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Retirement, pensions, social security, and related matters
Topic: Retirement, pensions, social security, and related matters (Read 1587 times)
Retirement, pensions, social security, and related matters
September 16, 2012, 10:44:43 AM »
Kicking this thread off with, of all things, an editorial from Pravda on the Hudson
The Road to Retirement
Published: September 15, 2012 120 Comments
Even before the Great Recession, Americans were not saving enough, if anything, for retirement, and policy experts were warning of a looming catastrophe. The economic downturn and its consequences — including losses in jobs, income, investments and home equity — have made that bad situation much worse.
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And yet, judging by the presidential campaign, this clear and present danger is a political nonissue.
Medicare, of course, is an issue. But Social Security, a critical source of income for most retirees, is barely mentioned, though the parties have sharply different views on how to improve it. The Democratic platform correctly acknowledges that it can be strengthened and preserved, implying that a modest mix of tax increases and benefit cuts is needed. The Republican platform vows to “give workers control over, and a sound return on, their investments.” That sounds like privatization, which would be cruel folly.
Neither side, however, is grappling with the fact that the nation’s retirement challenges go well beyond both programs, and that most Americans, by and large, cannot afford to retire.
The crux of the problem is that as traditional pensions have disappeared from the private sector, replacement plans have proved woefully inadequate. Fewer than half of the nation’s private sector workers have 401(k) plans, and more than a third of households have no retirement coverage during their work lives, according to the Center for Retirement Research at Boston College.
The center also found that among people ages 55 to 64 who had a 401(k), the recession and slow recovery left the typical worker with just $54,000 in that account in 2010, while households with workers in that age group had $120,000 in all retirement accounts on average. That is not nearly enough.
Nor do most Americans have significant wealth in other assets to fall back on. According to Federal Reserve data, median net worth declined by a staggering 40 percent from 2007 to 2010, to $77,000; for households near retirement, ages 55 to 64, the decline was 33 percent, to $179,000. Home equity, once thought of as a cushion in retirement, has been especially devastated. The bursting of the housing bubble has erased nearly $6 trillion in equity, and left nearly 13 million people owing a total of $660 billion more on their mortgages than their homes are worth, according to Moody’s Analytics.
A separate study by AARP has found that as of December 2011, people ages 50 and older accounted for 3.5 million underwater loans, with 1.2 million in or near foreclosure. That is on top of the more than 1.5 million older Americans who have already lost their homes in the bust since 2007.
Many people who are coming up short take refuge in the notion that they can continue working. But can they?
Working longer can help to rebuild savings, and, more important, allow one to delay taking Social Security, which improves the ultimate payout. As a practical matter, however, keeping a job is no sure thing. Workers ages 55 to 64 have been less likely than younger ones to lose their jobs in recent years; their jobless rate has averaged 6.1 percent in the past year, compared with 7.3 percent for workers ages 25 to 54. But when older workers become unemployed, they are much more likely to be out of work for long periods and less likely to find new jobs, while those who do become re-employed usually take a big pay cut.
More saving is clearly needed, along with ways to protect retirement savings from devastating downturns. The question is how. In addition to strengthening and preserving Social Security, the nation needs new forms of retirement coverage, along the lines of the “Automatic Individual Retirement Accounts” that President Obama has proposed in recent budgets, which would require companies that did not offer retirement plans to automatically divert 3 percent of an employee’s pay into an I.R.A., unless the employee opted out. A similar plan was recently proposed by Senator Tom Harkin, Democrat of Iowa.
The proposals are not cure-alls, but they could be important steps toward an ultimate aim of expanding retirement coverage and reducing reliance on 401(k)’s, which have proved far too vulnerable to investing mistakes and market downturns to be the core of a retirement plan.
Millions of Americans are headed for insecure retirements, but with new policies, millions more could escape that fate.
BO going after retirement accounts?
Reply #1 on:
April 06, 2013, 08:14:22 AM »
Kessler: The ROR Fantasy
Reply #2 on:
April 09, 2013, 09:50:35 PM »
Andy Kessler: The Pension Rate-of-Return Fantasy
Counting on 7.5% when Treasury bonds are paying 1.74%? That's going to cost taxpayers billions..
By ANDY KESSLER
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 or, in the case of California, taxpayers.
In June of 2012, Calpers lowered the expected rate of return on its portfolio to 7.5% from 7.75%. Mr. Milligan suggested 7.25%. Calpers had last dropped the rate in 2004, from 8.25%. But even the 7.5% return is fiction. Wall Street would laugh if the matter weren't so serious.
