Thursday, May 27, 2010

Trust No One

...with your retirement that is. Or at least FLG has always preferred that he control his own retirement funds. Consequently, he's prefers private social security accounts and defined contribution plans.

People in favor of social security and defined benefit pensions often raise the specter of market volatility. "The market goes up and down. Therefore, it's better to have a guaranteed income stream in retirement."

FLG thinks this misses the point on two counts. First, defined pensions are putting their money in the market. So, ultimately there is market risk at the ultra-macro-level. Second, the investment decisions are out of your hands, which FLG was reminded of the other day when listening to the radio.

NPR:
When sex abuse lawsuits pushed the Catholic Diocese of Wilmington, Del., into bankruptcy, Maria Carpitella got some bad news. Through bankruptcy filings, she and other retirees and lay employees of the diocese learned their pension plan was severely underfunded and isn't protected like corporate pension plans.

And, truth be told, even the corporate plans, which do have protection, often pay out a lot less once they are turned over to the PBGC.

The simple truth for FLG is this. He'd rather have money now for his retirement that is his and he can control rather than a promise to be paid decades from now. Many people see guarantees as a way to flee scary market risk, but they don't realize they are accepting another form of risk in return.

Now, in complete fairness, there is an economic case to be made that a institution can absorb volatility better than an individual and presumably hire experts in investing to manage the portfolio. But that's in a ideal world, and FLG feels much better seeing the money in his own account where he doesn't have to trust anybody else will make good on their promises several decades from now.

2 comments:

Anonymous said...

Are you aware of the state (pun so totally intended) of some of the State public pensions funds? California is a prime example as is NJ, NY, IL and MI to name a few others. Al States run by Dems for decades. Unlike the private institution, the Church, the States can't hide behind the excuse of having to pay out millions for sex abuse judgments. They can only claim invincible ignorance. And it will be the taxpayer who will be to pick up the tab to pay annual retirement/pension benefits of others. Annual retirement/pension benefits that at times are a lot more than a lot of taxpayers will make themselves annually. When the average nonUnion taxpayer figures that one out -which many are and they are call tea partiers or teabaggers depending upon your party affiliation - the Democrats, to quote Ricky Riccardo, are goin' to have some 'splaining to do. Anyway read on...

"From The Washington Examiner last April:

"Study: California state pension plans face $500 billion shortfall
By: Mark Hemingway

04/06/10

"Gov. Schwarzenegger commissioned a Stanford university study to examine the costs of the California’s public sector pension plans. The results are not pretty:

"[California Foundation for Fiscal Responsibility President Marcia] Fritz said the $535 billion shortfall estimated by the Stanford report means every household in the state is on the hook for about $36,000.

“That’s how much they owe to government workers for their retirement benefits,” Fritz said.

“It’s not like they will have to send a check to pay for it. But they will see it in higher classroom sizes, roads that aren’t repaired, parks that are closed, fewer policemen, far fewer firefighters and government offices that are probably going to be closed even more than we are seeing today.”

"Representatives from CalPERS and the California State Teachers’ Retirement System (CalSTRS) did not return calls for comment.

"Jon Coupal, president of the Howard Jarvis Taxpayers Association, said he isn’t surprised by Stanford’s estimate.

“This is the ticking time bomb that fiscal conservatives have been identifying for a decade now,” Coupal said. “As soon as (former Gov.) Gray Davis granted those enhanced pension benefits, we’ve been like the Cassandra who warns everybody, but whose words are not heeded.

“And still, even right now, the Legislature is returning from its Easter break and they should change the rules by statute today. But they won’t because there are too many powerful special interests invested in the status quo.”

"To further put this in perspective, $535 billion is more than the gross domestic product of either Saudi Arabia, Sweden, Switzerland or Poland. The state budget’s general fund in California is $85 billion."


Mrs. P

Anonymous said...

By the by, did you see this? I took a pass at it at about 6am but it was Greek - may try again tomorrow -arresting headline...

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

Mrs. P

 
Creative Commons License
This work is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.