The Investor Class Hates Pensions
nytimes.com
nytimes.com
------ Pensions:
- "Your" money and everyone else's money is lumped into a single pool. If previous retirees were given too much money because of poor planning, "your" money will evaporate
- Your future benefits are fixed, regardless of market conditions. Unless the pension can't afford to do so because of a market crash, and declares bankruptcy. In which case, anyone left holding the bag will be screwed
- Zero financial literacy/discipline required. Your contributions are pre-determined, and the pension managers will take care of all investment decisions
------ 401ks:
- Your 401k is 100% yours. There is no risk of your 401k account "going bankrupt" because too much of it was given to others.
- Your future benefits are dependent on market conditions - unless you choose to buy an annuity.
- Financial literacy and discipline is required. If you don't contribute enough, or make bad investment choices, you're screwed
-----------------
The article completely ignores the 1st and 2nd differences, which is why many people like myself are uneasy with pensions. The 3rd point is what the article mostly focuses on, and that's a valid point. I'd love to see "full-service" 401k plans, where employees are forced to contribute at least X% of their income, and all of it is managed by the equivalent of a pension-fund-manager (ideally, invested into low-cost diversified index funds)
Too many people lack the financial discipline to make sufficient contributions, and the financial literacy to make good investment decisions. So full-service 401ks as described above, could be a net positive for society, without all the baggage that come with pension funds.
There are more benefits to this than you might think. In particular, its easier to spread death statistics across larger populations than against individuals.
We can reasonably expect 50% of men to die before they're 78.74 (life expectancy in the USA). A Pension Fund (since it is pooled across many individuals) can plan for this very well. True, life-expectancy changes from year to year, but this slow-moving change can be corrected over time.
An individual 401k however, has no real way of planning for the event. Realistically, individuals need to have a plan for death at age 60 and death at age 100. On the one hand, you may die before you have a chance to even crack your retirement fund, but on the other, you may die in extreme poverty, with all your money wasted away years before you die.
Planning for your age of death is damn near impossible on an individual basis. A 401k would be innately less efficient than a pension fund as we all have to plan far more conservatively. IE: A Pension Fund can plan for an age-of-death at ~80 years old (for males), while an individual male may need to plan for 85 or maybe 90 years old.
Life Insurance is weirder. Its more about leaving money left over for your family, especially if you die earlier than expected and your family will need a source of money to sustain themselves after losing you.
Social Security is only a little bit of money however. It taxes 12.4%, half of which is employer contribution, and the other half is an individual tax. Most people only see 6.2% individually. (Self-employed get taxed at the full 12.4%)
No one actually expects to live on Social Security alone in the USA. Supplemental savings (such as Pension Plans or 401k plans) are needed for a real retirement.
None should, but plenty do.
[1] - https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
"Superannuation" was the 401k-alike system started in 1992 which has the 9.5% minimum. You can choose your investment allocation, and there's a bunch of tax incentives if you choose to contribute extra.
[0]: https://www.humanservices.gov.au/individuals/services/centre... [1]: https://en.wikipedia.org/wiki/Superannuation_in_Australia
Systemic risk is present either way. You're just playing category theory sleight of hand and drawing distinctions between forced savings plans that aren't meaningful.
You never escape systemic risk. The reality is that guaranteed pensions have a track record of getting people to save for retirement. Those programs are gone now and people don't save. The clever reductionists in this thread blame the workers, but placing blame is an exercise that bears only schadenfreude. Personally, I'm interested in lessening systemic risk - and that doesn't mean buying more bonds with shit yield.
The pension, on the other hand, effectively collects mortality credits as beneficiaries die and distributes them to survivors.
The ideal retirement system would be effectively some sort of actuarially adjusted tontine. Nothing gets left behind when you die - instead, it gets split among surviving retirement savers in an actuarially fair manner.
You don't want to (IMO) design a retirement system where the well-to-do have every incentive to opt-out.
