Illinois Ponders Pension-Fund Moonshot: A $107B Bond Sale(bloomberg.com)
bloomberg.com
Illinois Ponders Pension-Fund Moonshot: A $107B Bond Sale
https://www.bloomberg.com/news/articles/2018-01-26/illinois-ponders-pension-fund-moonshot-a-107-billion-bond-sale
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Illinois is bankrupt, and the worst thing that you can do when you are bankrupt is pretend that you aren't. If I were a resident of the state I would strongly consider moving somewhere else as your taxes are going to explode, and services will likely be cut. The tax base is already shrinking which will cause a negative feedback loop destroying property values and new business formation.
> Illinois is bankrupt
No, it's not. Bankruptcy is a legal state, and one which is not open to US states.
It's not even insolvent, which “bankrupt” is often incorrectly used as a synonym for. It may have a projected future insolvency, but that's a different issue.
No, it's not. Bankruptcy is a legal state, and one which is not open to US states.
It's not even insolvent, which “bankrupt” is often incorrectly used as a synonym for. It may have a projected future insolvency, but that's a different issue.
Yay it's time for HN pedantry!
Bankrupt can also mean insolvent, it is not limited to the legal definition[1]. But more importantly you know what the person you're replying to meant. That they think Illinois is essentially out of money and pretending they're not.
You could have furthered this into an interesting discussion on the financial health of Illinois, but instead you found a way to feel intellectually superior without actually having to engage in discourse and without having put forward any ideas that could be challenged.
Your comment illustrates a common theme on sites like Reddit and HN, where people want to "win" the conversation as fast as possible. They find a easy and superficial way to call out another comment or article as "incorrect" and avoid putting forward anything of substance or actually worth talking about.
[1] - https://www.merriam-webster.com/dictionary/bankrupt
Bankrupt can also mean insolvent, it is not limited to the legal definition[1]. But more importantly you know what the person you're replying to meant. That they think Illinois is essentially out of money and pretending they're not.
You could have furthered this into an interesting discussion on the financial health of Illinois, but instead you found a way to feel intellectually superior without actually having to engage in discourse and without having put forward any ideas that could be challenged.
Your comment illustrates a common theme on sites like Reddit and HN, where people want to "win" the conversation as fast as possible. They find a easy and superficial way to call out another comment or article as "incorrect" and avoid putting forward anything of substance or actually worth talking about.
[1] - https://www.merriam-webster.com/dictionary/bankrupt
"Yay it's time for HN pedantry!"
Ha! Might be the defining characteristic of HN.
Ha! Might be the defining characteristic of HN.
Insolvency means your liabilities exceed your assets, or you can’t pay your debt as it comes due. If you’re a state like Illinois that has a constitutional restriction on reducing future pension obligations through a change in the law, then you’re cooking the books if you don’t count them as liabilities. And if you do, Illinois is almost certainly insolvent under the first definition. And since it’s not able to pay its bills in due course, it’s probably insolvent under the second definition too.
> Insolvency means your liabilities exceed your assets, or you can’t pay your debt as it comes due. If you’re a state like Illinois that has a constitutional restriction on reducing future pension obligations through a change in the law, then you’re cooking the books if you don’t count them as liabilities. And if you do, Illinois is almost certainly insolvent under the first definition.
You seem to be discounting assets, like taxation power (now, the politicsl consensus necessary for the state to use that power may not exist, but that's unwillingness to use an asset, not lack of assets.)
You seem to be discounting assets, like taxation power (now, the politicsl consensus necessary for the state to use that power may not exist, but that's unwillingness to use an asset, not lack of assets.)
> that's unwillingness to use an asset, not lack of assets
That’s like marking at 100 a bond trading at 30 while arguing the problem isn’t the asset, it’s buyers’ unwillingness to pay the right price. In any case, potential to raise taxes is like potential to raise prices. It isn’t an asset until it’s signed and producing.
That’s like marking at 100 a bond trading at 30 while arguing the problem isn’t the asset, it’s buyers’ unwillingness to pay the right price. In any case, potential to raise taxes is like potential to raise prices. It isn’t an asset until it’s signed and producing.
That's when you say that it's held-to-maturity and claim that it's not impaired.
assets, like taxation power
And taxation power is constrained by the US and IL Constitutions and even US and IL law.
Insolvency is a legal term meaning that one cannot pay their debts when due (see the UCC).
Illinois can currently pay its debts as they come due, so it is currently solvent. It is likely to become insolvent in the future, but that is not the current state.
Illinois can currently pay its debts as they come due, so it is currently solvent. It is likely to become insolvent in the future, but that is not the current state.
