This thread is inspired by the news that GE just became the most recent company to freeze its pension benefits. Given that, and in light of the fact that traditional defined benefit pensions are mostly extinct in the private sector, where do you fall on the trope oft-discussed that such pensions really are superior to the now-ubiquitous 401k systems that most workers tend to be invested in today?
I can kind of see both sides to the equation: having a decently sized pension ensures that no retiree will ever run out of money, while the pension itself is reliant on its parent company continuing to exist in the first place and making sound investment decisions with the pension funds. On the flipside, 401ks place the onus of retirement saving entirely onto the backs of individual workers, who could potentially lose a ton of their money if they do not invest judiciously enough, whether in terms of picking the right investments or simply stashing away enough of their paycheck for a long enough period of time. But, 401ks are portable and could prove invaluable to a worker who switches jobs multiple times throughout his or her working life.
FWIW, as somebody who actually is vested in a traditional pension thanks to union membership, I am mostly a big proponent of them even if I think that all workers nowadays should supplement any pension benefits with copious retirement investing (which I also do). I am sad to see them basically be eliminated from the private sector, and hopefully at some point they will make a resurgence.
Do you not have the intermediate stage of a defined contribution plan, but the assets are invested by an investment board made up of representatives from the employer and the employees?
It’s an approach taken in Canada. The pension money vests in each employee’s account with each pay period, and the employer can’t claw it back. So the pension funds are’n’t affected if the company goes under. But the investment board provides professional investment decisions, rather than leaving it to each employer, and has the clout of a pension fund in making investments at good rates.
My employer offered employees a chance to take cash according to their years of service and income to switch to a 401k type plan back in 1997. I knew some guys who took them up on it and got in some cases $250K to switch. Then the bust of 2000 came and some of them took a real beating. I stood pat as they only offered me something like $45K to switch. Best move I ever made. I think if you’ve got a pension plan, stick with it and go ahead and put a 401k on top of it.
Rule of Thumb: if you’ve got a long-term financial asset of some sort, and someone with an army of accountants and actuaries on call offers to buy it from you for a hefty price, turn them down!
If they want it that badly, they’ve assessed the long-term value and it’s s worth more in the long run than whatever the immediate cash value they’re offering now.
Not be rude, but - not a chance. They were an experiment that was tried for a few decades, but the conclusion was that they were not sustainable. In the history of the world, a mere blip.
They both have their problems. Pensions have the problem that companies underfund them, especially if their value grows during a boom, and so when the bust comes they never catch up. Plus, the way they were done in the US was not portable. When I was in grad school computer scientists who switched jobs often often complained about never staying in one place long enough for pensions to vest for very long. They loved 401Ks.
The problem with 401Ks is that people can’t afford to put money into them, and so don’t get the match, and that people mismanage them, selling low and buying high.
I had both. My AT&T pension lasted several changes of companies, and when I got offered a buyout it was a lot bigger than I expected it to be. (I took the buyout to be able to manage it directly.)
But I was making enough to invest in 401Ks and didn’t panic during crashes. The median 401K value for those 50 - 59 is $60,900, which is not going to go very far. So it can be said that 401Ks have failed also. Look at all the people whose retirement plan is to work until they die.
I can see two solutions. One is a pension that goes with the person, not the company, and is managed outside the company. Companies are forced to contribute. Since the manager’s bottom line is not helped by reducing contributions in up years, a lot of the issues would be removed.
Another would be mandatory company contributions to 401Ks before matching. My daughter, who works for a university, gets 10% without contributing anything.
On the plus side, when I hit 80 I might be able to handle yunguns (age 65) to be my servants, because a lot will be broke.
In the history of the world, having a lot of people surviving until retirement is a mere blip. So I think we either need to do something or have some ice floes ready.
And in the US most of us do have a government pension, without which things would be really bad.
I know a family that had saved up 401K of about 1 million dollars, when they retired in 1999.
By 2012 or 2013, it was all gone, as they had stayed in the stock market through the crash, and had mis-managed it. Now, they live strictly on social security and their company pensions (they both worked at companies that had defined benefit pensions).
The reason defined benefit plans are going away is because they are generally not sustainable in the current environment. They subject companies and municipalities to unpredictable swings due to changes in interest rates and mortality tables, and are a huge resource drain.
I see no way that defined benefit plans can make a resurgence. Even in the government sector many municipalities are tiering their plans to reduce the cost of new entrants.
Why is it that companies only do matching to 401k contributions rather than standalone contributions? Are they not allowed to? They used to have to put money away for a pension. It seems they could put that money in a 401k just as easily.
I wish there was an annuity-based fund for a 401k that was sort of like a pension. It could be like adding extra to SS or something. Many people are very bad with investment decisions and will either fritter or lose all their money. If instead they could contribute and then get some fixed benefit later on, that would be a great choice for many people who aren’t savvy about investments or disciplined enough to leave the money alone.
