This requires a bit of analysis - Basically pensions are/were sold as the magic elixir to allow people who have worked their entire lives to live a comfortable retirement. Since pensions require the work activities of the present work force to assist in the payment of the current base of retirees (just like Social Security) this is seen by many as superior to the equation presented by the 401K. Since the 401K is a "defined balance" plan where the person's individual savings balance at the time of retirement defines the money that he will have at his disposal it lacks the socialization effect that is present within pensions where the money is added to a pool and the benefits are defined.
Few of the backers of pensions dare to notate the consequences that are faced when the pool of money present is exhausted by the number of people who have straws seeking to drain it. Thus the argument that 401ks are not safe because the stock market fluctuates is counter balanced by the fact that pension balances can be exceeded by unmatched liabilities that make deny the retirees from ever gaining hold to these benefits.
The typical answer is to CREATE A BIGGER RISK POOL!! Allow the federal government to take over more of these elements of retirement savings, health care, education. In my view this does nothing more than provide temporary forbearance to the painful truth that is around us. Since nothing in life is free - the functional tossing invoices that we can't afford to pay up in the air and allowing the next rung of government to pick up the tab is not a sound strategy.
We should instead be pushing both productivity and risk down toward the periphery.
New York City Mayor Michael Bloomberg's right hand man is warning that the Big Apple could be headed down the same road as the Big Three automakers if it doesn't reign in its pension costs.
"The private companies that have them, such as GM, are facing bankruptcy and bailouts. The city will be in the same position if we don't get these costs under control," New York City Deputy Mayor Ed Sklyer told the New York Post.
The stern warning comes as New York City's pension costs have more than tripled to $6.2 billion from $1.9 billion in 2002. Bloomberg is looking to reduce $7 billion in pension costs over the next 20 years by pushing for a less lucrative pension tier that requires new employees to work at least 25 years before retiring at a minimum age of 50 -- currently city employees can retire after 20 years on the job. Skyler says the current pension compensation system has put the Big Apple in such a precarious situation that the Fire Department pays more in health and pension benefits than salaries.
New York City is not alone when it comes to likely not being able to afford generous pensions. San Diego and the state of New Jersey are facing the same crisis. Vallejo, Calif. already filed for bankruptcy in 2008 blaming its high pension costs.
The time is ticking for the Big Apple. Hopefully, it'll react faster than General Motors Corp. (NYSE: GM) did to put itself in the right track. If it doesn't, New York City may try to wait behind others on a long growing line for a bailout from the federal government.
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