Actually they can't. They currently have somewhere north of 5 billion in unpaid invoices. Their slow payment on contracts have driven some organizations into bankruptcy themselves. Many small business owners I know now refuse to do business with the state because thay can't wait years to be paid.
Do you have a cite for that? Because the only articles claiming that size of a backlog predate the budget resolution they passed last year after 2 years of no budget. They're currently on track to be out of deficit-spending within 2 or 3 years (possibly this year, if the Trump is to be believed) due to a combination of massive spending cuts ($6 billion in total cuts between 2015 and 2017) and tax revenue increases.
> Actually they can't. They currently have somewhere north of 5 billion in unpaid invoices.
There's a difference between not having the money to pay debts as they come due (which is insolvency) and just paying late by choice, incompetence, or -- as happens with in some jurisdictions with budget delays -- legal prohibition on using existing funds [0] (none of which are insolvency, though they may be default on the individual debts).
[0] Which, looked at one way, is a subset of choice, since the actors not making the necessary choice to remove the legal roadblock are the political leadership of the state.
There's a difference between not having the money to pay debts as they come due (which is insolvency) and just paying late by choice, incompetence, or -- as happens with in some jurisdictions with budget delays -- legal prohibition on using existing funds [0] (none of which are insolvency, though they may be default on the individual debts).
[0] Which, looked at one way, is a subset of choice, since the actors not making the necessary choice to remove the legal roadblock are the political leadership of the state.
> Illinois can currently pay its debts as they come due, so it is currently solvent.
It almost certainly can, if it chooses to, but it hasn't been choosing to, if you consider the pension fund distinct from the state.
It almost certainly can, if it chooses to, but it hasn't been choosing to, if you consider the pension fund distinct from the state.
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isn't the US then the same by your reasoning? we should flee the US as well.
It might be if it had a constitutional amendment saying Medicaid, Medicare and/or Social Security were untouchable. It doesn't. There's no spending in the US that's not on the table. When or if push came to shove it's not hard to imagine some or all of those programs being cut just as it's not hard to imagine taxes going up.
The US is not bankrupt or insolvent: https://en.wikipedia.org/wiki/Financial_position_of_the_Unit...
US Federal debt is in USD term so it can always repay its debt with printed USD. Technically it is not insolvent.
The US can always pay its debt because it is denominated in US dollars - it can print sufficient US dollars to meet its debt obligations. States do not have this ability.
Bankruptcy is an English word that just means you are insolvent (unable to pay your debts) not a legal state. There just happens to be a legal state named after it in the US.
And a state can go rid itself of debt similar to a normal bankruptcy. Since they have sovereign immunity they can just declare that some or all of the debt is void and won't be paid back and not face any consequences (other than lenders possibly choosing not to lend them more money - just like with a normal bankruptcy).
And a state can go rid itself of debt similar to a normal bankruptcy. Since they have sovereign immunity they can just declare that some or all of the debt is void and won't be paid back and not face any consequences (other than lenders possibly choosing not to lend them more money - just like with a normal bankruptcy).
No, it also means "utter ruin, failure, depletion, or the like."[1]. A person can be said to be "morally bankrupt" and that would also be correct usage.
Maybe consult the dictionary before before engaging in such unproductive pedantry.
[1] http://www.dictionary.com/browse/bankruptcy
Maybe consult the dictionary before before engaging in such unproductive pedantry.
[1] http://www.dictionary.com/browse/bankruptcy
Reminds me of this:
https://ianayres.yale.edu/sites/default/files/files/Mortgage...
Take out a mortgage in your 20s to finance your retirement so can diversify over a long time period.
Take out a mortgage in your 20s to finance your retirement so can diversify over a long time period.
Taking out a mortgage and buying stocks on margin are different things. The author is recommending using margin. Taking out a mortgage and having money available to invest requires that you first own an unmortgaged house, or have significant extra equity in a house. And if you have that in your 20s, well, you are already really far ahead.
Right, but the mantra in the personal finance circles is "Mortgage Your Retirement" because you are borrowing all the money you will need to retire -- say $2m, investing it in the S&P 500 and paying that off over time. If the market goes up than you're that much closer to paying it off and retiring.
The authors recommend only 2:1 leverage so only a 50% decline would wipe you out. The problem I personally have with this is the declining marginal utility of money. Losing everything (or a large portion) to squeak out better returns isn't worth it.
