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Old 05-25-2016, 10:22 PM
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Are pensions a crippling drain on the economy?


Many once-great companies have been ruined by their pension plans. Sears seems to be the next one to be dragged into the grave by this. Then when the company goes under, taxpayers get stuck making up the shortfall. Why should we have to pay for promises some crooked CEO made and knew he couldn't keep? Pensions for former government workers are a huge part of most budgets for towns, counties, and states. With the shape a lot of our country is in it seems like there are better investments to be made than "Paychecks for people who don't work here anymore".
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Old 05-25-2016, 10:39 PM
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Nope. Crooked CEOs and politicians are a crippling drain on the economy.
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Old 05-25-2016, 10:42 PM
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What may or may not be a crippling drain on the economy is the dependency ratio - the number of people who produce no goods or services, versus the number of people who do. The former, obviously, survive only if they consume goods and services produced by the latter.

Pensions from employment are just one mechanism for transferring goods and services from the producers to the non-producers. You could substitute a different mechanism - social security, private savings - but you haven't really changed anything fundamental. The only ways to reduce the burden of dependency are (a) to have fewer dependents, or (b) to feed, clothe, house etc your dependents to a lower standard.

Complicating the issue is the realisation on the part of most current producers that (all going well) one day they, too, will be dependents. So how they treat dependents now creates a precedent, establishes a pattern, or what you will - it has implications for how they themselves will be treated when the time comes.

Treating employment-related pensions as a special kind of promise that you are allowed to welch on is tricky. I promise A that if he works for me, I will pay compensation on stated terms, including deferred compensation in the form of a pension. I promise B that if he provides me with loan capital and will pay interest and repay the principal on stated terms. I promise C that if he provides me with share capital I will pay him a dividend on stated terms. If I welch on my promise to A, shouldn't B and C feel a bit nervous?

The answer is yes, they should. We have a mechanism for dealing with the situation that arises when enterprises make financial commitments that they are unable to honour; it's called insolvency. If a corporation can't honour the financial commitments it has made to its workers, it's insolvent. Why should we deny the fact? And if we're going to pick a group of creditors and say that an enterprise can default on its obligations to this group, why would we pick the former workers? They are perhaps in the weakest position. They have already honoured their side of the bargain and cannot retaliate, or recoup their losses, or whatever, in ways that suppliers, lenders, etc can.
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Old 05-25-2016, 10:52 PM
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Nope. Crooked CEOs and politicians are a crippling drain on the economy.
Tell that to Greece.
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Old 05-25-2016, 10:54 PM
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Tell that to Greece.
I think they know now.
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Old 05-25-2016, 11:01 PM
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Of course not. Pensions are paid by employees over the course of their working lifetimes.
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Old 05-25-2016, 11:03 PM
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Actually the "pension" system most worry about is Social Security--as the Baby Boomers increasingly retire and retirees live longer.
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Old 05-25-2016, 11:24 PM
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Actually the "pension" system most worry about is Social Security--as the Baby Boomers increasingly retire and retirees live longer.
Yes. But corporate pension plans and social security are alternative (or complementary) mechanisms for doing the same thing - transferring goods and services to non-producing retirees. The cost of doing this doesn't depend greatly on what mechanism you use (and, FWIW, social security is one of the lower-cost mechanisms). Ultimately, the only way to reduce the cost of providing goods and services to retirees is to provide fewer goods and services to retirees.
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Old 05-26-2016, 12:23 AM
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Ultimately, the only way to reduce the cost of providing goods and services to retirees is to provide fewer goods and services to retirees.
Which, btw, Social Security is doing by raising the standard retirement age for successive generations of workers.

Makes sense to me, at least for workers in fields that don't involve hard physical labor or something of the sort. If when I'm 65 I'm in better health than retirees of previous generations were, and have a longer life expectancy than they did, I don't see why I shouldn't go on working an extra few years before retiring. There's nothing magic about the number 65 that says a person is either obligated or entitled to stop working.
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Old 05-26-2016, 12:30 AM
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There are plenty of ways to keep Social Security from crippling the economy. There is no way to do anything about the past pension scams. These pensions were just unsecured promissory notes that the issuers could run out on whenever they felt like it, while lining their own pockets instead of preparing to cover the costs of paying out.
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Old 05-26-2016, 12:37 AM
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Probably the largest single factor in the growth (and projected further growth) is the huge growth in live expectancy at age 65 since the US introduced the social security retirement pension in 1935. In 1940, life expectancy at age 65 was 12.7 years for men and 14.7 years for women. By 2010 it has risen to 17.7 years for men, and 20.1 for women. That has a huge impact on the cost of providing retirement pensions, even if the number of people qualifying for retirement pensions did not go up (which, of course, it did).

