5 ms·

I feel like the author is mixing together some important differences between 401ks and pensions. ------ Pensions: - "Your" money and everyone else's money is

by whack 9y ago

I feel like the author is mixing together some important differences between 401ks and pensions. ------ Pensions: - "Your" money and everyone else's money is lumped into a single pool. If previous retirees were given too much money because of poor planning, "your" money will evaporate - Your future benefits are fixed, regardless of market conditions. Unless the pension can't afford to do so because of a market crash, and declares bankruptcy. In which case, anyone left holding the bag will be screwed - Zero financial literacy/discipline required. Your contributions are pre-determined, and the pension managers will take care of all investment decisions ------ 401ks: - Your 401k is 100% yours. There is no risk of your 401k account "going bankrupt" because too much of it was given to others. - Your future benefits are dependent on market conditions - unless you choose to buy an annuity. - Financial literacy and discipline is required. If you don't contribute enough, or make bad investment choices, you're screwed ----------------- The article completely ignores the 1st and 2nd differences, which is why many people like myself are uneasy with pensions. The 3rd point is what the article mostly focuses on, and that's a valid point. I'd love to see "full-service" 401k plans, where employees are forced to contribute at least X% of their income, and all of it is managed by the equivalent of a pension-fund-manager (ideally, invested into low-cost diversified index funds) Too many people lack the financial discipline to make sufficient contributions, and the financial literacy to make good investment decisions. So full-service 401ks as described above, could be a net positive for society, without all the baggage that come with pension funds.

dragontamer 9y ago
> - "Your" money and everyone else's money is lumped into a single pool. If previous retirees were given too much money because of poor planning, "your" money will evaporate There are more benefits to this than you might think. In particular, its easier to spread death statistics across larger populations than against individuals. We can reasonably expect 50% of men to die before they're 78.74 (life expectancy in the USA). A Pension Fund (since it is pooled across many individuals) can plan for this very well. True, life-expectancy changes from year to year, but this slow-moving change can be corrected over time. An individual 401k however, has no real way of planning for the event. Realistically, individuals need to have a plan for death at age 60 and death at age 100. On the one hand, you may die before you have a chance to even crack your retirement fund, but on the other, you may die in extreme poverty, with all your money wasted away years before you die. Planning for your age of death is damn near impossible on an individual basis. A 401k would be innately less efficient than a pension fund as we all have to plan far more conservatively. IE: A Pension Fund can plan for an age-of-death at ~80 years old (for males), while an individual male may need to plan for 85 or maybe 90 years old.
- gwright 9y ago
  Annuities and life insurance is how an individual gains access to the risk pool you are describing.
  - dragontamer 9y ago
    Or pension plans. Which essentially combine an Annuity with a Retirement Fund. Life Insurance is weirder. Its more about leaving money left over for your family, especially if you die earlier than expected and your family will need a source of money to sustain themselves after losing you.
Arbalest 9y ago
Here in Australia, Superannuation (essentially 401k) is compulsory and the process to get the money out before you retire is quite arduous. It is contributed by your employer and often isn't included in the advertised income. The compulsory contribution is about 9% of your income (exact value eludes me).
- dragontamer 9y ago
  Sounds like "Social Security" in the USA. Social Security is only a little bit of money however. It taxes 12.4%, half of which is employer contribution, and the other half is an individual tax. Most people only see 6.2% individually. (Self-employed get taxed at the full 12.4%) No one actually expects to live on Social Security alone in the USA. Supplemental savings (such as Pension Plans or 401k plans) are needed for a real retirement.
  - jcwayne 9y ago
    > No one actually expects to live on Social Security alone... None should, but plenty do.
    - dbjacobs 9y ago
      To be more precise. Among elderly Social Security beneficiaries, 23% of married couples and about 43% of unmarried persons rely on Social Security for 90% or more of their income [1]. [1] - https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
      - srtjstjsj 9y ago
        That doesn't account for spending past income, as in a savings account, cost-basis of investments, or home ownership.
  - kgwgk 9y ago
    Except the part where the money you’re giving to the SS is no longer yours.
beguiledfoil 9y ago
>Your 401k is 100% yours. There is no risk of your 401k account "going bankrupt" because too much of it was given to others. Systemic risk is present either way. You're just playing category theory sleight of hand and drawing distinctions between forced savings plans that aren't meaningful.
- thereare5lights 9y ago
  I don't see how actually having control over where you invest your money in a 401k vs having none whatsoever in a pension is "category theory sleight of hand" or a distinction lacking in meaning.
  - beguiledfoil 9y ago
    Do you index or do you actively manage your 401k?
    - thereare5lights 9y ago
      So your argument is that, choosing to index instead of actively manage is the same thing as not having the option at all?
      - beguiledfoil 9y ago
        The risk is systemic either way. Those in this thread feel good about themselves for contributing more than others, but long run they're in the same boat as those 'others'. You never escape systemic risk. The reality is that guaranteed pensions have a track record of getting people to save for retirement. Those programs are gone now and people don't save. The clever reductionists in this thread blame the workers, but placing blame is an exercise that bears only schadenfreude. Personally, I'm interested in lessening systemic risk - and that doesn't mean buying more bonds with shit yield.
hkmurakami 9y ago
Afaik there are some companies that take up the 401k advisor role. $FNGN is one, and I'm sure there are others.
ThrustVectoring 9y ago
The 401k being 100% yours is a somewhat significant downside, too. It means that the funds get transferred to your heirs on death, diverting funds from supporting retirement in general. This can be counteracted by purchasing an annuity, but that usually isn't the route taken by retirees. Overall, it means that saving for retirement is more expensive than it needs to be, since you're also effectively saving for an inheritance too. The pension, on the other hand, effectively collects mortality credits as beneficiaries die and distributes them to survivors. The ideal retirement system would be effectively some sort of actuarially adjusted tontine. Nothing gets left behind when you die - instead, it gets split among surviving retirement savers in an actuarially fair manner.
- sokoloff 9y ago
  Except for the fact that psychologically, those who think, expect, or worry that their money might outlive them may take significant comfort in that money being passed to their heirs. This may make them more likely to save for retirement, even at the risk of over-saving, because the benefit of that money is not fully "lost" on death. You don't want to (IMO) design a retirement system where the well-to-do have every incentive to opt-out.
  - deleted 9y ago
    [deleted]
  - ThrustVectoring 9y ago
    Erm, what? Yeah, you want to structure a retirement system where the well-to-do want to opt out. Otherwise, we're giving tax advantages for "retirement saving" that really goes to heirs. How it's currently structured in the US, we do so through contribution limits. If all the retirement system change is make rich people opt out and have poor people who die early pay for the retirement of poor people who die late, it's a smashing success.
    - sokoloff 9y ago
      I see your point, but in any private system where only the poor participate, only the poor pay the fees that allow the system to exist, so you either further disproportionately disadvantage them financially and/or you provide them with notably worse service and support than the well-to-do enjoy for their investments.
gizmo686 9y ago
> I'd love to see "full-service" 401k plans, where employees are forced to contribute at least X% of their income, and all of it is managed by the equivalent of a pension-fund-manager (ideally, invested into low-cost diversified index funds) My employer does something like this. They put money (3% of my salary) into a 401k for me regardless of my own contribution, so I have no option of not saving at least that much (although I still save additional money, because 3% is not really enough). This defaults into a low-cost index fund. However, I still have the option of transferring the 401k to another fund; but I suspect that most people would stick with the default instead of trying to change the investment.
shrikant 9y ago
> Your future benefits are fixed, regardless of market conditions. Unless the pension can't afford to do so because of a market crash, and declares bankruptcy. In which case, anyone left holding the bag will be screwed. AFAIK, "defined benefits" are pretty much unavailable to new entrants. The vast majority of national and employer pension schemes are "defined contribution" only. [In the UK...]
skookumchuck 9y ago
> I'd love to see ... where employees are forced to ... I'd prefer to live in a country free from people who think they are smarter than the rest of us, and that that entitles them to force their ideas on us.