If all the retirement system change is make rich people opt out and have poor people who die early pay for the retirement of poor people who die late, it's a smashing success.
Another advantage of retirement policies that can take advantage of actuarial risk, is that they can also adjust their market risk to match the actuarial distribution. The common advice is to have most of your 401k in bonds and other safe assets by the time you retire to protect against market volatility. But if you live another 40 years, you will have missed out on a lot of potential investment return if you were all in on bonds. Pooled retirement solutions can balance those risks better.
Being able to leave assets to heirs comes at a price. Just look at the pricing of the different single premium immediate annuity options - anything that also preserves assets to heirs in certain conditions also costs significantly more for the same income stream. The goal of retirement programs in general should be to ensure that as many people as possible aren't destitute in old age as cheaply as possible, IMO.
Actuarially fair tontines would yield mortality credits based off age and amount invested. So if you had a 10% risk of dying in a year based off actuarial tables, and you had a balance of $10k, you'd have 1000 mortality credit units. 1% chance of dying means only 100 mortality credits. So there's no advantage to signing up younger folks - the lower risk of dying proportionally lowers the mortality credits earned.
My employer does something like this. They put money (3% of my salary) into a 401k for me regardless of my own contribution, so I have no option of not saving at least that much (although I still save additional money, because 3% is not really enough). This defaults into a low-cost index fund. However, I still have the option of transferring the 401k to another fund; but I suspect that most people would stick with the default instead of trying to change the investment.
I'd prefer to live in a country free from people who think they are smarter than the rest of us, and that that entitles them to force their ideas on us.
AFAIK, "defined benefits" are pretty much unavailable to new entrants. The vast majority of national and employer pension schemes are "defined contribution" only.
[In the UK...]
401(k)s by design can't extract funding as future liabilities. Are there proposals for ways to do this for pensions? I know there are pushes to "fully-fund" them, but the temptation to use overly optimistic projections seems like it will never really go away.
Anyway, consider that this is all quite new to us. A highly financialized pension setup is not something multiple generations have done and the pension demographics have never really been what they are now, or will be soon.
I'm not sure the macroeconomics of that many pensioners, living for 30-40 years on savings... it goes beyond just financial math, or even political-financial math.
The formula is simple, don’t allow skipping out on liabilities and have an independent entity administer the plan. In New York, the state comptroller controls the pension funds as well as 529 plans. This avoids the issues in many states and the private sector where executives raid the funds.
The other issue with the anti-pension crowd is that people need to live. So no matter what you do, the public ends up paying for things like subsidized housing, healthcare and other entitlements that impoverished elderly people end up needing without adequate income. I think will start to appreciate this phenomenon when the wave of 50-somethings purged by the Fortune 1000 start qualifing for Medicaid.
Is this satire? How is a pension better than a 401k in any of these dimensions? If my retirement is invested in overpriced, underperforming funds it's 100% my own fault. If my pension is chronically mismanaged (as they tend to be) there is literally nothing I can do about it.
Well, IRAs and Roth IRAs are the competitor in that realm. I don't trust most people to handle their own funds in an "automatic" 401k plan however. How many "normal" people do you know who has a Roth IRA for example?
Not a lot. A ton of people I know even pull money from their 401k early for luxurious reasons. (It makes sense to do so in an emergency. But not for like... a Euro-trip or Cruise Vacation like some people in my circle...)
Honestly, each time I hear about stupid personal finance stories like that, I wish that those people were on a pension instead. There's a lot of stupid out there.
If your company is small or your benefits person clueless, you may have worse funds available to you than in the taxable brokerage world.
My attitude in practice is that if I'm getting an employer match, then why complain about fees? It's their problem to minimize them - I'm still doing better than I would on my own. The efficiency is their problem, and because they have an incentive to minimize their costs, there shouldn't be a systemic problem.
[1] Average ETF tracking error is said to be as high as 50 basis points: http://www.nytimes.com/2013/04/07/business/mutfund/exchange-...
http://time.com/money/3959942/401k-bad-choices/
http://www.pionline.com/article/20170927/ONLINE/170929858/ge...
