Comment by wnissen | Hacker News Reader

Comment by wnissen | Hacker News Reader

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Pensions are cheaper than 401(k) accounts. I will say it again, this is simple actuarial math: Pensions are cheaper than 401(k)s. Three reasons: 1. Some people will die before they collect, others will live far longer. With a pension the former subsidize the latter, and everyone who needs income gets it. In a 401(k) everyone has to save like they're going to live forever, or risk running out of money. If you keep your withdrawal rate at 4%, you probably could live forever, but that means you need 25 times your salary saved. Twenty five years salary! A pension does not need nearly the same level of assets.

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.

This ignores demographic bubbles, such as the boomers retiring right now. When there were a lot of them working, there were a lot paying into the pension (which pays current workers). When there are less of them working there is not enough workers to pay benefits.

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.

The point about individuals needing to guard against the "worst case" of long life, vs an pension de-risking it via large numbers is very interesting, and it's not something I've thought about before.

But pensions seems so ripe for abuse. It's too easy to make optimistic and unkeepable promises about future compensation.

Yes, it is easier to screw with a pension than a 401(k), for sure. Countries that have national pension schemes certainly have their share of problems. But the median 401(k) balance for a senior is $65K. That's maybe 2 years living expenses at a median wage of $35K. And half the population doesn't have one at all, so the typical person has saved about 1 year's salary. (I'm not using averages because they are so skewed by the rich people who sock away most of the money.) That typical person would almost certainly be much better off having even a corrupt, inadequate pension plan.

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.

Well average life expectancy in 1978 was 69.6 years, average life expectancy in 2018 is 78.7 years. So the problem with pension obligations is people in general tend to live longer, and the people who live far longer are living longer and there's more of them. Not enough people die young to offset that cost methinks.

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...

Twenty five years retirement salary, not present salary. If you're retired it's extremely likely you have minimal expenses. Your house should be paid off. Your car, even if still financed is not going to have to commute you to work every day. Healthcare is covered by Medicare.

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.

This is super interesting and something I've never thought about.

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.

Considering something like 70% of rich families already spend away their inherited wealth by the second generation (and I think ~90% by third generation) this seems like a small issue to be concerned about...

Hmmm, interesting. Any citation for that number? I've heard numbers like that thrown around, but I don't know where they come from.

Apparently the numbers are from a wealth consultancy, so not exactly free of bias.

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.

That's the up side.

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)

Inter-generational transfer of wealth is 100% a feature and not a bug. My money was earned through my work. I should be able to dictate to whom it goes when I die. It shouldn't be spread out to help pay for thousands of people I've never met.

Individual investors are morons

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.

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