The real reason for pensions

http://www.newyorker.com/online/blogs/currency/2013/12/the-real-reason-for-pensions.html

by tristanj • 13 years ago

37 65 13 years ago

I think that a pension is a promise to the employee that should be held.

I also think it was silly to offer pensions in the first place since it is not possible to predict the future. People working for cities and other organizations offering pensions should be very concerned by recent events.

cma• 13 years ago

Make commitments, launder out the money through dividends, renege. (not applicable to cities, etc.)

bradleyjg3• 13 years ago

A contract is how we formalize promises.

Every contract is formed in the shadow of its governing law.

Municipal bankruptcies have been a part of the law of the United States since 1937.

∴ no promises are being broken in a meaningful sense.

ef4• 13 years ago

Every debt is a promise that should be held. But in a bankruptcy that's not possible, so it only becomes a question of which promises will be broken and by how much.

GVIrish4• 13 years ago

It is difficult to predict the future but when it comes down to it, most of the time when these pensions go belly up, it is due to significant mismanagement and incompetence.

I think a big failing of government pension funds (and Social Security) is that there is always a tremendous temptation for politicans to borrow against them, and leave the repayment to someone who will be elected after they're long gone. The next person kicks the can down the road, and sooner or later you're Detroit.

With sane and responsible management I'm sure some pensions would fail anyway because there's always the chance of catastrophe. But I've seen enough pension problems that were the result of risky investing, poor forecasting, and irresponsible borrowing that I feel like most of the time the pension needn't have failed or gotten cut.

msandford3• 13 years ago

Which is worse? Taking money from the young (who already have bad prospects) and giving it to the elderly? Or "taking" money from the elderly and "giving" it to the young? I say "taking" in quotes because a pension is a contractual obligation, not a god-given right.

Ultimately neither solution is a good one. This is class warfare at its finest.

Personally I think the social contract of the US is starting to break down, as is societal cohesion. We're all super civilized when we all have good prospects and everyone's life is improving. As the prospects deteriorate so do people's willingness to participate.

gohrt4• 13 years ago

Generally speaking, life gets massively better from one generation to the next. There are exceptions, of course, for nations collapsing in war, and there's pollution and whatnot posing a lurking threat, but overall:

If you had the choice, and had to pay for your decision, how much would you pay to live in the 2000s instead living in the 1900s?

The elderly deserve their pensions. The young get Modern Progress.

christkv2• 13 years ago

The problem with pensions is that they need a pyramid age distributions. That's to say lots of young people to pay the taxes to fund the top of the pyramid. That scheme is broken in the west so the whole system will creak on until the younger generations cuts the funds.

The excessive entitlements granted over the last 2 generations is unsustainable. In Spain many baby-boomers have 2X-3X the pension income of a full-time employee. How is that sustainable ??

revelation• 13 years ago

It's not exactly a tradeoff. You can get Modern Progress and not pay some old dudes lush pension.

adventured2• 13 years ago

It's also worth noting that the premise of life getting massively better one generation to the next, is a freak occurrence - and as it applies to the broad planet it's a recent one - over the course of human history. It has been the extremely rare event, for there to be a big leap one generation to the next, if you're tracking the total span of the species.

Why do I point that out? Because there's no rule that human life has to get massively better. There is no guarantee. It does not have to happen at all, and I would argue entropy + certain aspects of human nature are constantly acting to undermine the potential for progress to occur.

It's not just that there have been exceptions. Life getting massively better one gen to the next is the extraordinarily rare exception. We definitely shouldn't take it for granted.

hapless• 13 years ago

This article proposes that we close the barn door after the horse is left.

If my employer offered me a pension I'd laugh in his face. In 2013, a pension benefit's market value is $0. Who actually believes the money will be there when the time comes?

After 30 years of private sector firms refusing to fund pensions and passing them off to the PBGC, the public sector is finally getting into the game. No one should surprised.

drcube3• 13 years ago

Pensions are a foolish idea and I seriously hope no one under the age of 50 takes a job with a pension, expecting it to actually materialize. But the workers of the past didn't have our benefit of hindsight, and we should do what we can to keep our promises to them.

But seriously, guys, don't offer your employees a pension, and if a potential employer offers you one, laugh in their face. Let us manage our own retirements.

mathattack3• 13 years ago

Once could argue the same thing about Social Security. :-)

In my view, there are 2 kinds of pensions. One is Defined Benefit, which is crazy to count on. On the other hand, companies can offer Defined Contribution, which is fine. If a company offers a 401K, and makes a 10K contribution, I'm happy. It's 10K more income that will probably get taxed at a lower bracket when I retire.