So, yeah, having a high dependency ratio is in large part the result of success in improving livings standards and health standards. And it means that a fixed retirement age of 65 makes less and less sense. (Indeed, the traditional notion of "retirement" as a rapid transition from full-time work to no work at all makes less and less sense.)
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Old 05-26-2016, 12:39 AM
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There are plenty of ways to keep Social Security from crippling the economy. There is no way to do anything about the past pension scams. These pensions were just unsecured promissory notes that the issuers could run out on whenever they felt like it, while lining their own pockets instead of preparing to cover the costs of paying out.
Doesn't the US require corporate pension plans to be funded and actuarially assessed? Genuine question.
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Old 05-26-2016, 01:06 AM
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Are pensions a crippling drain on the economy?
Yeah, pretty much. In big cities like New York and Chicago, more police officers are living on benefits than are working. Meanwhile the exist funds are underfunded, as the city government for decades required low contributions from working police officers while promising them ever better benefits. No matter how hard politicians work to fudge the numbers, that sort of situation can't be sustained for very long. The city is responding to the crisis by raising taxes, even though its taxes are already quite high. Would you believe that taxpayers are fleeing Chicago? The mayor has suggested that bankruptcy may be looming in the near future.

So yeah, pensions suck. For politicians, it's easy to buy votes from government employees by promising them a gold-plated pension with very little contribution. To do so puts city governments on an unsustainable financial path, but the politicians figure they'll be out of office by the time the bill comes due.
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Old 05-26-2016, 01:11 AM
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Doesn't the US require corporate pension plans to be funded and actuarially assessed? Genuine question.
Yeah, about that.

For both government employee pension funds and corporate funds, there are laws. The problem is what the laws say. It is legal for the actuarial assessments to tell lies, pretty much. Not to tell any lie they want, but to lie in certain specific ways.

Each pension fund has a certain amount of money socked away in investments. The actuaries must predict how much that investment money will earn over time, which plays a large role in determining whether the whole pension fund is rated as financially sound or not. The problem is that it is legal to "predict" wildly unrealistic rates of return, and most large pension funds do exactly that. This allows them to hurtle towards bankruptcy, even while on paper it looks like their financial situation is solid.
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Old 05-26-2016, 01:34 AM
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Yeah, about that.

For both government employee pension funds and corporate funds, there are laws. The problem is what the laws say. It is legal for the actuarial assessments to tell lies, pretty much. Not to tell any lie they want, but to lie in certain specific ways.

Each pension fund has a certain amount of money socked away in investments. The actuaries must predict how much that investment money will earn over time, which plays a large role in determining whether the whole pension fund is rated as financially sound or not. The problem is that it is legal to "predict" wildly unrealistic rates of return, and most large pension funds do exactly that. This allows them to hurtle towards bankruptcy, even while on paper it looks like their financial situation is solid.
The raw rate of return is not important. What matters is the gap between the rate of return assumed on investments, and the rate at which it is assumed liabilities will grow (which will be some combination of the assumed rate of salary growth, and the assume rate of price inflation). The WSJ article gives examples of high assumed rates of investment return, but without knowing the other assumptions its not possible to say whether they threaten the solvency of the funds concerned. Assuming a 7% or 8% return is not in itself a problem if the fund is correspondingly maximalist in its assumptions about wage and price inflation.

Regardless, none of this would make pensions a "crippling drain" on the economy. It might be destabilising to the individual enterprise to make a pension promise but not arrange matters so that it can honour the promise when it falls due, but this doesn't "destablise the economy" any more than companies that make poor judgments about the price to pay for their raw materials, or the price to sell their goods at. Make enough mistakes of this kind, and the companies concerned destabilise themselves, but not the national economy. Likewise an insolvent municipality destablises itself, but not the national economy.

The cost of providing $1 of pension is, unsurprisingly, $1. This doesn't vary according to whether you provide it through a well-funded pension plan, a poorly-funded pension plan, a wholly unfunded pension plan or a taxpayer-funded plan. I agree, given the short-term focus which the electoral system encourages politicians to adopt, that there's a strong case for saying that state and local governments shouldn't be allowed to promise pensions which are not funded as they accrue through an actuarially robust mechanism, and from what you say this isn't currently the case. But I remain to be persuaded that the problem presents any threat of becoming a "crippling drain" on the economy at the national level.
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Old 05-26-2016, 01:45 AM
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Yeah, pretty much. In big cities like New York and Chicago, more police officers are living on benefits than are working. Meanwhile the exist funds are underfunded, as the city government for decades required low contributions from working police officers while promising them ever better benefits. No matter how hard politicians work to fudge the numbers, that sort of situation can't be sustained for very long. The city is responding to the crisis by raising taxes, even though its taxes are already quite high. Would you believe that taxpayers are fleeing Chicago? The mayor has suggested that bankruptcy may be looming in the near future.

