The real reason for pensions
newyorker.com
newyorker.com
Predictably the pensioners-to-be asked for generous pensions, paid early in life, at the least expense possible. Predictably the public purse was more generous with future payouts that didn't look like debt than it would be with present payouts. Predictably the economy shifted away from uncompetitive and unionised sectors of the economy in Detroit to Austin. Predictably the now-pensioners claim that they paid for pensions and are thus 'owed' them.
But from whom? Either they never cared to set up a fund or did and had the state backstop it, and now there is no money. Retiring after 32 years and earning "80% of your best 4 years of pay" for 40 years (remember, they keep paying out when you die because your wife still needs to eat, so we have to handle the statistics to handle the average case) turned out not to be affordable on the tiny percent they put away.
What else was ever going to happen?
Do you think employees are 'owed' a paycheck after they do their month of work?
Some jobs, instead of paying you all that money up-front, instead give you a pension. Just because it's deferred 30 years rather than just 30 days doesn't mean it's any less your pay than your paycheck.
I mean, you can argue that it isn't sustainable, or even that it's stupid to expect a company to deliver on a promise 30 years from now, but when you are paid in a promise of future pay... you are certainly owed that money.
>>Predictably the now-pensioners claim that they paid for pensions and are thus 'owed' them.
I read the quotes as implying that the poster thought that the pensioners were acting entitled because they thought they were owed their wages.
Of course, if someone that owes you money declares bankruptcy, sometimes those debts are reduced or expunged. But that doesn't make the original debt any less legitimate.
Companies and cities go bankrupt. This isn't news. This has been happening since before the Aztec empire started. If you are going to design a pension for thousands of people you should take care to design it for the worst case scenario. I would rather take a pension that had a 99% chance of paying out $500 per month, than one that had a 95% chance of paying out $650 per month, because the retired should be risk adverse.
Instead the employees were greedy, thought they could double dip by being part of the huge baby boomer group (thus not paying in a fair share, considering what they would get out) and retiring handsomely.
Well you can't change reality. At the very bottom of economics is actual real resources, and if you don't create enough value or save enough value and there there isn't enough other people to feed from then you must downwardly adjust your standard of living. Remember Freedom 55? I actually know people that worked for only 30 years at a government job and are being paid 80% of their best 4 years (adjusted for inflation of course) for the rest of their life. This is unsustainable.
And? I've had jobs where I got paid $200/hr. I mean, that's not a "sustainable" rate- I'm just not bringing that much value.
But the boss agreed to the rate; I still expect them to pay up for the hours I work, and I think that expectation is legitimate.
The big thing you are missing is that when the boomer pension contracts were created? you could expect a reasonable return, over and above inflation, on your T bills. Because safe investments that paid out reasonably existed, defined benefit pensions were a reasonable thing.
The economic reality is very different now, and the very idea that someone could make good on a defined-benefit pension is kinda laughable. My point is that the economic realities were different in the 80s. The big danger in the 80s wasn't that the value of your investment wouldn't go up, it was that inflation would go up even faster, making your 'defined benefit' worth much less in real dollars.
But seriously, guys, don't offer your employees a pension, and if a potential employer offers you one, laugh in their face. Let us manage our own retirements.
In my view, there are 2 kinds of pensions. One is Defined Benefit, which is crazy to count on. On the other hand, companies can offer Defined Contribution, which is fine. If a company offers a 401K, and makes a 10K contribution, I'm happy. It's 10K more income that will probably get taxed at a lower bracket when I retire.
In most countries the backstop is to have a small defined-benefit state pension, so they won't end up literally penniless (in the U.S. this is Social Security, which pays a minimum of ~$9,500/yr). Other countries have tried to move more people into essentially buying annuities to mitigate the varying-lifespan risk. For example most defined-contribution private-sector pensions in Denmark now pay into pension funds (third-party, non-profit organizations) that by default are essentially the purchase of an annuity. You can cash it out as a lump sum upon retirement, but if you do nothing, the default is a traditional monthly pension for life, with the amount dependent on your contribution.
The reason pension obligations can be discharged in bankruptcy and 401k contributions can't+, is because the former is a contractual obligation to a future stream of payments, while the latter is a transfer of vested property.
Neither employers nor unions like this idea however because they both like to use pensions as a slush fund. Some workers also might not like it because annuities don't have great returns.
+There is the unlikely possibility of a clawback of 2 years at most.
We already know from pre-social security times that approach doesn't work; most people end up destitute.
