Defined benefit pensions are stupid unless you can print money. So it is fine for the US federal government to offer, such as Social Security, but since no one can see 5, 10, 20, or 30+ years into the future, no city, county, or state should be in the business of promising things that far into the future.
Otherwise, as evidenced by basically every data point, politicians will promise the DB pensions, then not fund them, then lay the costs on future generations.
> Defined benefit pensions are stupid unless you can print money.
Or you look at demographics ahead of time and have the political will to switch away from a pay-as-you-go system. Like Canada did with its CPP in the 1990s:
Canada can print its own money though. They are effectively solvent no matter what. And sure, there might be some decent people working at decent DB pension funds.
But at the end of the day, what are they doing different that a target date fund from Vanguard/Schwab/Fidelity is not? Except the latter avoids agency risk and is super cheap.
And yet the health care works who have HOOPP also get it. As well as secondary school teachers (OTP), municipal workers (OMERS), etc. None of these entities can print money.
There's no guarantee that pensions will perform well of course (see Alberta). But as someone who spends a decent amount of time in /r/PersonalFinanceCanada, the random person on the street probably does worse.
> But at the end of the day, what are they doing different that a target date fund from Vanguard/Schwab/Fidelity is not?
1. Forced savings taken off their pay cheques no matter what, which solves a huge behaviour issue.
2. Run by folks who are better audited than individuals are personally, so results are readily available, and can be easily criticized for non-performance.
1. This is more easily accomplished as a federal program.
2. It is already very easy to write software that compares performance to an index.
Regardless, if the purpose of a DB pension fund is to protect people from their own proclivities, then a federal pay as you go system works better (cheaper, less agency risk). If the purpose is to supplement the amounts from the federal system, then a personal account at a brokerage invested in a low cost index works better.
I am not even sure why Canada invests its pension funds in the private markets. Canada can always issue new Canadian dollars anytime it needs to pay the benefits it has promised if tax receipts are insufficient. If anything, this leads to another perverse incentive of Canada’s government wanting to bail out businesses it has invested in.
1. I wouldn't object. But employers would have to kick in money too, and some may not want to because that could potentially effect the bottom line. With (US) 401(k) (CA: RRSP), it's up to the employee to contribute and many don't so that saves companies money.
2. The listed pension funds are not for working specifically for the government, but are for more publicly focused aspects (health care, education). But there are other options, like folks who work in (e.g.) the food industry (supermarkets):
You keep using the word "stupid", and I don't think you know what it means.
It would be "stupid" to not pay pensions, unless you don't see the risks in leaving a whole generation in their elderly years with no income whatsoever. Most evident of all, it would be a deadly blow agains the economy itself, especially in developed countries with aging populations.
I specified the condition that it is stupid for entities that cannot print money, due to the enormous moral hazard allowing today's taxpayers to soak future taxpayers in unstated debt which evident by looking at almost any US city or state government's finances.
you seem to assume that printing money absolves a (nation-)state from future liability. it doesn’t. it’s still a moral hazard either way. you’re still leaving the future with less; it’s only the accounting that changes.
I am aware it devalues the currency, it is the least morally hazardous way though.
It is inevitable that the longer people live during their non working years and the more top heavy the population pyramid becomes, that there will be less for future generations’ during their younger years.
the least morally hazardous way is to not take from the future at all. there’s no reason for the top-heavy not to take less into retirement. there’s also plenty of excess wealth to easily avoid stealing from the future while still providing for all the top-heavy now.
At least in the US, there seems to be more than enough money to keep several branches going. The military just got $20 billion extra this year. Foreign aid is around $45 billion a year.
They inevitably fall into the trap of promising that benefits will be paid for in the future.
At a national level that is probably okay, at a municipal level it means that people that leave a city get services that they don't pay for, and future residents pay for services they didn't benefit from. It's a terrible alignment.
No, I'm making a particular point about public pensions. They should be fully funded during the vesting period or not exist, except maybe at the national level.
Otherwise, as evidenced by basically every data point, politicians will promise the DB pensions, then not fund them, then lay the costs on future generations.