4 ms·

Out of curiosity what's the difference between a public pension, where all funds are invested into a 401K like device, vs. each member in the group having their

by tabeth 9y ago

Out of curiosity what's the difference between a public pension, where all funds are invested into a 401K like device, vs. each member in the group having their own 401K? I know that's not how Illinois' pension worked, but wouldn't the former be superior as the highest principle results in a proportionally higher (raw) return vs. an individual's?

Spooky23 9y ago
Pensions are awesome when funded. Illinois stole from its future by underfunding it.
- tabeth 9y ago
  Sure, but my comment was supposing a hypothetical. Say you're a new state, Zion, and you have the two options available to you: 1) Simply let your employees invest in their own retirement via a 401k. 2) Pool everyone's money together and invest into a super 401k. What I'm asking is if (2) is better than (1), or not. Surely someone has tried a variant of (2) before. I agree though, that funded pensions are awesome. Since some organizations clearly have trouble with that, I was just wondering if there was a simpler way to ensure liquidity in the fund. I'm aware that money is already pulled together with a pension, however my understanding is that pension funds are generally "managed" where most people who use a 401k put it in some sort of index fund where it's pretty passive as it tracks the market in general.
  - Godel_unicode 9y ago
    2) is how most 401k's work already. e.g. Fidelity has target date funds, and everyone in the 2050 target date funds has their money in one pool which Fidelity manages as a group. There are 401k's that allow investing in individual securities (or so I'm given to understand) but that's not the norm.
  - lotsofpulp 9y ago
    (2) is what is happening now. It just so happens that everyone does it individually in their IRA or 401(k) and then buys mutual funds with it, hence their money is now pooled. Difference is you didn't have to risk a politician or union boss in the middle meddling with the funds, nor are future taxpayers on the hook for when there is a shortfall in the fund (incentivizing diversification by 401k owners).
  - Spooky23 9y ago
    Better despends on your perspective. There’s financial and social problems associated with the 401k model, namely that people won’t or can’t save enough or invest well. You’ll see the impact in a few years as the numbers of impoverished former middle class seniors increase. With the pension model, you fund, manage it responsibly and you have a sustainable system that benefits all. I live in a state with a constitutional guarantee of public pensions. I take a 35% pay hit, plus 10% to my own savings today for the ability to retire at 55. All big companies were able to afford this model, but the changes to tax law incentived then to ditch pensions.
- jeffbax 9y ago
  No, politicians sold out their taxbase by not reforming unsustainable and over-promising public pensions for years. The sooner they go away the better, no reason unions should be able to negotiate budget busting benefits, then run them poorly, and expect the majority of people without the sweet deal to have to bail them out while being responsible for their own 401ks and IRAs. Cronyism and special interests aren't just for corporations.
  - Spooky23 9y ago
    States like New York that funded its pensions are ok. Illinois did not. Unions don’t run public pension plans. So it really doesn’t make sense to throw around the anti union bullshit. When you are more corrupt and inept than NY government, you need to look at how you elect your legislature.
teej 9y ago
Just off the top - * Everyone gets lumped into the same risk tolerance bucket * Big funds tend to make big purchases which on their own can move markets, which is bad. You see this more with sovereign wealth funds than pensions though. * You can’t always trust the fiduciaries of the pension to make smart decisions. See 2008. * Pensions often come with a defined benefit which relies on younger people paying the benefits of older people. Often these benefits were calculated with very stupid future growth projections in mind. * Private company pensions often require the company to stay solvent for the pension to stay solvent. That isn’t always a safe assumption * People are living longer which further screws up the math that many pensions were set up on * Sometimes, workers or employers negotiate for changes to pension benefits. Those changes won't necessarily be net positive for everyone the pension covers.
- wahern 9y ago
  Federal law requires private employers to keep their defined benefit plans fully funded. That is, for every employee with a vested pension benefit the company must have deposited enough assets _today_ to ensure the pension can pay the accrued benefits _tomorrow_. IIRC, the regulatory agency (PBGC?) mandates a fairly conservative rate of return when calculating liabilities, which is one reason why corporations ditched pension plans. It's possible to game the system, but you really have to work at it. The merger craze of the 1980s and 1990s was in no small part driven by attempts to raid pension funds. When companies merged you could merge the pension funds, and the merger provided opportunities to argue that the merged pension was overfunded. (Timing, choice of partner, shuffling of staff around, and tweaking of contracts so benefit accruals were postponed just long enough to raid the pension fund.) The new found cash in tandem with the supposedly lower liabilities provided companies huge one-time gains on their books, which fueled bonuses for C-suite executives (especially CFOs), who would then quickly move on before it all unraveled. In any event, defined benefit plans in the private world aren't pyramid schemes. That's unique to the state governments because the pertinent federal law doesn't apply to them. Even though companies can screw with pensions if they try, it's still far more secure than 401(k)s. Just ask anyone who retires shortly before a recession. Or ask anyone who lives in Chile, which has had individual retirement savings accounts for decades. A fully funded pension scheme is basically an annuity. If you have a 401(k), as you approach retirement you're _supposed_ to be rolling it over to an annuity anyhow. That's the rational thing to do. But nobody does it because, well, people don't behave rationally when left to their own devices. Similarly, pension plans often deduct significantly more in wages than people voluntarily do with 401(k)s. Upwards of 20-30%. People systematically underestimate how much they need to save for retirement. Consider that social security effectively taxes you at 12%, but even if it stays completely solvent it's only going to provide a bare minimum income.
trevyn 9y ago
It is generally unwise to give someone else control of where your money is invested, particularly long-term; the incentives become twisted.
pjschlic 9y ago
1) A major difference is the fact that currently they are generally 'unfunded' in that the money isn't actually invested on your behalf. 2) The next is where the risk resides - even in cases where they are fully funded (ie: some model suggests that the returns on investment will be able to pay out obligations), there's still the issue of the risk models are wrong or investments underperform -that risk will still reside on the state to pony up the difference. 3) Lastly is the highly speculative nature of the obligation - most all pension plans use a subset of the worker's last years to determine the defined payment, so a common practice became to inform your (district, organization) that you intend to retire in 5 years, where they will then boost your pay for your last few years, thus providing a much larger pension. This esoteric issue is possibly dominating Illinois' financial problems as (from a few articles I read) retirees are receiving many times returns-compounded contributions, since their last 5 years are boosted so much over their average pay over the whole career. Gaming the system was not accounted for in the models.
- ghostly_s 9y ago
  > most all pension plans use a subset of the worker's last years to determine the defined payment, This is absurd. Why wouldn't it be calculated on lifetime compensation?
lotsofpulp 9y ago
These are two different financial devices. A taxpayer funded defined benefit pension (usually referred to as a public pension) is legally obligated to provide a set amount of money according to the formula in the pension plan to the recipient after they retire, on a monthly basis. A 401(k) is a tax advantaged account where an individual does not have to pay taxes on the money in the account until they start withdrawing from it after a certain age. Once the money is deposited into the 401(k), there is no guarantee how much will be there when the account holder retires, all of the risk from whatever it's invested in lies on the account holder. Theoretically, a larger fund with professionals investing it would be able to achieve higher returns, as in the case of a taxpayer funded defined benefit pension. However, due to corruption and ineptitude, it actually ends up costing taxpayers an incredible amount of money. There's a reason why non-taxpayer funded entities stopped offering defined benefit pensions. Public pensions are sold as being cheaper, but that is using false promises and lies of excessive returns. If they were held to the same standards that regular defined benefit pensions are, they would have ceased to exist also.
ww520 9y ago
Individual retirement plan can be inherited when you died. Public pension that pool resources take over the remaining fund once you and your spouse died.

