Photo Credit: Tori Barratt Crane || “When is the next pension check coming, dear?”
I’ve seen a small group of pension articles in the recent past, none happy:
A defined benefit pension is a stream of payments that continues until the beneficiaries die, mainly. It is funded from the assets set aside by the sponsor, and the earnings that flow from them, as well as additional contributions, should the assets not be enough. With municipal pensions that means taxes.
Pension benefits are like debt, and sometimes more so. What I mean is this — pension benefits earned can’t be reduced, except in bankruptcy. Many states give municipal pension payments preferential treatment, so troubled municipalities can’t compromise pension payments easily, even in bankruptcy, if allowed. (The main point of the third article is that underfunded pension plans in California will lead to taxes rising further, or, some sort of compromise, with a huge political fight either way.)
In principle, if defined benefit pensions had been funded properly, there wouldn’t be a lot of furor over them. From inception, funding rules were not conservative enough, particularly in what plans could assume they would earn off investments.
Thus the second article is no surprise. From my start in investment writing over 20 years ago, I predicted that more corporate pensions would get frozen, terminated, and replaced with defined contribution plans. Plans assumed too much in the way of investment earnings. Sponsors contributed too little, encouraged by the IRS, that wanted more tax revenue, and thus limited the amount sponsors could contribute.
Things could always be worse, though… many nations in Europe will undergo a lot of strain trying to pay all of the benefits that were promised. Here’s a quotation from the first article:
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