Detroit bankruptcy and the social value of pensions

Discussion in 'Politics, Religion, Social Issues' started by jnpy!$4g3cwk, Apr 17, 2014.

  1. jnpy!$4g3cwk macrumors 65816

    jnpy!$4g3cwk

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    #1
    Interesting article in today's NY Times about the Detroit bankruptcy negotiations and pensions.

    I'll quote from the article below, but, full-- well partial, disclosure, retirement is something I have to consider in my time horizon...

    The question is why pensions exist in the first place. Like, you know, why don't people save and invest enough so that they don't need pensions? So, let me explain how it is: pensions are actually a form of insurance that an employer provides. When you retire, you might die two years later at age 67, like one relative, or, you might live to age 90, like someone else I know. The obvious fact is, that no one knows how long they will live in retirement, and pretty much only the 1% will have enough cash lying around to live well in their 90's. Whatever cash you have, you just won't know at what rate to spend it.

    So, providing this kind of insurance is a very important job benefit to many people (maybe not in their 20's, but, when they get somewhat older for sure). So much so that, for example, people looking for stability have often chosen good benefits over current salary. On to Detroit.

    Bankrupt, as everyone knows. $18 Billion in debt, $3.5B of it in unfunded pension liabilities. And, right now, they are negotiating the settlements of all the debts. The current proposed settlement is more favorable to people on pensions that was previously suggested:

    http://www.nytimes.com/2014/04/17/us/as-detroit-pensioners-rejoice-bankruptcy-experts-are-wary.html?ref=us&_r=0

    Well, I have to say that I'm certainly not going to argue against "favoring Main Street over Wall Street. But, are pensions "special"-- different from
    other debts and obligations such that they ought to be first in line? I think they are, because of the massive societal benefits pensions provide. First, pensions are good for economic stability-- people spend pensions at a steady rate; the velocity of pension money is very predictable; pension spending frequently immediately benefits the locale where the pensioner lives. Second, it avoids public spending on charity and social services that would otherwise have to spent, probably less efficiently.

    So, basically, I'm in favor of the settlement favoring pensioners over bondholders. How about "you"?
     
  2. Desertrat macrumors newbie

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    #2
    To me, the issue is less pensions as pensions than it is the amount of the retirement benefits vs. the sponsor's funding capability. With too many--in hindsight, of course--the benefits were greater than fiscally feasible. Too many funds depend on investment returns of eight to ten percent, year-in, year-out.

    Ain't gonna happen. So, if the fund goes broke, guess who loses? It's not just Detroit; it's common across the whole country. Alligator mouths overloading canary butts.
     
  3. zin macrumors 6502

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    Apparently, the reason why the pension deal has improved is because the Federal Government has committed bailout funds to ease the burden on pensions.

    Why not bail out the entirety of the debt? I'm pretty sure the Federal Government could even negotiate a payment of less than $18 billion on behalf of Detroit, thus protecting the pensions and the people who rightfully should receive them. That kind of money is peanuts to the U.S. Government. Of course, this action ignores any others that should be taken to ensure Detroit doesn't end up in this situation again.
     
  4. Southern Dad macrumors 65816

    Southern Dad

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    #4

    The danger of bailing out Detroit is that there are many other municipalities that are cash strapped. They are making hard cuts in an effort to stave off bankruptcy. If the federal government bails out Detroit other cities may decide it is easier to file bankruptcy and have the government bail you out, as to try and work through the financial difficulties.
     
  5. FX120 macrumors 65816

    FX120

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    IMO Pensions are an outdated type of system, designed for an era when the thinking was you would graduate from school at 18, get a job with a big company who would be around forever, and you would work in that job until you retire, paying into the system along the way.

    What the Detroit bankruptcy highlights is that nothing is certain. What may look like a strong company today can fold in 20 years, and even municipalities can be run into the ground after years of mismanagement and corruption.
     
  6. PracticalMac macrumors 68030

    PracticalMac

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    #6
    Agree.

    And what needs to be done in Detroit and New Orleans no one wants to even think about, regardless of political party.
     
  7. VulchR macrumors 68020

    VulchR

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    #7
    Well, if those of us who are rotting carcasses do not get pensions, we'll work until we die. That's more competition for you young folk. :p

    Personally, though, I only want a place to sleep, some food, and a reasonably nice environment when I retire. i do not need world cruises or holidays, a golf club membership etc. I would like a little financial stability so that money doesn't worry me 24/7. I'd be perfectly happy to die penniless, for I believe my kids will be able to make their own way in life, so anything I have left can go to pensions or taxes that will benefit others. However, if I go broke before I die, I'll simply off myself so that I am not a burden to the next generation.
     
