In reading the City Council's report on Atlanta's pension system a good point is raised: when these systems were created in 1920s they looked much more affordable in actuarial terms.
The relevant passage:
"The City of Atlanta has three defined benefit pension plans (Fire, Police, and General
Employees), two of which were established in the 1920's, when the average male life expectancy
was 48 years, but retirement eligibility didn't begin until age 65. Currently, by contrast, some
employees will experience longer retirements than careers--placing an increasing strain on
pension plan funding that falls mainly upon the General Fund and thus diminishes Atlanta's
ability to adequately fund municipal services and programs."
That is just one reason why defined benefit can present a large liability on a company's or a government's balance sheet.
The other major problem in defined benefit plans is the systematic misvaluation of the liability - which is measured by referencing the expected returns on assets. High discount rates not only make the liability look smaller but it also implies investment risk will improve the stability of the system. It looks good when the market is booming but when the bottom falls out these systems start to teeter.
Unions are unhappy with the proposed reforms yet they present an improvement. In Atlanta's proposed defined contribution plan the employer offers an 8 percent match up front that belongs to the worker. In the current system contributions (both employee and employer) are deposited into a system that will be under increasing strain to pay out both promised benefits while at the same time maintaining the city's current budget.
"The City of Atlanta has three defined benefit pension plans (Fire, Police, and General
Employees), two of which were established in the 1920's, when the average male life expectancy
was 48 years, but retirement eligibility didn't begin until age 65. Currently, by contrast, some
employees will experience longer retirements than careers--placing an increasing strain on
pension plan funding that falls mainly upon the General Fund and thus diminishes Atlanta's
ability to adequately fund municipal services and programs."
That is just one reason why defined benefit can present a large liability on a company's or a government's balance sheet.
The other major problem in defined benefit plans is the systematic misvaluation of the liability - which is measured by referencing the expected returns on assets. High discount rates not only make the liability look smaller but it also implies investment risk will improve the stability of the system. It looks good when the market is booming but when the bottom falls out these systems start to teeter.
Unions are unhappy with the proposed reforms yet they present an improvement. In Atlanta's proposed defined contribution plan the employer offers an 8 percent match up front that belongs to the worker. In the current system contributions (both employee and employer) are deposited into a system that will be under increasing strain to pay out both promised benefits while at the same time maintaining the city's current budget.
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