I have never understood formulas that determine pay people receive when they retire — defined benefit plans. Such plans are often un- or under-funded, expecting to make payments out of current revenues. I guess such plans are okay so long as you expect the revenue sources to continue to grow at adequate rates. .... and so long as you trust the people managing the plan. But I don't much trust politicians and CEOs of struggling firms not to dip into the funds of these plans, as has happened recently in New Jersey:
In 2005, New Jersey put either $551 million, $56 million or nothing into its pension fund for teachers. All three figures appeared in various state documents — though the state now says that the actual amount was zero.Another good reason to prefer defined-contribution plans. Or as Craig Newmark said on Monday,
The phantom contribution is just one indication that New Jersey has been diverting billions of dollars from its pension fund for state and local workers into other government purposes over the last 15 years, using a variety of unorthodox transactions authorized by the Legislature and by governors from both political parties.
The state has long acknowledged that it has been putting less money into the pension fund than it should. But an analysis of its records by The New York Times shows that in many cases, New Jersey has overstated even what it has claimed to be contributing, sometimes by hundreds of millions of dollars.
Now do you want to tell me how privatizing Social Security is too risky?