The Broken Promise of Retirement
nybooks.com
nybooks.com
Juicy pensions are on the decline everywhere. The company I started working for at age 23, so many years ago, in all its vertically integrated, multinational glory, provided, at the time, pensions you really could continue living a middle class lifestyle on. I duly got into that pension plan, with the huge pension adjustments that entailed (greatly reduced ability to pay into your RRSP) but that future defined benefit pension was worth it.
Except that $bigco went bust, and when the dust settled, we got cash payout of the some percentage of the deemed value of the accrued pension that they could recover from the financial wreckage, and that was that. No pension at all.
Now I and everyone else is just on defined contribution plans, where between your own and the company's contribution you put in maybe 10% of what it would take to live on, per year. The rest is supposed to miraculously come from compound gains, using the old wisdom that anyone can get 10% per year without effort.
What does that mean in real life terms? Live cheap, far below your financial means - one basic car instead of his & hers SUVs, a basic house in a decent neighbourhood instead of the latest 5K square feet monstrosity and so on, and try to save a good 1/3 of your income for the future. Barring a financial meltdown or runaway inflation, I think we'll make it. The fact that "runaway healthcare costs" are not a factor here helps a lot, though without a company plan, you're on your own for all dental work and (up to a certain age) all prescription drug costs.
Anyway the economics is simply this: Work for 40-45 years and accrue enough to live another average 25 years after you retire. The $$ have to come from somehwere. You see a lot about super juicy public sector pensions in the USA where people can retire in luxury before age 50... probably outliers, as is the "evil people stole the pension fund" situations. On the whole, it's just that people live longer.
pensions don't really make sense though, because they create adverse incentives all around. first, for the pensioner, who transfers future risk to the pension, and by extension to the company, its customers, employees, and shareholders. and second, it's a big pot of money just sitting there begging the greedy to tirelessly and surreptitiously work to siphon off just a tiny spigot of it. and those are just the two most obvious ones.
parhaps the risk profile is too far in the opposite direction, but 401(k)'s could be fixed, for instance, by requiring companies to set up and contribute inverse-proportionally to monthly take-home pay, and tax the company progressively on contributions based on total compensation, so that highly-paid executives who need a 401(k) the least would be discouraged from that avenue of compensation, while the least-paid employees get a (partially-)funded retirement account automatically.
If you don't pay income tax, you get no benefit from a 401k.
We can go a long way to solving this by just making the subsidy a flat refundable tax credit. If we wanted to make it progressive, we could to the inverse of progressive income tax: by making the first $X get you a Y% credit, with a decreasing credit as you go up in contribution brackets.
https://www.investopedia.com/articles/retirement/04/031704.a...
Aside from the fact that the money you manage to put into it will still be there (with very high probability).
But, you do know that employers are allowed to offer “Roth 401k” plans too, right?. If you pay little to no income tax now, they are fantastic.
well if a pension doesn't make sense because it's a big pot of money attractive to greedy criminals then all sorts of big pots of money don't really make sense though, so in that case I don't think that argument really works.
>for the pensioner, who transfers future risk to the pension
this is probably me being silly but how is the pensioner transferring future risk?
the pensioner has no idea how long they'll live, so the amount of money to save for retirement is uncertain, as is the returns on investment to meet that need. this future risk is transferred to others, as the pensioner does nothing to mitigate them, the company through its pension plan does. risk transference is a key ingredient of adverse incentives (e.g., principal-agent problems).
Defined contribution plans cannot be fudged with accounting rules or unsustainable growth rates. By definition the money is paid as its accrued.
If people want a defined benefit plan then the market should provide one they can purchase outside of their job. It’s not rocket science to do the math involved for growth vs payout vs life expectancy. The problem is that the math doesn’t add up so nobody would buy it.
You mean companies don’t want to pay for them, and instead offer pathetic 401k matching as a compromise. That is the key point: the shift from defined benefit to defined contribution was done to shift profits away from workers. Very similar to college costs going up when public funding for education institutions decreased.
https://crr.bc.edu/working-papers/the-outlook-for-pension-co...