There are some decent arguments that need to be made about investment education and regulatory simplification but this article doesn't make them.
Its my understanding that there are a lot of 401(k) plans out there that charge a significant management fee on top of any fees charged by underlying funds. A lot of plans also don't offer much choice in terms of underlying funds.
On the other hand, I feel like we should remove the strange limits on IRAs and just merge them together with 401k plans so employers don't have to set up a '401k plan' each.
Here's an example of it happening on the 401K front.
https://www.morganstanley.com/articles/audrey-choi-ted-talk-...
“Today we have more choices and more opportunity to make our voices heard than ever before,” says Audrey Choi, head of Morgan Stanley’s Institute for Sustainable Investing. And collectively, we have the power to change the way companies and other institutions approach environmental, social and governance (ESG) issues. Finance, she says, “can be one of the most powerful forces for positive social change at our disposal – if we ask it to be. We have the power to make sustainable investing the new normal,” says Choi.
Choi calls out the fable that many of us carry in our heads that if you care about environmental or social issues when you invest, you probably aren’t going to make as much money. To bust those myths, she cites studies showing that investing in companies with strong sustainability strategies can result in the same if not better returns than investing in those that don’t.
As we enter 2018, BlackRock is eager to participate in discussions about long-term value creation and work to build a better framework for serving all your stakeholders. Today, our clients – who are your company’s owners – are asking you to demonstrate the leadership and clarity that will drive not only their own investment returns, but also the prosperity and security of their fellow citizens.
Unlike a pension, an annuity isn't tied to a specific employer, so it doesn't have career-immobilizing vesting requirements or weird payout rules tied to how much money you make in the last N years of your career. And you can select an annuity provider based on its fees and how solid its financials are, factors that aren't necessarily high on the list while selecting an employer.
So, why aren't annuities more popular as a retirement savings vehicle?
EDIT: it appears that Vanguard itself offers annuities, but they're not particularly transparent so I'm unsure if they're "good enough" for general-purpose retirement savings.
The U.S. government already sells 30-year Treasuries and savings bonds [1]. Spinning up a new government program is complicated. Just authorize the issuance of 50, 70 and 90-year Treasuries.
[1] https://www.treasurydirect.gov/indiv/products/prod_eebonds_g...
But maybe that's how it has to be, since it depends on the person? In any case, this will make them harder to sell.
This is rather similar to a tontine, which have been considered highly unsavoury for a long time and are illegal to boot.
Sure, they are similar in that a tontine is considered to be a type of annuity, but a typical annuity does not have the unsavory aspect that other members get more money if I die.
If I murder a fellow member of a tontine, I get more money. In a normal annuity, I would get no benefit.
I have some friends who are politically-involved in California and quite concerned about public sector unions and the fiscal sustainability of the pension promises that were made. This couldn't be about that, could it? On HN?
"...his relentless, well-funded attack has taken every form of political advocacy available. It ranges from campaign contributions to ballot initiatives to model legislation to lobbying to lawsuits to financing academic and judicial conferences...The justification is that these pensions are in crisis. The familiar claim is that states and municipalities face unsustainable pension obligations that will crowd out other government spending and lead to higher taxes. Therefore, traditional pensions, which guarantee retirement payments to workers — leaving states and cities on the hook — must be replaced by 401(k)s, which offer no such guarantee...Though the mainstream media has mostly taken the crisis claim at face value, economists and actuaries debate its extent and even its existence..."
Well fuck me. There it is. This isn't an analysis of pension funding. It's not a survey of financial managers. It's political cover-your-ass. Some folks think pension funds are in trouble. We're going to attack and say their claims are politically-motivated.
Everything is politics now, including, it seems, figuring out whether you have enough to retire on or not. I know plenty of people who are serious investors who are concerned about public pensions, but it's got jack squat to do with politics. All of the folks I know are huge union supporters. It has to do with the numbers not adding up.
