3 ms·

Why are defined benefit plans always unaffordable? You don’t want people’s retirements to be affected by the value of their investment at the moment of withdra

Why are defined benefit plans always unaffordable? You don’t want people’s retirements to be affected by the value of their investment at the moment of withdrawal. Instead you want the benefit to incorporate the expected value at retirement of the investment over the long run. The problem with many pensions is that the businesses themselves supporting them essentially went belly up as competition, technology and investors took their toll.

zzleeper 9y ago
For company plans, you said the answer. It's silly to assume that your employer will be alive when you are 80 year sold, and also seems like a stupid idea for a company in a completely unrelated business to get into the retirement fund mgmt business. For states, the reason is population. If your pop doubles every 50 years, then you only need 2 young people to pay for one retiree. If it's the opposite (Japan now, US in a few decades), then you are screwed.
- briandear 9y ago
  So it’s a Ponzi scheme.
  - toomuchtodo 9y ago
    Only if you have the unrealistic view that each generational cohort is completely isolated economically.
  - JetSpiegel 9y ago
    More like a loan from current workers to be repaid when those workers retire.
jshaqaw 9y ago
This is a good point. DC is no more “unaffordable” inherently. DC puts the volatility of upside and downside shocks on the individual (or more practically an age cohort) versus smoothing it out over wider age cohorts. For example, I have lots of savings. The market up 20% this year is great for me. Not so much for the next age cohort who face mathematically lower returns from this level. If anything DB at the margin forces more realistic upfront accounting (despite pension accounting flaws) because when an entire age cohort faces ruin they will vote to socialize much of the pain anyway ex post.
wbillingsley 9y ago
Some modern defined benefit schemes do that -- give a formula for the total dollar value you'll receive at retirement. And if you want to convert that to a pension you buy an annuity with it. However, they seem (to me) to have a couple of problems - - as the formula is often based on your last five years' average salary, it seems like an "all eggs in one basket" on your salary growing. Which seems to be the inverse of the sort of hedging and diversifying you try to do with personal investments -- if my salary grows I already gain, but I'd like my retirement savings to grow even if for any reason my salary stalls in 20 years' time. - the formulas seem to be quite fixed and can have some perverse incentives. For instance, "average salary from the last five years" seems (to me) to be partly behind why Vice Chancellor roles changed so much -- someone stepping back from being a VC to being a professor would face a salary drop, which would then affect their defined benefit pension calculation (costing them a lot of money), so it became "up or out" and the idea of university leadership roles as being a service role that academics would take on for a while simply died because it had to be the last role you took before retirement. Ok, that's a bit of an aside about how pension schemes can change the nature of the university, but practically speaking I'd like to keep the option of doing things like semi-retiring at the end of my career (dropping to part-time or doing something interesting that might not increase my salary) without incurring a massive penalty on my retirement savings.

zzleeper 9y ago

For company plans, you said the answer. It's silly to assume that your employer will be alive when you are 80 year sold, and also seems like a stupid idea for a company in a completely unrelated business to get into the retirement fund mgmt business. For states, the reason is population. If your pop doubles every 50 years, then you only need 2 young people to pay for one retiree. If it's the opposite (Japan now, US in a few decades), then you are screwed.

briandear 9y ago
So it’s a Ponzi scheme.
- toomuchtodo 9y ago
  Only if you have the unrealistic view that each generational cohort is completely isolated economically.
- JetSpiegel 9y ago
  More like a loan from current workers to be repaid when those workers retire.

jshaqaw 9y ago

This is a good point. DC is no more “unaffordable” inherently. DC puts the volatility of upside and downside shocks on the individual (or more practically an age cohort) versus smoothing it out over wider age cohorts. For example, I have lots of savings. The market up 20% this year is great for me. Not so much for the next age cohort who face mathematically lower returns from this level. If anything DB at the margin forces more realistic upfront accounting (despite pension accounting flaws) because when an entire age cohort faces ruin they will vote to socialize much of the pain anyway ex post.

wbillingsley 9y ago

Some modern defined benefit schemes do that -- give a formula for the total dollar value you'll receive at retirement. And if you want to convert that to a pension you buy an annuity with it. However, they seem (to me) to have a couple of problems - - as the formula is often based on your last five years' average salary, it seems like an "all eggs in one basket" on your salary growing. Which seems to be the inverse of the sort of hedging and diversifying you try to do with personal investments -- if my salary grows I already gain, but I'd like my retirement savings to grow even if for any reason my salary stalls in 20 years' time. - the formulas seem to be quite fixed and can have some perverse incentives. For instance, "average salary from the last five years" seems (to me) to be partly behind why Vice Chancellor roles changed so much -- someone stepping back from being a VC to being a professor would face a salary drop, which would then affect their defined benefit pension calculation (costing them a lot of money), so it became "up or out" and the idea of university leadership roles as being a service role that academics would take on for a while simply died because it had to be the last role you took before retirement. Ok, that's a bit of an aside about how pension schemes can change the nature of the university, but practically speaking I'd like to keep the option of doing things like semi-retiring at the end of my career (dropping to part-time or doing something interesting that might not increase my salary) without incurring a massive penalty on my retirement savings.