Damn that global warming, we’re all out of ice floes!
I have an old-fashioned defined-benefit pension coming at age 65. I also now have a 401(k) on top of it (or beside it, or something…) And social security. And planning to work until 70 if I can, and maybe beyond part time.
Suffice to say a lot of people my age and younger have little trust in any one method of funding old age. I want to keep multiple strategies going as long as I can. Unless you’re simply filthy rich no method is without risk and uncertainty.
They are indeed tiering their plans, but it doesn’t always have to do with interest rates and mortality tables. Sometimes it’s for more basic, obvious reasons. For example, when I joined my pension system, I expected to make contributions until I retired. After about 14 years, a law was passed that ended contributions for people with more than 10 years’ service - I got a 3% raise, but that’s also why their are two tiers after mine ( which both currently must contribute until they collect - until the politicians give them a gift). The tiering is also affected by mortality tables, although perhaps not only in the way you mean - people before me could retire at 55 with a full pension, I can retire at 55 with a full pension *if *I have 30 years of service and people after me have to wait until at least 62. Which means 1) most of the people in those tiers will wait until 62 to retire and 2) even if they don’t, the 40-50% reduction for early retirement will reduce payments.
They are indeed tiering their plans ,* but it doesn’t always have to do with interest rates and mortality tables. Sometimes it’s for more basic, obvious reasons. For example, when I joined my pension system, I expected to make contributions until I retired. After about 14 years, a law was passed that ended contributions for people with more than 10 years’ service - I got a 3% raise, but that’s also why their are two tiers after mine ( which both currently must contribute until they collect - until the politicians give them a gift). The tiering is also affected by mortality tables, although perhaps not only in the way you mean - people before me could retire at 55 with a full pension, I can retire at 55 with a full pension *if *I have 30 years of service and people after me have to wait until at least 62. Which means 1) most of the people in those tiers will wait until 62 to retire and 2) even if they don’t, the 40-50% reduction for early retirement will reduce payments.
and it’s been going on a long time- I joined Tier 4 in 1988
Right, but it’s not like individuals don’t have the same problems (unpredictable swings in the market and in interest rates, and really unknowable mortality with an actuarial pool of 1 person). And, individuals are much worse at managing money than professionals. And, it’s much harder for an individual to predict his own mortality than it is for a pension fund of hundreds or thousands being able to predict the mortality of their actuarial pool.
The main problem with pensions was that they were given very favorable accounting treatment and were allowed to assume very high rates of return, allowing companies to underfund them. Companies made a promise to pay these pensions and purposely underfunded them because the accounting rules said the could assume 8% returns forever in a 2% fixed rate environment. That’s obviously not sustainable.
Pensions were a great idea that were handled poorly so companies could raid them and then default on their obligations. It’s funny you mention GE, OP, because one of the reasons why they bought RCA was because of RCA’s overfunded pension (well, properly funded, probably, but overfunded from an accounting perspective) that they subsequently raided.
People are not good at saving and not good at investing and have no good way to hedge their own mortality. Pensions were forced savings, invested professionally, and had an actuarial pool of retirees with much more predictable mortality than an individual has. Annuities could help out individuals (if they saved enough), but they have so many fees and other issues, that it’s not that efficient.
I loves me my pending government pension. After 20 years of service, it will provide lovely monthly payments until both the Mrs. and I are deceased, and will also pay off to our kids if we both die before 15 years of payments have passed (but only to the 15 year mark for them). Unused sick time will be matched by my employer (the state) to pay for continued private health care insurance.
That’ll be supplemented by the 401Ks and other investments put into play during my 15+ years in the private sector and since. They were managed conservatively and did okay during the collapse of 2008.
We’ll postpone SS as long as possible, hopefully until age 70.
My view is that if you have a guaranteed pension, hang on to it because some of them just can’t be beat. But check out the details of it, and supplement it however you can with other retirement plans. Gotta be realistic.
This is already available. When people retire they can convert their savings to an annuity that pays them a defined benefit until they die. Economist have been puzzled by the fact that so few people use them. It turns out that most people value the option of having a reserve for emergencies over the security of a steady income stream.
Provided they can have the money grow and leave it untouched until they retire, that would be an option. But the people for whom an annuity is the right choice may not be savvy enough to make good investment decisions during their working life to buy a good annuity. It’s my feeling that if you can invest well enough to buy a good annuity, you don’t really need the annuity. Whatever you did to save up that money, you can keep doing that on your own and keep control of the money. The people who need the annuity would be the ones who wouldn’t save a lot, would pull the money out for vacations and such, would invest in funds with high fees or poor returns, etc.
I think it would be useful to have something where you could put 10% of your salary into a retirement annuity which worked much like SS. You couldn’t access the money until you were of a certain age, if you died earlier the estate wouldn’t get the money, etc. It would not be a good choice for a savvy investor, but it would be a beneficial option for people who want a “set and forget” retirement option.