Let me rephrase that. We are not talking about maximizing your wealth or upside potential. What we want to do is to match our liabilities to our assets. Our liability is a guaranteed payment – It is very low risk - We don’t have the option of not paying it – so we must minimize downside risk. The only asset that offsets that liability are TIPS – a very low risk asset and hence a very low reward security.
I have, and I would be careful about doing that.
Deterministic models tend to simplistic and leads to optimistic results. Stocks have an average return of 10%. Assuming a normal bell curve, this translates into a 7% geometric return. But it’s not, so returns will be a bit lower than that.
What you want to use is a monte carlo model , you want to factor in how you want to put together a diversified portfolio, how you are going to rebalance, taxes, etc.
No, GMAC also went bankrupt. IIRC, before GM. After GMAC was spun off they renamed themselves as Ally Financial. It was heavily invested the housing market.
No, I was informed beforehand. I know a thing or two about annuity accounting. And I just have to shake my head at all of the plans that rest of shoddy assumptions and accounting. It does not have to be that way – we have a choice.
There are low fee annuities out there. And by annuities I mean immediate annuities, not the variable ones. I would start with those with mutual ownership.
As for high contribution – well - being bullet proof comes with a price. The assumptions and investments are extremely conservative. In this low interest rate environment it is even worse.
But if you offer a guaranteed pension payoff then the annuity model is what you have to follow, very high contributions. The Bank of England puts it at 50% of your wages. If you want a lower contribution to your retirement plan that is going to involve risk and that risk has to land someplace.
Of course not, but then again the bond holders also had a contract with GM.
In bankruptcy law there is an order of payment.
Payroll (as you mentioned in the AIG case) and taxes are first,
Secured lien holders are second.
Unsecured lien holders – which includes pension obligations - are third.
Stock holders are last.
Obama jumped the pension obligation ahead of the secured lien holders. There was no legal reason for this and it was wrong.
If you think the order of payment is wrong then get the law changed. Don’t retroactively change the rules because you have political debts to pay off.
Of course not – but I am not sure what that has to do with anything. If you don’t like the law, change the law. Can you explain why GM pensions are more important than other pensions that held GM debt? Or do you think the President should ignore the law anytime he feels it is inconvenient? Or maybe only sometimes? If so, when can he break the law?
America is a nation of laws, not a kleptocracy where elected officials buy votes by throwing cash at their privileged base. I am exaggerating to point out the principle involved but it is a principle that I think should be robustly protected.
Yeah – that is one of the reasons why I hated that Obama jumped the Unions pension’s benefits ahead of the other unsecured bond holders. The union knew that there were issues with the plan’s structure, funding and asset composition. They had the power to insist that it be placed on firmer ground, did not, than cried foul when it blew up.
Probably not in the automotive industry. It’s too big and too complex for a start-up to easily step in.
Either a existing company would step in (as Fiat did with Chrysler) or the bond holdings would be converted to equity and the company would keep on ticking under new management.
Then don’t invest in stuff with uncertain returns.
Treasury Inflation Protected Securities (TIPS) are absolutely bullet proof. Of course, they offer around a 1% rate of return after inflation. A good stock / bond portfolio will offer around 5%. So you have to save 2 to 3 times as much if you only use TIPS so there is a trade-off.
Actually, GM has had problems since the 70s. It has been a long slow decline. Sadly, no one had the courage to make the radical changes that were needed.
Well, to be fair, the world has changed but the Unions have not.
Or at least not the tradtional American unions. I can point to other examples where unions have changed and done well.
No, it should be fine if the stock market is up or down.
I will point the insurance companies who offer annuities – which basically is the same thing as a pension. While insurance companies blew up the policies did not. You have a choice – you can either make high contributions to a low risk plan or one can make low contributions to a high risk plan. The problem is the lax accounting rules around pensions. Insurance companies would never have gotten away with such lax assumptions. It saddens me that management and the union took the cheap path.
A pension plan like GM, with lots of retries or people close to retirement age (which means fixed, guaranteed, well defined payments), should have been stuffed with bonds earning 5%(which offers fixed, guaranteed, well defined payments). Instead GM (with the union’s blessing) chose lots of stocks on the assumption that they would earn 10%. And stuff lots of GM stock into the plan because that was cheap. And any shortfall would be made up by GM – which is basically a promissory note.
½ right. Bush stared the process but Obama finsihed it - and Obama did make some of the decsions.
My biggest grip is that Obama reward the union by putting their claims ahead of the other unsecured borrowers and bullied those who opposed them. If you want to argue that pension benefits should be ahead of unsecured debt that’s fine – please change the bankruptcy law – don’t retroactively change the rules to benefit your constituents.
Nixon tried to pass a negative income rate. I like the idea. The Earned Income Work Credit comes close.
As to your specifics, I would nix them. It is a one size fits all solution and ignores what is actually happening on the ground. There will be unforeseen consequences as firms try to dodge the rules. I personally would advocate union reform. Germany seems to be able to do the union thing much better then the US.