> This paper addresses the relationship between defined benefit pension plans and corporate profits and examines the outlook for defined benefit plans in the wake of the bear market. Due to a soaring stock market during the extended bull market of 1982-2000, together with federal regulations and legislation that shifted funding requirements forward, pension contributions virtually disappeared as a corporate expense for much of the previous two decades.
> Our analysis suggests that in the absence of the stock market boom and the regulatory and legislative changes that reduced funding, the average firm’s contribution to its pension plan would have been 50 percent higher during the 1982-2001 period – 9.9 percent of payroll instead of 6.6 percent of payroll. The downturn in contributions had a significant impact on corporate profits. Lower pension contributions, all else equal, will produce a dollar-for-dollar increase in before-tax profits. Our analysis implies that corporate profits were roughly 5 percent higher than they would have been otherwise. Higher profits produce a feedback effect as they lead to further capital gains and further reductions in contributions.
Excessively generous pensions or those assuming unrealistic market returns are a different issue. Pensions can be sustainable when properly implemented and governed.
High level, the past strip mined the future, and the bill is coming due.
Not just that, but most employees would choose higher paychecks and a 401K option over a company that offered lower paychecks but a substantial pension, even if the net compensation was equivalent.
Pensions become increasingly less attractive as young people recognize that changing jobs every several years is a quicker route to financial career growth than parking long-term at one company with a pension.
I was once acquired into a company that offered the worst benefits I had ever seen (zero insurance contribution, zero 401K match, basically just paychecks and nothing more). I thought it would be a death sentence for recruiting, but it turned out most younger candidates just don’t care at all about anything other than their salary number. We lost a lot of people as they grew older and had families, but younger people didn’t bat an eye at the near complete lack of benefits. We could win a lot of hiring battles by simply offering the higher bottom-line salary number since we had such little overhead. (I left quickly for a better company)
I have no issue with private pensions. If employers want to offer them and employees accept them, have at it. Don’t look to me to find the difference when the numbers don’t add up.
Public pensions are a disaster though. The people making the promises don’t care about being fiscally solvent. They just want to buy votes using your grandchildren’s tax dollars as a credit card.
The earning class will eventually vote with their feet and those municipalities will either force a haircut on the pensioners or beg for a Federal bail out.
And they will get the federal bail out, of course.
I started maxing out my 401k account 25 years ago, back when I was only 22 and making $30,000 / year.
At the time, financially it was a little rough. My wife wasn't working, and I had a ton of debt from school. But, I figured it would be easier to do it then, while I was able and we didn't have kids.
I doubled down on compound interest and the future growth of the global economy. I invested it all in S&P 500. There were several significant down turns. But, eventually the investments started working for me instead of being a sink. Now, on average, I gain about double my salary in investment returns, per year.
So, I totally recommend 401ks highly for people under 25.
However, there are certainly sketchy companies out there offering plans. So, it's wise to compare a fund's fees and expense ratios to ones like Vanguard admiral funds.
Also, I do understand that the major benefits of 401ks go to those in higher tax brackets, but still - it's a solid way to automatically pay one's future self first.
Hmm, but passive retiree investors, on whose behalf all those institutions like Blackrock are ultimately investing, have probably contributed enormously to a rise in asset values. Shareholders gain a lot from people dumbly saving in investment vehicles, whether pensions or 401ks.
[0, page 11]: https://www.goldmansachs.com/insights/pages/top-of-mind/buyb...
It is not possible for anyone to work 30 years and then retire for another 30 that pay out their end-of-career salary, that is likely artificially inflated with crazy overtime.
The pandemic relief bills included almost 90 billion dollars in free money to bailout pensions. Pensions are insolvent and require corrupt bailouts to stay alive. It’s all super super gross.
Beyond keeping the elderly out of poverty I’m not sure there’s a problem to solve. If people would rather drive a BMW in their 30s than play golf in their 70s who am I to tell them they are wrong?