And the trouble is not just in California. Public-pension funds in Illinois use an average of 8.18% expected returns. According to the actuarial firm Millman, the 100 top U.S. public companies with defined benefit pension assets of $1.3 trillion have an average expected rate of return of 7.5%. Three of them are over 9%. (Since 2000, these assets have returned 5.6%.)
Who wouldn't want 7.5%-8% returns these days? Ten-year U.S. Treasury bonds are paying 1.74%. There is almost zero probability that Calpers will earn 7.5% on its $255 billion anytime soon.
The right number is probably 3%. Fixed income has negative real rates right now and will be a drag on returns. The math is not this easy, but in general, the expected return for equities is the inflation rate plus productivity improvements plus the expansion of the price/earnings multiple. For the past 30 years, an 8.5% expected return was reasonable, given +3%-4% inflation, +2% productivity, and +3% multiple expansion as interest rates plummeted. But in our new environment, inflation is +2%, productivity is +2% and given that interest rates are zero, multiple expansion should be, and I'm being generous, -1%.
So what to do? I recall a conversation from 20 years ago. I was hoping to get into the money-management business at Morgan Stanley MS 0.00%. I wanted to ramp up its venture-capital investing in Silicon Valley, but I was waved away. It was explained to me that investors wanted instead to put billions into private equity.
One of the firm's big clients, General Motors, GM -0.22%had a huge problem. Its pension shortfall rose from $14 billion in 1992 to $22.4 billion in 1993. The company had to put up assets. Instead, Morgan Stanley suggested that it only had an actuarial problem. Pension money invested for an 8% return, the going expected rate at the time, would grow 10 times over the next 30 years. But money invested in "alternative assets" like private equity (and venture capital) would see expected returns of 14%-16%. At 16%, capital would grow 85 times over 30 years. Woo-hoo: problem solved. With the stroke of a pen and no new money from corporate, the GM pension could be fully funded—actuarially anyway.
Things didn't go as planned. The fund put up $170 million in equity and borrowed another $505 million and invested in—I'm not kidding—a northern Missouri farm raising genetically engineered pigs. Meatier pork chops for all! Everything went wrong. In May 1996, the pigs defaulted on $412 million in junk debt. In a perhaps related event, General Motors entered 2012 with its global pension plans underfunded by $25.4 billion.
In other words, you can't wish this stuff away. Over time, returns are going to be subpar and the contributions demanded from cities across California and companies across America are going to go up and more dominoes are going to fall. San Bernardino and seven other California cities may also be headed to Chapter 9. The more Chapter 9 filings, the less money Calpers receives, and the more strain on the fictional expected rate of return until the boiler bursts.
In the long run, defined-contribution plans that most corporations have embraced will also be adopted by local and state governments. Meanwhile, though, all the knobs and levers that can be pulled to delay Armageddon have already been used. California, through Prop 30, has tapped the top 1% of taxpayers. State employers are facing 50% contribution increases. Private equity has shuffled all the mattress and rental-car companies it can. Buying out Dell is the most exciting thing they can come up with. Expected rates of return on pension portfolios are going down, not up. Even Facebook FB -0.96%millionaires won't make up the shortfall.
Sadly, the only thing left is to cut retiree payouts, something Judge Klein has left open. There are 12,338 retired California government workers receiving $100,000 or more in pension payments from Calpers. Michael D. Johnson, a retiree from the County of Solano, pulls in $30,920.24 per month. As more municipalities file Chapter 9, the more these kinds of retirement deals will be broken. When Wisconsin public employees protested the state government's move to rein in pensions in 2011, the demonstrations got ugly—but that was just a hint of the torches and pitchforks likely to come.
Meanwhile, it's business as usual. California Gov. Jerry Brown released a state budget suggesting a $29 million surplus for the fiscal year ending June 2013 and $1 billion in the next fiscal year. Actuarially anyway.
Or as Utah Rep. Jason Chaffetz told Vermont Gov. Peter Shumlin, upon learning at a 2011 House hearing about that state's unrealistic pension assumptions: "If someone told me they expected to get an 8% to 8.5% return, I'd say they were probably smoking those maple leaves."
Mr. Kessler, a former hedge-fund manager, is the author most recently of "Eat People" (Portfolio, 2011).
