Pension plans

When Trump became president the old subject of private vs public came up since he was an outsider who never held public office. One long standing way to compare private and public is pension funds. About 50 years ago private companies recognized that they had to get rid of the pension plans and replaced them with 401K plans. Projections into the future clearly showed increasing cost that most companies could not absorb. Governments, however, with the taxpayers to back them up did not have such concerns so they remained with pension plans. The Employee Retirement Income Security Act of 1974 said that pensions must be evaluated every year to make sure they were properly funded, in other words, to assure that the money for retirees would be there when needed. When deciding how much money must be set aside today to cover future needs several factors come into play and one of the most important is estimating the return on investments. Pensions came under pressure because people were living longer and many states started diverting pension funds to cover other programs. They made up the difference by assuming high returns that in many cases were unrealistic. At one time the California pension plan was forecasting 7.5% return when the average was 5%. Every time the pension plan was raided to cover some other agency the predicted interest rate was raised to cover the loss. Today government pension plans including state employees and teachers are severely underfunded. The only way out for many states is to increase taxes but the ultimate long-term solution is to revert to 401K plans.