Thursday, May 12, 2005

"Kid, we all got it comin' "

Money moves about. You sell me something I want, I build something you need. I get money, you get value. Forth and back, over and again. Propelled by wants, by self interest, and, until Buddhism overcomes all desire, by desires. Turning money loose into that fight, ("I got a dog in that fight"), is the way to move it around a bit . It may show up again at the front door, larger and well fed, or scrawny and tired at the back screen.

The United Airline pension default just limped into the PBGC garage.

When last seen it promised way more that the 25 to 50% payout its retired bettors might now expect. Ankle Biting Pundits notes how suspiciously this money/pension shake-up resembles the Social Security shakedown.

If you want a sneak peak into what the future holds for Social Security if major reform (which includes personal accounts) is not made, look no further than Federal Bankruptcy Court. Specifically, you need to pay attention to a Judge's recent decision to allow United Airlines (UAL) to dump its vastly under funded pension liabilities to its union employees onto the Pension Benefit Guaranty Corp. (PBGC), which is funded by the federal government (that's you and me folks).

Smoothing Plane, this is incorrect. From the PBGC site: "Our financing comes from insurance premiums paid by companies whose plans we protect, from our investments, and from the assets of pension plans that we take over, but not from taxes." (Rereading this, intriguing...will UAL be paying premiums to PBGC? Anyone?) PBGC's takeover of UAL's pension plan avoids bankruptcy for UAL. Reducing pension liability to prevent bankruptcy means reducing defined pension plan benefits. When the company assumes the risks, the retirees are along for the ride, like any other creditor.

Ankle Biting:
As a result the transfer of these vastly under funded pensions of United's employees and retirees their monthly benefits will slashed by at least 25%. The decision will also give United some hope in getting out of bankruptcy and keeping the company afloat.

This pension fund, and social security (hyperbole alert!!) are both defined benefits plans, very ably defined courtesy of Turbotax articles.

A defined benefit plan spells out how much money you will get at retirement, and figures out how much you need to contribute to reach that goal.
A defined benefit plan is set up to pay a fixed annual amount to eligible employees during their retirement years. Your quarterly or annual contribution is based upon an actuarial determination of what your retirement benefits should be, not on profits.

A defined benefit plan is set up to pay a fixed annual amount to eligible employees during their retirement years. Your quarterly or annual contribution is based upon an actuarial determination of what your retirement benefits should be, not on profits.
To figure out how much you should contribute, the plan administrators look at how much money must be contributed now in order for there to be enough money to pay you a fixed amount of benefits in the future. (These projections assume a reasonable expected rate of return on the money you contribute to the plan).

Another definition of defined benefits plan from : A company retirement plan, such as a pension plan, in which a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk. Contributions may be made by the employee, the employer, or both.

Standing across the ring from defined benefits plans are the defined contribution plans. Turbotax: A defined contribution plan defines how much you, and perhaps your employer, will contribute as you go along, without specifying exactly how much you will receive in benefits at retirement. A defined contribution plan requires that an individual account be set up for each participant in the plan, even if the only participant in the plan is you. You can only contribute a fixed maximum amount to the plan each year. The contributions aren't based on your expected retirement benefit, but rather on a percentage of your income, a percentage that's specified in the plan. And Investorword: Defined contribution, a company retirement plan, such as a 401(k) or 403(b), in which the employee elects to defer some amount of his/her salary into the plan and bears the investment risk.

To my very novice ear, defined benefits sounds like "I will gladly pay you one dollar Tuesday for three dollars today". It has become a promise made on conditions which no longer hold. And that "employer bears the investment risk" part. That's the rub of fewer and fewer coins passing into more and more hands. The promised amounts excluded the flexibility of enough different desires, needs and wants to maintain vibrancy. So instead of the exponential penny, doubled daily for thirty days, the plan realizes only the retirement dreams of the dollar a year man. At the end of a long working life, some people getting but a tithe is a heartbreaker. The bet did not pay off. The PBGC takes over the payments, and benefits diminish. Would you invest in PBGC if it was a publicly traded company? Would you invest in the F.I.C.A. Corporation? Will the latter take over the former or vice versa should either default? Businesses come and go, things evolve, change, grow , prosper, decline, decay and die. If I had the choice to opt out entirely from social security (irony alert!), I’d leap at the chance, even if I couldn’t get back what’s been taken out. What I like is that "the employee bears the investment risk" part. It’s gamble, to be sure. But I'd be placing the bets.

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