CA city on brink of bankruptcy due to pensions
Reply #3 on:
December 29, 2013, 12:18:34 PM »
POTH: Pensions are fuct
Reply #4 on:
April 14, 2014, 04:31:47 PM »
The multiemployer plans' problems do look real and serious. One common denominator jumps out: all the plans with problems have unions among the participants. Unions tend to get in bed with politicians, and both have a penchant for over-promising benefits and attaching government guarantees which encourage pension managers to do stupid things. When hard times hit, the poor management of the fund and its under-funded status collide to produce massive losses. Now they want the taxpayers to make up the losses. These problems are acute in places like Los Angeles and other municipalities where there exists an unholy alliance between unions and politicians. The losses are massive, too big for the taxpayers to swallow. From the perspective of society we need failures to be recognized. From the perspective of the individuals who will lose their promised benefits, this is of course a tragedy. No easy way out.
Lots of private plans are already protected by the government.
As to your comment that all the plans that appear to be in trouble have unions involved, I would argue that there are many non-union plans that are also ripe for failure.
Friday, April 11, 2014 8:05 PM
Reader Question on the Inevitable Los Angeles Bankruptcy; What About Chicago?
In response to LA Commission Studies Pension Crisis, Recommends New Commission; Bankruptcy Inevitable reader Daniel writes ...
Can you please explain why a home owner in a place like Los Angeles would be concerned with their city's future bankruptcy?
Will whatever happens not be short lived?
I understand that city workers will be affected and that unions and union workers will be affected as well, but how would your typical resident/homeowner be affected in such a situation?
Thanks for your wonderful blog!!
Tax Hikes Coming
In a futile attempt to prevent the inevitable, the first thing LA politicians are likely to do is raise taxes, all kinds of taxes. They will probably invent new ones too.
Please compare LA's setup to Chicago.
Comparison to Chicago
Via email, Ted Dabrowski at the Illinois Policy Institutes writes ...
Gov. Pat Quinn is in a bind.
He’s being asked to sign a Chicago pension bill that he knows has no real reforms and no way to pay for itself. By signing the bill, Quinn will give Mayor Rahm Emanuel his blessing to raise Chicago property taxes by $750 million over five years.
But that’s just the beginning.
If the Legislature uses the same blueprint to “fix” the city and Cook County’s other pension funds, Quinn will be blessing billions more in tax hikes.
The problem for Quinn is that he promised property tax relief to all Illinoisans in his state budget address just two weeks ago. Here’s what he said:
“My comprehensive tax reform plan starts with providing every homeowner in Illinois with a guaranteed $500 property tax refund every year.
In Illinois, more is collected in property taxes every year than in the state income tax and state sales tax combined. In fact, Illinois has one of the highest property tax burdens on homeowners in the nation – more than 20 percent above the national average. The property tax is not based on ability to pay. The property tax is a complicated, unfair tax, hitting middle-class families the hardest.
For too long, Illinois has … overburdened its property taxpayers.”
By signing a pension bill that helps Emanuel raise property taxes, Quinn will break yet another promise. The governor has already asked the Legislature to make the 2011 tax hike permanent, even though he originally promised it would be temporary.
But Quinn has a way out of his predicament. Besides the obvious political reasons to oppose the bill, Quinn has three good policy reasons not to sign it:
1. Property tax hikes won’t solve Chicago’s pension problem. Emanuel needs more taxes because his plan doesn’t reform the broken pension system. Instead, it just props up a failed system run by the same politicians who bankrupted it in the first place.
What Emanuel and supporters of his pension bill won’t tell you is that they’ll be back for even more tax hikes. Emanuel’s current plan calls for additional city contributions (above what the city pays today) to the municipal pension fund totaling $4.1 billion through 2025. But his proposed property tax hikes will raise only an additional $2.25 billion during that time period.
That means the mayor’s tax hike will be $1.9 billion short of the extra contributions needed through 2025. Without real reforms, he’ll be back for more.
2. People and businesses will flee. Avoiding real reforms and raising taxes is a failed strategy. People and businesses will flee Chicago, just as they’ve been doing for years. Taxpayers will leave because they’ll be paying more money for fewer services.
Each Chicago household is already on the hook for more than $61,000 in future taxes to pay down the massive long-term debt – more than $63 billion in bonds and pension shortfalls – that their city and county governments have racked up.
Tax hikes mean fewer people will stick around to pay a growing bill.
