Are pensions a crippling drain on the economy?

[Ruken]

@UDS

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.

[bump]

@Stringbean

. 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.

[Kent_Clark]

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=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.
[/Quote]

Not quite. According to this 42.6% of elderly without Social Security are below the poverty line. With SS the number drops to 9.5% – but[URL=“http://www.pensionrights.org/publications/statistic/income-today%E2%80%99s-older-adults”] 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?

[DrDeth]

@smiling_bandit

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."

[Ruken]

@DrDeth

." 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.

[Tom_Tildrum]

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.

[Voyager]

@Ruken

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.

[Voyager]

@octopus

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.

[Ruken]

@Voyager

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/images/167908/median-net-worth-by-age_large.JPG

[Hari_Seldon]

@bump

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.

[Kropotkin]

@Northern_Piper

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.

In the defined contribution plan I’m in, when I retire I get a lump sum payment and then have to invest and manage it. So as my faculties fade and I make bad investments, the money will be scooped up and put back in the system: problem solved! :dubious:

[lance_strongarm]

@boffking

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.

So CEOs should just be off the hook for making promises they knew they couldn’t keep? How is that better?

Did you consider the idea that a lack of pensions is a drain on the economy because retirees have little to spend on consumer goods and must often depend on government assistance?

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”.

Jesus, do you even know what a pension is?

[Tom_Tildrum]

Keep in mind that under any system, the individual always bears all of the risk. The corporation or the government is never going to go hungry in old age. The question is better framed as who manages that risk, and who pays if the managers fail.