I just don’t get it. Why, besides greed, doesn’t the government do away with the pension system and go to a 401k plan? The pension system is flawed and is driving the country and the states broke. Why don’t these idiots get it? I own two businesses and I can tell you, we are not in a position to offer a pension like fund. We do however encourage our employees to enter our 401k fund. What do others think? Why is the government allowed to be in a class of its own?
Financial decisions are largely a zero sum game in these days with no capital investments occuring. If investing in a 401K won’t even help the economy grow in a macroeconomic sense, what you are really asking is “why doesn’t the government just pay its employees less?” Which is a valid question to ask but not one most would people would support.
Unions.
Inertia from the days when most companies provided a pension as well?
An incentive to get people to work in the public sector versus the private sector?
I am no fan of the 401(k). It forces the employee to try to become an investor whether they have any knack for it or skill at it, at all. Further, it does so with a pre-determined, limited set of funds–all of which may be junk.
Frankly, if I had the inclination to invest money as a living, that’s what I would have gone to school to learn to do. I didn’t. Nor do I want to.
Maybe I’m being overly cynical but it looks like the 401(k) shifts the eventual retirement responsibility from the company (who might have put into place a pension plan run by professionals) onto employees who often don’t know what they’re doing. Expected end result? People who will hit retirement age and find that their contributions were in under-performing funds leaving them with a lot less than they need to live.
I’m not exactly answering your question, bluejhavoc but I am suggesting that your alternative isn’t the best either.
I sense that you are seeking a debate on the issue, but I’ll keep my response strictly factual.
For Federal employees, there are two defined benefit pension programs. The old system is called CSRS, the “new” one is FERS. Under the old system, a worker with 30 years of service would retire with retirement pay of about 56% of his highest average salaries. Under the newer system, a federal employee would retire with about 30% of his highest average pay. Employees working under the CSRS system do not pay Social Security taxes, nor will they receive Social Security benefits. Those under the newer system pay Social Security taxes and will receive those benefits.
The Federal government also offers a 401k-like plan called the TSP. Part of the reason that the old retirement plan was phased out in the 1980s was that a 401k-like plan and Social Security taxes/benefits would more closely reflect private sector retirement plans.
I believe most observers would say that working for the Federal government versus a private employer entails both benefits and costs. Federal employment tends to offer greater stability – harder to be fired, rare changes in benefits or compensation, and so on. The “costs” of working for the Federal government is that virtually every study that has made apples-to-apples comparisons between pay by the government versus the private sector for nearly identical jobs finds that Federal employees make substantially less money than their counterparts in private industry.
So, it’s a trade off: Federal employees take less pay for somewhat better benefits. Private sector employees in similar jobs get better pay, but not as good benefits.
It would probably be difficult to just decree that public sector employees should be subject to all the same employment conditions as private sector employees, for a few reasons.
One, there is no single private sector package of pay and benefits. Different companies treat their employees differently. To whom shall Federal employees be compared: those go-get-em Silicon Valley type firms that offer unusual benefits like free sodas, heavily discounted lunches, and the potential for sky-high salaries? Or how about the employees of “old” industries like the car makers, where there are very strong unions? Or what about other companies that see value in providing only the bare minimum in employee benefits?
Two, there are public policy reasons why providing for a stable, experienced civil service may be preferable. In the past, new presidents could fire large numbers of government employees to make room for political patronage jobs – often with those new appointees having not a clue what they are doing. The current system allows for top officials to be politically appointed to reflect the president’s views on issues, but maintains a stable core of non-political employees who actually know how things work. Large changes to pay, benefits, or job security could mean that it would be difficult to retain those Federal employees who actually know how to get things done in order to carry out the directions of senior leaders who want to change various policies.
Again, I’m not advocating that this is the way that it always must be. I’m simply trying to explain the conventional wisdom on why government pay and benefits is often viewed as not being interchangeable with private sectors compensation.
ETA: By law, the new FERS defined benefit system must be fully funded by both employer (government) and employee contributions. The law requires this. The problems of having under-funded pension liabilities cannot exist with the FERS system.
The defined benefit pensions don’t have any employee contributions, which is what makes them both costly and hard to eliminate. It’s not a political issue.
You have to pay out to the people who are retired now. You have to payout to people who are vested, and to people for whom it’s too late to start a new 401K. If you slash the pension for state workers, you’re likely to just shift the cost to medicare or other public programs.