_delirium• 13 years ago

Defined contribution is kind of a poor match to future needs on the recipient's side, though, since people do not live fixed and predictable periods of time. You could fix this individually by converting the lump sum to an annuity, but few people seem to do so (it doesn't help that the annuity market is a bit confusing). The end result is that people who live significantly longer than expected run out of money. And they do so at the least convenient time: many people early in retirement could probably go back to work if needed, but a typical 100-year-old, who retired 30+ years ago and now ran out of money, is not in a condition to reenter the workforce.

In most countries the backstop is to have a small defined-benefit state pension, so they won't end up literally penniless (in the U.S. this is Social Security, which pays a minimum of ~$9,500/yr). Other countries have tried to move more people into essentially buying annuities to mitigate the varying-lifespan risk. For example most defined-contribution private-sector pensions in Denmark now pay into pension funds (third-party, non-profit organizations) that by default are essentially the purchase of an annuity. You can cash it out as a lump sum upon retirement, but if you do nothing, the default is a traditional monthly pension for life, with the amount dependent on your contribution.

bradleyjg3• 13 years ago

Defined contribution can be transformed into defined benefit if the contribution is a deferred annuity.

The reason pension obligations can be discharged in bankruptcy and 401k contributions can't+, is because the former is a contractual obligation to a future stream of payments, while the latter is a transfer of vested property.

Neither employers nor unions like this idea however because they both like to use pensions as a slush fund. Some workers also might not like it because annuities don't have great returns.

+There is the unlikely possibility of a clawback of 2 years at most.

gnaritas2• 13 years ago

Let us manage our own retirements.

We already know from pre-social security times that approach doesn't work; most people end up destitute.

drcube3• 13 years ago

I'm not talking about social security, I'm talking about pensions. To which a 401k or IRA is infinitely preferable. But SS has the same problem as pensions: there's nothing to stop future politicians from eliminating it at any time to free up some headroom in the budget.

Perhaps a mandatory 401k everyone must have, contribute to and refrain from using until age 65 would be the best of both worlds?

jgreen10• 13 years ago

It's easy for me to say, since I'm from a country with an excellent pension system (the Netherlands), but completely managing your own pension would be foolish at best. You cannot predict how long you will live compared to others. To spread the risk, you should always be part of a bigger pension scheme.

aquark• 13 years ago

That is an interesting point. You can of course always buy an annuity to benefit from the risk spreading whilst retaining control over your pension funds up to that point.

Are there products that let you do this pre-retirement as opposed to at retirement? If so they certainly don't seem as popular as the traditional save-to-65-then-buy-one approach.

coldtea2• 13 years ago

But seriously, guys, don't offer your employees a pension, and if a potential employer offers you one, laugh in their face. Let us manage our own retirements.

Yes, let's see how that turns out, when 80% of the population over 65 is destitute or working at Walmart/McDonalds well into its seventies...

Shivetya• 13 years ago

I am always shocked by the number of professionals I work with who either do not fund their 401k, or only to matching, instead of going for max. Yes I understand hitting your maximum can be difficult, but it should come before frivolous expenditures. You are investing in yourself and if you have family, them.

Yet while the excuses are legion the majority of these same people have no issue with car notes(s), cell phone contract(s), and buying breakfast/daily.

Fortunately my company offered a pension when I joined, they have since converted to 401k and frozen pensions at the end of the year. Yet it is there and one more safety for me.

nilkn• 13 years ago

In the oil & gas industry, it's common for companies to offer both 401(k) plans with matching and traditional pension plans.

3pt141592• 13 years ago

A group of people collectively bargained for future payouts from an entity that was only represented by its current voters (or in some cases, shareholders).

Predictably the pensioners-to-be asked for generous pensions, paid early in life, at the least expense possible. Predictably the public purse was more generous with future payouts that didn't look like debt than it would be with present payouts. Predictably the economy shifted away from uncompetitive and unionised sectors of the economy in Detroit to Austin. Predictably the now-pensioners claim that they paid for pensions and are thus 'owed' them.

But from whom? Either they never cared to set up a fund or did and had the state backstop it, and now there is no money. Retiring after 32 years and earning "80% of your best 4 years of pay" for 40 years (remember, they keep paying out when you die because your wife still needs to eat, so we have to handle the statistics to handle the average case) turned out not to be affordable on the tiny percent they put away.

What else was ever going to happen?

mathattack3• 13 years ago

Ponzi schemes can keep going if you can keep growing. They only die when growth stops. Detroit shows us the truth here. When the companies get strangled, people leave, and Detroit follows suit.

lsc4• 13 years ago

Predictably the now-pensioners claim that they paid for pensions and are thus 'owed' them.

Do you think employees are 'owed' a paycheck after they do their month of work?

Some jobs, instead of paying you all that money up-front, instead give you a pension. Just because it's deferred 30 years rather than just 30 days doesn't mean it's any less your pay than your paycheck.

I mean, you can argue that it isn't sustainable, or even that it's stupid to expect a company to deliver on a promise 30 years from now, but when you are paid in a promise of future pay... you are certainly owed that money.

rayiner2• 13 years ago

Sure, under normal circumstances, but e.g. in bankruptcy employees can be left with unpaid wages. That's the context here.

