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The Pension Mess: Explaining the Obvious

We are closely observing a crap-filled, retirement pension plan balloon. It is a strange balloon. Rather than expanding until explosion, this balloon’s contents get smaller and smaller before eruption. If the eruption occurs, the nasty innards will scatter in a loud and far reaching manner. Although the ultimate solution (if it is ultimately solved rather than allowed to explode) to this mess is complicated, the reasons and components of the solution are clear.

REASONS

1. Withdrawal amounts – Perhaps the amount of the withdrawals has been underestimated or perhaps some workers have learned how to game the system (see here and here) but this may be a reason for issues in some plans.

2. Lower Returns / high costs / economic shocks – Defined benefit (traditional pension) plan actuaries use an estimated return to determine the amount to be funded. It appears the estimated returns previously used have not been met. (see here)
In addition, economic shocks like 2008 put stress on retirement plans. In addition to making up for the losses, the plans have withdrawals from the retirees. Very stressful.

3. Longevity – Retirees are living longer and using more of the plan resources than expected. (see here)

4. Can Kicking by plans – Many plans are under-funded and/or not being funded quickly enough.

5. Can kicking by our leaders – the delay in addressing the issues has resulted in the mess getting larger.

SOLUTIONS

1. Put more money in the plans – No comment on where this will come from.

2. Higher returns / lower costs / smooth / strong economy – No comment on how this will happen.

3. Work longer before collecting benefits – Ouch (see here)

4. Reduced participant payout – (See here and here)

5. Die earlier – Another unattractive solution (see here and here)

6. Tax payer bailout – See here. We will need a bigger boat if we start down this slippery slope.

7. This should be addressed quickly  “Should” is the operative word. We will see how this proceeds.
The above are comments and observations, not opinions with the snark factor kept to a minimum. Solving the problem will be difficult, and few politicians have the leadership, inclination or political capital necessary to move these issues to fruition. This would partially explain the delay in taking action.

If history repeats, the problem will not be addressed until after the balloon has exploded. Let’s hope not.

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