Quote from clacy: "This is the crux of the problem for most 1st world governments. As workers live longer, they simply must work longer to compensate. We have the opposite. In the US, it's not uncommon for a public sector worker to retire at age 55. Think about that for a second. In a world where the average life expectancy for a 55 y/o is over 80. Let's assume that worker began working FT at age 22. That means they worked 33 years out of 80, meaning they DIDN'T work full-time for 59% of their life. The numbers simply can't add up to support our current public sector system." _________________ You are incorrect on this point. These considerations are not the problem with a properly managed defined benefit plan. The actuaries take into account both retirement age and total contributions. Martinghoul, however, is on to what is a problem for many defined benefit plans that hold equities in their portfolios when he says: "the more general problem is the unconditional promise that is embedded in a final salary defined benefit pension. In an uncertain world, that's just inviting trouble." What I would point out is that a well managed plan should not incorporate unconditional promises of a fixed, unalterable pension amount, and few do. Many of these plans assumed too high a future return on equities. Their future estimates were based on past returns, but as Martinghoul points out the future is uncertain, and there can be long periods over which equities under perform relative to inflation. Any properly managed plan allows for changes in the payout as circumstances dictate, and this is absolutely no different than for defined contribution plans. There were some public pension plans that were victims, directly or indirectly, of Wall Street fraud and malfeasance, and these plans had to make appropriate adjustments to future payments. Correcting for longevity is a trivial problem by comparison. Longevity changes only very very slowly and the actuaries take this into account when they make adjustments in the contribution rate. An example of a stable and outstandingly well designed defined benefit plan is U.S. social security. The actuaries have calculated that a 2 cent additional contribution on each dollar earned is needed to keep the system sound into the foreseeable future and correct for increased longevity and changing demographics. Also S.S. is 100% invested in special Treasury securities, so it is effected only indirectly by the equities market. It would certainly be better if the Trust were invested instead in the bonds and dividend paying equities of the most stable and fiscally sound countries in the world rather than limiting investment to the U.S. This would insulate the Trust to some extent from irresponsible fiscal policy in the U.S. Remember that the great benefit from a defined benefit plan such as social security, comes from those who die young subsidizing those who out live their actuarial lifetime. In practical terms, this means that one has to contribute less per month during ones working years, compared to a defined contribution plan, to obtain an equivalent benefit that one can not outlive. In return for this substantial benefit, you give up any residual that might otherwise be left for your heirs. There is huge opposition to Social Security on Wall Street and this is the source of most of the ridiculous rumors, all of which are untrue. For example that Social Security is a Ponzi scheme, or that current workers pay the pensions of those already retired, or that there is no Trust Fund, etc. Besides Wall Street, the other enemy of Social Security is the Republican Congress. And this latest move that reduces the S.S. payroll tax, when it should have been increased, that both democrats and republicans voted for, is irresponsible in the extreme. Also via deficit spending, and underestimating the inflation that results, congress steals indirectly from Social Security. (Congress is forbidden by law from stealing directly from the Trust.) Congress has the power to weaken, or even kill, social security by refusing to acknowledge and act on the actuaries' recommendations. Currently there is a three trillion surplus in the trust, but as of now benefit payments are starting to exceed contributions. The separate S.S. disability trust is not in as good shape, but it to can be easily fixed. As far as i'm concerned, it is a settled issue. Defined benefit plans where those who die young subsidize those who live an unusually long time are vastly superior for everyone but the very wealthy, and even for the wealthy they are still a good deal. In the ideal world one has both a defined benefit plan AND a defined contribution plan.
Corrections: In the post above "there can be long periods over which equities under perform relative to inflation..." should be "...there can be long periods in which portfolios under perform relative t to projections." In the second paragraph, "effected"should be "affected".