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marcus
@
2011 Apr 6, 1:52pm
1) The CTA derides 401Ks as “riskyâ€, while simultaneously investing in ways that are at least as risky as a typical 401K. And,
In a 401k, you the individual is in charge of the diversification or which mutual fund and timing. That is relatively risky compared to having a team of pension fund managers managing it, as they have quite well over the years.
2) They (and you) refuse to recognize that the only reason their defined benefit pension fund is not “risky†is that the can just get more money from taxpayers, or from the increased contributions of new hires.
As you know, I am quite certain that if the pension fund screws up in too big of a way, or if the markets crash in some kind of unprecedented way, that their hedging doesn't cover, my contribution would be raised, and yes it would cost the state something, But the public and the constant massive deficit situation of California would prevent them from covering more than a reasonable amount of it. California isn't that far from bankruptcy now, so they could wiggle out of too big a liability. You see tweaks happening now. Contributions will be raised. I see your point, but it's not as bad as you say. I would argue that they actually could even lower payout, if push really comes to shove.
In a 401k, you the individual is in charge of the diversification or which mutual fund and timing. That is relatively risky compared to having a team of pension fund managers managing it, as they have quite well over the years.
CTA/CalSTRS got a 2.9% return from 2000-2010. I did better than that with my IRA that I barely looked at over that period.
In charge of diversification and timing? Most people just contribute to a fully diversified stock and/or bond fund every month, and let it ride. Diversification is brain dead simple. Timing is a mostly a fools game, and in any event it's zero sum. If CalSTRS made profits from timing, that means it came at the expense of someone else's bad timing.
Sure, you can claim 401Ks, IRAs, etc. have the potential to be more risky, if people for some reason base all their retirement future on tech stocks or something, but for almost everybody it's no more risky than what CalSTRS does. CalSTRS even does private equity investment, which quite frequently goes to 0.
my contribution would be raised
For somebody retiring in the near future, or for the 100's of thousands already drawing their promised pensions, that is irrelevant. It mostly affect newer hires.
I would argue that they actually could even lower payout, if push really comes to shove.
By CA constitutional law the payouts already accrued cannot be lowered. There may be some legal maneuver, or court decision, or proposition that allows it the future, but it's not easy.
Compare my IRA risk vs. your pension risk:
My risk: Market falls, and I get less retirement benefits.
Your risk: Market falls, and you *might* loose some benefits if radical changes happen to the law, that will be vigorously opposed by your union.
Those risks are hardly comparable.
marcus
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2011 Apr 6, 3:35pm
Those risks are hardly comparable
Yes, and you too could be in a pubic service highly stressful job, getting these benefits that cost the State maybe 5K/yr more than if they used SS. Even if you want to somehow account for the risk (ie think insurance) of some future (financial crisis) cost to the state, that too can be quantified, discounted, and it is finite.
Get over it man.
CalSTRS got a 2.9% from 2000-2010
Can you tell me where you got those numbers, and also, do you know what the 20 year numbers look like ? You picked a time frame that had 2 very ugly down turns. And yes, they were affected by the Morgage Backed securities fiasco. But it would seem the fund survived, considering.
marcus
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2011 Apr 6, 3:39pm
Over the past 20 years CalSTRS has averaged an annual investment return
of 8.2 percent
Contributions by the State of California to the Defined Benefit Program actually
declined from 4.607 percent in 1998 to the current level of 2.017 percent.
Can you tell me where you got those numbers, and also, do you know what the 20 year numbers look like ?
2.9%. From the CTA website.
http://www.cta.org/~/media/D35EDDF6A009458299EC8226CE96B478.ashx page 9
The 20 year returns were mostly from from the late 90's where they made very risky bets that paid off. Contributions were almost meaningless, since the returns were so high. You really think that's going to happen again in your lifetime? You really want to come tax me if they don't?
http://calpensions.com/2010/07/27/sb400-pension-boost-uncanny-forecast-unheeded/
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http://www.cta.org/Issues-and-Action/Retirement/Retirement.aspx
There is a huge gaping hole in this reasoning. Why? CalSTRS itself invests in the very same investment vehicles that those with private 401K invest in.
The only difference is that the beneficiaries of CalSTRS are guaranteed a 7.75% return, since governments have to kick in more if the investments don't pan out. (And they haven't)
http://www.calstrs.com/newsroom/2010/news120210.aspx
Back to CTA:
Risky 401K plans? I just pointed out that the risks associated with the investments of CalPERS are no less than the risks associated with 401K plans. The only reason CalSTRS benefits are not risky is because taxpayers pick up the difference if the investments don't pan out.
Does the CTA really believe a pension system that invests in risky investments, but is taxpayer guaranteed, is a viable retirement system for "All Californians"? I sure hope not, because it most certainly is NOT viable.
If every Californian were on a pension system like CalSTRS, then the system would not have an underfunding of just $42B like CalSTRS, but more on the order of $1.2 trillion. We would have to levy an extra 3-4% tax on all workers for the next few decades to make up for the shortfall - roughly an extra $3K taxes per year for a couple making $80K. All of which would be borne by the current generation of workers while those in or nearing retirement enjoy all the guaranteed benefits.
Not to mention CalSTRS seeks to BEAT THE MARKET. If everybody were on this system, it would be very difficult to beat them market, since they would BE a large part of the market.
The even bigger CalPERS is in worse shape that CalSTRS.
I've got no problem with defined benefit pensions being part of the mix of benefits. I've a got HUGE problem with disingenuous talking points, and a class of workers than has guaranteed themselves market beating returns through the political process. And I'm ticked off they they won't even acknowledge this as a valid complaint.