There was someone on Bogleheads who posted about trying this, exhausting their student loans and credit cards, but unfortunately when they started it was Fall of 2007. The guy had pretty bad luck, but I'm sure it's worked for other people especially those who don't know it (e.g. "I bought options on Google in 2006!") https://www.bogleheads.org/forum/viewtopic.php?t=5934
There was someone on Bogleheads who posted about trying this, exhausting their student loans and credit cards, but unfortunately when they started it was Fall of 2007. The guy had pretty bad luck, but I'm sure it's worked for other people especially those who don't know it (e.g. "I bought options on Google in 2006!") https://www.bogleheads.org/forum/viewtopic.php?t=5934
Is there a term for a fund that takes money from people (let's call them "investors"), promises to pay them back that money plus abundant interest in the future, and doesn't actually have enough (or any) money to pay all of these "investors", so it resorts to borrowing money to keep payments going a little longer?
"Technically not insolvent"?
"Extend and pretend"?
"Fool me once, shame on you..."?
"Greater fool theory"?
"Extend and pretend"?
"Fool me once, shame on you..."?
"Greater fool theory"?
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Why would anyone invest in these bonds? By doing so, you're essentially investing in the State of Illinois as your hedge fund/bond manager (depending on the returns promised).
Usually with a muni-bond, they are using the money for some sort of public infrastructure and then paying the interest either from fees gained through the use of that infrastructure (like a bridge or power plant) or through taxes.
Here though the state is flat out saying, "we're gonna invest in the market, which you can also do, and hope we get better returns than you do so we we can skim some off the top".
Usually with a muni-bond, they are using the money for some sort of public infrastructure and then paying the interest either from fees gained through the use of that infrastructure (like a bridge or power plant) or through taxes.
Here though the state is flat out saying, "we're gonna invest in the market, which you can also do, and hope we get better returns than you do so we we can skim some off the top".
States are sovereign and can’t go bankrupt.
If they are general obligation bonds, you’ll make money and sell them to the next investor. If they are revenue bonds, you get dibs on the tolls, tax, etc.
If they are general obligation bonds, you’ll make money and sell them to the next investor. If they are revenue bonds, you get dibs on the tolls, tax, etc.
> If they are revenue bonds, you get dibs on the tolls, tax, etc.
This did not work out for Puerto Rico bond holders.
This did not work out for Puerto Rico bond holders.
What will stop legislators from siphoning off this chunk of cash? How much will be lost in infamous Illinois corruption? The system is already $129B in the hole; this smacks of desperation.
Is corruption the main problem? When I moved to Illinois in 2009, I was shocked to see it had public services like New York but taxes lower than Virginia or Georgia. State income tax was like 3% until recently. Obviously that wasn’t going to work.
And further one side of the equation (benefits) are constitutionally garaunteed but the other side (funding) isn’t. There is t a lot of room for corruption when allocation doesn’t happen.
My big question in all of this is why the mid & early career governmental union members keep going along with the strikes. They are out of luck regardless and should be negotiating for fallback positions.
My big question in all of this is why the mid & early career governmental union members keep going along with the strikes. They are out of luck regardless and should be negotiating for fallback positions.
The unions simply want taxes to be raised to whatever level is necessary to pay them what they want. It's been a while since I did the math, but my recollection is the level of taxation required to balance Illinois' books is not completely insane (though it is high).
Doesn't that high number presume that businesses won't move over the WI and IN border to avoid the tax increase? Most of the economy of IL is minutes from those borders.
Those borders aren't far, but it's not like Kansas City. No one should be worried about tens of thousands of people's jobs being relocated from central/suburban Chicago to rural Wisconsin. People live in a place like Chicago for a whole host of reasons beyond just 'the job is there' and we need to forget this lowest-common-denominator argument.
It does. I'm sure some would move, but New York and California maintain high tax rates without turning into ghost towns. To be clear, I'm not arguing the union position is correct, just that it's not ridiculous on its face. It's feasibility depends on subtle second order effects like the one you describe, not on raising tax collection to obviously impossible levels.
NYC is sui generis. California is geographically hard to flee from --- but people do flee SoCal for Vegas.
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IL is a bit distinct in how it funds things: At the state level its per-pupil education funding is the lowest in the nation. Medicaid rolls are also lower than the national average as well. If you are looking at the state level, it's a fairly lean operation, ranking quite low in terms of government employees per capita (see: http://www.governing.com/gov-data/public-workforce-salaries/...) -- just 49 FTEs per 10,000 residents. There are deep-red stats with nearly double that figure.
So how does IL do it?
For starters, local property taxes pick up the slack. We have some of the highest in the nation. Further compounding this, we have hundreds of local governmental layers like townships that fall somewhere between a town/city and a county that provide services, have elected offices, pay employees, etc. It's services are all heavily localized because the state's involvement is limited. It's also grossly inefficient.