3pt141592• 13 years ago

I put it in quotes because the group of people demanding it weren't honest enough for me to feel that they have a moral claim to it.

Companies and cities go bankrupt. This isn't news. This has been happening since before the Aztec empire started. If you are going to design a pension for thousands of people you should take care to design it for the worst case scenario. I would rather take a pension that had a 99% chance of paying out $500 per month, than one that had a 95% chance of paying out $650 per month, because the retired should be risk adverse.

Instead the employees were greedy, thought they could double dip by being part of the huge baby boomer group (thus not paying in a fair share, considering what they would get out) and retiring handsomely.

Well you can't change reality. At the very bottom of economics is actual real resources, and if you don't create enough value or save enough value and there there isn't enough other people to feed from then you must downwardly adjust your standard of living. Remember Freedom 55? I actually know people that worked for only 30 years at a government job and are being paid 80% of their best 4 years (adjusted for inflation of course) for the rest of their life. This is unsustainable.

dangerboysteve• 13 years ago

You folks should check out this video:

http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

GVIrish4• 13 years ago

Maybe pensions are a bad idea after all, but the bigger implication of this is that it will be yet another thing that dissuades people from public service. Some may say that's a good thing, but if you keep removing benefits of public service, it is only going to reduce the quality of people working for our government.

People talk about how bad government incompetence is now, but it can get far worse in the future. Not saying that pensions need to stay, or that they should never be cut. Just saying that if the good reasons to go into public service keep getting removed government is only going to get worse.

001sky3• 13 years ago

it will be yet another thing that dissuades people from public service

Lets face it, greed and easy-money is absolutely the wrong reason to be in "public service".

dmm2• 13 years ago

Asking to be paid what you are promised is "greed"?

GVIrish4• 13 years ago

I don't think it's greed at all, if you're going into public service a lot of times you are paid less as a result but it's made up for in the benefits package. If the benefits package gets drastically reduced, then you're left with less pay, and less benefits than the private sector.

So maybe some people will still go govvie out of a sense of duty, but for more than a few people it'll make it a raw deal. Especially considering how government workers now have to deal with furloughs and shutdowns. Sure, many people in other fields have to deal with a lot of uncertainty too, but one of the pluses of gov't work used to be stability. Without stability, it makes the job even less attractive.

protomyth• 13 years ago

Isn't the problem not so much with the pension, but the amount being paid into the pension fund vs what is scheduled to payout? Underfunding the plan and unreasonable expectations of the amount the fund will earn are commonly sited problems.

rayiner2• 13 years ago

This is the really interesting part of the article:

On Tuesday, a federal judge said Detroit could legally cut the pensions it has already promised to workers as part of its bankruptcy plan. Many state constitutions, including that of Michigan, hold that the government can’t go back on pension promises, and, because of this, cities have generally assumed that they could not touch existing pensions even in cases of bankruptcy. (Instead, many have been cutting pensions for newly hired workers.) But federal law supersedes state law, and, according to Judge Steve W. Rhodes, pension cuts are just fine under federal law. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” he said.

Takeaway: Bankruptcy courts > state constitutions. It's a straightforward result of the Supremacy Clause, but is practically very significant.

noclip• 13 years ago

Then there's this:

http://www.rollingstone.com/politics/news/looting-the-pensio...

redwood• 13 years ago

What I thought was missing from this article, but insinuated: that Caeser knew: give 'em something so they don't overthrow you.

Well the modern economy is reaching such inequality levels that we're going to have to do something or else it'll be forced, and potentially volatile.

Guaranteed income seems the best plan.

Adrock• 13 years ago

Related: I recently was chatting with a retired 401k salesperson who explained to me the real reason for employer-matched contributions. The highest compensated employees, typically executive management, are subject to deferral limits that are based on the contribution rates of the regular employees.

Why is it important for companies to encourage their employees to save? Aside from “it’s the right thing to do,” there are actually compliance reasons why this is necessary. “It helps with nondiscrimination tests,” says Robert Richter, vice president of SunGard’s wealth & retirement administration business in Jacksonville, Florida. He adds, “Highly compensated employees are subject to deferral limits that are based on non-highly compensated employee contribution rates. If non-highly compensated employees defer at low rates, then it will limit the amount that the highly compensated employees can defer. Safe harbor plans are a way to eliminate that test, but in order to use the safe harbor provisions the employer is required to contribute to the non-highly compensated employees either a minimum matching contribution or an across-the-board contribution, even for those who do not defer.”

- http://fiduciarynews.com/2013/11/are-401k-plan-sponsors-pois...

AndrewDucker• 13 years ago

I am very glad that in the UK all Defined-Benefits pensions have to be insured, so that if the company goes bust people aren't abandoned.

The real reason for pensions

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