If you pay into a pension for so many years, but end up living a long time then you will have likely gone through the principal as well as any interest earned. How do retirement systems fund this if you’ve drawn more than you’ve saved over the years?
In: Other
I would add that the actuarial tables tend to be quite accurate due to being based on LOTS of data collected over long periods.
It’s a bit like the Las Vegas casinos: The casino is NOT gambling when they appear to be playing with you. You might be “gambling” that you can beat the odds but the math is on their side. Same with both insurance companies and pension administrators based on the actuarial tables.
Where defined pensions “went wrong” gets a bit complex. One part is that the increase in costs for medical services was not well estimated so that left a pretty large hole in many pension plans. They basically didn’t predict that new medical tech would actually increase costs significantly vs reducing costs–more types of procedures and much more expensive to make medications (like biologics).
Another “failure” was actually a feature not a bug in the USA. Reagan changed the law so that the company could put the pension plan on the company books as an asset like they owned it..rather than a liability that they owed to their employees. That created a lot of gaming of the system (such as the corporation borrowing against pension value) which often ended with far underfunded pension plans. This also allowed corporations to invest their pension plans in that corporate stock vs being more properly and broadly invested–meaning if the corporation failed or was badly managed, the pension saw the same.
About the same time in the USA they also made it a **lot** easier for a company to abandon their pension plan and dump it on the federal government (the public) to clean up the mess and pay for. With a little creative accounting, even a profitable company could dump the plan they owed retired employees so the public had to foot the bill. Because the public could not afford the whole thing (plans were usually looted by the company at that point), the retirees got screwed and only got pennies on the promised dollar…if that.
Latest Answers