Comment by MarkusWandel | Hacker News Reader

Comment by MarkusWandel | Hacker News Reader

Is it really as political as that as in "the big bad republicans ate my pension"?

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.

The US workforce (at the time) was sold on 401ks as a replacement for pensions, when they’re really for only the highest compensation earners as a tax dodge [1]. Predictably, very few made enough to contribute to a 401k in a manner that would replace the safety of pensions, and now large cohorts nearing retirement are left with little while shareholders captured profits that previously contributed towards funding pensions. Tada!

[1] https://news.ycombinator.com/item?id=21827154

> shareholders captured what previously funded pensions

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.

Interestingly enough, net flows of those funds are negative[0] as more and more retirees pull to fund their retirement. The only thing keeping the stock market rising at the moment is in all the buybacks keeping demand up and supply down.

[0, page 11]: https://www.goldmansachs.com/insights/pages/top-of-mind/buyb...

The total amount of buybacks in 2020 was less than $500 billion, but almost $35 trillion in shares were traded. How is it mathematically possible that buybacks are the only thing keeping it afloat?

Agree. 401ks were never intended to be a complete retirement plan or pension replacement, and are frankly untested at the scale that they are now being used for. It's a little scary that a tiny carveout of the larger IRS code for pensions was turned into the defacto retirement plan for Americans.

https://en.wikipedia.org/wiki/401(k)#History

Social security and Medicare are supposed to provide a floor and prevent elderly poverty. We’ve gotten much much richer (which somehow previous generations never get any credit for) and so that floor seems a lot lower than it used to.

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?

> We’ve gotten much much richer (which somehow previous generations never get any credit for)

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.

The problem with pensions is that nobody wants to actually pay for them. It’s a great concept, but nearly impossible to keep financially solvent without growth of the payor base.

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.

> The problem with pensions is that nobody wants to actually pay for them. It’s a great concept, but nearly impossible to keep financially solvent without growth of the payor base.

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.

> You mean companies don’t want to pay for them

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)

It works in the aggregate in a tragedy of the commons sort of way, but social security taxes will just keep ratcheting up so everyone who didn’t save enough get a basic level of retirement (old people vote reliably, and there are a lot of poor old people on the horizon), probably with means testing starting in 10-15 years. I suppose that’s the best we can hope for considering humans and their terrible risk management and long term decisioning ability, and there’s clearly enough wealth and productivity for government to sink its teeth into. If the private sector couldn’t do it with 401ks or pensions on the front end, government can do transfer payments (social security) and taxes on the backend.

> High level, the past strip mined the future, and the bill is coming due.

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 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.

The market does provide it, it’s called a deferred annuity. If you find the pricing disappointing, well then you see the issue with pensions.

That’s precisely my point. People don’t want to pay the true cost of taking on a 40 years deferred annuity.

> "The US workforce (at the time) was sold on 401ks as a replacement for pensions, when they’re really for only the highest compensation earners as a tax dodge..."

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.

The issue with the 401k is that it is essentially an anti-progressive tax. It is there as a way for the government to encourage and subsidize retirement savings; but it does so by providing a 1:1 deduction on taxable income (with a choice of taking the deduction now or during retirement). This means that you get a greater benefit (read subsidy) if you are at a higher tax bracket; even if you are looking at the benefit in percentage terms instead of absolute.

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.

The savers tax credit is similar to what you are proposing.

https://www.investopedia.com/articles/retirement/04/031704.a...

yah, 401(k)'s are financially engineered to seem to be for the masses, but they're really designed to advantage high-earners even more. i'd actually prefer to remove the tax advantage altogether (and plow that into an overall more progressive tax structure), but absent that, a credit phase-out would be better than what we have.

> If you don't pay income tax, you get no benefit from a 401k.

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.

>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.

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?

actually yes, most big pots of money become poorly allocated (from graft, ossification, or whatever), whether via government, market, or some other mechanism. under uncertainty (which, in the real world, is always), we're better off having 10 relatively decoupled, medium-sized pots over 1 large, more easily corruptible pot, in all ways that matter to a society and economy (not so much to politics, the quest for power, though).

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).

And yet defined benefit pensions are pyramid schemes that are increasingly top-heavy and too many retirees and not enough workers to pay for their luxurious and impossible retirement benefits.

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.

401ks are great.

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.

> and try to save a good 1/3 of your income for the future.

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?

> Is it really as political as that as in "the big bad republicans ate my pension"?

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...

During the 80s, get tough on crime politics mushroomed pensions and healthcare obligations because state/local governments lacked the cash flow for raises during higher inflation times.

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.

> States like New York have mostly funded pensions, even with generous pension plans.

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?

One difference is that neither of those two states have New York City, simultaneously the producer and consumer of more money than 1/3 of the country.

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