Is a promise that won’t be kept really a promise at all? I was thinking about the issue of defined contribution plans (401(k)) vs defined benefit plans for city workers that will be on the ballot in June 2012. The Voice of San Diego summarized the issue neatly:
It [the ballot measure] was an agreement to unite and to set in motion what could be the climax of a nine-year drama about the city of San Diego’s mounting pension liabilities. The city never set aside money to meet those obligations. And the bills due today are suffocating other city services while the distrust the decisions created destroyed the city’s ability to ask taxpayers to rescue it.
Essentially, the city is going to be unable to deliver essential services if the trend continues with regards to its pension liabilities. The ultimate end of that path is bankruptcy whereby the promises of defined plans are abrogated. How is that better for workers than benefits that get paid into a fund when earned? For those who would argue that the ballot measure does nothing to change the current problems, because it only applies to future employees please read the whole VOSD article. The plan is not as great as a conservative might like, but gives us the tools to reduce future pension costs.
Another reason that 401(k)’s are better is that the pension fund belongs to the employee, not some retirement board that can be swayed by politics or mendacity. Consider this article regarding the San Diego county pension board from the U-T Watchdog.
The pension board’s outside portfolio strategist, Salient Partners of Houston, is suggesting board approval on Thursday of the investment with Weinstein’s new company, Saba Capital Partners.
If you are an employee, counting on the returns from this investment to fund your retirement, and you think the fools who were part of the whole mortgage backed securities game should be in jail not in business, what can you do? Not much, it turns out.
However, a properly managed 401(k) using dollar cost averaging and periodic sector re-balancing, can actually beat market returns. See this article for a short primer.
Or take CALPERS, please. In June 2007:
The California Public Employees’ Retirement System, the nation’s largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.
CDOs are collateralized debt obligations, mortgage backed securities. Further, CALPERS has a history of supporting union interests ahead of total returns for employees. If you are an employee, do you really want an investment board that puts the political interests of unions ahead of your returns?
In summary, I don’t understand why unions would be arguing against defined contribution plans, unless it deprives them of power over the work force. America is moving towards this system because it reduces the uncertainties associated with future bankruptcies and offloads the investment risk to the individual, where it belongs. As individuals become better investors, defined contribution plans will actually improve the economy by adding to the investment capital available.
Cross posted to The Liberator Today.