Re-Indexing Public Pensions

For months, if not years, we've warned that conflicted politicians and union bosses pursue a perverse set of goals in their management of pension funds, most of which have nothing to do with the application of sound financial principles. Here's how we summarized the situation back in the summer (see "An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion"):

In particular the government has not made it clear that most people retiring on the new state pension will not receive the £155.65 weekly rate, the work and pensions committee said. Under the change, 13 per cent of those reaching state pension age in the first year of the new state pension will receive the flat rate of £155.65. Some 32 per cent will receive more and 55 per cent will receive less.

Before embarking on a controversial expansion of the Canada Pension Plan, the Canadian government should consider Australia’s successful experience closing gaps in retirement savings through mandatory workplace pensions, according to the authors of a paper published Tuesday by the Fraser Institute. “The Australian model seems to show that there are options to expand pension coverage and increase retirement savings apart from raising the CPP,” according to authors Sean Speer and Jason Clemens.

If a federal court approves Detroit's bankruptcy plan, its retired workers will see their pension benefits cut drastically. It shouldn't be this way.

Retirement security has been a central focus of the labour movement for more than a century. But just as times have changed, so have the challenges for today’s retirees.

By James Kwak In the wake of the Detroit bankruptcy, Paul Krugman has a post pooh-poohing concerns about public pensions. His conclusion: “Nationwide, governments are underfunding their pensions by around 3 percent of $850 billion, or around $25 billion a year. A $25 billion shortfall in a $16 trillion economy. We’re doomed!” (Yes, that’s sarcasm.)

First: Let me try to widen the scope of this discussion... When I think about vehicles to provide retirement-income security... I think that encouraging people to invest in 401(k)s leads them, because of poor financial education, to pay a 2%/year tax on their asset accumulations to Wall Street--a transfer that is 100% a dissipative minus for any utilitarian societal welfare calculation given how rich the princes of Wall Street already are.

Yale economist and Nobel laureate Robert Shiller is warning about the consequences of waiting too long to address rising income inequality.