So yeah, pensions suck. For politicians, it's easy to buy votes from government employees by promising them a gold-plated pension with very little contribution. To do so puts city governments on an unsustainable financial path, but the politicians figure they'll be out of office by the time the bill comes due.
None of this is a surprise which makes it so maddening.
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Old 05-26-2016, 03:09 AM
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Both industry and government had incentives to make their current position look better by underfunding pensions and kicking the problem down the road. I cashed out my pension when I was offered the opportunity, and invested it myself. Maybe my company would have the money when I'm 90, but I ain't betting that way.

However I think we should worry even more about all the people my age who have $50K in their retirement accounts. When they run out of money and try to live on Social Security alone, that is going to be a big drain.
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Old 05-26-2016, 03:23 AM
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However I think we should worry even more about all the people my age who have $50K in their retirement accounts. When they run out of money and try to live on Social Security alone, that is going to be a big drain.
Well, it will increase political pressures to raise social security payment rates, but there'll only be a drain if the decision is taken actually to raise them. Which of course will be a decision for which the politicians of the day will be accountable to the voters of the day - including workers/taxpayers.

(Mind you, I think there's a good bet that voters will accept such decisions. "Would you like to pay an extra 0.5% in social security?" invites a certain answer, but in reality the question is more nuanced. "Would you prefer to pay an extra 0.5% in social security or have Great Aunt Agatha come and live with you?")
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Old 05-26-2016, 09:14 AM
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Ultimately, the only way to reduce the cost of providing goods and services to retirees is to provide fewer goods and services to retirees.
Very well and succinctly stated. Yet NO policy makers seem willing to admit as much, and NO ONE in private business (labor OR management) seems interested in formulating or funding practices with this in mind.

Public and private institutions focus on their short term profits/budgets, and essentially ignore longterm obligations/implications. I truly respect teachers, police officers, firemen, etc. but I don't think we can afford to continue paying the types of pensions we currently pay able bodied people in their 50s and 60s after they max out after 20-30 years of service.

I think we really need to rethink our ideas of retirement. Ought people expect a 20-30 year paid vacation at the end of their lives? If so, then we have to make the current sacrifices to pay for it.

Of course, the least able - those who are most dependent on Social Security, are likely to be those with the least savings, and the fewest employment options. Social Security is not a retirement savings plan - it is a wealth redistribution tax. Plain and simple. Can be easily revised - well, easy technically - not politically. Increase the withholding cap, increase age limits, and add means testing. Problem solved.

It truly burns me when companies are allowed to reorganize in a manner that allows them to escape pension obligations - while top management lands in clover (or takes proportionately far less of a hit.) If the company is foolish enough to enter into longterm obligations they cannot meet, then the company ought to fail. I think pension obligations ought to be among the highest priority obligations. Make the folk who enter into unsustainable contracts realize there will be implications.
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Old 05-26-2016, 09:29 AM
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Actually the "pension" system most worry about is Social Security--as the Baby Boomers increasingly retire and retirees live longer.
Or we can stay at our jobs until we drop & let the young (middle aged) whippersnappers wait for promotion.
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Old 05-26-2016, 09:44 AM
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Yeah, pretty much. In big cities like New York and Chicago, more police officers are living on benefits than are working. Meanwhile the exist funds are underfunded, as the city government for decades required low contributions from working police officers while promising them ever better benefits. No matter how hard politicians work to fudge the numbers, that sort of situation can't be sustained for very long. The city is responding to the crisis by raising taxes, even though its taxes are already quite high. Would you believe that taxpayers are fleeing Chicago? The mayor has suggested that bankruptcy may be looming in the near future.

So yeah, pensions suck. For politicians, it's easy to buy votes from government employees by promising them a gold-plated pension with very little contribution. To do so puts city governments on an unsustainable financial path, but the politicians figure they'll be out of office by the time the bill comes due.
I'd like to point out that it's primarily the police and fire departments that benefit from the largesse in pension plans, not the city rank and file. While they do get solid pensions, politicians rarely raise say... water meter reader pensions or staff engineer in the Public Works department pensions in the same way that they do police and fire pensions. This is mostly because the police and fire know that they have city governments over a barrel- if they want more benefits, they just have to make some noise about blue-flu, or about how public safety is at risk, and politicians then have to make the decision to seem like they're giving our beloved first-responders short shrift, or give them a boost and look like they're concerned about everyone's well-being.

But the folks who answer the phones at animal control, or read water meters, or manage a bunch of road-fixing crews don't have nearly the public exposure, nor does the public particularly care if they're not happy with their pensions, so they don't get the bumps nearly as often or as much as the police and fire departments.

