Hacker News Reader

> - "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

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.

Annuities and life insurance is how an individual gains access to the risk pool you are describing.

Or pension plans. Which essentially combine an Annuity with a Retirement Fund.

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.

The 401k being 100% yours is a somewhat significant downside, too. It means that the funds get transferred to your heirs on death, diverting funds from supporting retirement in general. This can be counteracted by purchasing an annuity, but that usually isn't the route taken by retirees. Overall, it means that saving for retirement is more expensive than it needs to be, since you're also effectively saving for an inheritance too.

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.

Except for the fact that psychologically, those who think, expect, or worry that their money might outlive them may take significant comfort in that money being passed to their heirs. This may make them more likely to save for retirement, even at the risk of over-saving, because the benefit of that money is not fully "lost" on death.

You don't want to (IMO) design a retirement system where the well-to-do have every incentive to opt-out.

Erm, what? Yeah, you want to structure a retirement system where the well-to-do want to opt out. Otherwise, we're giving tax advantages for "retirement saving" that really goes to heirs. How it's currently structured in the US, we do so through contribution limits.

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.

I see your point, but in any private system where only the poor participate, only the poor pay the fees that allow the system to exist, so you either further disproportionately disadvantage them financially and/or you provide them with notably worse service and support than the well-to-do enjoy for their investments.

We might have different definitions of "well to do". I was thinking of households making over $500k per year.

I agree that it's worth acknowledging the effects of 401ks as having some downsides for retirement in general. That said, I don't think it's fair to consider it a "significant" downside at face value when the upside of the transaction is that you can leave it to your heirs. For someone who values individual agency and family values that's going to be an upside, for someone who values optimizing around what benefits society at large it's obviously a negative. I might also be wildly misunderstanding you though so please correct me if I've gone off track.

If you plan for a 20 year retirement, but live an extra 10-20 years and run out of money, that is a pretty significant downside.

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.

I'm optimizing both for "what system is best for society to implement" as well as "what system is best for individuals within it". There's a pretty significant individual upside - people who were unable to save enough for retirement can now retire due to their tax-advantaged plan earning mortality credits.

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.

There actually used to be accounts like this. Apparently common in some parts of the world, not so much in the US.

https://en.wikipedia.org/wiki/Tontine

Old-style tontines are not actuarially fair - they are significantly more valuable for you if you have a higher life expectancy. It transferred wealth from older individuals with a higher chance of dying to younger individuals with a lower chance, with the obvious failure mode of a tontine being something you sign your children or grandchildren up for.

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.

Here in Australia, Superannuation (essentially 401k) is compulsory and the process to get the money out before you retire is quite arduous. It is contributed by your employer and often isn't included in the advertised income. The compulsory contribution is about 9% of your income (exact value eludes me).

Sounds like "Social Security" in the USA.

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.

> No one actually expects to live on Social Security alone...

None should, but plenty do.

To be more precise. Among elderly Social Security beneficiaries, 23% of married couples and about 43% of unmarried persons rely on Social Security for 90% or more of their income [1].

[1] - https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf

That doesn't account for spending past income, as in a savings account, cost-basis of investments, or home ownership.

Except the part where the money you’re giving to the SS is no longer yours.

No. We have the 'Age Pension' [0], which is the equivalent of your Social Security. It kicks in once you're 65 and not working (much), and pays up to $23k a year (which IMHO is enough to live on as long as you own your own home). The funds for it come out of general income tax.

"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

> 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.

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...]

> 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)

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.

Afaik there are some companies that take up the 401k advisor role. $FNGN is one, and I'm sure there are others.

> I'd love to see ... where employees are forced to ...

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.

>Your 401k is 100% yours. There is no risk of your 401k account "going bankrupt" because too much of it was given to others.

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.

I don't see how actually having control over where you invest your money in a 401k vs having none whatsoever in a pension is "category theory sleight of hand" or a distinction lacking in meaning.

Do you index or do you actively manage your 401k?

So your argument is that, choosing to index instead of actively manage is the same thing as not having the option at all?

The risk is systemic either way. Those in this thread feel good about themselves for contributing more than others, but long run they're in the same boat as those 'others'.

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.