IL needs a progressive income tax, pension reform, and needs to consolidate services at either the county or city level. Even Chicago, with all its graft and political machinery, was smart enough to jettison townships decades ago. I honestly have no clue what the redder, more conservative, more tax-conscious part of the state cling to them.
So how does IL do it?
For starters, local property taxes pick up the slack. We have some of the highest in the nation. Further compounding this, we have hundreds of local governmental layers like townships that fall somewhere between a town/city and a county that provide services, have elected offices, pay employees, etc. It's services are all heavily localized because the state's involvement is limited. It's also grossly inefficient.
IL needs a progressive income tax, pension reform, and needs to consolidate services at either the county or city level. Even Chicago, with all its graft and political machinery, was smart enough to jettison townships decades ago. I honestly have no clue what the redder, more conservative, more tax-conscious part of the state cling to them.
For starters, local property taxes pick up the slack.
Yup, and now it's not deductible anymore past the first 10K thanks to the new GOP tax laws.
People rushed to their county tax offices to prepay as much as they could before the end of 2017, but it's a lot of headache and effort for a one-time small relief.
Yup, and now it's not deductible anymore past the first 10K thanks to the new GOP tax laws.
People rushed to their county tax offices to prepay as much as they could before the end of 2017, but it's a lot of headache and effort for a one-time small relief.
Most people in IL don't have property taxes that exceed the SALT cap; the median homeowning family wouldn't exceed that cap in property and income taxes combined, right?
Most people, sure.
I'm in DuPage - highest property taxes in the state (closing in on 2.25%). So a $400K home will easily get you up near the 10K mark...and that's not even counting your income taxes.
I'm in DuPage - highest property taxes in the state (closing in on 2.25%). So a $400K home will easily get you up near the 10K mark...and that's not even counting your income taxes.
When you moved there in 2009, were you also shocked to know that your previous two governors were (or would soon be) serving prison sentences related to corruption charges?
Non sequitur. The fact that we had a governor that tried to sell a Senate seat does not dictate that corruption sets the high order bit on state finances. Like several other states, pension obligations that are straightforward to follow on the books seem to be the major problem we're facing.
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We really need to prevent the short-term game played by politicians, where they promise rich pension benefits, do not contribute enough to the pension funds and kick the problem down the road for someone else to solve.
The only possible solution I can see is to move from a defined-benefit system (eg. pension) to a defined-contribution one (eg. 401K). Everything else seems it can be gamed.
The only possible solution I can see is to move from a defined-benefit system (eg. pension) to a defined-contribution one (eg. 401K). Everything else seems it can be gamed.
Out of curiosity what's the difference between a public pension, where all funds are invested into a 401K like device, vs. each member in the group having their own 401K? I know that's not how Illinois' pension worked, but wouldn't the former be superior as the highest principle results in a proportionally higher (raw) return vs. an individual's?
1) A major difference is the fact that currently they are generally 'unfunded' in that the money isn't actually invested on your behalf.
2) The next is where the risk resides - even in cases where they are fully funded (ie: some model suggests that the returns on investment will be able to pay out obligations), there's still the issue of the risk models are wrong or investments underperform -that risk will still reside on the state to pony up the difference.
3) Lastly is the highly speculative nature of the obligation - most all pension plans use a subset of the worker's last years to determine the defined payment, so a common practice became to inform your (district, organization) that you intend to retire in 5 years, where they will then boost your pay for your last few years, thus providing a much larger pension. This esoteric issue is possibly dominating Illinois' financial problems as (from a few articles I read) retirees are receiving many times returns-compounded contributions, since their last 5 years are boosted so much over their average pay over the whole career. Gaming the system was not accounted for in the models.
2) The next is where the risk resides - even in cases where they are fully funded (ie: some model suggests that the returns on investment will be able to pay out obligations), there's still the issue of the risk models are wrong or investments underperform -that risk will still reside on the state to pony up the difference.
3) Lastly is the highly speculative nature of the obligation - most all pension plans use a subset of the worker's last years to determine the defined payment, so a common practice became to inform your (district, organization) that you intend to retire in 5 years, where they will then boost your pay for your last few years, thus providing a much larger pension. This esoteric issue is possibly dominating Illinois' financial problems as (from a few articles I read) retirees are receiving many times returns-compounded contributions, since their last 5 years are boosted so much over their average pay over the whole career. Gaming the system was not accounted for in the models.
