The problem with defined benefit pensions is that they create opportunities for looting, by claiming unrealistically high future earnings for the fund. This works in both the public and private sectors. The private sector loots for the benefit of shareholders; the public sector for the benefit of tax cuts in the here and now. The public sector has an additional problem. High salaries are frowned upon, so public sector employees are undercomped in salary and overcomped in benefits. (This is particularly true in state and local governments.)
There is a solution to the looting problem: life insurance companies. The big insurance companies intend to be in business for a long time, and are unlikely to loot. (They will, however, take a profit.) They already issue pensions, known as annuities. They are regulated, in effect, by the rating agencies as well as their state regulators. There is no reason an employer cannot purchase a pension from the insurer with premiums due every year: a transparent cost of a pension system.
The other incentive for DB pensions is the tax advantage.
Any scheme, including annuities, can be a good deal or not. Their complexity makes them more difficult to understand, evaluate, and regulate. The public DB route is still the best, as you would probably agree.
I agree that public DB is the best, but might require an insurer to keep it honest. The annuitants are likely to be paid regardless, but the current system of public DB lurches from crisis to crisis--bad fiscal management. It's also bad politics, because Democrats have to clean up a lot of elephant poop: thus being held responsible for higher taxes and reduced services during the fiscal cleanup. I know. I live in New Jersey.
The problem with defined benefit pensions is that they create opportunities for looting, by claiming unrealistically high future earnings for the fund. This works in both the public and private sectors. The private sector loots for the benefit of shareholders; the public sector for the benefit of tax cuts in the here and now. The public sector has an additional problem. High salaries are frowned upon, so public sector employees are undercomped in salary and overcomped in benefits. (This is particularly true in state and local governments.)
There is a solution to the looting problem: life insurance companies. The big insurance companies intend to be in business for a long time, and are unlikely to loot. (They will, however, take a profit.) They already issue pensions, known as annuities. They are regulated, in effect, by the rating agencies as well as their state regulators. There is no reason an employer cannot purchase a pension from the insurer with premiums due every year: a transparent cost of a pension system.
The other incentive for DB pensions is the tax advantage.
Any scheme, including annuities, can be a good deal or not. Their complexity makes them more difficult to understand, evaluate, and regulate. The public DB route is still the best, as you would probably agree.
I agree that public DB is the best, but might require an insurer to keep it honest. The annuitants are likely to be paid regardless, but the current system of public DB lurches from crisis to crisis--bad fiscal management. It's also bad politics, because Democrats have to clean up a lot of elephant poop: thus being held responsible for higher taxes and reduced services during the fiscal cleanup. I know. I live in New Jersey.
I'm beginning to understand your insightful writing my friend. It has renewed my faith in a corporate initiative 401k.