3. There is a plan to fix Chicago without tax hikes. The Illinois Policy Institute offers a reform plan that avoids tax hikes and immediately cuts Chicago’s pension shortfall in half. The core of its solution is a hybrid retirement plan for city workers that gives them a self-managed plan and fixed, monthly Social Security-like benefits at retirement.
The plan makes the tough choices necessary to bring about real retirement security for Chicago’s city workers.
Quinn and Emanuel’s goal must be to end Chicago’s pension crisis and to preserve Chicago’s status as a world-class city.
Massive property tax hikes will do just the opposite and push Chicago further in the direction of Detroit.
Vice President of Policy
No one should assume they are unaffected by the pension crisis, even if they do not live in troubled cities. For starters, more cities are affected than admitted.
For discussion, please see 85% of Pension Funds to Fail in Three Decades.
Secondly, and equally important, Democrat controlled states like California and Illinois are dominated by union sympathizers. Of course that is precisely why those states are in serious trouble.
So even if you live in an unaffected city, states controlled by unions are also highly likely to raise all sorts of taxes to protect union interests.
Mike "Mish" Shedlock
Read more at
Social Security debt bomb
Reply #5 on:
July 31, 2014, 03:27:34 AM »
But it's a very popular program!
The pension bomb
Reply #6 on:
August 05, 2014, 07:46:44 AM »
WSJ: Calpers Play for Pay
Reply #7 on:
August 26, 2014, 02:43:13 PM »
Calpers's Play for Pay
Jerry Brown wanted to stop 'pension spiking.' So much for that.
Updated Aug. 26, 2014 3:12 p.m. ET
When one door closes, government unions crack open a window. So it was last week when the labor-controlled board of the California Public Employees' Retirement System (Calpers) approved counting 99 categories of supplemental pay toward workers' pension calculations.
One objective of the de minimis reforms Gov. Jerry Brown signed in 2012 was to curb egregious abuses such as "pension spiking." Defined-benefit pensions in California are calculated as a percentage of the average of workers' highest compensation over three years multiplied by the numbers of years worked. Many employees have goosed their pensions by loading up on overtime and cashing out vacation and other add-ons during their final working years. In one famous example, a fire chief in Northern California who made $186,000 retired after 26 years with an annual pension of more than $230,000.
Mr. Brown's reforms ostensibly closed these loopholes by defining "pensionable compensation" as "base pay" for "services rendered on a full-time basis during normal working hours." The law explicitly bars overtime as well as unused vacation and sick leave.
Calpers has now tried to end run the law by including 99 other salary boosters such as "incentive pay" for "local safety members, school security officers and California Highway Patrol officers who meet an established physical fitness criterion."
Public-safety officers can earn up to $1,600 annually for taking annual physicals. Employees earn "longevity pay" for merely sticking around for more than five years, which comes on top of "step" increases and annual raises. Workers can also boost their salaries by up to 10% if they are "required to obtain a specified degree" such as a bachelor's and for "maintaining a license required by government or regulatory agencies to perform their duties."
Some governments even award extra pay to firefighters "who are routinely and consistently assigned to administrative work" and to prison guards who are given the onerous job of "responding to questions from the public." Police are paid premiums for handing out parking tickets and patrolling streets. Librarians can earn more if they have to "provide direction or resources to library patrons." If only journalists could earn bonuses for writing.
Calpers did graciously exclude from its list pay boosts for public-safety officers who wear their uniforms and the monthly allowance they receive for keeping their clothes clean. But it's inevitable that government unions will soon find ways to exploit these 99 other pay bumps to pad their pensions. For instance, they could negotiate greater "longevity pay" or larger "physical fitness" premiums for workers over age 50.
Gov. Brown has chastised Calpers for undermining the reforms and asked his staff to "determine what actions can be taken to protect the integrity of the Public Employees' Pension Reform Act." The truth is that government unions and Calpers will always find ways to manipulate defined-benefit plans that are run by their political allies. The only way to protect taxpayers is with 401(k)-style plans that are individual property that can't be politically exploited.
The Dutch do it without smoke and mirrors
Reply #8 on:
October 12, 2014, 11:37:35 AM »
Imagine a place where pensions were not an ever-deepening quagmire, where the numbers told the whole story and where workers could count on a decent retirement.
Imagine a place where regulators existed to make sure everyone followed the rules.
That place might just be the Netherlands. And it could provide an example for America’s troubled cities, or for states like Illinois and New Jersey that have promised more in pension benefits than they can deliver.
