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Surprised that #3 does not include "The culture that is Japan" or do all cultures value female thighs...

This is actually a Japan-only (or maybe Japan-originated) phenomeon called Zettai Ryouiki. Not just female thigh sexualization, but the specific context of exposing skin in a narrow gap.

It's also about a year old:

The 2008 bailout of the auto industry in Canada was pretty well an insertion of cash into the underfunded pension plan. The unfunded liability argument is great, it produces a very large number that can be ignored for 20-30 years. The real problem is that now pensions are getting returns of far less than 8% and municipalities and states are asked to contribute the shortfall. After a few years the shortfall gets so large that the choice becomes paying for the police force, sewage treatment and ambulance service, or top up the pension fund, in other words bankruptcy.

My question is why the actuaries don't calculate based on real return versus some imaginary number that was at one time a possibility? A stupid question I suppose. They have to issue bonds, and if they told investors the reality they wouldn't get cheap credit.

My next question is whether a politician can be personally liable for falsifying financial statements?

Shifts in culture happen in fits and starts. Pension fund managers for the longest time had a straight forward job. Invest extra cash in bonds and take a long lunch. Those bonds were both 100 risk free and guaranteed a 7-10% return. Those with a interest in the status quo will ignore the changing reality, preferring "the way it has always been" until the arithmetic can no longer be ignored. That's the wall into which we are racing at full speed. On the other side of that wall is a world where growth is not government emitted credit, but the proceeds of economic progress.

For now, every pension fund manager sits around pretending everything is fine, hoping to retire before it is not.

Dolphins don't have names. The headline should be "Journalists are idiots."

I did read that rebuttal, but I thought it was quite weak.

@Tyler you may have missed - there is no Great Stagnation, pizza-smelling DVDs:

or is this how our future robot overlords will keep us working for maximum economic efficiency.

Perhaps, in dolphin communities, when someone yells your name it is polite to yell ones name back at them. A sign of acknowledgement to the calling party. Unlike dogs, they don't just reply to any bark -- they only reply to their unique bark. I suppose this is the weaker part of the rebuttal.

I suppose I shouldn't be surprised to see you write this, Tyler, since writing terse, inscrutable replies is your *middle* name!

The rebuttal could be described as weak. If you subtract from it the logical fallacies of "appeal to authority" (without proving the authority actually is an authority), and repeated non-symmetrical refutations by subtraction (a problem common to linguists who don't really understand more than one or two languages, and the opposite of the Monty Hall problem, for those who care), and if you also subtract from the rebuttal the rhetorical fallacies of glittering generalities and braggadocio (usually called "snark" on the vintage internet), the rebuttal could be described, in what I hope is a scrutable way, as trivially unpersuasive. Possibly correct in its conclusion, of course, but very unconvincing.

I can't make head or tails about what you are getting at. Anyway, if someone thinks that that rebuttal is quite weak, then... Well, I'm speechless. That someone should email the heads of linguistic departments all over the world and ask what they think. I'm sure there would be few examples who are into this bullshit but dolphins and individual names... ...come on...

Linguists gonna semantic, or something.

But above and beyond there's still one name left over,
And that is the name that you never will guess;
The name that no human research can discover—
But THE CAT HIMSELF KNOWS, and will never confess.
When you notice a 'phin in profound meditation,
The reason, I tell you, is always the same:
His mind is engaged in a rapt contemplation
Of the thought, of the thought, of the thought of his name:
His ineffable effable
Deep and inscrutable singular Name.


4. How large is the public sector pension problem?

Big enough that the correct response should be for various governments to eschew pensions in favor of defined contribution plans. That would force politicians to actually pay for retirement plans they promise in the year they promise them. Instead, they can agree to lavish deals and expect to be long gone before the bill comes due.

Public sector pensions have become a Ponzi scheme in many areas.

For a given level of total compensation, I do not understand why anyone would prefer a pension to a 401(k). Given a choice between $100 now and a decades-away stream of payments with $100 NPV, contingent upon me not dying, you not going bankrupt, and the rules not changing in unforseen ways, is anyone going to pick the latter? The only reason I can imagine that public workers push so strongly for the latter is that they believe they can collude with their politician paymasters to get significantly more NPV out of taxpayers because government accounting rules do not require the cost to be booked upfront, and voters are apathetic and innumerate. I would honestly appreciate an advocate of pensions who could provide an honestly believed alternative explanation.

I'm not going to defend pensions because I don't think they are a good idea, but the idea of wanting a defined benefit retirement plan over a defined contribution retirement plan seems pretty obvious to me. You still have to contribute money to the pension while you are working, so why not want the defined benefits plan?

You have to think about the type of people who want them. They are generally not the most investment savvy folks (not always. see professionals who take lump sums and use it as a vehicle to save on taxes). An accrued benefit is so easy to understand and the annuity allows you not to outlive your savings.

I forgot to mention that your money is managed professionally. How many idiots cashed out or moved their 401(k) to cash in March 2009? Pension plans usually have target asset allocations or an investment policy that prohibits this.