> most all pension plans use a subset of the worker's last years to determine the defined payment,
This is absurd. Why wouldn't it be calculated on lifetime compensation?
This is absurd. Why wouldn't it be calculated on lifetime compensation?
Just off the top -
* Everyone gets lumped into the same risk tolerance bucket
* Big funds tend to make big purchases which on their own can move markets, which is bad. You see this more with sovereign wealth funds than pensions though.
* You can’t always trust the fiduciaries of the pension to make smart decisions. See 2008.
* Pensions often come with a defined benefit which relies on younger people paying the benefits of older people. Often these benefits were calculated with very stupid future growth projections in mind.
* Private company pensions often require the company to stay solvent for the pension to stay solvent. That isn’t always a safe assumption
* People are living longer which further screws up the math that many pensions were set up on
* Sometimes, workers or employers negotiate for changes to pension benefits. Those changes won't necessarily be net positive for everyone the pension covers.
* Everyone gets lumped into the same risk tolerance bucket
* Big funds tend to make big purchases which on their own can move markets, which is bad. You see this more with sovereign wealth funds than pensions though.
* You can’t always trust the fiduciaries of the pension to make smart decisions. See 2008.
* Pensions often come with a defined benefit which relies on younger people paying the benefits of older people. Often these benefits were calculated with very stupid future growth projections in mind.
* Private company pensions often require the company to stay solvent for the pension to stay solvent. That isn’t always a safe assumption
* People are living longer which further screws up the math that many pensions were set up on
* Sometimes, workers or employers negotiate for changes to pension benefits. Those changes won't necessarily be net positive for everyone the pension covers.
Federal law requires private employers to keep their defined benefit plans fully funded. That is, for every employee with a vested pension benefit the company must have deposited enough assets _today_ to ensure the pension can pay the accrued benefits _tomorrow_. IIRC, the regulatory agency (PBGC?) mandates a fairly conservative rate of return when calculating liabilities, which is one reason why corporations ditched pension plans.
It's possible to game the system, but you really have to work at it. The merger craze of the 1980s and 1990s was in no small part driven by attempts to raid pension funds. When companies merged you could merge the pension funds, and the merger provided opportunities to argue that the merged pension was overfunded. (Timing, choice of partner, shuffling of staff around, and tweaking of contracts so benefit accruals were postponed just long enough to raid the pension fund.) The new found cash in tandem with the supposedly lower liabilities provided companies huge one-time gains on their books, which fueled bonuses for C-suite executives (especially CFOs), who would then quickly move on before it all unraveled.
In any event, defined benefit plans in the private world aren't pyramid schemes. That's unique to the state governments because the pertinent federal law doesn't apply to them. Even though companies can screw with pensions if they try, it's still far more secure than 401(k)s. Just ask anyone who retires shortly before a recession. Or ask anyone who lives in Chile, which has had individual retirement savings accounts for decades.
A fully funded pension scheme is basically an annuity. If you have a 401(k), as you approach retirement you're _supposed_ to be rolling it over to an annuity anyhow. That's the rational thing to do. But nobody does it because, well, people don't behave rationally when left to their own devices.
Similarly, pension plans often deduct significantly more in wages than people voluntarily do with 401(k)s. Upwards of 20-30%. People systematically underestimate how much they need to save for retirement. Consider that social security effectively taxes you at 12%, but even if it stays completely solvent it's only going to provide a bare minimum income.
It's possible to game the system, but you really have to work at it. The merger craze of the 1980s and 1990s was in no small part driven by attempts to raid pension funds. When companies merged you could merge the pension funds, and the merger provided opportunities to argue that the merged pension was overfunded. (Timing, choice of partner, shuffling of staff around, and tweaking of contracts so benefit accruals were postponed just long enough to raid the pension fund.) The new found cash in tandem with the supposedly lower liabilities provided companies huge one-time gains on their books, which fueled bonuses for C-suite executives (especially CFOs), who would then quickly move on before it all unraveled.
In any event, defined benefit plans in the private world aren't pyramid schemes. That's unique to the state governments because the pertinent federal law doesn't apply to them. Even though companies can screw with pensions if they try, it's still far more secure than 401(k)s. Just ask anyone who retires shortly before a recession. Or ask anyone who lives in Chile, which has had individual retirement savings accounts for decades.
A fully funded pension scheme is basically an annuity. If you have a 401(k), as you approach retirement you're _supposed_ to be rolling it over to an annuity anyhow. That's the rational thing to do. But nobody does it because, well, people don't behave rationally when left to their own devices.
