When Mayor Adam Barringer addressed the Republican Club of Southeast Volusia on Thursday, he raised an interesting point when he said he read a news report that the nation's municipalities collectively are $2 trillion deep in unfunded pension commitments.
In the middle of a recession it is natural for people in a retirement community such as New Smyrna Beach to give some thought to their own retirement systems. Fortunately, for many New Smyrna residents, the State of Florida retirement system is in good shape.
However, it is important for young people to take a hard look at what they are doing to establish their financial condition. To this end we will compare private investments as opposed to pensions as vehicles to generate financial security.
There are so many basic problems with pensions that the individual should, if possible, move to get himself into a personal investment account retirement plan rather than a defined benefit pension.
The first, most basic, problem is that there are so many ways to lose a pension that it is very hard to feel secure about ever getting it.
The foremost example is under funded pensions that become inoperable when the parent company or political jurisdiction goes bankrupt. Another example is the pensions that can be taken away at the last minute for perceived unacceptable behavior.
Military personnel can lose their pensions very late in their careers. There are a few cases in which social security benefits have been denied to people who have paid in. This led to the famous Fleming vs Nestor case in which the Supreme Court ruled that social security payments were really a tax and did not entitle the payer to a retirement income.
Even the Daytona Beach News-Journal, which is in the process of being sold for a paltry $20 million is short $14 million in its pension funding.
Fortunately for people here in greater New Smyrna Beach, the State of Florida retirement system is in great shape.
State Rep. Dorothy Hukill, R-Port Orange, whose district includes Southeast Volusia, has advised me that during last year it dropped to about 94% coverage of liabilities for the defined benefit part of the plan. This is actually quite good. Furthermore, since the rebound of the stock market it is now well over 100% coverage, which is unusually good and makes it about the third most solvent plan in the U. S.
Note that several years ago under Gov. Jeb Bush and House Speaker Tom Feeney, the state started offering the option of personal 401k type retirement plans as an alternative to pensions. Many of the newer workers in the state took this option so there is no threat to their pensions since they are by their very nature fully funded. This will reduce the pressure and the potential moral hazard danger to the State’s finances.
At the other end of the solvency scale, Gov. Arnold Schwarzenegger said California is looking at a $ 300 billion shortfall is covering its pension liabilities. This is scary to say the least.
One of the fundamental dangers of government pensions is that the politicians in office curry favor with the government employees by offering huge retirement packages while leaving the actual funding of these packages to subsequent administrations. This tendency to put off funding can force political jurisdictions into bankruptcy as the pensions come due. Again, keep in mind that this problem goes away with private 401k type investment plans.
Now consider that in the best of all possible worlds in which all pension plans are fully funded a pension plan would still have serious drawbacks. Let us list some of them:
* You have very little or no control over the capital resources that provide your funds.
* You don’t have any access to income until you are older so the funds can’t help you in your career such as starting a business. A cynic would say you don’t have access to the money till its’ too late to make a difference. A personal investment plan gives you financial security that grows over time.
* A pension does nothing to build family wealth and can’t be passed on to your heirs or in many cases to even your spouse. (Ask some railroad people about some of the railroad pensions.)
* It costs more on the average to provide a given income through a pension than through an investment account. The reason is that pension funds must have a high degree of predictability since the payout is fixed. Investing for predictability offers a lower average return than if you don’t need so much predictability.
* Pensions create political moral hazard for the individual. If you think you have a guaranteed retirement income you may have a tendency to ignore the effects that bad anti business laws and bad political leadership can have on your financial future. These false guarantees can give you a bad attitude toward the golden goose that is carrying the load.
* Let’s face it. Everybody should own “a piece of the rock” and there is no way a pension can give you a piece of the rock except in a very indirect way. Owning a piece of the rock directly tends to make you a better, more informed citizen.
The time has come for all young people starting out in the business world to start saving and investing. It is a win, win situation over the long run even though there are temporary setbacks from time to time.
You gain security by diversity and playing for the long haul.