Posted on 04/27/2006 7:53:51 AM PDT by qam1
That fact is that what employers cannot afford to continue are defined benefit pension plans.
In defined benefit plans the benefit is soley derived from a formula; such as X percent times last salary, or an average of the last few years' salaries, increased or decreased by a factor representing the number of years employed by the company before retirement (years of service ).
In such plans, the actual dollar amount of an employee's pension benefit remains at whatever the fixed formula (defined benefit) says it is, no matter what.
It is the "no matter what" that employers cannot afford. The "no matter what" cannot take into consideration either how the underlying investments of the pension plan have performed, or are projected to perform, nor can they consider what is the mortality experience of those in the plan [are retirees living longer - on average - than was calculated when the "defined benefit" formula was established?].
With defined benefit plans, the "no matter what" means that when the stock market is down, and employers have less ability to raise capital, the value of the defined benefit pension plan is also down, and standard American accounting and actuarial advisors, and agencies like the SEC and the Federal Pension Guarantee Corporation, will insist that the company kick in additional money to the pension plan - right when they have less money on hand to do so. Why? Because the company has promised a fixed dollar amount of a benefit - no matter what.
Defined benefit plans provide similar problems when the the company is hit with the sudden occurrance of a large number of retirees in one year. No one can set aside the total lifetime payout of any pension benefit. The amount that is set aside is an amount that will pay a benefit and continue to grow somewhat as payments are made, so that the initial reserve plus what it earns over the expected term of the payments will provide the total needed. How much is needed? Enough to fund existing benefit payments currently being paid and enough to fund the start of new benefits for those working. And, when a large number of employees deside to retire in the same year, beyond what was anticipated, the fund is again going to suffer unexpected shortfalls of projected needs - for the short term - unless it kicks in additional funds so that the unexpected new payments do not reduce the reserves below "prudent" limits.
None of these issues arise in a defined contribution plan.
In a defined contribution plan, what the employer promises is to make a certain stated, fixed or flexible, level of contributions into the pension plan. Most such plans allow the employee to tax-shelter part of their salary, having a % of salary-earned deposited directly into the pension plan. My last employer who had this type of plan paid an amount equal to 14% of salary into the plan.
Most defined benefit plans offer the participant choices in how the contributions by them and by the employer are to be invested; with %'s allocated between higher earning and higher risk options and lower but stable earnings and less rsiky options; usually with combinations of those permitted.
And what is the benefit that is paid? It is essentially an actuarial calcualtion - how much is the total that was socked away plus the investment earnings and value growth on that total (the account), what is the mortality factor for the retiree (how many years of life expectancy from retirement to death), and what is a prudent level of expected investment return that the account continue to get while the benefits are paid.
The best of such plans invest 100% outside of the company, not in the company's own stock. This protects the exposure of the funds to the ups and downs of the company itself.
A defined contribution pension fund offers employers exactly what they cannot afford with defined benefit plans - the "no matter what" factor. In a defined contribution plan, the employer has no guessing about what is needed for the employees pension contributions - that, the employer's contribution is the one thing that is defined. Therefore, the employer's costs are always predictable and certain, no matter what the stock markets are doing today, no matter how many employees are retiring - or need to be given early retirement. The fund has in it whatever was contributed and whatever those invested contributions have earned. There is never a "crisis" to make up for the lack of predictability with defined contribution plans.
Unions, and particularly government unions, love defined benefit plans and hate defined contribution plans. They love the "no matter what" factor which alleviates any responsibility or sharing of risk on their part. And, those defined benefit, ofetn taxpayer financed, pensions are some of the highest pensions paid, when weighed against what the employees earned.
Financial problems for companies are mostly problems of risk, and financing to account for the risk. Defined benefit plans are financially untenable and they are not only banckrupting major corporations, they are turning public employee pensions into absorbing ever higher portions of what government must get from the taxpayers.
Get employers and government units out of defined benefit pension plans, put everyone on defined contribution plans and allot of the "pension problems" wll be reduced to manageable levels. Continue to pay some employees a formula benefit, no matter what, and we will all be bankrupt, under the cost of goods and the taxes to pay for the "benefits".
So you are espousing 100 million corporations of one person each ?
Yeah that'll work.
BUMP
Exxon makes less than 10% net profit as a company. The retiring CEO increased the stock value of the company 400% during his tenure. Nobody gave him anything. He earned it.
The investment income off of $400 million could make one person very happy, and provide trust funds to descendants in perpetuity, or make several more at least comfortable in their old age.
What you want to do here is euphemistically referred to as the redistribution of wealth. What you're really suggesting is stealing money from those who earned it and giving it to those who didn't. What economic system advocates doing this very thing?
Exactly. I was just about to reply to that same sentence. Every business would be in the same exact boat for the same exact reason. All jobs would suck so workers would just be stuck with working at sucky jobs.
I'm tired of funding government pensions. From the postman to the school janitor, I'm in over my head.
More like Board of Directors in Name Only warning. It's no different from the poor using their numbers to vote for government benefits for themselves by voting for Democrats, because they have the power and ability to do so. There's no oversight, even though these companies pretend there is.
My company sees the defined benefit program as the hiring trump card. As population decline moves the baby boom into retirement, highly skilled and experienced workers are going to be at a premium. In my field they outnumber the clerical and low skilled and so the cost of defined benefits for low skilled and lower paid clerical doesn't weigh heavy enough to loose the trump.
"Most Xers will never see a pension"
Glad I work for the gub'ment!
NY City alone has one of the largest scams on record: Public Employees. No private employer can compete with that.
Haven't they heard of 401Ks? I've never had a pension. Don't need one.
Workers should be able to rely upon the promises that their employers made. Part of the agreed-upon bargain in becoming an employee was a pension plan. Corporations should not be able to welsh on their pension promises if they pay their executives large salaries.
BTTT
As a worker, you shoulder a lot of risk when relying on agreed upon bargains. Over a 10 20 or 30 year period, much can change and companies go bankrupt. To stay in business, many take drastic action and so they should. Pensions are probably number one on the cut list followed or preceded by employees.
Life is a risk itself and so anyone needs to care for his own golden years through careful investment and prudent use of resources throughout a career or lifetime. If you drink smoke or do drugs, you are on a swift path to destruction and your golden years will be an unhealthy nightmare.
Besides being on the Forbes list of poorest Americans that need to choose between dog food and medication. You will be PO'd that you weren't very smart, or you will blame someone else like government, for your own stupidity. While you are young, (under 20) is the time to be thinking about retirement and pensions not when you are 50, having lost thirty years of contributions to your bad habits.
Excellent explanation of the differences. Few their be that make it through a thirty year career and then have the luxury of a defined benefit plan. Government workers, teachers, and some unions come to mind, but that doesn't mean that even those shouldn't be planning on their own.
"Government workers, teachers, and some unions come to mind,............."
And as those benefits keep coming due, your taxes to fund them keep going up. In some states and in some cities, government employee benefits are starting to become the largest single item in the budget - and with little room, by either the laws or the union contracts, to do anything about it. We need to get the courts to stay out of it and let us start converting government-employee defined benefit plans to define contribution plans.
A great law on this matter would require that government pensions could be no higher than the average pension that the private-sector employees get in the same jurisdiction.
As it is now, most lower and mid-level income people are paying taxes of which an increasing amount is for government employee pensions that most of them will never see. That is not "economic justice".
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