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Comment by nly | Hacker News Reader

The problem is we're all now dependent on stock market performance to make retirement feasible. Employer guaranteed defined-benefit pension schemes are dead.

My uncles pension scheme was structured to pay out 1.5% of his final salary, inflation adjusted for the rest of his life, for each year he'd worked. He worked at one company his whole career, from age 18 to age 55, when he retired. Factoring in his mortgage, which he paid off prior to retirement, his disposable income never even dropped when he retired.

Exact figures don't matter too much, but to achieve that with a defined-contribution pension you need to invest something in the range of 15%+ of your gross salary for 30 years and achieve a 7% above-inflation annualized investment return. And it won't be final salary but career average.

Most people aren't doing this so are fucked

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> The problem is we're all now dependent on stock market performance to make retirement feasible.

Which seems a bit convenient for the wealthy. I think it was intentional, to align the interests of pensioners with the wealthy.

It seems to me that pensions are one thing governments can do a good job at, because companies may fail but the government is much less likely to be unable to pay retirement benefits. They may need to renegotiate the benefits but they won’t go to zero. And if companies fail the government provides a pension of last resort anyway.

Either way, we have set up a system where those with assets are slightly in the majority (65% home ownership, probably similar number with 401ks or stocks [1] 56%) and so will continue to vote themselves benefits at the expense of those who haven’t already acquired assets.

[1] https://news.gallup.com/poll/266807/percentage-americans-own...

>It seems to me that pensions are one thing governments can do a good job at, because companies may fail but the government is much less likely to be unable to pay retirement benefits.

Illinois and New Jersey beg to differ. Granted checks haven't bounced yet but it's pretty clear weird stuff is gonna happen and either pensioners or taxpayers will get screwed bad.

People who can retire are wealthy. They have a claim on [10, 20, 30] years of an income stream in the future. This can either be a claim on future tax revenues (public pensions) or on return to capital previously invested (private pensions). Most people have always worked til they died and it seems unlikely that the system where people work for 30-40 years and then get 30-40 years of pension will last.

95% of people used to work in agriculture, now 5% do. This scarcity is our own creation.

I don't think it's scarcity, I think it's just reallocation of workforce, due to technological advancements. Those 5% can now produce equivalent or more to what the 95% used to produce. And because of that, people are able to focus on other work.

Right. Strategy 1 was "offer retirement plans and default on them," strategy 2 is "let them buy assets, dilute them with printed money."

I also agree that when the middle class erodes to the point that asset ownership falls below 50% is when things get, uhh, interesting.

A lot of people think this - but most of Europe has been like this for a while. Why will it be so interesting when it happens in the US?

Yeah middle class homeownership is bullshit. Middle class stock ownership is less obviously good or bad, because the 0-sum nature of land is not present.

When one gets right down to it, ownership is a too strong stuff. Total Control for eternity which is then sold in finite time in practice? Woah there, why so many infinities? "Rent" has a bad rep, but the problems of rent have to do with it being backstopped by ownship --- i.e. private landlords. "Rent all the way down" is good and conceptually simpler as their are no crazy cancelling out infinitis or whatnot. It's a system of flows that more accurate tracks how the "real economy" works.

Of course, it is important there is still leverage, futures markets, etc. etc. of various sorts to push along history, but full ownership is too much a sledgehammer.

There really isn't such thing as ownership. Stop paying your property tax and see what happens.

Certainly, but we dole out an awful lot of privileges in return for that measly obligation!

Prop 13 merely puts the silliness in sharper relief.

There is with bitcoin.

So, what then? The state owns all the land and all company stock? Non-middle-class persons own all the land and all company stock?

Sounds like a great way to force everyone except the wealthy elite into poverty cycles. Maybe there is a reason that those countries that implement what you are talking about (no property ownership) are locked in either perpetual poverty or perpetual war against their own citizens.

Doing away with property ownership is a great way to join the ranks of the third world.

It's already that way in the US, the percentage of paid off home owners is ~29%.

I don't know why some people consider themselves "owners" of assets the bank actually owns, but it's normal in the USA.

With interest rates at their current level, it makes a lot of sense to not pay down your mortage, to refinance, or even to take out a heloc.

Again what matters is net worth, not whether you house is paid off.

> It's already that way in the US, the percentage of paid off home owners is ~29%.

