not that hard to accumulate a large pot of unused leave.
I have no issue with the unused leave being paid out, but including it in the pension calculation is absurd. I also think they need a “use it or lose it” rule regarding unused leave time (like most all private companies have). Allowing the accumulation of unused leave without limit is also financially unsound.
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