Similarly, pension plans often deduct significantly more in wages than people voluntarily do with 401(k)s. Upwards of 20-30%. People systematically underestimate how much they need to save for retirement. Consider that social security effectively taxes you at 12%, but even if it stays completely solvent it's only going to provide a bare minimum income.
These are two different financial devices. A taxpayer funded defined benefit pension (usually referred to as a public pension) is legally obligated to provide a set amount of money according to the formula in the pension plan to the recipient after they retire, on a monthly basis.
A 401(k) is a tax advantaged account where an individual does not have to pay taxes on the money in the account until they start withdrawing from it after a certain age. Once the money is deposited into the 401(k), there is no guarantee how much will be there when the account holder retires, all of the risk from whatever it's invested in lies on the account holder.
Theoretically, a larger fund with professionals investing it would be able to achieve higher returns, as in the case of a taxpayer funded defined benefit pension. However, due to corruption and ineptitude, it actually ends up costing taxpayers an incredible amount of money. There's a reason why non-taxpayer funded entities stopped offering defined benefit pensions. Public pensions are sold as being cheaper, but that is using false promises and lies of excessive returns. If they were held to the same standards that regular defined benefit pensions are, they would have ceased to exist also.
A 401(k) is a tax advantaged account where an individual does not have to pay taxes on the money in the account until they start withdrawing from it after a certain age. Once the money is deposited into the 401(k), there is no guarantee how much will be there when the account holder retires, all of the risk from whatever it's invested in lies on the account holder.
Theoretically, a larger fund with professionals investing it would be able to achieve higher returns, as in the case of a taxpayer funded defined benefit pension. However, due to corruption and ineptitude, it actually ends up costing taxpayers an incredible amount of money. There's a reason why non-taxpayer funded entities stopped offering defined benefit pensions. Public pensions are sold as being cheaper, but that is using false promises and lies of excessive returns. If they were held to the same standards that regular defined benefit pensions are, they would have ceased to exist also.
It is generally unwise to give someone else control of where your money is invested, particularly long-term; the incentives become twisted.
Pensions are awesome when funded. Illinois stole from its future by underfunding it.
No, politicians sold out their taxbase by not reforming unsustainable and over-promising public pensions for years. The sooner they go away the better, no reason unions should be able to negotiate budget busting benefits, then run them poorly, and expect the majority of people without the sweet deal to have to bail them out while being responsible for their own 401ks and IRAs. Cronyism and special interests aren't just for corporations.
States like New York that funded its pensions are ok. Illinois did not.
Unions don’t run public pension plans. So it really doesn’t make sense to throw around the anti union bullshit. When you are more corrupt and inept than NY government, you need to look at how you elect your legislature.
Unions don’t run public pension plans. So it really doesn’t make sense to throw around the anti union bullshit. When you are more corrupt and inept than NY government, you need to look at how you elect your legislature.
Sure, but my comment was supposing a hypothetical. Say you're a new state, Zion, and you have the two options available to you:
1) Simply let your employees invest in their own retirement via a 401k.
2) Pool everyone's money together and invest into a super 401k.
What I'm asking is if (2) is better than (1), or not. Surely someone has tried a variant of (2) before.
I agree though, that funded pensions are awesome. Since some organizations clearly have trouble with that, I was just wondering if there was a simpler way to ensure liquidity in the fund.
I'm aware that money is already pulled together with a pension, however my understanding is that pension funds are generally "managed" where most people who use a 401k put it in some sort of index fund where it's pretty passive as it tracks the market in general.
1) Simply let your employees invest in their own retirement via a 401k.
2) Pool everyone's money together and invest into a super 401k.
What I'm asking is if (2) is better than (1), or not. Surely someone has tried a variant of (2) before.
I agree though, that funded pensions are awesome. Since some organizations clearly have trouble with that, I was just wondering if there was a simpler way to ensure liquidity in the fund.
I'm aware that money is already pulled together with a pension, however my understanding is that pension funds are generally "managed" where most people who use a 401k put it in some sort of index fund where it's pretty passive as it tracks the market in general.
2) is how most 401k's work already.
e.g. Fidelity has target date funds, and everyone in the 2050 target date funds has their money in one pool which Fidelity manages as a group.
There are 401k's that allow investing in individual securities (or so I'm given to understand) but that's not the norm.
e.g. Fidelity has target date funds, and everyone in the 2050 target date funds has their money in one pool which Fidelity manages as a group.
There are 401k's that allow investing in individual securities (or so I'm given to understand) but that's not the norm.