I'm not quite on board with penalizing current management for the failures of past management; for example, a CEO from 1985 may have made a decision back then that made sense with respect to the pensions, but now in 2016, it's biting the company in the ass and mandating reorganization and/or reduction of benefits. Why is the guy hired in 2012 necessarily responsible for that, and why should he be penalized? It's entirely possible that what he's doing is what needs to be done to keep the company and system at least somewhat solvent.

I also don't think pensions are that much of a drain on the economy; most private companies haven't had them in significant numbers since the 1990s, I'd guess, and it's also likely that the retirees still living off of actual defined-benefit pensions are getting older by the day. Most employees and recent retirees are probably 401k or other defined contribution plans, with mostly public workers at the muncipal, state or federal level still getting defined benefit plans. I'd be willing to bet that teachers are probably the single biggest group with a defined benefit plan these days.
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Old 05-26-2016, 10:04 AM
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One long-term solution is to change the type of pension plan, from defined benefits plan to defined contribution plans.

Defined benefits plans are the traditional model that seem to be under discussion in this thread: where the employer makes a committment to maintain a pot of money to pay pensions until, well, the last pensioner dies. Those plans are attractive for the pensioners, so long as all goes well, but carry with it an unknown price tag for the employer into the future.

Defined contribution plans work differently. Each pay period, the employee and the employer make their pension contributions into the pension account for that employee. All of the employees' individual pension funds are managed by a joint board of trustees composed of employee and employer reps. They invest the money as prudently as possible. Then when the employee retires, they have a separate pension account that pays out, rather like an IRA.

This type of plan has the major advantage of no unfunded liability. It's a pay as you go. Each pay period, employer and employee pays in. The employer doesn't have to keep paying into the fund if needed to keep it solvent, because the money is already in each employee's own fund.

Governments in Canada have been moving towards this type of plan because it is more fiscally prudent. For employees, it has the down side that the benefits may not be as good as under the defined benefits plan, but it has the upside that the money is there before they retire and they don't need to depend on the employer making future contributions for thirty years, if needed to keep the pension fund solvent, which is the major issue with defined benefit plans.
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Old 05-26-2016, 10:16 AM
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Of course not. Pensions are paid by employees over the course of their working lifetimes.
Not always.

Part of what crippled companies, municipalities and industries over the last 25 years was the practice of union-driven "spending the future to save the present." In auto, steel, municipal service and some other huge industries, immediate wage and benefit improvements were traded for increasingly lavish pension and retirement benefits. "Take a $1 raise now instead of $3, and we'll throw in lifetime health coverage for your family." Repeat every 2-5 years for decades, until the corporate "win" in holding down salaries and benefits in each short run were at the cost of platinum-plated retirement benefits (but way down the road when it was all S.E.P.)

The chickens that came to roost were approximately Gojira-sized, especially on top of the shrinking industry and benefits-producing worker bases... since in many cases adequate funding was never set aside or properly managed by the unions and corporations.

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Old 05-26-2016, 10:19 AM
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Very few employers offer defined benefit plans to new hires these days. My employer stopped offering them in 1997.

There is nothing intrinsically wrong about defined benefit pensions nor is it evidence that government can't do anything right. There are plenty of corporate pensions that have been undermined by boards deciding they can contribute less than what is needed to keep them afloat. I don't see the terms of too many pensions becoming more generous over time, what is likely more significant is the cost of retiree health care rising dramatically over the years. It's easier to point the fickle finger of blame at the unions or the politicians, I think the far bigger issue has been Republican sabotage of any and all plans to address health care costs.
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Old 05-26-2016, 11:13 AM
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Many once-great companies have been ruined by their pension plans. Sears seems to be the next one to be dragged into the grave by this. Then when the company goes under, taxpayers get stuck making up the shortfall. Why should we have to pay for promises some crooked CEO made and knew he couldn't keep?
Because the alternative is thousands, if not millions, of elderly cripples wandering the streets begging for spare change. And then they start taking up hospital beds when they come down with easily prevented diseases. The elderly homeless and indigent rapidly become an even bigger drain on resources than if you had just paid them a pension to begin with. Whether that money comes from a business or a taxpayer, that money has to come from somewhere, unless you want the world to look like the cast of "Les Mis."

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Pensions for former government workers are a huge part of most budgets for towns, counties, and states. With the shape a lot of our country is in it seems like there are better investments to be made than "Paychecks for people who don't work here anymore".
So what is your point? Governments need to attract and retain skilled employees. If the government benefits package and retirement plan is not competitive with private industry, then skilled workers are going to jump ship and enter the corporate world. I realize that seeing the DMV employees quit probably doesn't cause you much heartache, but think about what happens when the police, military, fire departments, and public utilities of the world can't hire and retain top candidates? Do you think we'd be seeing riots over police misconduct if the police were able to attract and afford better candidates? Regardless of whether you agree with government policies or not, the fact remains that the government needs to attract the best and brightest, and when they don't it does have an impact on your life.