  8. Bug-Creator macrumors 6502

    Bug-Creator

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    #8
    When they are done in the way they were (obviously) done in Detroit and elsewhere than yes they are outdated.

    If they are done correctly, they are still a good idea:
    - make the fund completly independent from the company/city
    - don't allow the fund to make risky deals
    - make sure that every employee has his own "account" that on him leaving can either be continued (without further payments), payed out or transfered at a reasonable rate.

    Now the real problem with pensions based on funds is allways that is very hard to predict how the economy/stock market will look like in 20 or more years making it into some big gamble.
     
  9. obeygiant macrumors 68040

    obeygiant

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    #9
    link

    Seems important to Obama...
     
  10. jnpy!$4g3cwk thread starter macrumors 65816

    jnpy!$4g3cwk

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    I don't agree that pensions are an outdated concept, but, I agree that in the future, pensions will have to be portable. Nobody works for 50 years for the same company any more. That doesn't negate the basic premise of pensions, which is that when you retire, you need enough to live on whether that is one year or thirty years. It is a different kind of risk spreading than fire insurance, but, you are paying for coverage of the "risk" that you will live for thirty years when you only have money for fifteen.

    Agreed, and as Desertrat observed, too often, pension funds have been predicated on unrealistic rates of returns. Reminds me of those people you meet who always say things like, "I get over 10 percent real rate of return, every year." ("If you are that smart, why are you still working here?")
     
  11. alent1234 macrumors 603

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    #11

    the best pension you can buy is to buy a home
    i see so many people in their 20's and 30's in NYC rent in expensive hip neighborhoods and spend their money on partying all the time
    if you buy a home around 30 and pay it off by 65 a lot of localities will give you a big break on property taxes
     
  12. Southern Dad macrumors 65816

    Southern Dad

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    #12
    In Detroit you can buy homes for $1… The negative side? They're in Detroit.
     
  13. Bug-Creator macrumors 6502

    Bug-Creator

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    #13
    The best pension is one that actually "pays" once your retired....

    Those young people partying in expensive NYC homes, couldn't buy those same homes with the same amount of $.

    Sure they could buy somewhere else cheaper, but than they could also rent for less and put the saved money in a conventional pension fund.

    Buying a home as pension makes sense:
    - when you know your gonna be able to stay for the rest of your life, or are pretty sure it will be sellable at a reasonable rate at any given time
    - when you pay only a little more for the mortage (on fixed interest, everything else is suicide) than for renting a similar place
    - when you factor in that you will need to remodel that home atleast once in the course of the next 30+ years
    - when you think inflation will eat away any interest on a normal pension fund

    There are plenty people who found out that buying a home can be the worst kind of pension..... starting with those who bought a house in Detroit 30 years ago :rolleyes:
     
  14. barkomatic macrumors 68040

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    True, but keep in mind that many of the retirees who are collecting their pension are *from* the era you describe. I can't blame them for participating in a system which at the time seemed very stable.

    I agree that nothing is certain, but for the sake of the stability of our country we have to try and make good on the promises we make to our retirees.
     
  15. Zombie Acorn macrumors 65816

    Zombie Acorn

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    #15
    Lol have you seen house prices? If you are 30 and live in Toronto/NYC the only way you are affording a house is if your parents cosign or if you win the lottery. Otherwise you are moving to another city nearby. Townhouses are going for 1.8 million around here.
     
  16. malman89, Apr 18, 2014
    Last edited: Apr 19, 2014

    malman89 macrumors 68000

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    Nice chip in from the federal government, but the State of Michigan and a group of nonprofits/foundations are chipping in hundreds of millions more - contingent on the pensioners accepting a deal with the City of Detroit. This is all a part to save the DIA art from any creditors.
     
  17. tgara macrumors 6502a

    tgara

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    You've essentially described the 401k, which is a defined contribution plan. Any money the employee or employer put into a tax-advantaged 401K account generally vests immediately, it's the employee's money, and can move with the employee when the change jobs. It's better for the employer too because once they've contributed, they're done. No future obligations to worry about.

