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Sears blames retirees for financial woes -link
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WYDave
Posted 9/14/2018 18:56 (#6988271 - in reply to #6987774)
Subject: RE: Sears blames retirees for financial woes -link


Wyoming

Defined-benefit pensions have been breaking actuarial assumptions left and right, in the private and public sector, all over the place. Sears is just another case, they're nothing special.

Three things converged on defined-benefit pensions to cause this:

1. A rising life expectancy. Pension benefit streams are estimated to last "X" years based on retirees dying suitably soon enough that they're not collecting a lot more than originally estimated. This is the big problem at the heart of Social Security too. When the "retirement age" was set at 65 for Social Security (and therefore lots of private sector jobs too) in the 1930's, only about one-half (or slightly less) of men in the 30's got that old. About half of all men were dead before they made it to 65. So a retirement age of 65 worked out pretty well for Social Security and lots of pension plans.

2. Many pension plans have had some pretty flat investment returns in the last 10 years, with some very optimistic investment rates of return in the plans' estimations. I'll give you just one example of a pension plan with wildly optimistic assumptions as an example of what I'm saying here:

Take CalPERS, the California Public Employee Retirement System. Lots of firefighters, cops, teachers, etc in California (both at the state and local levels) pay into this plan. They have 10's of billions of dollars under management in their system. They employ quite a few people to manage the pension funds - and their pension investment reports read like a private equity fund's management letter. They're into all sorts of things - stocks, bonds, private placement funds, real estate, insurance companies, you name it.

For years, they've been estimating that they would get 7.25% annual returns - and for years, they've been getting less than 2%. That sort of discrepancy will eventually sink a pension fund.

One of the big problems for pensions is that the Fed has crushed bond yields. Bonds used to be a BIG part of pension investment portfolios - because they were easier to model for their returns, as well as they were less speculative.

3. Under-funding by the members. Almost every pension out there, public employee and private sector, has been under-funded by the members of the pension, for decades. The problems with defined-benefit pensions have been seen coming for decades - but no one has wanted to go toe-to-toe with the unions (public employee and private) to tell them that the payroll deductions for many pension plan participants will need to go up rather drastically - in some case, by as much as 100% or more.

So here we are.  As it stands now, defined-benefit pensions need to be outlawed. With rising life expectancies, there's simply no way to make them work, mathematically speaking, with the sort of certainty that they require to meet contractual obligations.

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