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Old 05-26-2016, 01:18 PM
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In my book, the migration to defined contribution pension plans (i.e. 401ks) is worse than the potential problems with pensions, as at least defined-beneift pensions have various regulations and checks and even the Pension Benefit Guaranty Corporation to ensure that people continue to be paid.

But with a 401k, ALL that risk is pushed off onto the worker- we're each individually responsible for ensuring that our money grows, and we contribute enough, etc... So while there's no huge bloc of people who might get screwed like with traditional pension plans, it's the tragedy of a million individual people whose retirement funds aren't large enough, or don't last long enough, or got nailed by stock market downturns, or what have you.

I mean, I've been to business school, and I really don't know what I'm doing in terms of which funds to invest in, and for how long, etc... I can't imagine how some person who has never had a finance course in their life would handle this stuff.
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Old 05-26-2016, 02:08 PM
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Right. In theory it makes sense to say that each worker has a lot more incentive to manage his individual retirement account correctly than any third party manager.

But empirically this is shown to be false. Some financially savvy people are much better at doing this. But a large majority are terrible. If you make the majority of people responsible for their own retirement income, they're going to hit 65 with nothing.

And then what? Tell them, "Hey, you should have done things different back when you were 32, sucks to be you, have fun dying in the gutter"?

That's not going to happen, is it? And so we're going to have to fund some sort of minimal pension that keeps elderly people who made foolish financial decisions in the past out of the gutters and in some kind of minimally decent housing, food, and health care. And we have that, it's called social security.

The notion that social security is some sort of private investment, and retirees get back what they paid in is silly. Social Security payments are consumed by today's retirees and produced by today's workers. There's no other way to do it. Even if you literally stockpile canned goods in the basement and eat them 20 years later that's still food that is consumed in the present out of present stock.

And even a well-off retiree who has comfortable savings of their own is still buying food and medical care and what have you from people working today. And savings can be wiped out in all sorts of ways. Have a war, or a disastrous currency devaluation, or an earthquake. Insurance doesn't change anything, it just pins the tail on another donkey.
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Old 05-26-2016, 02:22 PM
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Well, it will increase political pressures to raise social security payment rates, but there'll only be a drain if the decision is taken actually to raise them. Which of course will be a decision for which the politicians of the day will be accountable to the voters of the day - including workers/taxpayers.

(Mind you, I think there's a good bet that voters will accept such decisions. "Would you like to pay an extra 0.5% in social security?" invites a certain answer, but in reality the question is more nuanced. "Would you prefer to pay an extra 0.5% in social security or have Great Aunt Agatha come and live with you?")
Since it won't make sense to increase SS payments to everyone to deal with the set who didn't save enough, I think the drain will come from welfare payments and the like. Or maybe job programs. When I hit 80 in not too long I fully expect to be able to hire some 75 year olds as servants at a pretty low price.
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Old 05-26-2016, 02:24 PM
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But with a 401k, ALL that risk is pushed off onto the worker- we're each individually responsible for ensuring that our money grows, and we contribute enough, etc...
What is more than that, risk like that is something that is better handled collectively. If I know that the average life expectancy of people like me is 85 years 4 months and 10 days old, it's not like I can plan my budget so I spend my last cent that day just before I croak. I have to have a lot of additional savings just in case I live significantly longer than that. If there are a thousand people just like me, all saving individually, then we all have to save that extra, because any one of us could be at the top end of the distribution.

But if me and my 1000 brothers all paid into a defined-benefit pension plan instead, the pension plan could plan for us living to something very close to 85y4m10d. There's a chance that any of us would live longer than that, but the average of all of us is going to pretty close to the mean, and the outliers who live longer are paid for by savings from the outliers who die early. Spreading the risk out makes the risk less overall.
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Old 05-26-2016, 02:34 PM
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As I mentioned in my post above, the defined contribution plans that I am familiar with in Canada don't push the investment decisions onto the employees. Rather, all of the money is assigned to a trust, with trustees appointed by the employer and the employees whose sole function is to manage the fund, which is allocated to each employee's personal account.

The trust employs the experts in investing and projecting that are being mentioned here, and invests the fund accordingly. So individual employees do not have to make those kind of complex risk projections and investment decisions.

Last edited by Northern Piper; 05-26-2016 at 02:34 PM.
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Old 05-26-2016, 04:17 PM
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Both industry and government had incentives to make their current position look better by underfunding pensions and kicking the problem down the road. I cashed out my pension when I was offered the opportunity, and invested it myself. Maybe my company would have the money when I'm 90, but I ain't betting that way.