That 29% is a huge chunk of people; to put things in perspective US presidents win elections with a lower percentage of support from the population.

> I don't know why some people consider themselves "owners" of assets the bank actually owns, but it's normal in the USA.

Because they actually have equity in that asset, and that equity might be the majority? For example, they bought the house for $500k, then ten years later they owe $350k but the realisable value of the house is $800k. If the house is turned into cash, they own more of the cash than the bank does.

Also, because there is a clear path to ownership[1]? You aren't at the whim of the landlord - upgrade (or not) your property whichever way you feel is best with very little interference from the actual "owner" (i.e. the bank). If you have complete say in how an asset is used, and when it will be disposed off, and who may use it, that sure looks like ownership to me.

My residence, for example, will, at the current trajectory, be completely paid off in 24 months or less. My monthly costs drop dramatically at that point, which can be the major goal when "buying" property.

The bank owns the debt on the money that was used to buy the house, which is not the same as the house by any stretch. Having the deed to a house comes with a lot of strong legal protections.

The problem with the current situation is if the stock market gets too divorced from reality, it won't matter if the stock price is high or not. There will be physical shortages of goods. The stock market is supposed to represent capital formation where people set up systems to produce stuff in the future. If the stock market gets too broken, those systems won't be in place and stuff won't be produced.

As a tangential aside it is fun to imagine how an animal perceives shopping - humans walk in to a shop, picks up some stuff, and walk out. It seems very communal. Some humans get in trouble when they pick things up and walk out but it isn't obvious why. They get called thieves. The humans know a bit more than that - the trick is a complex system of bookkeeping, represented by money, to track who is entitled to how much of what. The bookkeeping only matters if people trust that it accurately represents entitlement. If the trust is lost there is hell to pay.

Adding on to your first paragraph about dependency on stock market performance for retirement.

401ks that my generation is used to are a concept only ~36years old, even at that most companies didn't start offering them until the 90s.

It's a very young tool that we're only just now seeing play out for people reaching retirement age that missed the ubiquitous pension era.

And roth IRA was introduced in 1997.

No comment on any of this being good or bad, I think it's interesting to look at the historical perspective of it though.

I do wonder if it will be durable… or they will just change it to something else in 30 years (when I can touch the money).

I'll admit that one of the things that makes me nervous about the Roth, and not taking your tax advantage now instead of later, is that in an extreme situation, the government could renege on the promise of tax free gains and distributions.

They can't renege on the tax advantage they already gave you with a traditional.

You have to think more creatively :)

What about a surtax on distributions from traditional IRAs?

Good point. I don't have a cohesive rebuttal.

>He worked at one company his whole career,

Which was one of the issues with defined benefit plans. They were structured around long employee tenure. Move around every few years and you basically got no pension most of the time.

I personally think it's unfortunate that most people won't have defined benefit plans any longer. (I'm glad I'll have one from a long-ago 10+ year job whenever I decide to start collecting.) But it's hard to get away from the tenure requirements unless you make the system portable and then you're basically creating a shadow social security system.

>most people won't have defined benefit plans any longer.

Most people never had them. Only a minority of middle and upper class white men had them for a short period in time.

Here's some historical tables [1]. For example, in 1975, 44M people were in one, decently less than half of workers.

[1] https://www.dol.gov/sites/dolgov/files/ebsa/researchers/stat...

In the UK the law was changed such that people were given the freedom to transfer out of their defined benefit schemes, and most were paid handsome lump sums for doing so because the schemes were desperately underfunded and wanted people out

How does paying a handsome lump sum to leavers help make them less underfunded? If the handsome amount is less than the value of the pension, rational people would leave it in there. If it’s more than the current value of the pension, rational people would take it out and the pension fund is thereby left worse off, right?

The guarantee on these schemes was on the fixed retirement income, which means as interest rates fell the present day value actually shot up.

I don't think these companies had a choice in the matter. Lots of people cashed out because they feared their pension scheme would collapse.

It should be noted that transfering out of these schemes is expensive because you're forced to take advice from an IFA

Just guessing, but, lump sum may be more than the current amount that the person has contributed, but less than what the pension guarantees but may not be able to attain. That is, person may have put in 100k; and a payout is 150k. That seems like a loss, except the pension may also be built around assumptions of 7% growth in that 100k per year; in reality it may be seeing only 3% growth. Better to get it off the books than have to service it in 30 years. And for the individual, better to get more and be able to invest it elsewhere, than to risk it in a pension that may go under or otherwise be unable to meet the level of return you expect. So, win/win.

