Another Tale of Pensions

Once upon a time, a guy named Mike had money accumulated from various sources. He wanted to use some of that money to buy a car. The car was priced at $20,000.
As Mike was preparing to visit the car dealer, a young gentleman named Brian passed by. Brian had also accumulated some money of his own, though not as much as Mike had, mostly because Brian was much younger than Mike. Mike discreetly approached Brian, pointed to the $20,000 car in the showroom, and said “I have a plan that can get a car like that for the lowest cost possible. Do you want to learn how it works?”. Brian, always looking for ways to stretch his money, said he did. Mike said, “Give me $5,000 of your dollars”. Brian, being a trusting and innocent young fellow, complied.
Mike entered the dealership with his money and Brian’s, bought the car for $20,000, and drove off, leaving Brian behind.
Brian patiently waited for the plan to make the purchase less expensive to continue to unfold, but heard nothing further from Mike. Being a resourceful young man, Brian found a way to contact Mike and messaged him to inquire when the next step in the plan to lower the cost of a car would occur. Mike answered “What do you mean by ‘next step’? I just bought a $20,000 car by spending only $15,000 of the money I had saved for myself”.
Brian, now growing concerned, replied “But I’m now $5,000 further away from a car of my own — and I’ll still have to pay the full $20,000 to get it”.
Mike was honestly confused. “I got a $20,000 car for my $15,000. I got it at the lowest cost possible, like I said I would”. Then, realizing what the problem was and its obvious remedy, Mike continued, “Don’t worry, Brian. You’re young enough; you’ll eventually find someone even younger who will be willing to make the same deal with you that you made with me”.
Understand this story, and you will understand the meaning of “lowest cost possible” used by advocates of reamortizing the pension system.

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BobN
BobN
11 years ago

Thanks, Andrew for putting it in terms that even Tom might understand.

Max Diesel
Max Diesel
11 years ago

Nice job!

Dan
Dan
11 years ago

I lol’d. Maybe Sgouros can write a children’s book about rabbits that explains the stimulus.

Rasputin
Rasputin
11 years ago

Tom Sgorous is a complete hypocrite. He lambasted the legislature and Governor Carcieri for borrowing money for transportation bonds, which does cost more money over the long haul. Yet he supports re-amortizing the pension system.
The man is a complete shill for the unions, plan and simple. I will tell him to his face next time I have a chance.

Phil
Phil
11 years ago

“This is a point that many people resist understanding: the goal is not full funding of the system; our goal should be simply making sure the checks don’t bounce, at the lowest cost to the taxpayers, employees, students in the schools and drivers on our streets. Full funding is a means to that end – under certain conditions. It is not an end in itself, and widespread confusion on the point has demonstrably made the situation worse.”
many people resist understanding
Andrew
Next time you offer a post like this maybe you could include some pictures.
Maybe get Monique to draw them with crayons.

BobN
BobN
11 years ago

While I understand that Phil might need Dr. Seussian drawings to understand Andrew’s point, I don’t know whether AR’s software can handle such graphics.

Phil
Phil
11 years ago

“I meant what I said and I said what I meant.” Dr Suess
Have some green eggs and ham for breakfast Bob and have a wonderful day.

BobN
BobN
11 years ago

The problem, Phil, is that at your best your comments are meaningless; most of them detract from the on-topic discussions carried on here.
The economic reality is the same whether one undertakes the merely cosmetic step or “re-amortizing” the liability or not. The arbitrary choice of a rate of return or of an actuarial life expectancy does not change the reality. And that unfunded liability, if fairly calculated is worse than what has been reported due to an incorrectly high assumed rate of return. The capitalization of that liability is merely the present value of the future payment shortfall. There is no such thing as “making sure the checks don’t bounce, at the lowest cost to the taxpayers…” without changing the economic reality of the system.
And the fundamental economic reality of the government employee pension system is that it was actuarially unsound from the beginning. In term of “promises”, the politicians and union leaders made the equivalent of campaign promises or used-car salesmens’ assurances that nobody should have believed in the first place. Now we are beginning to see the consequences.

Phil
Phil
11 years ago

Could a contributing factor affecting the present state of pensions be attributed to the fact that the average life expectancy has steadily risen and we are beginning to feel the impact of the baby boomers entering retirement.

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