However I think we should worry even more about all the people my age who have $50K in their retirement accounts. When they run out of money and try to live on Social Security alone, that is going to be a big drain.
The government will reap the reward for improper management of Social Security funds. Nah, the voters won't hold the government accountable for theft. They never do.
  #32  
Old 05-26-2016, 04:19 PM
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Very well and succinctly stated. Yet NO policy makers seem willing to admit as much, and NO ONE in private business (labor OR management) seems interested in formulating or funding practices with this in mind.

Public and private institutions focus on their short term profits/budgets, and essentially ignore longterm obligations/implications. I truly respect teachers, police officers, firemen, etc. but I don't think we can afford to continue paying the types of pensions we currently pay able bodied people in their 50s and 60s after they max out after 20-30 years of service.

I think we really need to rethink our ideas of retirement. Ought people expect a 20-30 year paid vacation at the end of their lives? If so, then we have to make the current sacrifices to pay for it.

Of course, the least able - those who are most dependent on Social Security, are likely to be those with the least savings, and the fewest employment options. Social Security is not a retirement savings plan - it is a wealth redistribution tax. Plain and simple. Can be easily revised - well, easy technically - not politically. Increase the withholding cap, increase age limits, and add means testing. Problem solved.

It truly burns me when companies are allowed to reorganize in a manner that allows them to escape pension obligations - while top management lands in clover (or takes proportionately far less of a hit.) If the company is foolish enough to enter into longterm obligations they cannot meet, then the company ought to fail. I think pension obligations ought to be among the highest priority obligations. Make the folk who enter into unsustainable contracts realize there will be implications.
See Social Security is NOT a wealth redistribution tax. That would be make the government lose tremendous credibility for lying at that magnitude. Social Security is for the retirement of those workers who PAID into the fund.
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Old 05-26-2016, 06:28 PM
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UNDER funded Pension plans or those run by corrupt or incompetent trustees are a drain.
  #34  
Old 05-26-2016, 06:50 PM
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In my book, the migration to defined contribution pension plans (i.e. 401ks) is worse than the potential problems with pensions, as at least defined-beneift pensions have various regulations and checks and even the Pension Benefit Guaranty Corporation to ensure that people continue to be paid.

But with a 401k, ALL that risk is pushed off onto the worker- we're each individually responsible for ensuring that our money grows, and we contribute enough, etc... So while there's no huge bloc of people who might get screwed like with traditional pension plans, it's the tragedy of a million individual people whose retirement funds aren't large enough, or don't last long enough, or got nailed by stock market downturns, or what have you.

I mean, I've been to business school, and I really don't know what I'm doing in terms of which funds to invest in, and for how long, etc... I can't imagine how some person who has never had a finance course in their life would handle this stuff.
Show me a Target Fund that has bankrupted a municipality. The tragedy is in making impossible promises in the face of demographic change. 401(k) programs are not to be treated as stock market speculation. If some moron think he can outmaneuver even a basic indexed fund he is deserving of no sympathy.
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Old 05-26-2016, 07:37 PM
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Show me a Target Fund that has bankrupted a municipality. The tragedy is in making impossible promises in the face of demographic change. 401(k) programs are not to be treated as stock market speculation. If some moron think he can outmaneuver even a basic indexed fund he is deserving of no sympathy.
"No sympathy"?

So get busy dying in the gutter, grandpa. You made the wrong choice, now die for it. Coffee is for closers.

Fact is, lots of people are idiots. Half of Americans are below average. So now what?
  #36  
Old 05-26-2016, 08:58 PM
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See Social Security is NOT a wealth redistribution tax. That would be make the government lose tremendous credibility for lying at that magnitude. Social Security is for the retirement of those workers who PAID into the fund.
It is, though. Social security contributions are collected from workers, and distributed to retirees. Wealth is redistributed from workers to retirees. That's the whole point.

Sure, the retirees paid into the fund when they were working, so at different time in their lives they have been on both sides of this redistribution programme. But that doesn't change the fact that it is absolutely a wealth redistribution tax - probably the clearest example of such a tax that we have.
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Old 05-26-2016, 09:04 PM
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One long-term solution is to change the type of pension plan, from defined benefits plan to defined contribution plans.
Depends on what you're looking to find a long term solution for.

Defined contribution plans are inefficient compared to defined benefit plans, because the latter benefit from the miracle of risk-spreading. While - as I said above - it costs $1 to provide $1 of pension, if you do this through a defined contribution plan a fair chunk of the dollars you put in will not in fact be used to provide dollars of pension. The result is that if you put the same amount of money into DC plans as you are currently putting into DB plans, you can expect lower pensions overall.