And even if you say “new workers won’t be eligible for the pension plan,” you won’t see any savings for 30 or 40 years. And even then, maybe not. Defined benefit plans are great during boom times and a deadly burden when times are tough. We’re likely to go through a couple of cycles before we reach that date.
It amazes me how people who are well off suggest others can get by without. George Bush tried a year or two before he crashed the market to convert social security to a 401K-type plan. That would’ve been a move for the history books if it succeeded.
Given the way the stock market has performed since GWB tried this, is it a good idea? Given the way Wall Street managed money for mortgages, and the number of shady operators that seem to come out of the woodwork when there’s money to be made, should people with no money smarts be expected to know how to pick a money fund or how to manage it?
This is not meant to be a snide comment about you or GWB; the problem is, the average person does NOT have sufficient savings or 401K or whatever to handle retirement, and does not have the money smarts to accumulate and manage money. They count on the steady income promised by pension plans. Trying to live off savings, between the stock market, bank service charges, and current bond interest rates is “not good”.
Maybe you could convert their pension entitlement to 401K; however, today is the worst time to do it. A conversion would use “net present value” and expected growth. The expected growth depends interest rate, so conversion when rates are at a historic low is not the best time.
IIRC, several companies have converted their pension to 401K type arrangements - IIRC they then were embroiled in lawsuits over the process and fairness. (IBM comes to mind as one)
Airline employees, for example, agreed to good pensions instead of higher wages - then the banruptcy court took it away from them. Pension entitlement is “earned money” the same as wages. The only difference is, at the stroke of a judge’s pen, it can all be stolen from the employee.
Businesses are moving away from real pensions exactly the way your business is - either they stopped offering them to new employees, or they have offered 401K-type plans (defined contribution) rather than guaranteed pension income (defined benefit).
Should the Social Security plan go the same way? if so, then who will manage the money? If you think social security is bad now, what happens when a significant amount of the money is converted to Wall Street commissons using an investment strategy called “churning”? What do you do for people who have not earned a livable pension, or somehow their investment has gone south? Should they strave in the dark, or (more likely) the government will still be paying them the same amount, it will just be called “welfare” instead? What about the disabled? does it matter whether what they are paid is called “social security” or “welfare”? I guess it matter if you are in congress, since welfare is probably a state or city pay-out.
Really? There is no employee contribution at all? The government picks up the tab fully?
Of course not. CSRS beneficiaries contribute 8% of their paycheck to the retirement trust fund, and FERS beneficiaries contribute about 1.1%. The employing agency contributes about 8% matching for CSRS beneficiaries, and somewhat higher for FERS beneficiaries. The government matches approximately 5% of contributions to its government 401k-type program.
I was hoping anson would correct his false statement before somebody else could get in here.
Because if gov. employees don’t contribute to their pensions, I would like to know who has been taking 10%+ of my paycheck. And in my state the current administration wants every gov. employee - state, local, teacher, firefighter, or what have you - to pay even more towards their pension plan.
How many people in the private sector are paying over 10% of their salary in their 401(k)? How many have no choice in the amount of contribution?
For informational purposes - I have selected the 401(k) like pension plan, and have no guaranteed benefit when and if I retire from the state in thirty years. I would also have no problem with the state cutting pensions and matching 401(k) contributions to a percentage equivalent to the private sector, so long as it comes with a pay raise from the money saved in cutting the state’s contribution to the pension system.
Does it really matter if an employee contributes to a plan or not? If the employer sends the money directly to the fund instead of it taking a short detour through the employee’s “earnings total” on their pay stub, the effect is still the same - the money contributed represents money that would have been paid to the employee today, but instead is given to a fund that will pay it to him/her later. Most employers consider the money they give the pension plan part of the cost of having employees.
If the employer does not offer pension or other benefits, it means they have lower-paid employees, even if the cash wages paid are the same.
Moving to Great Debates from GQ.
Colibri
General Questions Moderator
My brother was a public defender in California and had the choice to go into the private sector or continuing to work for the public sector. One of the reasons he decided to stay was because of the lucrative pension that was being offered to public employees. Since it meant he would keep getting checks long after he retired he thought that was the safer bet. He could have made more money not working for the state, but he would have had no retirement other than what he could have saved in a 401K plan.
As it turns out he was appointed to a judgeship 20 years ago and will be getting 100% of his working salary once he retires for the rest of his life. He plans to continue to work as a judge after retirement so he will be able to effectively double his salary for 5 or 10 more years.
Did the state have to provide such a rich pension? Apparently they thought they did.