We gotta stop this thing we do where we form up into teams and throw crap at one another. It's certainly possible that these two things are unrelated. It's also certainly possible, highly-likely even, that this essay is a desire to politicize something for the purpose of obfuscating the real issues involved. That's a shame, especially for both the citizens and workers who are not expecting a crisis.
I mean... I'd ask for a citation right here. Maybe it's due to my "bubble" but I've never once heard an actuary state that most public pensions are perfectly fine. The opposite is almost universally true with a few notable exceptions. Heck, a high schooler with a napkin and basic math skills can figure out how utterly unsustainable so many of these plans are - and how they've only sustained so far by being what amounts to a pyramid scheme.
Illinois in no way is even a sustainable state long-term at this point, almost solely due to insane unfunded pension debt coming due. You can be pro-pension or anti-pension, but either way the math is pretty clear.
I think a much more productive discussion is over the models and standards used to judge the worthiness of pensions, a discussion that has roots going back a long time before the current stuff. None of this has to be political. This is common stuff people have been doing for decades. I am quite curious who these people are and how they defend the statements they make.
When friends of your cause tell you that you have a problem and your response is creating villains and presupposing the dangers of various unacceptable solutions that may or may never actually come to pass, you've got two really bad problems instead of just one: the original problem and denial.
This type of essay is identifying bad guys and pre-planting rhetorical defenses to be used if anybody gets close to the problem. Attack the messenger! It's much easier to just discredit people than engage with them on the merits. And it's simple enough that anybody can do it.
Hell, I'd be interested in a discussion of the various pension models and just the history of how each has fared over the years. You could take all the political fearmongering stuff out and just go with that. I think it'd be fascinating. There are several fact-based, dispassionate essays that could be written on this topic that would be both interesting and informative.
It seems to mostly invoke the Koch brothers and paint a target on The Investor Class, and hope that is proof enough.
If the Koch brothers favor pension reform, then by definition pensions are not failing!
(I'm sure it is for some)
To wit: is it possible that the requirements for participation in a 401(k) are such that fewer and fewer people can actually contribute to one for a significant period of time? In that case, low contributions would be a result of the 401(k)'s structure, and your conjunction's consequent would be false.
TLDR: The Kochs are trying to kill pensions because they don't like Calpers' political activism. The author doesn't get into specifics, preferring to make sweeping accusations such as, "This relentless, well-funded attack has taken every form of political advocacy available. It ranges from campaign contributions to ballot initiatives to model legislation to lobbying to lawsuits to financing academic and judicial conferences."
Sounds pretty scary. And as a former investment banker I can confirm that, in fact, F500 CEOs and boards are afraid of Calpers and Ontario Teachers and a few others who have gone the activist route. So maybe there is something to the thesis that all these fat cats want to stymie the ability of the working class to effect meaningful change through its collective ability to influence corporate governance.
But as someone currently involved in the government of a small town, I can also tell you that pensions are, legitimately, a major problem. Especially when they pertain to unionized public employees whose unions are allowed to force every member of that group of public servants (cops, teachers, garbage collectors, etc) to pay union dues regardless of whether they want to be part of the union.
The tenacity of union leaders, coupled with the universally bad optics of management not giving labor the future financial security that labor wants, often results in management making pension promises that they won't be able to deliver in a decade's time -- especially if the discussions happen during a good market run when modeling a perennial 7% YoY return on the pension portfolio seems reasonable.
This is ultimately much more of a public sector problem than a private sector one. Unfunded pension liabilities can kill companies, giving union leadership a strong incentive to compromise in cases where the pension is going to bankrupt the company.
On the public sector side, what you see instead is hiring freezes that benefit tenured union members, tax hikes that prompt wealthy residents to move to Florida, and cutbacks in other areas (e.g., paving roads).
It's not a pretty picture, and this op-ed is a good example of the rhetoric that can be deployed against people trying to make sources of funds equal uses of funds. Please DO NOT take that as an implicit defense of anything the Kochs are doing, btw.