So, if the problem you are seeking to solve is controlling the cost of retirement systems and avoiding unexpected cost blowouts, DC plans will acheive this. But if the problem you are trying to solve is providing retirement income in the most efficient and effective way, DC plans are not the way to go.
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Old 05-26-2016, 10:00 PM
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Sure, the retirees paid into the fund when they were working, so at different time in their lives they have been on both sides of this redistribution programme. But that doesn't change the fact that it is absolutely a wealth redistribution tax - probably the clearest example of such a tax that we have.
On average, though, aren't the recipients of social security likely to be wealthier and in a higher class than the taxpayer? That isn't necessarily a criticism, but it's something to keep in mind.

Last edited by smiling bandit; 05-26-2016 at 10:02 PM.
  #39  
Old 05-26-2016, 10:14 PM
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On average, though, aren't the recipients of social security likely to be wealthier and in a higher class than the taxpayer?
I have no idea, I'm afraid. I suspect the answer is going to depend on how you measure wealth and class. For instance, are we saying that the typical social security recipient has higher net assets than the typical worker, or higher income?

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That isn't necessarily a criticism, but it's something to keep in mind.
Wealth redistribution doesn't have to be from richer to poorer. It can be, as in this case, from younger to older.

As you say, you might want to consider whether it's a good policy to transfer wealth from younger to older. But that doesn't change the fact that this is currently what the system does, and that makes it a wealth transfer mechanism.
  #40  
Old 05-27-2016, 01:27 AM
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On average, though, aren't the recipients of social security likely to be wealthier and in a higher class than the taxpayer? That isn't necessarily a criticism, but it's something to keep in mind.
Hey, I received Social Security from age 4 to 18 because my father died. (Well, my mother got the checks for all 3 of us--but she spent them on our upkeep.) We weren't a wealthy & high class family.

Now I'll be collecting again in a few years. Doing OK but not exactly wealthy. I do try to be classy!
  #41  
Old 05-27-2016, 06:26 AM
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I have no idea, I'm afraid. I suspect the answer is going to depend on how you measure wealth and class. For instance, are we saying that the typical social security recipient has higher net assets than the typical worker, or higher income?


Wealth redistribution doesn't have to be from richer to poorer. It can be, as in this case, from younger to older.

As you say, you might want to consider whether it's a good policy to transfer wealth from younger to older. But that doesn't change the fact that this is currently what the system does, and that makes it a wealth transfer mechanism.
The 65+ group tends to have the highest wealth and lowest income. SS is transferring income, not wealth. And only a portion of earned income, not other forms of income.
  #42  
Old 05-27-2016, 10:27 AM
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. 401(k) programs are not to be treated as stock market speculation. If some moron think he can outmaneuver even a basic indexed fund he is deserving of no sympathy.
So if they're not stock market speculation, then why does just about every 401k plan I've ever been involved with require me to invest in specific individual funds based on the same prospectus information that any investor gets? It may not be stock market speculation in the sense of day trading or investing in individual companies hoping to get lucky, but it's not a situation where you just have them deduct your 401k money from your check and it just builds up and gains value automatically with no intervention either.

Beyond the questions of individual vs. collective risk and adequate saving rates, it makes me exceedingly nervous to have a 401k plan expect me to be able to tell the difference between the "T. Rowe Price Dividend Growth Fund " and the "Spartan® 500 Index Fund - Institutional". They're both in the Morningstar "Large Blend" category, and which one I should put my 401k money in, and how much.

It's possibly reasonable to expect *me* to do that- I do have an MBA. But I think it's totally unreasonable to expect say... that guy in PR whose job is to make sure that every document that my company puts out adheres to the correct logo and format standards, to have anything resembling a clue as to how to assess those funds and make that particular decision. I'd go so far as to say that even asking that guy to make the decision between Small Cap Value and Large Cap Growth and assign percentages may be a bit too much, considering that his retirement livelihood rely in large part on making those kinds of decisions.

I realize that most of them have managed plans, and that's what I'm doing- I don't have the time or the knowledge to do it right, so I'm trusting our 401k management company to do it for me effectively... for a fee.

But people shouldn't really be placed in the position of putting their retirement livelihoods in someone else's hands for a fee, or making uninformed and semi-random choices on their own. For most people, I'd think some kind of annuity might be better overall than a 401k plan- at least that way, they're not having to actually decide HOW to invest it when they don't know what they're doing.
  #43  
Old 05-27-2016, 01:06 PM
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Let's look at a real-world example here. My wife taught in public schools for more than 30 years. Almost exactly halfway through her career, the state dropped its defined benefit pension and switched to a defined contribution program. But since the state grandfathered in the current employees, my wife was one of the few people to get both a pension and a contribution.

First off, because she's a public employee, the income she earned wasn't taxed for Social Security, and her SS benefits don't include it. Her monthly SS check is slightly less than $300, mostly based on summer jobs and the several years she spent tweaching in private schools.

