Think: retirement plan with guaranteed investment results.
That is, those government workers lucky enough to receive a defined-benefit plan are guaranteed some minimum rate of annual investment return from the government-hired union Wall Street investors managing their money.
Now, when you think of the sharpest, meanest, hungriest Wall Street investors, who were raised by a single mother in a poor neighborhood in Brooklyn, where they would eat nails to make enough money for a nice dinner...you generally don't think of union government workers.
So it comes as little surprise that government-managed investments have historically done very poorly relative to the results of the highly paid professionals performing the same duties. As a result, taxpayers must then make up the difference from the poor performing government managers to equal the minimums required in a defined-benefit retirement plan.
In California, interesting conflicts arose out of the union pension liability, which the city owed to its local police force. A common game in the negotiations between unions and politicians revolved around retirement economics. Police could retire after 30 years of service and collect a pension for the rest of their lives. The deal didn't seem bad when the average cop lived to be 62. But then cops got organic, shunned the donut thing, and 82 was the new 62.
Compounding problems, police received as their pension 85% of whatever their total compensation came to on average, in the previous 3 years that they worked. So in those 3 years, cops put in massive amounts of overtime, often working the equivalent of double shifts for 3 years. As a result, salaries skyrocketed.
They then took 85% of that figure and promptly retired. Hey, wouldn't you?
Now, add to this liability pension obligations and a bunch of other costs like health insurance, and it created a crisis wherein cities explained that they simply could not afford the police force that they had. Instead of pointing to the bloated deals that were cut by lousy politicians with unions who negotiated beautifully, cities asked their constituents to be allowed to raise taxes. When the vote was emphatically "no," many cities were forced to fire their entire police and fire forces and "outsource" to hire a service which could negotiate much more favorable "in market" pricing.
Related or Semi-related Video
Finance: What is Pension Benefit Guarant...0 Views
Finance Allah shmoop What is the Pension Benefit Guaranty Corporation
Well the PBGC is a notionally independent agency of the
federal government Its goal is to protect the retirement incomes
of nearly forty million American workers in nearly twenty four
thousand private sector defined benefit engine plans And that mission
statement is right off their website The agency was set
up in nineteen seventy for is part of Arisa Employee
Retirement Income Security Act to protect defined benefit plans That
one were there Benefit is a huge deal because it's
non identical Twin sister is a defined contribution plan The
big diff well in a defined contribution pension plan employees
contribute some percentage of their income to their retirement pension
and the employer matches it and that's it The money
gets invested in the stock market and goes up and
down and up and down but over time mostly up
And then the employees retires Decades later owning whatever the
market or their investments that they risk say they young
period End of story But in a defined benefit plan
the employer essentially guarantees a minimum amount of invested return
That is the big boss Usually the federal government with
its union employees on taxpayer dollars then guarantees a raid
of say nine percent a year to the employee retiring
in the form of a minimum monthly draw from their
pension that the employees can take out If the market
goes through a really bad spell well then it's up
to the company to make up the difference to that
employees The people who framed a Risa knew of the
likely issue that the guaranteed investment return could end up
bankrupting states and or the country So PBGC was formed
and it helps a lot of people like one point
five million who ultimately rely on PBGC to bail out
their pensions And if you're one of those people while
you can expect to get something like sixty five thousand
dollars annually or about fifty three hundred bucks a month
assuming you retire at sixty five So if you retire
early well those cheques arriving in your mailbox won't be
quite so heavy Retire late in while the numbers go
up And maybe the best part is that the U
S taxpayer doesn't need to get all up in arms
Since the dough used to manage PBGC doesn't come from
John Q Taxpayer but rather from the private worlds employers
So in forty or fifty years PBGC may be your
best friend but until then well you're invisible Rabbit pal 00:02:30.543 --> [endTime] will be with you through thick and thin
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