Originally Posted by Whoopsmybad (Post 3597189)

You mean the same SS that is completely underfunded and the government has no idea how to make it back? Show me anything the gov has touched that fiscally hasn’t turned into a disaster. No thanks, ill pay my taxes that both parties can F away, and I’ll keep my own $$. Same with pensions, to bring it back full circle. No matter what happens to Mother D in the future, that $$ is mine.

Originally Posted by NuGuy (Post 3597361)

Ehhhh, this is only partially true, and fails to tell the whole convoluted story.

Yes, pension funds are invested in the market. However, the assumptions used to calculate fund liabilities are extremely restricted. You can have the ace of aces investing your fund, but if interest rates are very low, as they have been, your forward looking liability is based on 30+ years (or whatever actuarial model they're using) of essentially zero interest. THAT number, minus what's essentially in your current day fund, is what drives contributions. Compounding liabilities year after year with near zero assumed return is a crushing load that no market gains can recover.

Think of it like this: The pension is your mortgage. You have a good rate, you have a good job, and you make your payments on time. One day, through no fault of your own, you lose your job. The bank says "you lost your ability to pay, so we're calling your mortgage". You say "well, wait, I'm a smart person, I have money in the bank, I can make my payments while I look for another job". Bank says "we don't care. You don't have a job NOW, which is what we're basing our decision on. Besides, the economy is bad, even if you hadn't lost your job, we're expecting you will, so even if we don't call your loan, we're jacking your payments up 400%, which you could't pay anyway, so we're calling in your loan".

"Ah ha!" you think to yourself, "I'd never get myself into this predicament, because I'd be paying my loan off early". Nope, IRS forbids you to do so, because they consider that a tax dodge.

ERISA is designed to protect pensions, but it does so in the most convoluted way possible (I know, big surprise, right?). It does this by preventing wild-ass assumptions on fund performance, which is fine, but only to an extent. The problem is, when the economy goes south, the first thing that happens is the value of the fund decreases because the value of the assets generally decrease. But those things recover, even if it takes time, and only a certain number of beneficiaries are taking funds at any one time. But along with the decrease in the fund value, interest rates usually also go down, which jacks that forward looking liability number WAY up. Put -2 and -2 together, and you can winding up with a pension fund that is grossly underfunded...on paper. This number actually bares little relation to the actual ability of the fund to pay.

The truth is that fund value recovers with the economy, as do interest rates, at least usually. But ERISA requires that funding to be made NOW. And if the economy is bad, well, chances are your business doesn't have a spare billy to toss in the pension fund because the math sucks today.

A couple of other Baby Ruths in the pool at the club:

The IRS actually prohibits over funding of pensions. Pension contributions have tax advantages, and the IRS does't want pension overfunding used as a tax dodge. So one potential avenue to prevent this kind of thing from happening is actually prohibited by essentially the same entity that is charged with protecting pensions.

There is a fundamental disconnect with long term interest rates and the economy. This number, baring some peaks and valleys, has been pretty stable over the years. People are losing their minds over interest rates right now, and they really haven't approached even the low side of historically normal. Some of you are really into waving red flags, so here's one for you....an economy that needs near zero interest rates to operate is not fundamentally healthy. This has been going on for the last 15 or so years, since the crash of '08. I get that paying more than 3% for a mortgage or the note on my new Miata stinks, but yea, not healthy.

So you ask yourself "well, what if the opposite happens?". Good question, and we're seeing this play out now. A lot of pension funds have had forced contributions to them over the past decade, based on a stupid high liability generated by zero interest rates. Fund values have been generally going up, but without the boat anchor of low interest, the new calculations get...very weird. A pension that is nominally funded, say between 90-100% of what the previous liabilities calculated, suddenly find themselves very overfunded.

Things happen at this point...the plan sponsor could voluntarily terminate the fund. I strongly suspect this will be done wherever possible where it is not otherwise restricted. This is usually done by paying out to the beneficiaries the current dollar value of their benefit. Adding in some admin costs, that number is usually 105-110% funded. They get to keep the rest.

