By David Merkel of Aleph Blog
I have long thought that Defined Benefit plans are the best retirement plans for workers. They are also the worst for employers. Why?
Employees are incapable of making intelligent investment decisions in aggregate, much as they like the feeling of “control.” Far better to have professionals choose investments where they don’t give in (as much) to fear and greed, and lose a lot of money in the process.
Defined benefits give retirees a fixed budget, which is good; they are not capable of managing a lump sum over a lifetime. Indeed that would tax most “professionals.” The pensions are also judgment-proof, aside from QDROs.
The cost of providing fixed benefits amid low interest rates is tough for most employers, who have seen their liabilities expand dramatically. It takes a lot more assets to provide a pension if you are investing in safe bond investments.
This is particularly true for public pensions, since they had the greatest tendency to defer making contributions to avoid raising taxes. Now they are in the soup. It will be interesting to see what the municipalities do with the pensions. There may be compromises driven over retirement benefits for future employees, current employees, and even current retirees. Then again, maybe taxes will be raised to cover the expense.
That will vary by state; some will accept more taxes, and some won’t… beyond that, some will move out of high taxation states, creating a “death spiral” for taxes, or a default/compromise on pension payments.
All that said, I can simply say that in a period of low interest rates and low returns from risk assets, it is unlikely that pension payments will be maintained in many states, unless taxes are raised, and many will oppose that, because their own retirements so not look so promising.