Corporations have not gotten rid of retirement plans, they've gotten rid of unsustainable defined benefit retirement plans (pensions) in exchange for defined contribution retirement plans (401ks).
2. A pension can ride out a "bad" market because some people are paying in while others are paying out. In a 401(k) if you retired in 2009, you took a lifetime hit, even with a balanced portfolio. And you can get hit by a bad market and a long life at the same time!
3. Individual investors are morons. They buy overpriced funds and do a lousy job managing them. I am a moron, but at least I know it and invest accordingly. Vanguard did a huge study of all their individual retirement accounts, and number of trades that produced the best return was: zero. Every trade you make (statistically) is buying high and selling low. Pension managers aren't perfect, but they pay attention to expenses and don't chase the latest hot stock. Therefore you need much less of a contribution to fund a pension.
It depends on how you assess these factors, but Joey Schmoe is going to have to save 15% or more of her salary to get the same retirement security as a pension contribution of 10%. A pension is only unaffordable if those contributions aren't made, and then a wave of retirements sets off an unsustainable withdrawal. But that's not a feature of defined benefit vs. defined contribution, rather it's governments who use shady accounting rather than making a small contribution annually.
When you add in the fact that almost everyone who contributes to 401(k)s is well-off (half the population doesn't even have access), it is hard to imagine a method that is less likely to lead to comfortable retirements.
If your argument is that people pay into their own retirement as an account, then current people don't get pensions, unless they paid in (which the first group at some point did not do, so back to start).
At some point people must pay in to start, and that group is completely susceptible to the same market failures as before - if the market tanks when a large cohort is about to retire, then there will not be enough to cover them. Tapping the value from those not yet retiring to pay for those retiring will mean there is not significantly less for those not yet retiring.
You also overplay the value needed in a 401k. No one plans to live forever, so planning for a decade or a few after retirement is fine, with an expectation that at some point you may have to live of SS alone. This works fine, and doesn't need a fear inducing 25x salary savings.
Finally, companies fail, and with them pension plans fail. People move jobs a lot, so these pensions need to be mobile. Many pension plans require a decent amount of time to even get one, so people failing to meet that lose value over and over. At least a 401k is their money.
Your solution does not make these problems go away.
A better solution is to have a national pension plan, where everyone pays in, and everyone get some benefits. But that's SS, which already exists. Instead of 401ks and company pensions (why do people tie retirement plans with employers anyways?) increase SS taxes and payments.
But pensions seems so ripe for abuse. It's too easy to make optimistic and unkeepable promises about future compensation.
A quick calculation shows that you'd have to save roughly 2.5% of your salary during your working life, earning only 3% over inflation, to accumulate the median 401(k) balance.
And if people are consistently drawing more than they're paying in it's not sustainable. Every solution to that problem has drawbacks. You increase the premiums and fewer people pay in. You lower the benefits and maybe fewer people pay in too. It becomes a hard sell either way.
Compared to a 401k, where the company contributes 3% of an employee's salary (or somesuch) a year as an incentive to participate and if the employee screws themselves, that's their problem. It sounds a bit more attractive I imagine than all the other burdens a company has maintaining a pension program. And being responsible for it and to the recipients in perpetuity...
And you couple that with, not every sort of job operated a pension program even at their heyday. Not having access to a 401k program in 2018 doesn't mean your job would have had a pension program in 1978 either...
The maximum 401(k) contribution for 2018 is $18,500. It's gone up $500/yr pretty regularly, but even if you contribute that maximum (~$750 paycheck pre-tax so your take home goes down much less) without an employer match, you can retire on $40k/yr in 24 years. And that's at the conservative 4% figure you mentioned. That doesn't include employer match, which is free money that most people with 401(k) access have. That doesn't include supplemental Roth IRA savings (2018 max of $5,500/yr) which can give you more a favorable tax structure in retirement. And that doesn't include additional savings you can have in a regular brokerage account, on the same securities your 401(k) is on, just without the tax advantages.
One other issue I have noticed with 401k's. Do 401k's exacerbate inter-generational income inequality? I know a number of people who are going to, in the next few decades, inherit very sizable 401k accounts. This is great, in that their parents were very frugal, saved well, and had comfortable retirements. But on the flip side, a pension would have died with that person, now there is this ongoing inter-generational transfer of wealth that otherwise wouldn't have occurred.
http://amp.timeinc.net/time/money/3925308/rich-families-lose...
>Indeed, 70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third, according to the Williams Group wealth consultancy.
I love this "factoid" though:
>“It takes the average recipient of an inheritance 19 days until they buy a new car.”
Anecdotally, I personally have two friends who got inhertences, both immediately spent it on cosmetic surgery.
On the flipside, if the person who has a 401k finishes it, and has no more money they will then have to depend on their descendants for their livelihood.
Which can make the living standards of the descendant lower, because now they are taking care of their parent for the rest of their life. Which only gets more expensive the further they go (IE: Illnesses)
Speaking of individuals,
4. Individual investors can't sue and otherwise police the companies they hold very effectively. A large fund is in a better position to prosecute fraud and that kind of thing.
You're absolutely correct. You cannot do these things and have functional DB plans.