Astute point. I hacn't thought of it that way before.
All the talk about past generations "borrowing from their grandchildren's credit card" doesn't take into account the wealth created for the grandchildren to inherit.
I wonder how these forces balance out when evaluated by economists.
But that is what pensions ARE. The people who got them took less money up front because part of their compensation was a defined benefit pension. They WERE saving money by deferring payment.
How is this any different than your 401k suddenly saying “sorry, when we said we were investing in the stock market with your money we actually used it on other stuff, so now your retirement account doesn’t have any money”?
Would your response be to tell the people who were investing their retirement in the 401k, “well you should have saved money for retirement”
They were trying to save money for retirement! They saved money they were making now to be used later. Are you suggesting people should only save by stuffing money in their mattress?
Which party / ideology is trying to get rid of the public Social Security in the US?
* https://en.wikipedia.org/wiki/Social_Security_debate_in_the_...
Do you think it's a coïncidence that wealth and income inequality in the US as exploded since 1980, the year that Reagan got elected? (Though the Democrats in Congress have been complicit.)
The American oligarchs have put on a concerted effort since the 1970s, and they've largely been succeeded. Good history of the subject published in 2020:
* https://en.wikipedia.org/wiki/Evil_Geniuses:_The_Unmaking_of...
Police and fire pensions usually drive this stuff because overtime assigned by seniority spikes salaries and pensions.
The “evil republican” angle is that “fiscally conservative” politicians usually balanced budgets by cutting pension contributions or buying support by reducing local contributions during tight budget times. Democratic legislators and governors did this too, but this type of fiscal behavior is a “conservative” trademark.
States like New York have mostly funded pensions, even with generous pension plans. The “secret” is easy - governments, especially local governments have to pay.
What exactly do you mean by "states like New York" here? What is it New York-like that makes place have funded pensions? For comparison, two of the New York neighbors, which arguably are most similar states to New York, both culturally and politically, that is, New Jersey and Connecticut, are among worst five in terms of public pension shortfall. Are "evil republican" "fiscal conservatives" to blame for NJ and CT pension problems? How about in Illinois, another one in top 5 most underfunded pensions? Conservatives also pulling the strings there?
Mayor Kilpatrick signed a terrible deal and separately (?) was corrupt and went to prison. Have the voters learned anything? Have their voting patterns notably changed since then?
What about the union representatives elected by the Detroit municipal workers? Don’t they bear some culpability? Have there been a seismic shift there, or are the same old cronies still passing off power one to another?
> For decades, conservative governors and state legislators [...] have worked to undermine public employee pensions.
> Last year, as the Covid-19 pandemic raged, Senate Majority Leader Mitch McConnell denied governors’ appeals for federal emergency aid because he saw an opportunity to punish states for their pension debts.
And so forth. Granted, I don't know the history behind all of this, but even with the benefit of the doubt these seem very stark takes without any additional context.
But the Federal Gov through cuts (we all know who pushed those cuts) and Union Busting, is causing the whole pension system to go bust since pensions work only if the Company or Union is growing and people are there to pay into it. Now that union membership is optional in many states, money is not flowing into the fund.
There’s a name for a scheme like this—-pyramid.
https://en.m.wikipedia.org/wiki/List_of_U.S._states_and_terr...
Only true if it's a "pay-as-you-go" systems:
* https://en.wikipedia.org/wiki/Pay-as-you-go_pension_plan
Canada's public pension (CPP) used to be this way (like US SS), but was changed in the 1990s and uses investment returns in addition to contributions:
* https://en.wikipedia.org/wiki/Canada_Pension_Plan#1996_refor...
It is possible to have a practical fund without new contributions. It is after all how the "4% rule" works with private retirement accounts:
* https://en.wikipedia.org/wiki/Trinity_study
* https://en.wikipedia.org/wiki/Retirement_spend-down
You stop contributing at (e.g.) 65 and you can coast on the holdings without putting new money into account.