(2) is what is happening now. It just so happens that everyone does it individually in their IRA or 401(k) and then buys mutual funds with it, hence their money is now pooled. Difference is you didn't have to risk a politician or union boss in the middle meddling with the funds, nor are future taxpayers on the hook for when there is a shortfall in the fund (incentivizing diversification by 401k owners).
Better despends on your perspective.
There’s financial and social problems associated with the 401k model, namely that people won’t or can’t save enough or invest well. You’ll see the impact in a few years as the numbers of impoverished former middle class seniors increase.
With the pension model, you fund, manage it responsibly and you have a sustainable system that benefits all.
I live in a state with a constitutional guarantee of public pensions. I take a 35% pay hit, plus 10% to my own savings today for the ability to retire at 55.
All big companies were able to afford this model, but the changes to tax law incentived then to ditch pensions.
There’s financial and social problems associated with the 401k model, namely that people won’t or can’t save enough or invest well. You’ll see the impact in a few years as the numbers of impoverished former middle class seniors increase.
With the pension model, you fund, manage it responsibly and you have a sustainable system that benefits all.
I live in a state with a constitutional guarantee of public pensions. I take a 35% pay hit, plus 10% to my own savings today for the ability to retire at 55.
All big companies were able to afford this model, but the changes to tax law incentived then to ditch pensions.
Individual retirement plan can be inherited when you died. Public pension that pool resources take over the remaining fund once you and your spouse died.
Sounds like it's time for a change to the state constitution. Everything is a negotiation:
"Because the state’s constitution bans any reduction in worker retirement benefits, the government’s pension costs will continue to rise as it faces pressure to pay down that debt, a squeeze that has pushed Illinois’s bond rating to the precipice of junk."
"Because the state’s constitution bans any reduction in worker retirement benefits, the government’s pension costs will continue to rise as it faces pressure to pay down that debt, a squeeze that has pushed Illinois’s bond rating to the precipice of junk."
I wonder if you could implement communism/socialism this way. If the supposed immortality of governments/pensions allows one to moneypump financial markets as easily as 'borrow at low interest, buy and hold and reinvest forever', what stops governments from asymptotically approaching 100% ownership of capital?
My gut says that eventually prices will reflect a major player like this. Eventually it will get harder and harder for a government to borrow money to pump into other investment systems, or the other investments will get more and more expensive giving a lower yield. Couple this with the fact that the government still needs to deficit spend occasionally (or at least politically it's nearly impossible not to run a deficit) , means that they can't just buy and hold, but will inevitably have to cash out some of their holdings.
If done at the central bank level, you can simply print the money necessary to acquire equity investments. Japan’s central bank does this, and is slowly consuming the Nikkei.
To answer the original post above, there’s nothing stopping the federal reserve from delivering communism/socialism this way except political will and leanings. The federal reserve mandates are to keep the country at full employment and keep inflation low. What better way to do so besides “seizing the means of production” through printing fiat.
https://www.bloomberg.com/news/articles/2017-07-18/boj-s-etf...
To answer the original post above, there’s nothing stopping the federal reserve from delivering communism/socialism this way except political will and leanings. The federal reserve mandates are to keep the country at full employment and keep inflation low. What better way to do so besides “seizing the means of production” through printing fiat.
https://www.bloomberg.com/news/articles/2017-07-18/boj-s-etf...
California's pensions are in trouble as well: http://www.sacbee.com/news/politics-government/politics-colu...
Ha ha ha. Not falling for that one, Illinois. You just want to take my money and find some way to never pay it back.
If I really want that bond yield, I could just follow whatever investment strategy you had in mind on my own, thanks. Any tax advantage is more than offset by the additional returns that I'll get to keep for myself instead of handing over to retirees, and my expectation that the fund administrator will be as crooked as the boundary of a Julia set.
Suck it up, accept you're "Detroit bankrupt", and amend your constitution now, or wait until after the state is "Puerto Rico bankrupt" and all the responsible parties are collecting their pensions from prison.
The smart move here is to not be able to touch Illinois with an eleven-foot pole. Do not buy these bonds. Do not move to Illinois. Do not keep your money where Illinois can get to it. Maybe even get some vaccinations to avoid unnecessary illness.
If I really want that bond yield, I could just follow whatever investment strategy you had in mind on my own, thanks. Any tax advantage is more than offset by the additional returns that I'll get to keep for myself instead of handing over to retirees, and my expectation that the fund administrator will be as crooked as the boundary of a Julia set.
Suck it up, accept you're "Detroit bankrupt", and amend your constitution now, or wait until after the state is "Puerto Rico bankrupt" and all the responsible parties are collecting their pensions from prison.