“The rest of the world sort of laughs at the United States — how can a great country like the United States get so many things wrong?” said Keith Ambachtsheer, a Dutch pension specialist who works at the University of Toronto — specifically at its Rotman International Center for Pension Management, a global clearinghouse of information on how successful retirement systems work.
Going Dutch, however, can be painful. Dutch pensions are scrupulously funded, unlike many United States plans, and are required to tally their liabilities with brutal honesty, using a method that is common in the financial-services industry but rejected by American public pension funds.
"Everybody wants safety and everybody wants an affordable system, and you can’t have both. It’s become a major public debate in the Netherlands,” said Keith Ambachtsheer, a Dutch pension specialist.
The Dutch system rests on the idea that each generation should pay its own costs — and that the costs must be measured accurately if that is to happen. After the financial collapse of 2008, workers and retirees in the Netherlands took the bitter medicine needed to rebuild their collective nest eggs quickly, with higher contributions from workers and benefit cuts for pensioners.
The Dutch approach bears little resemblance to the American practice of shielding the current generation of workers, retirees and taxpayers while pushing costs and risks into the future, where they can metastasize unseen. The most recent data suggest that public funds in the United States are holding just 67 cents for every dollar they owe to current and future pensioners, and in some places the strain is palpable. The Netherlands, by contrast, have no Detroits (no cities going bankrupt because pension costs grew while the population shrank), no Puerto Ricos (territories awash in debt but with no access to bankruptcy court) and nothing like an Illinois or New Jersey, where elected officials kicked the can down the road so many times that it finally hit a dead end.
About 90 percent of Dutch workers earn real pensions at their jobs. Their benefits are intended to amount to about 70 percent of their lifetime average pay, as many financial planners recommend. For this and other reasons, the Netherlands has for years been at or near the top of global pension rankings compiled by Mercer, the consulting firm, and the Australian Center for Financial Studies, among others.
Accomplishing this feat — solid workplace pensions for most citizens — isn’t easy. For one thing, it’s expensive. Dutch workers typically sock away nearly 18 percent of their pay, most of it in diversified, professionally run pension funds. That compares with 16.4 percent for American workers, but most of that is for Social Security, which is intended to provide just 40 percent of a middle-class worker’s income in retirement.
Dutch employers contribute to their system, too, but their payments are usually capped. While that may seem a counterintuitive way to make sure that pensions are well funded, it actually encourages companies to stick with pension plans. If the markets drop, Dutch employers do not receive urgent calls to pump in more money — the kind of cash calls that have prompted so many American companies to stop offering pensions. In the private sector, only 14 percent of Americans with retirement plans at work have defined-benefit pension plans — the ones that offer the most security — compared with 38 percent who had them in 1979. And if the markets rally and a Dutch pension fund earns more than it needs, the employers are not allowed to touch the surplus. In the United States, companies have found many ways to tap a pension surplus. The problem today is that there usually is no surplus left.
Dutch companies, as well as public-sector employers, typically band together by sector in big, pooled pension plans, then hire nonprofit firms to invest the money. Terms are negotiated sectorwide in talks that resemble American-style collective bargaining.
This vast collaborative process may sound too slow, too unwieldy and maybe even too socialist for American tastes. But standing guard over it is a decidedly capitalist watchdog, the Dutch central bank. More than a decade ago, after the dot-com collapse, a director of the central bank warned of a looming pension funding crisis. In response, the central bank in 2002 began to require pension funds to keep at least $1.05 on hand for every dollar they would have to pay in future benefits. If a fund fell below the line, it had just three years to recover.
American public pension funds have no such minimum requirement, and even if they did, there is no regulator to enforce it. Company pensions are bound by federal funding rules, but Congress has a tendency to soften them.
The Dutch central bank also imposed a rigorous method for measuring the current value of all pensions due in the future. Pensions are not supposed to be risky, so the Dutch measure them the same way the market prices very safe bonds, like Treasuries — that is, by discounting the future payments to today’s dollars with a very low interest rate. This method shows that a stable lifelong benefit is very valuable, and therefore very expensive to fund.
Notably, the Dutch central bank prohibited the measurement method that virtually all American states and cities use, which is based on the hope that strong market gains on pension investments will make the benefits cheaper. A significant downside to this method is that it lets pension systems take advantage of market gains today, but pushes the risk of losses into the future, for others to cope with. “We had lengthy discussions about this in the Netherlands,” said Theo Kocken, an economist who teaches at the Free University in Amsterdam and is the founder of Cardano, a risk analysis firm. “But all economists now agree. The expected-return approach is a huge economic offense, hurting younger generations.”
