1 How Pension Funds Work

Knowing how pension funds work is the only way to truly understand the problems with the pension system in the U.S. and our small part of it. This knowledge is also crucial to proper labor negotiations and decisions about the future of our Fund. Fortunately, pension funds are easy to understand. You will find that a pension fund works in much the same way as a mortgage on a house or a long-term savings account. We encourage you to use your experience with these common investments from your everyday life to understand pension plans.

We will use a single “average person” in the examples that follow. Actuaries call this “the individual method”. We think this will be simpler and more intuitive for most people. To get the costs for five hundred or five million “average persons” in a pension plan, just multiply the individual cost by the number of “average persons”. We deliberately omit important details, such as the effects on pensions of employees dying early or changing careers midstream. While these “decrements” are important for pension plans (plans would not be affordable without them), they don’t have anything to do with the basics of how plans function or the crisis we face today. Including them would increase complexity without adding anything to understanding.

 1.1 Pension Basics
 1.2 Why Pensions are Underfunded
  1.2.1 The Role of the Interest Rate
  1.2.2 What’s the Right Discount Rate?
  1.2.3 The Insanity of an Inflated Discount Rate
 1.3 The First Wave of Decision Making
  1.3.1 The Regulators Step In
 1.4 The Second Wave of Decision Making