Perhaps a mandatory 401k everyone must have, contribute to and refrain from using until age 65 would be the best of both worlds?
The same goes for salaries. There's nothing to stop them from offering them and enforcing slavery.
Except, you know, the people that would be affected.
Society needs to find some way to make promises of future money in exchange for present goods and services enforceable. If only there was some mechanism for that...
There are some 401K plans (not many) that allow you to have index funds as your core which is definitely good. But not sure how to handle the market crash problem.
I didn't say you were, I merely pointed out that we already know people can't in general handle their own retirements.
Social security is a pension.
> To which a 401k or IRA is infinitely preferable.
I dunno, the people who have had 401k's wiped out in various economic collapses might disagree on whether such plans are "infinitely preferable" to defined-benefit pensions.
> But SS has the same problem as pensions: there's nothing to stop future politicians from eliminating it at any time to free up some headroom in the budget.
Well, except voters, which have stopped politicians on several occasions who wanted to make much smaller changes -- which would not even affect current beneficiaries -- to Social Security than eliminating it.
> Perhaps a mandatory 401k everyone must have, contribute to and refrain from using until age 65 would be the best of both worlds?
Well, certainly, it would be one of the best (of the very many!) public subsidies the financial services industry has received. Not sure it would be good for anything beyond that, though.
Are there products that let you do this pre-retirement as opposed to at retirement? If so they certainly don't seem as popular as the traditional save-to-65-then-buy-one approach.
Yes, let's see how that turns out, when 80% of the population over 65 is destitute or working at Walmart/McDonalds well into its seventies...
Yet while the excuses are legion the majority of these same people have no issue with car notes(s), cell phone contract(s), and buying breakfast/daily.
Fortunately my company offered a pension when I joined, they have since converted to 401k and frozen pensions at the end of the year. Yet it is there and one more safety for me.
It will take decades to undo this mans legacy.
The best we can do is withdraw 25% as a lump sum and then buy an annuity with the remainder ( or draw-down a Government-controlled small % each year ).
Not much of a safety net.
So naturally people decide to use a different savings vehicle, one in which they can decide how to use the capital. Hence the headline 'underfunding' of our personal pensions.
If my employer offered me a pension I'd laugh in his face. In 2013, a pension benefit's market value is $0. Who actually believes the money will be there when the time comes?
After 30 years of private sector firms refusing to fund pensions and passing them off to the PBGC, the public sector is finally getting into the game. No one should surprised.
Ultimately neither solution is a good one. This is class warfare at its finest.
Personally I think the social contract of the US is starting to break down, as is societal cohesion. We're all super civilized when we all have good prospects and everyone's life is improving. As the prospects deteriorate so do people's willingness to participate.
If you had the choice, and had to pay for your decision, how much would you pay to live in the 2000s instead living in the 1900s?
The elderly deserve their pensions. The young get Modern Progress.
The excessive entitlements granted over the last 2 generations is unsustainable. In Spain many baby-boomers have 2X-3X the pension income of a full-time employee. How is that sustainable ??
No, they don't, necessarily. There is a balance to be struck with regard to magnitude and length of pension payments.
2-3x the pension income of a full-timer seems excessive at a glance. That doesn't disprove the existence of a reasonable pension scheme.
Falling populations alone force a requirement for ever higher taxes due to a downward spiral equation on taxes / people / savings / standard of living. The next generation always has to pay more for the last (greater population in the past each cycle), while having less savings and a lower standard of living.
Why do I point that out? Because there's no rule that human life has to get massively better. There is no guarantee. It does not have to happen at all, and I would argue entropy + certain aspects of human nature are constantly acting to undermine the potential for progress to occur.
It's not just that there have been exceptions. Life getting massively better one gen to the next is the extraordinarily rare exception. We definitely shouldn't take it for granted.
BUT the pensions and social security and whatever are premised on the world getting more bitchin' at a high rate. That high rate is gone, but the programs put into place while it was around are still around, and they haven't been adjusted.
I don't mind that we've returned to slow growth instead of rapid, so long as it happens to everyone. That does not seem to be the case re: social security, the housing market, etc and those are largely dictated by government. The Fed (a quasi-government agency) sets the interest rate and thus has a lot of control over housing prices. The Federal Government enacted Social Security and refuses to reform it in any meaningful way.
As a result I'm not optimistic that social cohesion will continue. We're graduating people who can't buy houses or cars or start families at a substantial rate. Loss aversion is a REALLY strong emotionally motivating force for humans as we're wired to avoid losses much more aggressively than pursue gains. But if you don't have much to lose any possibility of gain appealing and that's how you have a revolution.