by tabeth 9y ago

Spooky23 9y ago

Pensions are awesome when funded. Illinois stole from its future by underfunding it.

tabeth 9y ago
Sure, but my comment was supposing a hypothetical. Say you're a new state, Zion, and you have the two options available to you: 1) Simply let your employees invest in their own retirement via a 401k. 2) Pool everyone's money together and invest into a super 401k. What I'm asking is if (2) is better than (1), or not. Surely someone has tried a variant of (2) before. I agree though, that funded pensions are awesome. Since some organizations clearly have trouble with that, I was just wondering if there was a simpler way to ensure liquidity in the fund. I'm aware that money is already pulled together with a pension, however my understanding is that pension funds are generally "managed" where most people who use a 401k put it in some sort of index fund where it's pretty passive as it tracks the market in general.
- Godel_unicode 9y ago
  2) is how most 401k's work already. e.g. Fidelity has target date funds, and everyone in the 2050 target date funds has their money in one pool which Fidelity manages as a group. There are 401k's that allow investing in individual securities (or so I'm given to understand) but that's not the norm.
- lotsofpulp 9y ago
  (2) is what is happening now. It just so happens that everyone does it individually in their IRA or 401(k) and then buys mutual funds with it, hence their money is now pooled. Difference is you didn't have to risk a politician or union boss in the middle meddling with the funds, nor are future taxpayers on the hook for when there is a shortfall in the fund (incentivizing diversification by 401k owners).
- Spooky23 9y ago
  Better despends on your perspective. There’s financial and social problems associated with the 401k model, namely that people won’t or can’t save enough or invest well. You’ll see the impact in a few years as the numbers of impoverished former middle class seniors increase. With the pension model, you fund, manage it responsibly and you have a sustainable system that benefits all. I live in a state with a constitutional guarantee of public pensions. I take a 35% pay hit, plus 10% to my own savings today for the ability to retire at 55. All big companies were able to afford this model, but the changes to tax law incentived then to ditch pensions.
jeffbax 9y ago
No, politicians sold out their taxbase by not reforming unsustainable and over-promising public pensions for years. The sooner they go away the better, no reason unions should be able to negotiate budget busting benefits, then run them poorly, and expect the majority of people without the sweet deal to have to bail them out while being responsible for their own 401ks and IRAs. Cronyism and special interests aren't just for corporations.
- Spooky23 9y ago
  States like New York that funded its pensions are ok. Illinois did not. Unions don’t run public pension plans. So it really doesn’t make sense to throw around the anti union bullshit. When you are more corrupt and inept than NY government, you need to look at how you elect your legislature.