That's a pretty reasonable, even conservative, assumption for the long-run nominal total return of the stock market.
I wish I could find the version that had figures in it (rather than simply 3% wide buckets, but all of the 25 and 30-year long periods in the heatmap have real returns in excess of 6% (meaning the nominal would be over 7%) https://portfoliocharts.com/portfolio/total-stock-market/
I think 7% nominal over a long period (such as a pension fund could expect) is quite reasonable and would expect a pension so funded to be quite stable.
Not all the growth is domestic. Many "US" stocks make a substantial portion of their revenue and profit from international operations [sales and/or manufacturing], not all of which is reflected in US GDP growth. As an example, when Apple makes an iPhone in China and sells it Europe, that doesn't contribute to US GDP, yet it contributes to the total return of Apple shareholders.
[1] https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?cid=GPD_...
There could be some simple and comforting explanation for the discrepancy between the markets and the economy, but I find it both interesting and perhaps portentous that bringing it up generally elicits glib responses (not just from you here and now) that really don't explain anything. It tends to reinforce my gut feelings about things reverting to the mean and a very long period of market underperformance being necessary to do so.
[1] https://www.investopedia.com/ask/answers/042415/what-average...
I don't think 7+% real returns are long-run sustainable and don't plan my retirement around those optimistic figures, even though we've crushed those figures for the last 15 years. It's possible after all this back and forth that we discover that we more or less agree.
Pension funds aren't retirement accounts; you don't care about a total 30-year return, you care about ongoing cash flow, and if you have fixed obligations in a bad year then you eat into principal. This obviously creates problems down the road, especially when you have decreased contributions over time due to a shrinking population in the municipality in question -- or a shrinking tax base (e.g., the downward spiral of rich people leaving because they don't like tax hikes, which results in tax hikes to cover the revenue shortfall....repeat).
Also, they're usually diverse portfolios with a fair amount of lower-risk/lower-return assets (mostly T-bills and investment grade F500 debt), so 7% is actually pretty ambitious.
To your excellent point about shrinking base making things fall apart, this is only a problem for underfunded pensions and Ponzi schemes. I leave it to the reader to determine whether those are two different things or not.
I'm not sure I understand your point about cash and cash equivalents....securities are fungible to cash....the issue is that there's a defined payout every year in $USD, and if the contributions to the fund from which it were paid were modeled in an overly optimistic way, then the fund runs out of money.
Individuals need to hold a certain amount of their 401K/IRA in cash to pay expenses, to prevent having to sell a lot of stock in a bear market. Individuals will not have the time to recover from a sharp bear market just as they begin retirement. This causes them to miss out on the higher upside in normal and bull markets. (see "sequence risk")
Permanent funds, adequately funded, could leave a greater percentage of their money in equities, which has (historically had) higher overall returns despite larger short-term drawdowns.
Agree, but they don't. Every pension portfolio I've seen has a lot of fixed income in it.
I think you see them holding fixed income and cash equivalents because they need current cash and future cash deposits. (They're pretty damn close to Ponzi schemes in a lot of cases.)
1) Underfunding due to shrinking business or region -- it's a lot easier to make your pension numbers work if people who retired 20 years ago are a tiny fraction of your current workforce.
2) Underfunding due to overly-generous plans (the retirement pay a lot of public sector employees get is disproportionately generous vs. their pay while working. Especially when contracts do "highest 3 years" or "last 3 years" and employees collude to give lots of overtime or other special pay to let people about to retire juice the pension
3) Underfunding due to bad math -- really easy to just make the "expected investment return" the dependent variable
Perhaps the other way to look at it is "these government workers sacrificed current income throughout their career in exchange for a secure retirement via their pension agreement".
The beauty is when you pull their pensions out from under them after they've worked for 30 years. Then they took the pay cut and have nothing to retire on. That'll teach the next generation of kids to work for the government (and compete with the benefits I provide my employees at my oil company).