The other part of her retirement fund is the defined contribution plan she enrolled in in 1993. She (and the state) piled up several hundred thousand dollars in the 15 years before she retired. However, if you add 1993 and 15 you get 2008 -- and her portfolio took a big hit at the exact moment she started to tap into her savings.

For the most part, she has not needed to draw down her savings, and her portfolio has built back up. Even so, if her pension went bust today and she were forced to annuitize her portfolio, it would give her about $1,000/month. Adding the $300 from Social Security, that works out to roughly $15,600/yr.

So, what's it worth to keep her (currently sound) pension viable until all the pre-1993 teachers die off?

Quote:
Originally Posted by smiling bandit
On average, though, aren't the recipients of social security likely to be wealthier and in a higher class than the taxpayer? That isn't necessarily a criticism, but it's something to keep in mind.
Not quite. According to this [URL="http://www.cbpp.org/research/social-security/policy-basics-top-ten-facts-about-social-security"] 42.6% of elderly without Social Security are below the poverty line. With SS the number drops to 9.5% -- but the median houisehold income for people 65+ is only $36,895 -- and that includes the 20% of seniors who are still working.

So, what's it worth to keep Social Security funded?
  #44  
Old 05-27-2016, 01:28 PM
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On average, though, aren't the recipients of social security likely to be wealthier and in a higher class than the taxpayer?.


." Median income of all recipients over 65 is $26,000."
  #45  
Old 05-27-2016, 02:39 PM
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." Median income of all recipients over 65 is $26,000."
Wealth is not income. 65+ had the highest net worth. But I'm not sure that's the best number to look at. They aren't the highest if you exclude real estate.
  #46  
Old 05-27-2016, 03:06 PM
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The state of Illinois's pension plan is one of the worst-off large funds in the US, and an interesting and detailed analysis of how it got that way is here.
  #47  
Old 05-27-2016, 04:17 PM
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Wealth is not income. 65+ had the highest net worth. But I'm not sure that's the best number to look at. They aren't the highest if you exclude real estate.
Wealth for at least some people working is increasing. Wealth for most people over 65 is decreasing. You just want to make sure it doesn't go to zero before you die.
I suspect wealth at 65 is higher than wealth at 85 on average.
  #48  
Old 05-27-2016, 04:27 PM
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The government will reap the reward for improper management of Social Security funds. Nah, the voters won't hold the government accountable for theft. They never do.
By improper management do you mean limiting investment to about the safest investment in the world? Odd definition of theft. I know the arguments for riskier investments, but opposing them is not supporting theft.
  #49  
Old 05-27-2016, 05:36 PM
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Wealth for at least some people working is increasing. Wealth for most people over 65 is decreasing. You just want to make sure it doesn't go to zero before you die.
I suspect wealth at 65 is higher than wealth at 85 on average.
Confirming your suspicion: https://g.foolcdn.com/editorial/imag...-age_large.JPG
  #50  
Old 05-27-2016, 07:54 PM
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In my book, the migration to defined contribution pension plans (i.e. 401ks) is worse than the potential problems with pensions, as at least defined-beneift pensions have various regulations and checks and even the Pension Benefit Guaranty Corporation to ensure that people continue to be paid.

But with a 401k, ALL that risk is pushed off onto the worker- we're each individually responsible for ensuring that our money grows, and we contribute enough, etc... So while there's no huge bloc of people who might get screwed like with traditional pension plans, it's the tragedy of a million individual people whose retirement funds aren't large enough, or don't last long enough, or got nailed by stock market downturns, or what have you.

I mean, I've been to business school, and I really don't know what I'm doing in terms of which funds to invest in, and for how long, etc... I can't imagine how some person who has never had a finance course in their life would handle this stuff.
Reread Northern Piper's post on defined contribution, at least the way it works in Canada. The individual pension fund is managed not by the individual, but by a committee that basically represents the employees. The only choice I had was whether to put 25%, 50%, or 75% in fixed income securities. I chose 50% but would have done much better had I chosen 75%. I retired on the last day of 1999. I had a choice of taking my individual account and investing it myself or taking an annuity guaranteed by my employer. The fact was that the annuity rates were too high, way too high as it turned out. It was going down on Jan. 1, 2000, which is why I took early retirement. In effect, I got the better rate as a buyout, since the change had been announced 6 months earlier. At any rate, the combination of stock market crash and infinitesimal interest rates means my employer is taking a bath on my pension. They have now gotten out of the business of giving annuities.

Now here is my take on the OP. Everyone is talking about pensions in terms of money. But IMHO, there is a more serious problem. At some point (maybe 2040 or 2050, long after I have shuffled off) there will be only two people working for every non-working dependent (child or pensioner). At this point, the working people will revolt.
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