An issue arises when contemplating the incentives. Every person involved in the up-front planning for DB plans is incentivized to be wildly unrealistic about the future. It's not like anyone doing the negotiating will have any real consequences, so why not offer lower contributions to win your election / union approval / make quarterly numbers?
DC plans have the distinct benefit of helping incentives align. It puts the costs on the balance sheet in the short term, and accountability is much more immediate.
It's not a perfect compromise. For pretty much everyone, ideally run pensions are better. It's just that getting there has proven at best incredibly difficult and unreliable.
Annuities are not pensions. They pay fixed amounts based on some interest rate. The difference is in the lifetime of the beneficiary. We all die eventually, normally befor hitting 100. Short of magic, that isn't going to change much.
The difference with a defined benefit retirement plan is that the cost of benefits can rise drastically. Look at the difference in the cost of health care today and in 1960.
"The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today"
I doubt things look any rosier 6 years later. So what does the math look like when the firm lifespan of the most profitable companies is quite a bit less than the lifespan of someone's useful working period?
At that point, you might as well do your own thing with Vanguard or Fidelity. The net result is the company got rid of the retirement plan, and started reselling other companies' commercial retirement plan products to their employees.
You can also "do your own thing with Vanguard or Fidelity" in an IRA, which has the tax benefits of a 401(k), however, the yearly contribution limits are unreasonably low, especially compared to a 401(k).
If there is no employer contribution, you essentially already are doing your own thing, except with whomever your company picked to be the retirement benefits manager, instead of it being your own choice. So you create your own IRA at the company you pick, and roll over everything from your employer's 401(k) into it every time you switch jobs.
I also think that IRA and 401(k) contribution limits should be combined, so none of this "$5,500 IRA limit and $18,500 401(k) limit," it should be "$24,000 combined 401(k)/IRA limit."
I was just saying that if you are young and have $10,000 a year to save for retirement you are better off, from a tax perspective, saving $5,500 into an IRA and $4,500 in your hallow 401(k) rather than saving $5,500 into an IRA and $4,500 in your Fidelity brokerage account. That's it.
My concern is that companies that offer a hollow 401(k) are actually getting some kind of kickback for forcing all of their employees to one company as their retirement benefits manager, or to a specific subset of portfolio options with that company, and the employees have no effective recourse, because of the separate contribution limits.
If the limits were combined, there would be no reason whatsoever to insert the no-contribution employer as middleman into retirement planning, or even to deposit more into the employer-sponsored plan than the maximum matching amount. Most of the companies are implicitly saying "you're on your own after you retire", but the law still says you have to invest through your employer to min/max your retirement plan. Given that many of them will dump employees long before retirement age anyway, it makes less and less sense for any retirement account to inexplicably have an employer's corporate logo pasted onto it.
I think it points out the dangers of government regulating too closely, but it IS a valid point.
Nearly every major industrialized nation's infrastructure was bombed to hell after WW2, except America. To the victor went the spoils, and so our economy boomed to a much much greater degree than it would have otherwise.
This lasted for a generation or two, and certain aspects of that capitalist feeding frenzy were enshrined as cultural values.
The idea that there was a social contract between employers and employees, and that an average hard working American wouldn't be tossed out on the street if they got sick, would have a house to live in and would not have to toil in their old age, was baked into America. If you work hard and you're loyal, you'll be ok.
However, where that was seen as a Governmental function after the Great Depression, in the boom years after WW2, the economy was simply flooded with money.
When there's that much money and opportunity around, it's easy to start thinking that the Government was the problem. That the social contract would always remain, and that we could trust our bosses who we knew and worked with every day far more than some politically motivated government bureaucrat.
Corporations bought the politicians. Then the politicians passed laws to make the bribery legal. Then slowly those post WW2 culturally enshrined easy answers became law.
Now we have people seriously talking about "trickle down" economics as if it were a real thing. Because it was kinda like that in the 50's when we were the only major industrial powerhouse in the world.
Now we've privatized nearly our entire healthcare system, because in the 50's hell, going to the doctor was cheap and how could that be anyone's problem but yours?
And now we have no retirement plans other than "we will let you put some of your own money into the stock market tax free, but hey if the market tanks you're on your own bruh! (even though you had zippy control over that)"
Again, because maybe that would have made sense in the 50's and 60's, and god knows if anything might have seemed true in that era it must be the word of God himself.
The problem of course, is that now that the winning team picks the referees, there's pretty much no way out of this. The government SHOULD be providing healthcare, and decent retirement so that business doesn't have this burden.
But then it'd be too easy to start new businesses. The referees picked by the last winning team aren't too keen on that.
I believe longer lifespans coupled with generous safety net provided by the government is a historical anomaly, propped up due to the growth spurt that happened post great depression + ww2. Now that things are reverting back to historical norms, we should rethink the way society is structured.
Social welfare such as the old age pension and disability pensions were starting to be eased before that. In Britain and it's colonies it was just after the turn of the century. (Not idea re: the USA.) They were basic, but you wouldn't starve.
> Now that things are reverting back to historical norms, we should rethink the way society is structured.
Or should we fight against reverting to historical norms? I'm not so keen on seeing our quality of life and life expectancy decline.