Seriously, many public pension schemes are absolutely ridiculous. People shouldn't retire after 20-25 years of work and be defacto millionaires with lifetime pensions on the backs of tax payers. The system really can't support that scheme as is becoming painfully clear.
"Ed Murray’s time as Seattle mayor boosted his pension past $100,000 a year for life"
I.e. stealing money from pension accounts so you can satisfy your urge to gamble with money you don't have for money you'll inevitably lose in the next bubble or blow on unnecessarily expensive shit noone needs?
Cool, so when I rob someone on the street, I could tell the judge I just turned the victim into a passive investor for that new phone I want to buy...
But it's easy to blame someone else. The problem is the people posting here, including me, and the people posting on every other forum on the Internet and people who don't use the Internet. People don't vote, they don't hold politicians accountable, they create perverse incentives for politicians to kick the can down the road by voting against those who are fiscally responsible, and people oppose paying their share to fund the pensions.
I know it's more complicated than blaming the voter, but on the other hand, it's also much more complicated than blaming the politician. There's also a systemic problem, but that's also on the voter IMHO.
Trivia question: Name your local elected representatives (e.g., state legislators, or the equivalent wherever you live. Can you? Those are the people dealing with the pension issue to a large extent.
I think it would be a great idea if when people on the internet complain about the government, they also identify who they voted for. Then they're forced to face responsibility for whatever that guy does when the next blame-the-politicians new story comes up.
It's really best if leverage goes all the way through from me to the end, though.
With a 401(k), if a fund is being managed poorly, I can "fire" the manager by selling it and buying another fund in the plan. (And at next job change, I can roll over to a new 401(k) plan or an IRA.)
If my pension is being managed poorly, as far as I know, I'm just out of luck. I have a pension from an old job, and to my knowledge, I cannot touch it until I'm 65. Of course there is no choice of pension "funds" to switch between within the plan like mutual funds in a 401(k). Even though I've changed jobs, I can't roll it over to anything.
So as far as I can tell, the pension trustees (managers) may have leverage over whatever they invest in, but I have no useful leverage over the pension trustees.
And it's not like pensions are never mismanaged. For example, in recent years there has been a scandal where the Dallas Police and Fire Pension System (DPFP) had a high guaranteed payout that their investment returns couldn't match, and instead of trying to fix it properly (whatever that means), they just kept it a secret and went wild with risky investments. See https://interactives.dallasnews.com/2017/dallas-police-fire-... . Thankfully my own pension is better managed. At least, I assume so, but it's hard to research since it's a private fund thing.
If the problem is that 401k fees are too high, let's make 401k's more mobile. Let's create a liquid market in 401k managers so that fees get pushed towards zero - as they should be.
I don't agree. Retirees do need money as long as they live, which is what pensions (including Social Security) provide. Pensions needed to be properly funded, as the income annuities offered by insurance companies are.
To which kind of insurance are you referring?
Here's an example from New York Life: https://www.nylinvestments.com/annuities/products/New-York-L...
401(k) is a poor solution that requires individual initiative to deploy successfully. Those who don't contribute eventually burden those who do (even if that burden can potentially be paid for in advance, if you have the account type that taxes on deposit), and that's only if they withstood the lifetime of temptations that press people into early withdrawal.
It's not about whose interests they serve so much as it is how sustainable and practical they actually are. Is it kind to make a commitment to someone around which they will organize their life at the cost of crippling the lives of their successors? What if that organization isn't a company, but a government, and the resulting costs cripple its ability to perform other functions? Is it kind to cripple a city's services or a school's ability to teach in order to meet pension obligations that were poorly planned for decades? Who will pay a company's pension bill if the pensions push it into insolvency?
These aren't trivial questions with easy, pre-baked answers. They also are real, pressing questions that face us today. Your heart is unquestionably in the right place - it's not about the investor class! It's about the retirees who have given their lives! But there might be some room for subtlety.
