Pensions: Remember Those?

Pensions are one of those things that millenials, such as myself, will likely have heard over, but never actually see, like top hats or slide rules.  In a bygone era, pensions were instituted in order to provide retirees from many enterprises, be they public or private, income security.  The idea was great, as it mandated a certain basic income that retirees were eligible to receive.  The problem with pensions, as has always been the problem with pensions, is that they’re easy to promise, but they’re hard, hard, hard to fund.

Most of us likely have self-funded (with partial contributions from our employers) retirement accounts in the form of 401(k) accounts (or some such other IRS designation similar to a 401(k)).  The bottom line is that the worker, and noone else, is responsible for funding those accounts.  Pensions are generally referred to as ‘defined benefit’ plans, and the rest generally fall under the heading ‘defined contribution.’

So the problem that inevitably arises, as with nearly every single pension fund in the United States, is that the total commitments to retirees far outstrip the pool of cash made available to pay out.  Basically, they promise far more than they’re able to deliver.  Pension funds are usually raided when budgetary matters get rough, and they need a quick fix.  Probably the biggest offender would be the federal government, who has systematically switched out cash assets from the Social Security Trust and replaced them with Treasury bills, which is equivalent to putting an IOU in the cookie jar.

Wayne County, the home of Detroit, has just such a mess on its hands.  There are about 5,000 retirees that are eligible for pensions, and a rapidly shrinking pool of money with which to pay them.  The stock market has battered the county’s finances, and it’s likely that total liabilities will outstrip the available assets by a country mile when all the liabilities come due.

It’s not that I’m against pensions, it’s just that there’s no good way to pay for them.  Making individuals responsible for their own retirement savings (along with partial contributions from the employer) is much more efficient, not to mention fair, than pensions.  Because, at the end of the day, what will happen is that the taxpayer is going to be stuck holding the bag on a pension for a retired public servant when they’ve been struggling to fund their own retirements.

I also don’t think that we should renege on the commitments that we’ve made to retirees either.  They worked their jobs with the expectation that they’d be able to retire in a certain way.  In many cases, this is the only retirement income that individuals have.  Going forward, however, I think that retirements ought to be self-funded.

And another word on retirements.  Whenever economic times are tough, there’s a certain amount of vitriol that enters the public discourse. Yes, times are tough, and the times that it becomes necessary to address these issues, when they become most pressing, are at the precise moment when it becomes the most difficult as well.  This too, shall pass.  When the economy recovers, and it will, this will become easier to fix.  Until then, expect the absolute worst when it comes to discussing this, let alone taking action.

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