[aresant]

From first principles public pension funds are broken.

The "Safe Withdrawal Rate" assumed by many private individuals planning for their own retirement assumes a withdrawal rate in the 3 - 4% range based on the "trinity study" - https://en.wikipedia.org/wiki/Trinity_study

Meanwhile, American public pensions are structurally engineered around a 7%+ SWR - this was recently confirmed again by the median goal by the National Association of State Retirement Administrators.

The perpetual "under funded" nature, and all the return hunting etc in pension fund management can be explained by that disconnect.

But this then belies a very uncomfortable acknowledgement which is that we cannot afford the government workforce currently in place requiring us to either:

(a) Raise taxes to increase contributions.

Or

(b) Somehow make due with less government :)

[jltsiren]

Individuals saving for retirement must deal with the risk that they live to an old age and their savings must last for decades. Pension plans have a higher safe withdrawal rate, because people on the average have average lifespans. When a plan member dies early, their remaining contributions can be used (partially or in full) to fund other members' pensions.

[aresant]

Really good comment and fair point

But mortality credits (pooling) don't solve the math of the discount rate - they add 100 - 150 basis points of reduction so retarget to 5.5% vs 4% if generous

So they are still structurally designed where they HAVE to allocate towards risk to meet their targets which is at core of issue

[ineptech]

It feels like you're missing the whole point of the whole article, which is that treating public pensions like a bunch of 401ks misses the opportunity to invest all that money in something that benefits the retirees collectively. I'd rather retire on 4% from a bond to improve the school my grandkids go to than 5.5% from a PE firm that intends to "more efficiently manage" the retirement home I live in.

[LorenPechtel]

And a pension fund can be in a more tax advantaged situation.

But that does not justify the numbers we actually see being used.

[lotsofpulp]

Only taxpayer funded defined benefit pension plans get to use 7%+. Because they have the power to use future taxpayers’ money to pay for underfunding/underperformance/corruption from the past. And obviously, politicians that would choose to increase taxes today for something that could but punted to the future would lose elections.

The Pension Protection Act of 2006 mandates that non taxpayer funded defined benefit pension plans use discount rates from high grade corporate bond yield curves, which are much lower.

https://www.irs.gov/retirement-plans/pension-plan-funding-se...

[LorenPechtel]

The power to use future taxpayers money isn't justification for doing so.

[lotsofpulp]

Yet that is the modus operandi of governments worldwide that need to secure the votes of the old. There is no reason the US explicit has different rules for taxpayer funded and non taxpayer funded defined benefit pensions. They are the same liabilities, the same cash flows, the same probabilities, just different political entities on the hook.

Even some non taxpayer funded defined benefit pension plans are more privy than others, depending on the political power of their beneficiaries.

https://archive.is/CJefA

[LorenPechtel]

Yup, this is the real problem. What he's talking about isn't the real problem. The real problem is we have gone to a "model" of fund less, pretend we can make it up by increasing risk. And rather than face a big problem it gets swept under the rug until it can't be any more.

We also have the problem that paying pensions becomes somebody else's problem. Thus in contract negotiations pushing benefits into pensions rather than current wages becomes attractive. You can agree to more without breaking the current budget.

The old rules worked better because limiting what pension funds could be in also limited the shenanigans that were possible.

[downrightmike]

Don't need to even raise taxes, just make the loopholes go away for corps. You want access to the market and the people, you need to pay your share.

[rurp]

Employee pensions are a tiny portion of overall government spending. There are any number of ways to handle a modest increase in costs there.

[gruez]

>There are any number of ways to handle a modest increase in costs there.

So the "we'll find 'efficiencies' somehow" argument that every opposition party trots out when they're campaigning?

[array_key_first]

Well we tried the "burn it all down" approach with DOGE and the BBB and we got... -2 trillion in savings? Really? Wow, okay.

The truth is nobody wants to solve the deficit. It's a self eating beast at this point and simply cutting funding for a bunch of shit won't solve it. A lot of these things are fundamentally the federal governments concern, whether people admit it or not.

[bee_rider]

What does it mean for something to be broken from first principles? I would expect some that just cannot work on a fundamental level, like faster-than-light travel or a lightbulb that powers it’s own via solar panel.

3% vs 7% doesn’t seem broken on principle, just, a tuning parameter is off.

[lenerdenator]

> But this then belies a very uncomfortable acknowledgement which is that we cannot afford the government workforce currently in place

It's not just the government. It's all of the other stuff seniors buy. It used to be that you just kind of stuck around and retired in the area where you had worked. You had paid off that house, so you retired in it. Maybe you went to the Shriners' hall and played bingo with a core group of friends until you couldn't anymore. Then you moved into a retirement home and they found activities for you to do there until Father Time came to collect his due. Maybe you spoiled yourself with a Buick or Lincoln sometime between getting your gold watch from the plant manager and croaking.

Now, that's not enough. We need entire retirement communities hundreds of miles away in warmer climes where they can play golf several months out of the year. We need cruises and travel packages. We need cosmetic procedures to look younger. We need more advanced surgeries that extend life, though not participation in the workforce. And of course, now that Lincoln is a Mercedes.

And that's great, because we've told everyone that they deserve it after a long, hard career. There's only one problem: we never addressed where that retirement income was actually coming from. They're coming from that 7% SWR, which must be funded somehow. Otherwise the retirees might have to stay in-town, be cold during the winter, and provide childcare for the grandkids because preschool now costs as much as a year of college tuition. And that makes them cranky and they start calling investment advisors and politicians demanding answers.