I agree with you that increased lifespans throw a wrench in the works, but that is not enough of a problem to justify throwing out the baby with the bathwater. Pensions represent a HUGE portion of market actors' institutional conservatism and that is a necessary counterweight to the sort of irrational exuberance that is endemic to tech and other forward-thinking sectors
You want to talk about skyrocketing costs? Why not focus that energy on sorting out the mountains of institutional waste found elsewhere in the economy? Like, why the fuck does infrastructure here cost 10x other industrialized countries? Lots more money to be freed up that way
EDIT:
Further, there's a basic accountability problem. It was - is - easy to gain politically in the short term by making promises about pensions. Promise bigger pensions, smaller contributions, and so on. The gains can be realized almost immediately. The price is paid much later, often decades later, and the people who made those unwise promises cannot be held to account so long after the fact.
For many states and cities, pensions act as a counterweight to the ability to do anything other than pay pension costs.
As before, you are absolutely right that there are mountains of waste to be investigated and addressed. You're completely right that there's a lot of money to be freed up there. Those issues are real, and they are pressing. Yet it is perhaps no more real or more pressing than the burden imposed by decades of financial mismanagement around pensions.
Not knowing what other entities' books look like, and also knowing that one town is hardly representative, pension spend looks large (large enough that I'd guess many different types would like to optimize out of the equation) but not that large. How big of a crisis are we looking at -- 50% of total budgets? 30%? 20%?
You're right- mismanagement needs to be addressed. And I have no idea how to bring these firms to heel -- I just think that a market-based solution ("let them have 401(k)s!") is not the right answer here.
In general, underfunded pensions and large increases in expenses are a looming threat to many state and local governments. In California, many cities are expecting their pension costs to increase by 50% or more. Few have much in the way of spare cash to begin with.
It's not just the mismanagement of professional pension management funds, though you are of course right that that is a major concern. Broadly, the crisis is the result of applying unreasonable discount rates (8% or more) and making unrealistic promises about contributions and payouts. This is very, very easy to do when you're negotiating a union contract, as a state generally has little choice but to pay up when the time comes. It's also easy to do when you can bump up the assumed discount rate a bit and use the cash this frees up for goodies for your voters.
These weren't just poor management decisions made by self-interested private companies. Indeed, private pensions often assumed much less rosy discount rates and fared much better. These poor financial management decisions were quite often made by union leadership and local officials, some of them elected.
Sad to say, shifting from a defined-benefit system to a defined-contribution system seems to be the only way to guarantee that this particular form of politically expedient mismanagement will not recur. This doesn't have to be 401(k)s, 403(b)s, or other market-oriented system. But whatever the eventual system is, it clearly cannot look anything like the pensions of yesteryear. That system has failed, and the kindness and compassion and pure intentions at its heart has gone to waste.
Let there be no doubt - this is tragedy.
That's why 401k's are good. I have control, and if my retirement is underfunded it's my own fault. Compare this to pensions (both public and private) which are chronically underfunded:
https://www.bloomberg.com/graphics/2017-state-pension-fundin... https://www.bloomberg.com/graphics/2017-corporate-pensions/
If I don't have steady work the last thing on my mind is retirement...
We need as better system for retirement but pensions are not the answer.
Pensions may not be the answer, but neither are retirement accounts.
I agree with you that the future is murky for young people. That doesn't change my view that a 401k is preferable to a pension.
1. You are promised a pension and the company delivers.
2. You are promised a pension and the company does some creative accounting to screw you.
3. You are not promised a pension and plan for your own retirement accordingly.
4. You are not promised a pension and fail to plan for your retirement.
I don't believe #1 is reliable enough. Unless (and maybe even if) you are working for a government, your pension isn't rock solid. If you (more likely) run into #2 you end up betrayed, and have to scramble to make things work in your retirement.
I am 100% in camp #3. Plan for your own retirement-- No expectations; no disappointment.
Option #4? Well... there are consequences to your actions.
