How Pensions Work

“We have an old saying in journalism: If you don’t understand something, it must be important.”  ~ Columnist Dave Barry on the stock market

Australian Experience Shows Pitfalls of Ending Traditional Pensions

PensionDialog welcomes the following post from the Alliance for Retirement Income Adequacy, a network of Canadian organizations which are promoting an informed discussion about the importance of income adequacy in retirement.

These days, in Canada and around the world, headlines talk about switching public sector pension plans from traditional “defined benefit” plans to newer “defined contribution” models—such as 401(k)-type plans that are in the U.S.

Those who favour the DC plans argue that they cost less – typically the contributions made by plan members and employers are lower – and that the employer (or the taxpayer) does not have to worry about shortfalls when the plan is underfunded.

The private sector seems to have embraced DC, or so the argument goes, so why not the public sector?

The Cost of Pensions

On a nationwide basis, pension costs for state and local governments are roughly three percent of total spending.  According to data from the U.S. Census Bureau, pension costs since 1980 have been reliably stable, averaging from around four to three percent.

Third Quarter Assets Decline—A Snapshot in Time

Driven largely by the decreases in corporate stocks and interna­tional securities, the U.S. Census reports that the value of investments held by 100 of the largest U.S. public-employee retirement systems fell in the third quarter of 2011. Total holdings and investments quarter-to-quarter decreased $236.6 billion, or 8.5 percent, to $2.5 trillion.

This news is no surprise to anyone who has even half-listened to the daily, or weekly, gyrations of the stock market. However, performance in one quarter—especially following a trend of increases for five consecutive quarters—is not as worrisome as some may think.