On Sat, 13 Dec 2008 00:38:27 +0000, Mark Rand
wrote:

On Fri, 12 Dec 2008 08:50:49 -0800 (PST), Millwright Ron
wrote:
SNIP
The third category is the cost of benefits for retirees. These are
essentially fixed costs that have no relation to how many vehicles the
companies make. But they are a real cost, so the companies add them
into the mix — dividing those costs by the total hours of the current
work force, to get a figure of $15 or so — and end up at roughly $70
an hour.
SNIP
Millwright Ron
www.unionmillwright.com
Can someone please explain to me how in hell it is possible for businesses to
be allowed to pay pension benefits from current receipts? This liability
should be funded entirely from investments separate from the business. The
contributions from the business and the employee should be invested at the
time the liability is created. The only organizations that can justify paying
pensions out of current receipts are governments and that's only because they
_can't_ go bankrupt.
Mark Rand
RTFM
-------------------------
Two items:

First, only one government [Federal] can't go bankrupt, if only
because the can always print more money. Other levels can and
have, although I don't know if an entire state has. [we may find
out shortly]
http://govinfo.library.unt.edu/nbrc/.../22chapte.html
http://www.la-par.org/Publications/P...Bankruptcy.pdf
http://www.ppic.org/content/pubs/op/OP_398OP.pdf
http://www.sacbee.com/static/weblogs...st/017728.html
http://www.sacbee.com/static/weblogs...st/017743.html
http://www.sacbee.com/opinion/story/1467682.html
http://www.ocregister.com/articles/g...private-change


Second, the critical qualifier is "should be invested at the
time the liability is created," the problem being just what is an
"investment."

As you point out, the rational process would be to simply
purchase an annuity policy from a reputable established company,
but the corporations were convinced they could get better ROI on
their own, and in the short run they may have been correct.

While it is now hard to believe, in the late 90s, many of the
defined benefit pension plans were stuffed with company stock,
and because of the stock bubble, were "over funded," and
assumptions of 12% ROI were common in the calculations for the
required contributions, even when much less was actually
generated. [ i.e. we will make it up next year.] This paper
"over funding" [in the multi billions for GM alone] was
"recaptured" for the corporation.

In effect, an annuity has been created, but the companies saw
this as a pool of cheap largely unregulated and unprotected
capital they could, and did, dip deeply into, without the benefit
of state regulation and actuarial knowledge of established
insurance companies. Note that this knowledge, about what is and
is not possible, had been accumulated over 200 years at enormous
personal and financial losses.

Unfortunately the managerial hubris that they could run an
insurance company better than the insurance companies was not
unique, as they also felt they could run banks better than the
bankers, with the result we now have not only the pension fund
disaster to be charged to taxpayers through the PGBC [with
considerable loss to the pensioneers also as there is a
relatively low cap], but also the impending GMAC/ResCap/Diatech
Funding catastrophe for the taxpayers to cover.

Detroit management may have been correct in one sense in that
they could indeed run their insurance companies and banks as well
as they built cars.... ;-(


Unka' George [George McDuffee]
-------------------------------------------
He that will not apply new remedies,
must expect new evils:
for Time is the greatest innovator: and
if Time, of course, alter things to the worse,
and wisdom and counsel shall not alter them to the better,
what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman.
Essays, "Of Innovations" (1597-1625).