    You are wrong about pensions being outdated. This is the old defined benefit plan that are only used now by municipalities (largely because the public sector unions put up a big stink when governments try to change it). Virtually no businesses use these anymore, they've all moved to 401K plans. The problem with pensions (defined benefit plans) is that they promise unrealistic returns and saddle the employer with future obligations that they may not be able to make good on.
     
  18. Aspasia macrumors 65816

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    Also contingent upon the State of Michigan $350 million dollar bailout being approved by the legislature. Something not very popular with Michigan taxpayers - at least those of us up here in the north.

    I tend to agree with House Speaker Bolger that the unions should contribute to the pot.
     
  19. Southern Dad macrumors 65816

    Southern Dad

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    #19
    I don't think the unions will be too inclined to jump on board that train.
     
  20. Aspasia macrumors 65816

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    It's interesting to follow, as Mr. Bolger claims he won't bring the $350 million bailout to a legislative vote unless the unions contribute.

    I personally think any bailout is a lost cause and throwing good money after bad, unless outside independent receivers are appointed to run the city finances. Detroit has a sorry history of political corruption and incompetence.
     
  21. malman89 macrumors 68000

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    #21
    Well, the northern part of the state needs to realize there's many more people and much more money in the rest of the state. To be a bunch of obstructionists would do no one any good. I would hope most people in this state can realize that sometimes the right decision isn't the most enjoyable. Handicapping Detroit's recovery by withholding funds hurts more people in the long run than it helps selfish interests in the short term.

    Snyder has a track record of letting the kids in the legislature run wild when it's an issue that doesn't matter to him, but has a pretty good history of getting legislation he actually cares about passed, so hopefully he exerts his political will if needed. There's no time to screw around with this fast tracked bankruptcy with political posturing. Pretty sure the unions have contributed a fair in the latest proposed agreement with the city of Detroit.
     
  22. thekev macrumors 604

    thekev

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    I'm just going to add that matching employer contributions sometimes take a certain amount of time to vest, although it depends on the employer.
     
  23. ElectronGuru macrumors 65816

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    #23
    There's some interesting math going on here. Thanks to tgaras excellent post, we see that 401k are individual risk and reward: each person gets out what they pay in, irrespective of life span. You could save short and live long or save long and life short or match up double long or double short. Your risk, your work, your reward.

    And we see that pensions are shared/pooled. There's a risk on the returns but as jnpy points out, there's also a pooling of risk on lifespan. It could be argued that it's not fair that someone in the same pool gets more benefits for living 10 years longer, but what benefit is the 401k serving when the couple who owns it both die at 58?

    Perhaps a hybrid system that doesn't 'define benefits' but also doesn't compartmentalize life span risk, would reduce the burden to tax payers who often end up covering the long after not even collecting on the short.
     
  24. turtle777 macrumors 6502a

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    I don't think that's a great solution anymore.

    Owning means you're renting from the government.
    Property taxes will ensure that after 40-50 years, your property was financially "seized" by the government.

    Broke states and municipalities (look at Cook County/Chicago) will keep raising property taxes, because the owners are locked in.

    Home owners in cook County are paying about 3% property tax. That means that after 24 years, you have paid the full amount of the house to the government. It's complete ********.

    -t
     
  25. jnpy!$4g3cwk thread starter macrumors 65816

    jnpy!$4g3cwk

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    It is common practice to use pension to cover "defined contribution plan" as well as "defined benefit plan". In my mind, one key concept, though, is that there is a safety net generous enough to keep people off the streets and out of homeless shelters.

    I agree. Purchasing a home is as a pension is overrated. It does function as a kind of forced investment account -- once you are in, especially with a real (20-25%) down payment, you have a strong incentive to keep paying. But, unless you are committed to living in your old hometown or wherever you have moved to, it can easily become a problem. And, houses don't always appreciate, not even at the rate of inflation -- trust me. (Others have mentioned Detroit).

    And future retirees. The concept still makes sense, because, you don't know how long you will live after retirement.

    Agreed. 401k type plans are one way to do it. And, there are times (when interest rates are higher than they are now), when it make sense to roll it over directly into an annuity.

    Social Security + 401k represents that kind of hybrid. Sometimes people plan to spend all their 401k by age 85, say, and live on whatever they get from SS after that. Defer collecting SS until age 70. Not many live to 90, so, the strategy seems to work. As long as medical care doesn't impoverish them.
     

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