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.
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.
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.
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.
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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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!