It's just not true: http://gapminder.org , http://www.gapminder.org/world/
"The Earth's not a closed system, it's powered by the Sun." -- M C Hawking
> On Tuesday, a federal judge said Detroit could legally cut the pensions it has already promised to workers as part of its bankruptcy plan. Many state constitutions, including that of Michigan, hold that the government can’t go back on pension promises, and, because of this, cities have generally assumed that they could not touch existing pensions even in cases of bankruptcy. (Instead, many have been cutting pensions for newly hired workers.) But federal law supersedes state law, and, according to Judge Steve W. Rhodes, pension cuts are just fine under federal law. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” he said.
Takeaway: Bankruptcy courts > state constitutions. It's a straightforward result of the Supremacy Clause, but is practically very significant.
People talk about how bad government incompetence is now, but it can get far worse in the future. Not saying that pensions need to stay, or that they should never be cut. Just saying that if the good reasons to go into public service keep getting removed government is only going to get worse.
Lets face it, greed and easy-money is absolutely the wrong reason to be in "public service".
The parent is espousing "greed" as a primary means of recruitment. The method of payment my point. People motivated by "greed" is not the type of people one wants in government. Especially If we have to pay them with a form of remuneration is at once both opaque and easily manipulated.
In otherwords, if these people (say teachers) are valuable, pay them proper salaries. Don't pay them poor salaries and then promise them a $2 or $5 million dollar pension pot if the "stick around" for 20-30 years. Just pay them fair and square a proper wage from the get-go. The poor pay + gold plated pension thing is just a form of dis-honest pay, where special interests manipulate the system for their own advantage.
So, don't negotiate cut-rate payment plans for cut-rate people. Seems simple enough. If you want good people, pay them properly and transparently.
As I said though, it's not "greedy" of people to choose a job that pays less in the short term because it makes up for it with a deferred benefit. It's no different than getting a smaller salary in return for equity or a lower salary in return for more leave. It's just another thing that goes into the equation when people are evaluating their options.
The word "greed" (typically) goes beyond "rational foresight"to include opportunistic self-enrichment (esp. in the absence of transparency, effective oversight or control). But doing a DCF of a career trajectory vs. a simple Salary comparison is legitimate math any employee, IMHO.
So maybe some people will still go govvie out of a sense of duty, but for more than a few people it'll make it a raw deal. Especially considering how government workers now have to deal with furloughs and shutdowns. Sure, many people in other fields have to deal with a lot of uncertainty too, but one of the pluses of gov't work used to be stability. Without stability, it makes the job even less attractive.
> Why is it important for companies to encourage their employees to save? Aside from “it’s the right thing to do,” there are actually compliance reasons why this is necessary. “It helps with nondiscrimination tests,” says Robert Richter, vice president of SunGard’s wealth & retirement administration business in Jacksonville, Florida. He adds, “Highly compensated employees are subject to deferral limits that are based on non-highly compensated employee contribution rates. If non-highly compensated employees defer at low rates, then it will limit the amount that the highly compensated employees can defer. Safe harbor plans are a way to eliminate that test, but in order to use the safe harbor provisions the employer is required to contribute to the non-highly compensated employees either a minimum matching contribution or an across-the-board contribution, even for those who do not defer.”
- http://fiduciarynews.com/2013/11/are-401k-plan-sponsors-pois...
I also think it was silly to offer pensions in the first place since it is not possible to predict the future. People working for cities and other organizations offering pensions should be very concerned by recent events.
Every contract is formed in the shadow of its governing law.
Municipal bankruptcies have been a part of the law of the United States since 1937.
∴ no promises are being broken in a meaningful sense.
I think a big failing of government pension funds (and Social Security) is that there is always a tremendous temptation for politicans to borrow against them, and leave the repayment to someone who will be elected after they're long gone. The next person kicks the can down the road, and sooner or later you're Detroit.
With sane and responsible management I'm sure some pensions would fail anyway because there's always the chance of catastrophe. But I've seen enough pension problems that were the result of risky investing, poor forecasting, and irresponsible borrowing that I feel like most of the time the pension needn't have failed or gotten cut.
Well the modern economy is reaching such inequality levels that we're going to have to do something or else it'll be forced, and potentially volatile.
Guaranteed income seems the best plan.
http://www.rollingstone.com/politics/news/looting-the-pensio...