Originally Posted by NuGuy (Post 3597361)

Ehhhh, this is only partially true, and fails to tell the whole convoluted story.

Yes, pension funds are invested in the market. However, the assumptions used to calculate fund liabilities are extremely restricted. You can have the ace of aces investing your fund, but if interest rates are very low, as they have been, your forward looking liability is based on 30+ years (or whatever actuarial model they're using) of essentially zero interest. THAT number, minus what's essentially in your current day fund, is what drives contributions. Compounding liabilities year after year with near zero assumed return is a crushing load that no market gains can recover.

Think of it like this: The pension is your mortgage. You have a good rate, you have a good job, and you make your payments on time. One day, through no fault of your own, you lose your job. The bank says "you lost your ability to pay, so we're calling your mortgage". You say "well, wait, I'm a smart person, I have money in the bank, I can make my payments while I look for another job". Bank says "we don't care. You don't have a job NOW, which is what we're basing our decision on. Besides, the economy is bad, even if you hadn't lost your job, we're expecting you will, so even if we don't call your loan, we're jacking your payments up 400%, which you could't pay anyway, so we're calling in your loan".

"Ah ha!" you think to yourself, "I'd never get myself into this predicament, because I'd be paying my loan off early". Nope, IRS forbids you to do so, because they consider that a tax dodge.

ERISA is designed to protect pensions, but it does so in the most convoluted way possible (I know, big surprise, right?). It does this by preventing wild-ass assumptions on fund performance, which is fine, but only to an extent. The problem is, when the economy goes south, the first thing that happens is the value of the fund decreases because the value of the assets generally decrease. But those things recover, even if it takes time, and only a certain number of beneficiaries are taking funds at any one time. But along with the decrease in the fund value, interest rates usually also go down, which jacks that forward looking liability number WAY up. Put -2 and -2 together, and you can winding up with a pension fund that is grossly underfunded...on paper. This number actually bares little relation to the actual ability of the fund to pay.

The truth is that fund value recovers with the economy, as do interest rates, at least usually. But ERISA requires that funding to be made NOW. And if the economy is bad, well, chances are your business doesn't have a spare billy to toss in the pension fund because the math sucks today.

A couple of other Baby Ruths in the pool at the club:

The IRS actually prohibits over funding of pensions. Pension contributions have tax advantages, and the IRS does't want pension overfunding used as a tax dodge. So one potential avenue to prevent this kind of thing from happening is actually prohibited by essentially the same entity that is charged with protecting pensions.

There is a fundamental disconnect with long term interest rates and the economy. This number, baring some peaks and valleys, has been pretty stable over the years. People are losing their minds over interest rates right now, and they really haven't approached even the low side of historically normal. Some of you are really into waving red flags, so here's one for you....an economy that needs near zero interest rates to operate is not fundamentally healthy. This has been going on for the last 15 or so years, since the crash of '08. I get that paying more than 3% for a mortgage or the note on my new Miata stinks, but yea, not healthy.

So you ask yourself "well, what if the opposite happens?". Good question, and we're seeing this play out now. A lot of pension funds have had forced contributions to them over the past decade, based on a stupid high liability generated by zero interest rates. Fund values have been generally going up, but without the boat anchor of low interest, the new calculations get...very weird. A pension that is nominally funded, say between 90-100% of what the previous liabilities calculated, suddenly find themselves very overfunded.

Things happen at this point...the plan sponsor could voluntarily terminate the fund. I strongly suspect this will be done wherever possible where it is not otherwise restricted. This is usually done by paying out to the beneficiaries the current dollar value of their benefit. Adding in some admin costs, that number is usually 105-110% funded. They get to keep the rest.

Originally Posted by nene (Post 3597897)

This was actually what happened to Delta pensions in 2000. Stocks up so Feds said no contributions to pensions. Delta actually petitioned the IRS to make rainy day contributions and irs said NO. Pay taxes greedy rich corp. well a few short years later pension was seriously underfunded.