Defined benefit were typically paid in by the company. That's the thing that makes them attractive. As an employee you do nothing and, when you retire, you potentially get a nice check every month. I've known people I worked with in a past life who had even totally forgotten about the benefit.

But you're probably basically correct. It's a lump sum that's likely a significant payout but less than the computed actuarial value that would have to be paid out.

Rationality is in the eyes of the beholder.

One wonders about the actuarial assumptions made by your uncle’s former employer and how, or if, they expected to meet that obligation.

If history is any indication the answer to both of those were "they were wrong" and "caused severe financial issues to the company, if it didn't bankrupt them entirely"

Exactly, the point of the comment being that generous defined benefit pension schemes probably aren’t some paneceal solution that capital is now withholding, but that they were at best a burden and at worst a lie.

How are individuals supposed to have it any easier, though? Should people just be forced to work until they drop? Or does everybody now need to be some kind of financial genius in order to make retirement work?

Tax the zillionaires, pay the individuals more, and the executives less. "Robber baron" used to be an insult and a sign of disapproval. It was a popular term.

In much of the western world, people set aside ~10% of their paycheck to a pension fund, which then invests it in relatively solid options (stocks, real estate, bonds, with a risk profile that adjusts over time as the worker ages).

If you do that throughout a career - keeping the same fund between employers - you have an independent source of income for retirement. By giving significant tax benefits to not withdrawing this money early, most people who worked most of their careers will be set for retirement.

Here in the UK:

> After a lifetime of saving, the average UK pension pot stands at £61,897. With current annuity rates, this would buy you an average retirement income of only around £3,000 extra per year from 67, which added to the maximum State Pension, makes just over £12,000 a year, just enough for a basic retirement lifestyle.

Source[0]. £12K is $16K USD/yr

There are also some sobering statistics on PensionBee[1]

[0] https://www.telegraph.co.uk/financial-services/pensions-advi...

[1] https://www.pensionbee.com/next-generation-of-retirees-repor...

The financial planning is the same, the difference is just in who takes responsibility.

The bottom line is that many people had this as a benefit and now very few do. What's unchanged is most people spend less time thinking about their pension throughout their lifespan than they do about almost anything else you can imagine, but they really should be because it's all on their shoulders now.

Here in the UK it seems we have a whole generation a couple of decades away from retirement poverty.

What's changed is that declining population growth and eventual reversal makes defined benefit pensions impossible to service.

I don’t know how a pensions would work in tech. 95% of the companies won’t exist by the end of your career so who pays for the pensions?

The stock market. You get a private pension.

Yep. If you pay very close attention, research, move things when necessary, etc. That's either a cool hobby or a second job.

Here's the thing, most humans find it less than scintillating to devolve ALL their activities to some sort of spreadsheet or algo optimization. World of Warcraft is fun for most until the end-game where discovery and imagination is ripped away and all that is left is actuarial tables and dice rolls.

The social contract between WesternCorp™ and their employees that involved a pension (or, conversely, through a Union), was an unfortunately brief period of history fueled by the tragedy of WWII (this is naturally an incredibly deep topic with many nuances that I'm shamelessly glossing over).

My humble and super-simplified opinion is that the PTSD of WWI fueled the subsequent Great Depression (Versailles, etc.), allowed the build-up to the global cataclysm of WWII, and when the emergent Super Powers were two complete divergent theories of government who had both been surprise attacked just a few years previous...there might be some feels.

Not being an economist, the small-S socialism that created the foundation coming out of the Depression which allowed the US to be the "arsenal of democracy" was slowly eroded by the worst excesses of capitalism, increasingly allowed and then accepted as normal because to protest would be to side with "them". Drunk on the irrational profits from WWII and the hyper-growth of the early post-war years, "Us vs. Them" of the Cold War was good business AND good patriotic politics. When you start to think those irrational margins are the norm, and they start to shrink, you do what you think is required to keep them aloft. With that mindset, sustaining a pension fund for a workforce that is decades out of employment can hardly be thought of as something that is increasing shareholder value (there was a time when a lot of the shareholders were also employees).