teej 9y ago

Just off the top - * Everyone gets lumped into the same risk tolerance bucket * Big funds tend to make big purchases which on their own can move markets, which is bad. You see this more with sovereign wealth funds than pensions though. * You can’t always trust the fiduciaries of the pension to make smart decisions. See 2008. * Pensions often come with a defined benefit which relies on younger people paying the benefits of older people. Often these benefits were calculated with very stupid future growth projections in mind. * Private company pensions often require the company to stay solvent for the pension to stay solvent. That isn’t always a safe assumption * People are living longer which further screws up the math that many pensions were set up on * Sometimes, workers or employers negotiate for changes to pension benefits. Those changes won't necessarily be net positive for everyone the pension covers.

wahern 9y ago
Federal law requires private employers to keep their defined benefit plans fully funded. That is, for every employee with a vested pension benefit the company must have deposited enough assets _today_ to ensure the pension can pay the accrued benefits _tomorrow_. IIRC, the regulatory agency (PBGC?) mandates a fairly conservative rate of return when calculating liabilities, which is one reason why corporations ditched pension plans. It's possible to game the system, but you really have to work at it. The merger craze of the 1980s and 1990s was in no small part driven by attempts to raid pension funds. When companies merged you could merge the pension funds, and the merger provided opportunities to argue that the merged pension was overfunded. (Timing, choice of partner, shuffling of staff around, and tweaking of contracts so benefit accruals were postponed just long enough to raid the pension fund.) The new found cash in tandem with the supposedly lower liabilities provided companies huge one-time gains on their books, which fueled bonuses for C-suite executives (especially CFOs), who would then quickly move on before it all unraveled. In any event, defined benefit plans in the private world aren't pyramid schemes. That's unique to the state governments because the pertinent federal law doesn't apply to them. Even though companies can screw with pensions if they try, it's still far more secure than 401(k)s. Just ask anyone who retires shortly before a recession. Or ask anyone who lives in Chile, which has had individual retirement savings accounts for decades. A fully funded pension scheme is basically an annuity. If you have a 401(k), as you approach retirement you're _supposed_ to be rolling it over to an annuity anyhow. That's the rational thing to do. But nobody does it because, well, people don't behave rationally when left to their own devices. Similarly, pension plans often deduct significantly more in wages than people voluntarily do with 401(k)s. Upwards of 20-30%. People systematically underestimate how much they need to save for retirement. Consider that social security effectively taxes you at 12%, but even if it stays completely solvent it's only going to provide a bare minimum income.

trevyn 9y ago

It is generally unwise to give someone else control of where your money is invested, particularly long-term; the incentives become twisted.

pjschlic 9y ago

1) A major difference is the fact that currently they are generally 'unfunded' in that the money isn't actually invested on your behalf. 2) The next is where the risk resides - even in cases where they are fully funded (ie: some model suggests that the returns on investment will be able to pay out obligations), there's still the issue of the risk models are wrong or investments underperform -that risk will still reside on the state to pony up the difference. 3) Lastly is the highly speculative nature of the obligation - most all pension plans use a subset of the worker's last years to determine the defined payment, so a common practice became to inform your (district, organization) that you intend to retire in 5 years, where they will then boost your pay for your last few years, thus providing a much larger pension. This esoteric issue is possibly dominating Illinois' financial problems as (from a few articles I read) retirees are receiving many times returns-compounded contributions, since their last 5 years are boosted so much over their average pay over the whole career. Gaming the system was not accounted for in the models.

ghostly_s 9y ago
> most all pension plans use a subset of the worker's last years to determine the defined payment, This is absurd. Why wouldn't it be calculated on lifetime compensation?

lotsofpulp 9y ago

These are two different financial devices. A taxpayer funded defined benefit pension (usually referred to as a public pension) is legally obligated to provide a set amount of money according to the formula in the pension plan to the recipient after they retire, on a monthly basis. A 401(k) is a tax advantaged account where an individual does not have to pay taxes on the money in the account until they start withdrawing from it after a certain age. Once the money is deposited into the 401(k), there is no guarantee how much will be there when the account holder retires, all of the risk from whatever it's invested in lies on the account holder. Theoretically, a larger fund with professionals investing it would be able to achieve higher returns, as in the case of a taxpayer funded defined benefit pension. However, due to corruption and ineptitude, it actually ends up costing taxpayers an incredible amount of money. There's a reason why non-taxpayer funded entities stopped offering defined benefit pensions. Public pensions are sold as being cheaper, but that is using false promises and lies of excessive returns. If they were held to the same standards that regular defined benefit pensions are, they would have ceased to exist also.

ww520 9y ago

Individual retirement plan can be inherited when you died. Public pension that pool resources take over the remaining fund once you and your spouse died.