Being someone who works with the retirement industry, I can say the 401k problem is worse than the public pension problem. The averages are pretty clear, 401k investors invest poorly and save very little. Whose problem will the chronically bad savers/investors become? (If the answer is the taxpayer, then tell me how this differs the public pension problem presented by Josh Rauh?)

The vast majority of public sector workers do not retire with lavish benefits. Rather than cherry-picking a few articles, a little homework would reenforce this fact. They fight for their pensions because, when properly funded, they are a truly efficient way of generating retirement income with the benefit of mortality pooling. It is entirely rational not to want to bear the individual risk of outliving your retirement savings.

You can argue six ways to Sunday what it means to be properly funded. The financial economists may win the theoretical argument that the RF rate curve should be used to discount liabilities, but they ought to be ashamed of how impractical a suggestion that is...especially in today's interest rate environment.

Ultimately, public pensions and 401(k)s face the same problem: financing retirement is twice as expensive as it was a generation ago- that's what low interest rates means.

401(k) participants are getting the memo- not pretty, but better than living in fantasyland. Private sector pensions, which are forced by regulation to think clearly about the nature of these obligations, have also got the memo. The public sector, so far, hasn't got the memo. Something magical about 'governments aren't households' I think.

Here's the math: based on an 8% compound annual net of expenses return, the 'cost' of a certain pension accrual is, say, 12% of pay. The employee pays 6% and the state pays 6%.

There is an alternative to all this risky business- buy the annuity from an insurer. Only here, the cost is 24% of pay. The 'real' cost to the state of providing this benefit is 18% of pay, not 6% of pay. So, 12% pay cut anyone?

This is the math the real world deals with. In the above example, I'm the taxpayer- I'm the one underwriting the risk. Being on the other side of this "get a benefit worth 18% of pay for only 6% of pay" is a sweet deal, I assure you- one that doesn't exist outside of the gilded cage of public sector pensions.

Yes, there are lots of problems with 401(k)s- but that's where the dialogue has moved to in the real world.

When you say 8% does that mean 8% real return, inflation adjusted or does it mean 6% real return using teh fed inflation target?

I'm talking nominal. The REAL problem, of course, is low-to-nonexistent REAL interest rates. You can substitute real variables for nominal ones without changing the story.

Being someone who works with the retirement industry, I can say the 401k problem is worse than the public pension problem.

I think that assumes that the public pension is actually paid out in full. Which is kind of the whole point. Public entities aren't investing enough money to fund the pensions, but they are still promising benefits as if they were.

The big big big advantage of defined benefits is that it places one really big risk from the retiree onto another party that can easily absorb it.

That really big risk is longevity risk. You don't know if you are going to live 50 days or 50 years in retirement. It's very hard to manually manage a nest egg for that, while someone managing a nest egg for 10,000 retirees can absorb that risk easily.

I don't want to say that the way employers have done DB is great -- it's not, as the link demonstrates. I'm saying when you propose alternatives to the traditional pension, you should address this one specific point.

But Dan a medical breakthrough can sink the whole pension.

I just retired last week after 35 years as a pension actuary. When I started, actuarial practice dictated the use of the expected return on assets for discounting liabilities. Since the typical pension fund had a 60/40 allocation equities/fixed income, the expected returns were typically in the range of 7-9% per annum. Beginning with the accounting standards that were published in the mid-80's, discounting of liabilities moved to the rates on corporate bonds. Of course, at that time, corporate bond rates were roughly 10%, so all was fine. It wasn't until the financial crisis of 2007-08 and the passage of the Pension Protection Act that the problems in pension funding became acute. PPA required the use of corporate bond rates for discounting liabilities (for non-govermental plans) and the financial crisis drove rates up and then down. When rates go down, liabilities go up, as the pension obligation is like a very long bond. Plan sponsors have been driven to change their asset allocations to fixed income, so that assets and liabilities move together (not perfectly). If that is not done, there can be wild swings in liabilities, funded status, contributions and accounting expense. Long bond effective rates dropped from an average of roughly 6% to roughly 3.5% and liabilities mushroomed.

If plan sponsors are driven to fixed income investments, the cost of pension promises is higher than with a significant equity allocation. The cost of reduced volatility is higher cost. I believe that the defined contribution savings plan is now significantly more attractive to participants, as they can earn higher returns over a long period and they control their own destiny. The DC plan is portable and it doesn't matter if you switch jobs frequently (vesting requirements notwithstanding). The downside is that if you don't save when you are young, you lose the power of compound interest just when it is strongest. There is a lot more that I can say, but this is just a comment.

Ironically, although I worked on defined benefit plans, almost all of my retirement resources are DC.

Apparently, from Saturn the Earth and Moon look square. It's a square world after all?

#4 gets bonus points from me for doing the plots (and one presumes, the analyses) in Matlab instead of Excel.

#4 seems ironic that the federal government may end up bailing them out even while the federal government does not fund SS at all, as it is pay as you go. Perhaps that should have promised pensioners some percent of taxes taken in.

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