To be a savvy investor in the stock market requires both attention and treasure. The partnership between business and employee, always contentious (good!), during the Pax Americana emerged from innovation by firms like Kaiser, the G.I. bill mentality and the Marshall Plan. It ended with us recklessly dunking on a broken Russia for 15 years while "maximizing shareholder value" and ignoring the implications. The US dollar is now pegged to the value of our military to back it (rather than the intrinsic value of our production), which means we spend stupid amounts of blood and treasure while backsliding on the principles that built the Pax Americana to begin with.

At the end of the day, why should it be necessary for a citizen of the most dominant power in human history to toil their whole lives without some well-intentioned guidance and support so that it doesn't end in misery?

> World of Warcraft is fun for most until the end-game where discovery and imagination is ripped away and all that is left is actuarial tables and dice rolls.

Going to add this to my quote rolodex, thanks

most humans find it less than scintillating to devolve ALL their activities to some sort of spreadsheet or algo optimization.

Happy to be the exception that proves the rule: as an undergrad my friends and I would often have to resort to a spreadsheet that allowed anonymous ranking of activities to decide what to do to maximize fun.

You’re overstating the difficulty of investing for retirement. A simple Vanguard target date fund is all you need. Set up a monthly automatic contribution and that’s it. More control is possible but not necessary for decent returns.

If only there were some sort of entity "above" corporations that governed, in some sort of way. They could provide security for society. Nope, that could never work.

Government is not a magic box that just solves problems. It is full of people who are just as flawed and selfish and short-sighted as those running corporations. Look no further than the gaping fiscal hole that is Social Security for evidence of government’s ability to “provide security for society”.

Pension funds.

The company you work for will give X% of your salary each month to Willis Towers Watson or whoever, who invest huge sums of money on behalf of people like you.

Then you move jobs or the start-up fails or whatever, but your old money is still with Towers Watson, hopefully earning a decent return. You contribute to a pension in your new job too.

When it comes to retiring, you cash in your contributions from the pension fund (possibly having done some amalgamating and tidying up from the various jobs you've had) for some class of annuity and possibly a lump sum. All going well, it should be enough to live on in retirement.

If you're working and aren't contributing to a pension, I would strongly recommend it.

The state. Is our physical economy not capable of taking care of old people?

The monetary economy and real economy are less delinked than the populists think, but sometimes....c'mon people. If we can't pay for our old people what does that mean? Saving the money for later is an abstraction, we are not literally stockpiling canned food and adult diapers.

Ultimately if there is is a problem taking care of retirees, it is because we continue to let this ridiculous healthcare system exist. And honestly, I am not sure that is actually a limiting factor, or just a stupidity.

Frankly, as a huge net importer there are very few clear material limits --- port of LA problems have more to do with rate of change or imports than absolute amount. China, Germany, S. Korea, etc. could just stop exporting to us and all hell would break loose here, but it would be pretty weird there too.

Back to retirees. Let's not beancount our way to poverty. To paraphrase Keynes, if we can do it, we can afford it. On the flip side, if don't do it, then we will loose what capacity we had in that area.

> from age 18 to age 55, when he retired

Pension plans that start paying out for life at age 55 are fiscally infeasible

> Employer guaranteed defined-benefit pension schemes are dead

What do you think those funds invest(ed) in? If stocks and bonds don't perform well, how do those funds continue to make their payments? The shift to individual plans shifted responsibility, hurt some efficiencies pensions could get because they can plan for the mean, not the p95, and decoupled retirement from employers, improving the labor market. All in all, it's somewhat mixed, but what hasn't changed is where the money comes from.

Employer run schemes are/were supported by the business. The theory went that yes, they invested the pension funds in the market, but the business itself would always be there to contribute to cover the shortfall.

What fucked these schemes is falling bond yields

> the business itself would always be there to contribute to cover the shortfall

This is problematic because companies aren't eternal, and stock performance is somewhat liked to economic conditions, so if stocks are struggling, the company might be struggling, making the pension obligations a double-whammy, actually putting the health of the company at risk.

These days, in the US, there seem to be a lot of romantic notions of pensions, and I'm not against them per se, but having them managed and tied to employers was a really bad idea.

You could argue that having any kind of benecits at all tied to your employment is a bad idea... Yet Americans love to do that with healthcare

I'm not convinced having the average person manage their own retirement fund choices is any better. They lack bargaining power and they lack the savvy to make wise choices for the long term

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