Monday, June 13, 2011

Protecting pay

Pensions are deferred compensation - money that employees would have been paid as cash salary but choose, instead, to have placed in the state operated pension fund where the money can be professionally invested (at a lower cost of management) for the future. If it is true that pension money is money that already belongs to the public-sector workers, you might ask why state employees would not just take the cash as direct compensation and do their own investing for their retirement through their own individual retirement plans. Expecting individuals to be experts at investing their retirement money in defined contribution plans — instead of pooling the money so professional investors can manage the money as is done in defined benefit plans — is not sound economics. The concept, at its most basic, is buying wholesale instead of retail. Wholesale is cheaper for the buyers.

With pension rule changes, expecting public service workers to make a larger contribution to their pension and benefits programs. What they are actually asking is that the employees take a pay cut. Unions agreeing to these deals on their benefits are accepting the obligation their members paying for them out of their own pockets.

Some commenters have made the point that, while it is true that it is state-employees’ own money that funds the pension plan, when the pension plan comes up short it is up to the employer to make up the difference. There is some truth in this – but not as much as many seem to think.

Because the pension plan is a defined benefit plan – requiring the state to pay the agreed benefit for however long the employee may live in retirement- if the employee lives longer than the actuarial plan anticipated, the taxpayer is on the hook for the pay-outs during the longer life. But is this the fault of the employees? The pension agreements are the result of collective bargaining. That means that the state has had every opportunity to properly calculate the anticipated lifespan and then add on some margin for error.

Nor can the losses taken by the pension funds over the past few years be blamed on the employees. We had employers failing to make annual payments (taking pension holidays) for their pension systems. Lower investment returns from the recession. Increased taxation by the government on funds.

See also here

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