The smart move here is to not be able to touch Illinois with an eleven-foot pole. Do not buy these bonds. Do not move to Illinois. Do not keep your money where Illinois can get to it. Maybe even get some vaccinations to avoid unnecessary illness.
Public pensions. And people still argue that we should have those over 401ks.
Because investing in education and enacting policies to support raising families and future generations isn't popular for some reason, so we'd rather entrust our retirement funds in the hands of some politicians and fund managers, and if they end up making corrupt and stupid decisions, we can still raise taxes in the future, or divert funds from education and other social welfare to pay for the pensions.
> Because investing in education ... isn't popular for some reason
That's contradicted by the spending facts of the last several decades.
The US invests more per pupil when it comes to primary and secondary education, than any other nations except for Switzerland, Luxembourg, Norway, and Austria. So there's the US - 330 million people - competing with hyper rich, tiny, Luxembourg - 600k people - on education spending per pupil.
Our teachers are also among the best paid in the world.
We've dramatically over-invested into classical education. Far too many people have run up immense student loan debts, when they should have acquired a trade skill instead at a small fraction of the cost.
Germany is the model that the US should be following, rather than just blindly spending more on a traditional education path (which is not working out well).
https://www.theatlantic.com/business/archive/2014/10/why-ger...
http://blogs.edweek.org/edweek/global_learning/2017/05/the_u...
That's contradicted by the spending facts of the last several decades.
The US invests more per pupil when it comes to primary and secondary education, than any other nations except for Switzerland, Luxembourg, Norway, and Austria. So there's the US - 330 million people - competing with hyper rich, tiny, Luxembourg - 600k people - on education spending per pupil.
Our teachers are also among the best paid in the world.
We've dramatically over-invested into classical education. Far too many people have run up immense student loan debts, when they should have acquired a trade skill instead at a small fraction of the cost.
Germany is the model that the US should be following, rather than just blindly spending more on a traditional education path (which is not working out well).
https://www.theatlantic.com/business/archive/2014/10/why-ger...
http://blogs.edweek.org/edweek/global_learning/2017/05/the_u...
The US is two countries. My kid goes to a private school where 6th graders are building and programming robots.
Three blocks away from my house, 30% of 6th graders are at reading level.
Three blocks away from my house, 30% of 6th graders are at reading level.
I should have written investing in education to teach students about their finances. You can go all the way through high school in America and never learn how to calculate interest or amortize or understand how investment returns should be calculated.
Our teachers are, in many cases, very poorly paid. (Administrators, on the other hand...) If US teachers are paid better than in other countries, that's pretty appalling.
The US bureau of labor statistics says that the average teacher salary is $58k/year (with over 2 months of time off) while the average non-teacher salary is $61k/year (average PTO less than two weeks) with at least a bachelor degree.
Don't forget the present value of a teacher's pension.
the argument is between defined benefit vs defined contribution plans. The former are unsustainable as evidenced by illinois’ ballooning deficit, while the latter are somewhat variable in return.
It's clear enough that many pensions are poorly funded.
I don't think it is clear at all that this is inevitable.
(It certainly seems likely that they will be underfunded; why not pay for services with promises that someone else has to fulfill)
I don't think it is clear at all that this is inevitable.
(It certainly seems likely that they will be underfunded; why not pay for services with promises that someone else has to fulfill)
Usually, when you're spending someone else's money, there is a moral hazard that you don't quite care about the return.
Add to that fact that in the US, taxpayer funded pensions have NO rules (they're specifically exempt from laws regarding defined benefit pension funding), it's quite easy to see politicians giving away deferred benefits to government worker unions in exchange for votes today. The only person this affects (future taxpayers in 20 to 30 years), are mostly not at the table. And not enough people pay attention to local elections or understand the numbers enough to stop this.
Add to that fact that in the US, taxpayer funded pensions have NO rules (they're specifically exempt from laws regarding defined benefit pension funding), it's quite easy to see politicians giving away deferred benefits to government worker unions in exchange for votes today. The only person this affects (future taxpayers in 20 to 30 years), are mostly not at the table. And not enough people pay attention to local elections or understand the numbers enough to stop this.
Don't you think that the people who run the pensions invest that money with those same "fund managers"?
They're not, they have different risk profiles. There might be some overlap, but by and large, pension funds (especially taxpayer funded) take many more risks than the usual 401k index and bond funds.
If I understand correctly, this is because (at least often) the pension funds are underfunded, and have to take risks because they have to have higher rates of return, because with realistic rates of return the contributions aren't enough to reach the specified level of benefits.
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This sounds like a horrible idea.
Illinois is well into “all ideas are horrible” territory.