Quote:
Originally Posted by zhelder
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Here's my point: Chris Christie is able to talk all this smack about shutting down defined benefit programs because he most likely doesn't need a pension, so it won't really affect him. (But again, would he be willing to give up his pension?) This is just another case of another super wealthy politician wanting to take away from those hard-working public employees who need and deserve pensions.
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It's not a matter of "taking away" pensions, it's a matter of not promising something that you can't deliver.
Defined benefit plans
promise to pay a certain amount. That is, they are supposed to be risk free. The problem is that they depend on stock market returns that include a risk premium. If the pension plan worked along the lines of, "you put in (X) and you get out whatever we can pay you when you retire", that would be just fine. As would "you put in (X) and you get out whatever the returns on (X) are" (that would be a defined contribution plan). Or, if they said that they would invest in risk free investments, and fund the plan according to tthe risk free rate of return, that would also be OK.
But as it is, they are not accounting upfront for the costs of the plan. You can't
promise the long run stock market return without paying for that promise. Such a promise is traded on the stock market -- it's called a "put option". If you make such a promise without buying the option, you are not being honest about the costs of your program (you're making an unfunded promise).
Here's a question for you -- what do you think that the state should do if the pensions run out of money because of a future stock market crash ?
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