He explained that in the Netherlands, regulators believe that basing the cost of benefits today on possible investment gains tomorrow is the same as robbing tomorrow’s workers to pay for today’s excesses.
"The expected-return approach is a huge economic offense, hurting younger generations,” said Theo Kocken, a Dutch economist.
Most public pension officials in the United States reject this view, saying governments can wait out bear markets because governments, unlike companies, don’t go out of business.
For years, economists have been calling on American cities and states to measure pensions the Dutch way. And, in fact, California’s big state pension system, Calpers, sometimes calculates a city’s total obligation by that method. When Stockton went bankrupt, for instance, Calpers recalculated and found that the city owed it $1.6 billion. Of course, Stockton is insolvent and does not have an extra $1.6 billion, but Christopher Klein, a bankruptcy judge, has said that federal bankruptcy law permits it to walk away from the debt. Calpers disagrees, setting up a clash that seems destined for the United States Supreme Court.
But most of the time, when someone in the United States calls for Dutch-style measurements, pension officials suspect a ploy to show public pensions in the worst possible light, to make them easier to abolish.
“They want to create a false report, to create a crisis,” said Barry Kasinitz, director of government affairs for the International Association of Fire Fighters, after members of Congress introduced a bill to require the Dutch method.
The Dutch say their approach is, in fact, supposed to prevent a crisis — the crisis that will ensue if the boomer generation retires without fully funded benefits. Their $1.05 minimum is really just a minimum; pension funds are encouraged to keep an even bigger surplus, to help them weather market shocks. The Dutch sailed into the global collapse of 2008 with $1.45 for every dollar of benefits owed, far more than they appeared to need. But when the dust settled, they were down to just 90 cents. The damage was so bad that the central bank gave them a breather: They had five years to get back to the $1.05 minimum, instead of the usual three.
American public plans emerged from the crisis in worse shape, on the whole, and many allowed themselves 30 years to recover. But 30 years is so long that the boomer generation will have retired by then, and the losses will have been pushed far into the future for others to repay.
It’s a recipe for disaster if the employer happens to be a city like Detroit. The city’s pension system used a 30-year schedule to cover losses but reset it at “Year 1” every year, a tactic employed in a surprising number of places. In Detroit, it meant the city never replaced the money that the pension system lost. When Detroit finally declared bankruptcy last year, an outside review found a $3.5 billion shortfall, one of the biggest claims of the bankruptcy. Manipulating the 30-year funding schedule had helped to hide it.
“This happening in the Netherlands is totally out of the question,” Mr. Kocken said.
While the Netherlands has a stellar reputation for saving, that doesn’t mean pensions have been without controversy there; in fact, a loud, intergenerational debate is occurring about how to manage pensions. The financial crisis raised new calls for reform, Mr. Ambachtsheer said. Retirees were shocked and angry to have their pensions cut by an average of 2 percent after the crash. That had never happened before, and many had no idea that cuts were even possible. A new political party, 50Plus, sprang up to defend the interests of older citizens and won two seats in the national Parliament.
But something else happened: Dutch young people found their voice. No matter their employment sector, they could see that their pension money was commingled with retirees’ money, then invested that way by the outside asset management firms. In the wake of the financial crisis, they realized that they and the retirees had fundamentally opposing interests. The young people were eager to keep taking investment risk, to take advantage of their long time horizon. But the retirees now wanted absolute safety, which meant investing in risk-free, cashlike assets. If all the money remained pooled, young people said, the aggressive investment returns they wanted would be diluted by the pittance that cashlike assets pay.
“Now the question is, ‘How do you resolve this dilemma?’ ” Mr. Ambachtsheer said. “Everybody wants safety and everybody wants an affordable system, and you can’t have both. It’s become a major public debate in the Netherlands.”
It’s a debate that is rarely, if ever, heard in the United States.
Re: Retirement, pensions, social security, ... Dutch system
Reply #9 on:
October 14, 2014, 03:51:17 PM »
We are in Europe now and had lunch with a young Dutch college girl who is a friend of my daughter. She said she knows she will work until (exactly) 67. A public system like that is not for me, but it is solvent when all the facts are out in the open and all sides keep their promises.
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