People will have to pay a little more, a little longer, and take out a little less in some combination. I am sure the actuaries are smart enough to figure it out.
That's exactly what happened with the dinosaur companies (GM, Bethlehem, etc) with unfunded pension obligations. The "legacy costs" made it so they couldn't compete. True, it's harder to switch countries than avoid employment at a dinosaur, but that's a difference of degree, not kind; the dynamics are all the same.
Don't start from a model that assumes no one will ever leave. That's how earlier generations of actuaries "didn't figure it out".
Edit: It's not even necessary that workers flee the country; it could also be that more of the economy is driven underground, which has its own nasty side effects.
But to address your concern head on - yes, the fund can go broke, and it's not the rest of the public's problem. That's the kind of loss that creates healthy risk aversion and should make for sensible negotiation by labor leaders and the politicians they put into office in order to limit corruption.
I'm not confounding anything; it's the same the problem in both cases: your organization accrued a liability with no asset to pay it, so you had to take the payments from newcomers to this system. Whether that happens within a private or a public pension fund doesn't change the dynamics of the core problem, which is that your organization is at a cost disadvantage to competing organizations, which then spirals out.
The example I gave was the dinosaur companies. Bethlehem offers $15/hour but must take out $1/hour to pay for unfunded pension obligations. NewSteelCorp offers $15/hour but needn't take out anything for legacy pension obligations. Where do the best workers go? And what does that to do the burden on remaining workers?
Likewise, every time you raise SS taxes to cover increased obligations, you're risking the flight of contributors to other countries and the underground economy.
I don't know what you think I'm "confounding" there; I see a recognition of a common pattern that I tried to explicate, with implications for the current problem. "Oh, this is public, not private" is non-responsive.
>Of what I know of actuarial work (not much, admittedly,) outlooks are calculated on the combination of many risk dimensions.
And my point was that the actuaries missed a big dimension, which is that the organization has actual competition. So when you say "oh, we'll just take one more dollar an hour from workers to shore it up, what's the problem?" you're failing to model the loss of contributing workers to companies that don't have to thusly gore them.
You're right that pension funds can retroactively change pension formulas, but they typically don't, and Social Security definitely hasn't cut pensions to something sustainable.
>But to address your concern head on - yes, the fund can go broke, and it's not the rest of the public's problem. That's the kind of loss that creates healthy risk aversion and should make for sensible negotiation by labor leaders and the politicians they put into office in order to limit corruption.
So you agree a pension fund can go broke, but are simply claiming that governments are immune to an analogous problem? I'd say it becomes the public's problem at that point, when there are millions of seniors that expected payments they can't get without raiding other critical government services. Why don't you?
Then you agree that you need to address the parallel's I've drawn if you want to maintain that position?
> (e.g., there is no "competing" state trooper battalion operating at a better labor cost advantage).
Are you reading my comments? In both replies, I already explained how there are relevant ways in public pension funds experience this problem: workers can be scared into other countries, other jurisdictions, other jobs, and the underground economy, with the exact same effect on ability to meet obligations. If you believe this can't happen, you need to flesh it out a bit more.
"It's not like there's another company they can work for lol" is how GM etc got into this mess.
> Pension funds do not necessarily impose an obligation on the operating budget of a municipality. That's what it means to say it can go broke
I don't know any non-trivial sense in which "a massive class of people expected pension payments that will be cut off" doesn't count as the public's problem.
To everyone in the world looking at the this, the problem is that a) lots of people are expecting to receive pension money and b) lots government services need to be provided, and we can't afford to do both.
You're saying it's "not a problem" simply because "you can just reneg on a) while paying b)"? That's a non-standard conception of "not a problem".
This seems more preferable to me than nickle and diming the elderly.
Proposed solutions of austerity and cutting and degrading services even further for the lower classes are exacerbating this tendency. I'm not sure what the endgame here is supposed to be.
In my opinion, most people are incapable of planning for their future. I've probably done a great job in comparison to others, but I often wonder if it's going to be enough.
Just because you organize a fair amount of the economy around ideas of free market efficiencies (which already has a big asterisk), doesn't mean you should organize all of society around that idea.
Further, there is no income cap on social security, you simply get deferred payments, but at 70 earnings stop counting. AKA if you take it at 62 and make enough money to get 1/2 as much from SS at 70 it's recalculated and you get more money than if you had started at 62.
Anyway try some numbers: https://www.ssa.gov/OACT/quickcalc/index.html Date of birth: 6/15/1950 Current earnings: $40,000.00 Retirement month: 6/2020 = $1,564.00/month.
Double earnings to 80k and keep other number the same and you get: $2,510.00 which is much less than 3,128 or 2x $1,564.00/month. Drop that to 20k and it's still $1,090.00.per month which 73.7% better ROI than someone making 80k per year.
Now yes lifespan is critical, but not enough to make up the 73+% gap. Marriage on the other hand can provide more than a 50% benefit on it's own which shifts things even more dramatically.
For example, NOBODY KNOWS how much health care will cost in 20 years, but that's central to figuring out defined benefit obligations (as just one example).
Or, what's a good investment rate of return assumption to use? Small differences (e.g. fractions of a percent) compounded over decades lead to huge differences.
How do you model black swan events (e.g. 2008 crash)?
It's not that simple when you have politics involved. We will keep borrowing more and kicking the can down road so that the next for the next generation to deal with until we can't borrow anymore. No different than how terribly indebted households keep borrowing and moving debt from credit card to credit card until there run out of options.
What politician is going to ruin his chance of re-election or election by supporting "people having to pay more, a little longer" or "people getting less".