Currently, state pensions aren’t nearly as generous as they were years ago, so states are learning they don’t need to bend over quite so far to attract good people to work for the public sector.
Whenever a company (or government) offers a defined benefit pension, they know exactly what it will cost. It is not like health insurance where the cost keeps going up and is largely outside their control. They knew the obligation they were incurring. Had they paid that obligation when it was due, there would be no problem. Not only did they not pay it, but in many cases they borrowed from the fund to meet other obligations. Furthermore they often altered financial assumptions to enable them to avoid making payments (“We’ll make 15% this year”). If the system is flawed, it is because people behaved irresponsibly, perhaps illegally, and were never held accountable.
As far as 401(k)s are concerned, it is usually fairly easy for you, as an employer, to determine if it is a good deal for you. It is much more complicated to determine if it is a good deal for your employees. I suspect we will find out a lot of dark secrets about 401(k)s in the years to come. Furthermore, as that article illustrates, you may be responsible for picking that dog of a 401(k). Don’t congratulate yourself yet.
I think that, unless you give me the money that was paid into my pension for 15 years so I can roll it over into an IRA I can’t get on board. I earned my pension, it was part of the compensation the company agreed to pay me in return for my work, and I am as entitled to it as you are entitled to the money in your 401(k). Why are you intent on depriving me of my retirement money?
I’ve worked for both large and small businesses. I understand small businesses can’t provide a pension - that’s why other options exist.
On The Daily Show last night (10/17/11) Stewart’s guest was author Ellen Schultz, who’s book “Retirment Heist” claims that the reason pension costs are so high is because company big wigs use the funds for their own gold-plated pensions, among other things.
I haven’t read the book yet.
Considering what some lawyers can make, any state paycheque is probably pretty small. Same idea as MD’s who become teachers at medical school - do you need to pay a surgeon instructor what a surgeon could make privately to keep them in teaching? Probably.
I certainly hope your brother was good. I hope at some level at least, “smart” and “good”, not just “connected”,are criteria for selecting judges out of the pool of available candidates. If so, they probably should be paid decently. I would think the guy who decides if you are getting a fair trial should make more than an autoworker. As for double-dipping in general, what’s the problem? If your brother retired, he’d get that pension and they would pay the same judgeship pay rate to someone else; instead, he’s taking the pension he earned when he can, and also working to earn what his job pays. From what I hear low-man-on-the-totem-pole prosecutors generally make, he earned that whack of pay through being underpaid working his way up. Plus how many years of college to get there?
And if his money was in a 401K instead, he’d still be able to withdraw it at 65 (if it works like Canada) and keep working. So what.
Many businesses in private industry offer pensions as well, or at least they used to. So it’s not just the government. Many of my older relatives who are retired get pensions and none of them worked for the government. A pension used to be part of a standard benefit package offered by most large corporations. Heck, I had a pension plan when I started working in the corporate world in the 1990s.
That being said, there was been a major shift in recent years in private industry away from pension plans and towards defined-contribution plans, such as the 401k. That happened in my job as well.
So it isn’t that government is in a class of its own, it’s just that industry has been shifting away from pensions and government, for the most part, has stayed with them.
ETA: I can see how great a successful pension plan is from the experience of my mother. She worked for an insurance company for many years and now she and my dad can live pretty well in retirement on the pension from that job plus their social security, so they never have to touch their savings.
It was more than that. They have found way to legally short the funds and convert the money in them into profits:
[
[QUOTE=Ellen Shchultz quoted in USA Today]
As she writes, “What Immelt didn’t mention was that, far from being a burden, GE’s pension and retiree plans had contributed billions of dollars to the company’s bottom line over the past decade and a half, and were responsible for a chunk of the earnings that the executives had taken credit for. Nor were these retirement programs — even with GE’s 230,000 retirees — bleeding the company of cash. In fact, GE hadn’t contributed a cent to the workers’ pension plans since 1987 but still had enough money to cover all the current and future retirees.”
Then Schultz delivers the clincher: GE was indeed burdened by a pension plan — the plan for top executives. The obligations of that plan, for a minuscule number of individuals compared with the 230,000 lower-level retirees, totaled $4.4 billion and had drained about $573 million from the corporate treasury over the past three years.
[/QUOTE]
](http://www.usatoday.com/money/books/reviews/story/2011-10-14/retirement-heist-book/50795990/1)
I also have not read the book, but if she is right the huge costs of pensions is a bill of goods we have been sold in an effort use retirement funds to increase earnings and boost pay for top level executives.