Those consequences will inevitably be put on group #3 since they will be vilified as a group and it will be very easy to politically take their money to give to group #4.
I've not really figured out away around that problem. The numbers are simply too great too ignore - unless you truly feel something like 60% of retirees who have saved literally nothing other than their (meager) social security benefits will simply quietly die in the street.
Unfortunately this fact is one of the larger reasons why I feel this social division in the country is just starting, not coming to a head as most I talk to seem to think.
Morality left the building a long time ago in American capitalism--few consider there to be any real moral duty that a company owes its workers. If it's not in the contract, you're a sucker.
It's not a good way to run a polity as far as I can tell, but that's the program.
If pension liabilities get large enough, companies will tend to "go bankrupt" (not really!) or restructure in such a way as to shed the liability.
An interesting midpoint, I think is super in australia or kiwisaver in nz - mandated retiredment savings which can be invested in a choice of compliant funds (or self managed if you really want). Variable % contribution but a legal minimum. From a regulatory POV you can set these up with mandatory "employer" contributions and/or add government sweeteners. Of course, it's all part of your compensation, just like a pension promise but more direct and payable immediately.
I think these schemes also work more cleanly with modern reality: few people work for the same company for 30 years anymore.
Although, I agree pensions are... sub-optimal.
401(k)'s do seem like a much better option. However not all employers provide that. I'm not sure what the solution is.
Just because the take is left-of-center and questions neoliberal doctrine, it shouldn't be publishable?
We were sold that privatization would lead to more efficiently run societal safety nets, that it would provide a net-benefit to the worker and to society. The article argues that not only did transition to 401k enrich money management middlemen, it's done worse: it's disenfranchised us. It's destroyed our ability to collectively act via our retirement funds.
Of course, this is expensive, which is why we have the Government putting aside money into a sovereign wealth fund to help pay for it (2).
We also know that we should personally contribute if we want a better retirement, so we have personal retirement accounts, where the minimum contribution is 3% of salary, matched with 3% from your employer, plus ~$500 NZD from the Government (3).
(1) - https://en.wikipedia.org/wiki/Welfare_in_New_Zealand#Superan...
(2) - https://en.wikipedia.org/wiki/New_Zealand_Superannuation_Fun...
A young company wants to hire 100 people, but from the market rate of salaries, they can only afford to pay hire 80 people. They also don't want to dilute their stock holdings so they opt for pensions instead. The extra 20 employees increase company profits and stock prices explode. The company's balance sheet looks good because they don't have to pay any pensions yet. The original investors can sell their stock long before pensions get paid out, and don't suffer any negative consequences.
Companies under GAAP accounting actually do have to carry their pension liabilities/assets on their balance sheet and have to report on the status of their pension fund. So investors can see if the pension is underfunded.
Edit: for example, check GM’s last 10-K, note 16. [0]
[0] http://phx.corporate-ir.net/phoenix.zhtml?c=231169&p=irol-se...
Caveat emptor, because ain't nobody looking out for you but you.
One of the reasons I'm not a big fan of pensions is precisely that it's not "in the current climate", but a persistent problem over the span of decades. Many of the bills that are now compounding to an unignorable size are trainwrecks decades in the making. It isn't just that they were mismanaged today; they were mismanaged in the 200xs, and the 1990s (much harder to see because the stock market was doing really well up until it wasn't), and the 1980s... it's not hard to think that maybe the fact they worked at all was simply another historical accident of the bizarre just-after-WW2 period, rather than any sort of good idea. We seem to lack angels virtuous enough to be honest about the numbers and to resist dipping into the Honkin' Big Pile o' Money.
In any case I don't think any basic income plan works if you imagine that everyone stops saving their earnings and relies on the basic income for their working years and retirement. It is called universal basic income after all and not universal "luxurious" income.
In that type of a world, people who chose to work during what we today call "working years" would likely feel the need to put some money aside for their "post-working years" so they didn't slip back to the $1200/mo as a couple standard of living.