July 21, 2009

Who Woulda Thought It: Defined-Benefit Pensions Don't Do Well in a Market Crash!

Carroll Andrew Morse

Given the numbers reported in this Los Angeles Times story from today…

California's two huge government pension funds reported whopping annual losses today of about one-quarter of their portfolios.

The California Public Employees' Retirement System, the largest in the nation, today posted a preliminary drop of $56.2 billion for the fiscal year ended June 30. The second-ranked fund, the State Teachers' Retirement System, reported a preliminary loss of $43.4 billion.

…would anyone like to volunteer to walk Anchor Rising's readers through the explanation, heard from some quarters, of how the financial meltdown has "proven" that 401(k)s and individual Social Security accounts are unworkable, while not proving the same thing about defined-benefit pension plans?

Comments, although monitored, are not necessarily representative of the views Anchor Rising's contributors or approved by them. We reserve the right to delete or modify comments for any reason.

Because the collective nature of the investments in a defined benefit system allow time for market recovery both before retirement and during the retirement years, and an individual invested soley in a 401 (k) has no such chance. But I suspect you knew that.

Posted by: Bob Walsh at July 22, 2009 3:55 PM

If the only factor involved is time for a market recovery, as your response implies, then the pension fund should be expected to recover without any increased contributions from outside the system -- so can we tell the people of California that the "employer contriubtion to state pensions" item in their budget won't be growing, as a result of the market crash?

Posted by: Andrew at July 23, 2009 7:39 AM

Sadly, no, because while employee contributions to public sector plans are fixed (more or less), the government employer funds (hopefully) to the actuarial minimum, leaving no margin for error, so increases are needed based on the new data. But in most cases, the biggest gains will indeed come from the market recovery, not the actual contributions. In a perfect world, the contributions would be x % higher than an expected minimum over set periods of time, so that such fluctuations could be offset over time, but that would be trading extra funding up front for predictability, and politicians run based on short-term, not long-term, outcomes.

Posted by: Bob Walsh at July 23, 2009 8:47 PM
Post a comment

Remember personal info?

Important note: The text "http:" cannot appear anywhere in your comment.