Wednesday, September 15, 2010

Oh Boy

FLG listens to Marketplace on NPR most days. One of his least favorite parts is when they go to letters. Here's a particular example why:
We talk about budget deficits and trade gaps on this broadcast all the time, but our story last week on a trillion dollar gap in pension funds left many of you fuming. Local, state and federal governments are grappling with how to pay out on what're called defined benefit plans, even though tax revenues are down and the economy is too.

Ellen Knopf from Greenwich Village, New York City doesn't see a problem, provided people are smart.

Ellen Knopf: There is no problem with defined benefit plans unless the state or employer puts pension money in risky investments or in the stock market. A prudent investor may still make a profit.

Oh, sweet fucking crap. This is fucktarded.

It's not just about making a fucking profit. It's about making a return that also is larger than inflation. Putting a bunch of money in Treasury bonds or CDs just ain't gonna work. Well, FLG guesses you could technically put all the money in supersafe treasuries, but then you'd have to lower the expected returns on the pension fund. This would mean current employees would have to contribute a ton more each paycheck and the employer would have to throw a bunch more money into the pot to pay older workers. Not very reasonable. In fairness, one does have to be wary of employers who didn't contribute enough to the funds themselves trying to make it up by shifting the portfolio toward more risky assets. But all told, the idea that the problem with pension funds is that they are invested in the stock market might be the single stupidest financial analysis FLG has ever heard. It's not just about making a profit. There's a minimum acceptable value for that profit.

1 comment:

The Maximum Leader said...

I thought exactly the same thing when I heard this letter yesterday!

 
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