Come work for us, we pay less than the private sector but future generations will figure out how to pay you a nice retirement package! Oh, I won't be around to be held accountable if they can't, but don't worry Uncle Sam will pick up the tab!
According to the article, the private pension bailout was "paid for" by ending the enhanced unemployment program in August instead of September. Of course, you don't pay for new spending by "cutting" other new spending.
[1] https://www.forbes.com/sites/ebauer/2021/03/10/the-covid-rel...
Also, IRA, SHMAYARAY. Max out your Roth every year, and then do whatever. I don't see how the taxes for the rest of us are going to go down with the aging population.
The main difference is that the 401k is a much more transparent product, so this outright theft is not as possible. The flip side of that is that your exposure to the market is more direct (which may not be that much of a flipside, as pension funds are still exposed to the market, but that exposure is more obscured).
> I don't see how the taxes for the rest of us are going to go down with the aging population.
Who says taxes are going to go down? Reading the political winds, the grass roots support for raising taxes is the highest I have ever seen it, and seems to be growing. We are leaving the political era of low taxes independent of the actual fiscal need to raise them.
Then, the pensions went bankrupt and failed to pay what they promised.
This is not people failing to plan for the future. This is people having what is promised them revoked.
Can't squeeze blood from a turnip.
Well then don't read articles about middle class concerns like retirement, in middle class publications like the New York Review of Books.
When middle class wages go up, small businesses open, they employ more people, creating more middle class people, and the cycle continues ad infinitum. The middle class pays the bulk of the taxes since they lack the finances to avoid them, and additionally is responsible for creating the bulk of the jobs in small business. The middle class also leads consumption. See the previous point for why this is important.
If the middle class fails everything below them fails. The only people that win in all scenarios are the ultra wealthy. If the middle class cannot retire, effectively no one can retire. Since their suffering is magnified in the lower economic strata.
That's the brutal truth.
Some people born in the early 90s are already retired.
Aside from the permanent administrative staff, many funds are in the hands and political control of people generally wholly unqualified to understand and manage them, and who have at most their elected positions on the line if it goes badly. It's not their money, so what does it matter if they just apply expertise to the fund's management with all the part-time attention of a high schooler?
The amount of rank amateurism in deciding the fate of many, many billions of dollars is incredible. Like less-than-Excel spreadsheet sophistication.
Take a couple of general examples:
-- Many state/local funds estimate or forecast some optimistic annual return % when they set the benefits level. Then they never revisit or adjust contributions to account for when the market returns fall. Or they do absolutely stupid things like increase benefits when a certain year looks better than average ("our hard working state employees deserve to participate in gains in the market, blah blah blah")
-- They'll set labor contracts with no eye towards what the promised benefits will cost 25 years from now. Who cares? The elected officials now won't be around when the bill comes due, and the incentives to not get tossed out of office for being responsible and clamping down on the expensive party are much more real than paying a few dollars more decades from now.
-- My favorite example: under years of mismanagement of rank amateurs (as I named above), Detroit discovered that its pension fund had been habitually paying out "13th paychecks" each year -- an extra check in December above what was planned, as a xmas gift to employees/retirees, because "it looked like our fund was doing well, and these people need that money to make ends meet".
You may be surprised at how bad the situation is in every state and city (with few exceptions) thanks to the bad incentives that these systems create. And few rewards for people who are responsible enough to try to fix it before it becomes critical. People have been pointing to waves of bankruptcy and spiraling costs in the near future, for years now.
And you wonder why we can't fund infrastructure and other nice things.
I guess that they published the July issue some days early. I guess that if the month issue is already finished, it makes sense to publish it.
Here you can see the mail-date cover-date relationship for the physical publication: https://www.nybooks.com/publication-schedule/
The magazine with cover date "July 1, 2021" is mailed on "June 8, 2021"
I don’t know how it came to be that politicians could promise impossible things to public employees in exchange for power, and when it turned out to indeed be impossible, somehow the taxpayer foots the bill.
