Underfunded Pensions
I have been reading a lot about underfunded pensions. This isn’t just a problem with GM and Chrysler, this is a problem with pretty much every pension fund in the US. If I wasn’t being force feed so much news on the topic, I wouldn’t give a shit, because I will never have a pension, but since I have, I gave a little thought to the math behind pension funds.
My conclusions, pension funds managers are idiots.
First, lets say you are a company that has been around forever, has grown considerably over that time, employees pay into the pension 20-40 years and the payouts lasting 20 years. The company has grown and so has the number of employees funding the pension. In good times like these, the pension should be net positive cash flow. By this I mean the outgoing retirement benefits being paid are less than the incoming funds from existing employees, thus the pension fund has a growing net asset base and the existing base is never touched.
Now, in this ideal situation, I believe that this is true.
Next, take a company (or government) that provides a pension and has grown linearly with time, or just at a much low exponential rate than a highly successful company. The cash flow should still be net positive, because you have more people paying in then are taking a draw.
In this situation, I do not believe this is true, because pension fund managers allow companies (and governments) to underfund the pension, creating a cash flow problem, and thus to meet current obligations, assets have to be sold, thus decreasing the size of the pension. Thus, pension fund managers are idiots.
Finally, take a company that offered a pension, but is now bankrupt. If this company has met all obligations to date, the remaining balance in the pension should allow the pension to make payments for 20 years.
In this situation, the funds start out underfunded and the asset base, the portfolio of the pension, contains too much risk. Not only could the pension not meet obligations because it started out underfunded, but being invested in risky assets means that there is variable chance that the pension will even last as long as its current value would indicate. Thus, pension fund managers are idiots.