Defined Benefit Pensions...how were they supposed to be sustainable?

[jkarolyi]

There's a lot of criticism lately of traditional pensions becoming overwhelming burdens for old-industry corporations like the steel mills, airlines, and automakers.

I would like to know how traditional pensions were set up and how they were supposed to work. It sounds like a crazy scheme where companies have a ever-escalating debt to pay to an ever-escalating pool of retired workers. Aren't Social Security and diverse investments supposed to pay for retirement? Why would anyone want to rely on the viability of a single company to pay for their retirement?

How could any sane businessman approve of pensions (or workers rely on them) when they are so obviously going to bleed the company dry eventually? Lots of industries had these pensions up until recently, so I really am curious as to how they were supposed to be sustainable long-term.

To me, they seem like a very hare-brained idea. We taxpayers are now going to fund these lofty, unreasonable pension "promises" when the Pension Benefit Guaranty Corp. goes bankrupt, which is a certainty at this point.

[Superman]

Defined benefit pension plans do create a future liability, and so they are required to be reviewed by an actuary each year. The actuary determines the amount the company must set aside to cover the expected obligations. In other words, they are largely "pre-funded." The money earns interest, which is calculated into the actuary's figures. Folks have certain expected retirement dates and ages, and certain life expentancies. Again, this is what actuaries deal with. Federal law requires that these funds be signed off by an independent actuary annually. You wanna make obscene money, become an actuary. I considered it and decided not to. If I had, I'd be much richer, but I wouldn't be having this much fun.

[Rondinone]

This is why defined contribution plans are so much better. When you and the company part ways, you no longer have to worry about each other.

[Dennis Kalma]

Some of the problem came up when returns from investment (interest rates) were in the 'teens, the actuaries then calculated what they needed to put in to make things work with those kind of returns, and then the returns fell. Also, many companies (like the one I was at - Shell) had their pension predicated on full lifetime of service, at leat until age 60 in the company. They then got stupid and axed a bunch of staff, took the savings in pension fund contributions as profits and essentially were left over with a relatively low level of funding. Now Shell was pretty good, the money for the most part is actually there, but many companies did not go back and top up the funds, which now leaves them in the wreckage they now live with.

I agree, defined contribution is the only way to go, but then one has the problem of "what is enough" and what do you use for an average return? I use 7% return and $1.1m as the target for retirement at age 55....

Any other thoughts?

Dennis

[campbellcj]

IMO the main problems in these plans is not necessarily the defined benefit concept itself, rather the companies that are underfunding them, or hanging onto poorly designed plans based on unrealistic rates of return in conjunction with the employer's inability to keep up with the contributions required to keep the trust's assets in line with its liabilities.

When judiciously used, like in the case of my (very small) business, they can work out nicely in terms of tax advantage and very high contribution limits. Since we are private, we can basically amend, freeze or unfreeze the plan as needed. I believe you can also have a defined contribution plan, IRA, etc. and pump funds into whichever makes the most sense for a particular (tax year) situation. Looking to explore that further in the near future...

[daleflesburg]

The defined benefit plans could only work it the stock market, in which those funds were invested, had continued to "gain" at 10+% per year, and even then with the baby boomers coming, the smart gurus said, even in the late 70's, to convert them to defined contributions.

You can define a contribution, say $40 per week or $80 per week, but you cannot predict the future of the market.

When the market lost 50% of its value in 01 and 02, the pension plan values were all "underfunded" to such an extent that they could never recover.

The advantage of defined contributions, especially ones that employees contribute to, is that the employee has a say as to where the funds are invested, and you can put it all in a bond fund, or even the money market if you are that conservative.

To plan for retirement you need to build into your savings plan for inflation.

A million dollars will not assure you of being able to retire, if all you can get is 2 or 3 or even 4%. Do a declining balance, and study it. At 4% growth a million dollar base will only allow you to pull out $100,000 per year for about 13 years. If you can live on $50K of course it will last more than double that. How much will $50,000 per year buy in 20 years, not much I suspect. You will need the 100K to live like you can today on 50K. If your life expectancy is 87 years, and you want to retire at 55, I suggest that you will need a lot more that a million.

Save, Save, Save, and stay out of dot com companies.

Just my 2 cents

[legion]

I have a 401k and a pension. Even by the most conservative measures, my company's pension is grossly overfunded. The joys of not working for a public company...

[Dennis Kalma]

Done the declining balance thing, yes, if everything goes for crap then life would be tough, but one can also vary the amount of spending. No debt, all the toys you want, modest life style.....if things go well on the market, you take better vacations. If it does worse, then a back yard vacation is in order.

Other aspect is we are giving both of our kids one car, one degree and one suitcase (when they graduate). They leave the house with no debt, a vehicle to drive and an education (both are becoming engineers), so there is a balance to the save save save mantra..they can also support us in the style to which we want to become accustomed...

Just joking about that last part...

Dennis

[red-beard]

The biggest problem is not the underfunding of public corporation pensions. It is the underfunding of public government pensions. San Diego is the poster child of this.

They way over promised.

Back to the original poster's question.

#1. People were supposed to die at age 65. G0ddammit, why won't tey die? Freaking government tells them that smoking is bad and they should reduce cholestoral and everyone listened! Oh well.

#2. Way way back when, like in the 50's and 60's, the economy was expanding at a tremedous rate. Lots of these 'future benefits' were given because a) they were not 'real', and b) and an expanding ecomony would eventually pay for them (leave it to future generations, like social security - what happened to that debate???)

Too bad that, that kinf of expansion, was not going to goon forever. For those that need futher proof, see Japan inc.