I’m under no obligation to carry forward an unsustainable promise. It should have never been promised in the first place. The taxpayer, who gets NONE of this, is not the one who should pay the bill.
The taxpayer DID get something for this. They got public employees who took less money up front in return for a good pension. This saved the taxpayers money in the short term.
Under your argument, is the government not required to keep ANY promise? “The government should never have promised to pay back these treasury bills. Taxpayers don’t get anything from redeeming them, we shouldn’t pay off any of the government debt!”
I’m sure you get upset when you read about some big company charging billions for some mismanaged project. That’s generally the alternative.
You may not feel an obligation for your government to follow the law and responsibly manage its obligation to pay some 70 year old former librarian her modest pension. Hopefully your understanding about government not meeting obligations holds when you can’t get to work because a highway bridge is closed due to deferred maintenance, or your parents don’t get adequate care because your state health department fails to effectively regulate nursing facilities.
I hope someday we can all see why this is both amazing and ridiculous...
> In Rescuing Retirement, Ghilarducci and James promote what they call a “Guaranteed Retirement Account” (GRA), a system of federal retirement savings accounts that would combine features of defined benefit and defined contribution plans.
Nice to see a proposal in the article.
> GRAs would be professionally invested and would, Ghilarducci and James argue, generate greater returns than existing 401(k)s by taking advantage of access to the more profitable investments and lower fees that large pools of assets can offer. The accounts would follow workers throughout their careers, even if they changed employers. When the time came, the GRA would be transformed into an annuity, which, alongside Social Security, would pay out a consistent and lifelong income.
I don't know anything about 401(k)s but do they really operate on some foundational condition of less-profitable investments and higher fees?
Given Social Security, not only as a concept, but how it has been used as a piggy bank by a spendthrift Congress, the likelihood that a GRA would suffer a similar result is close to certain.
"Giving money and power to government is like giving whiskey and car keys to teenage boys."--P.J. O'Rourke
The (HR person of the) employer chooses what to allow in a 401k. Normally you have a dozen funds or so available. And the choice by the employer doesn't necessarily align with the employees interests, as the high fee funds would love to send you that amazon gift card, whereas the low fee funds wouldn't even reach out to you. ;-)
Some companies have experienced people looking at many companies and picking one based on the lowest costs and wide selections.
Other companies might pick Joe Blow Company because the salespeople are attractive and the lunches and dinners are expensive. Vanguard might have salespeople if you're big enough but most companies aren't.
Locally, there was a company that got its hands on a lot of union pension money. They took the trustees on safaris in Africa, etc. https://www.wweek.com/portland/article-23437-sept-21-2000-th... In a lot of cases, the people making the recommendations aren't evil but just overwhelmed by the personalized attention that a high-cost alternative can give them.
And, one doesn't need some magical financial acumen to do this. You can buy a "target retirement" fund which simply holds things in a ratio (based on financial industry consensus) recommended for your retirement age.
Anyway, the general strategy is to move from stocks to bonds and then government bonds the closer you get to retirement. Definitely not something you need a money manager for
Instead, we should treat each retiree as a ward of the state, and provide them with Government housing, cell phone and plan, food (cooked or ingredients), and a limited amount of electricity/water - plus a small stipend for private purchases.
The other fault of the current system is that we link retirement to age - instead, it should be linked to health: if you can continue working, you should be expected to do so.
With the savings, we can eliminate regressive taxes like sales taxes (or just enable the currently totally unsustainable system to keep functioning.)
"Providing citizens with cash, which they then use to independently procure good and services across millions of individuals, is fundamentally inefficient.
Instead, we should treat each citizen as a ward of the state, and provide them with Government housing, cell phone and plan, food (cooked or ingredients), and a limited amount of electricity/water - plus a small stipend for private purchases."
Please no. People should not have to work until they cannot work anymore. Our incredibly flawed system of today is still miles ahead of your proposal.