by whack 9y ago

dragontamer 9y ago

> - "Your" money and everyone else's money is lumped into a single pool. If previous retirees were given too much money because of poor planning, "your" money will evaporate There are more benefits to this than you might think. In particular, its easier to spread death statistics across larger populations than against individuals. We can reasonably expect 50% of men to die before they're 78.74 (life expectancy in the USA). A Pension Fund (since it is pooled across many individuals) can plan for this very well. True, life-expectancy changes from year to year, but this slow-moving change can be corrected over time. An individual 401k however, has no real way of planning for the event. Realistically, individuals need to have a plan for death at age 60 and death at age 100. On the one hand, you may die before you have a chance to even crack your retirement fund, but on the other, you may die in extreme poverty, with all your money wasted away years before you die. Planning for your age of death is damn near impossible on an individual basis. A 401k would be innately less efficient than a pension fund as we all have to plan far more conservatively. IE: A Pension Fund can plan for an age-of-death at ~80 years old (for males), while an individual male may need to plan for 85 or maybe 90 years old.

gwright 9y ago
Annuities and life insurance is how an individual gains access to the risk pool you are describing.
- dragontamer 9y ago
  Or pension plans. Which essentially combine an Annuity with a Retirement Fund. Life Insurance is weirder. Its more about leaving money left over for your family, especially if you die earlier than expected and your family will need a source of money to sustain themselves after losing you.

Arbalest 9y ago

Here in Australia, Superannuation (essentially 401k) is compulsory and the process to get the money out before you retire is quite arduous. It is contributed by your employer and often isn't included in the advertised income. The compulsory contribution is about 9% of your income (exact value eludes me).

dragontamer 9y ago
Sounds like "Social Security" in the USA. Social Security is only a little bit of money however. It taxes 12.4%, half of which is employer contribution, and the other half is an individual tax. Most people only see 6.2% individually. (Self-employed get taxed at the full 12.4%) No one actually expects to live on Social Security alone in the USA. Supplemental savings (such as Pension Plans or 401k plans) are needed for a real retirement.
- jcwayne 9y ago
  > No one actually expects to live on Social Security alone... None should, but plenty do.
  - dbjacobs 9y ago
    To be more precise. Among elderly Social Security beneficiaries, 23% of married couples and about 43% of unmarried persons rely on Social Security for 90% or more of their income [1]. [1] - https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
    - srtjstjsj 9y ago
      That doesn't account for spending past income, as in a savings account, cost-basis of investments, or home ownership.
- kgwgk 9y ago
  Except the part where the money you’re giving to the SS is no longer yours.

beguiledfoil 9y ago

>Your 401k is 100% yours. There is no risk of your 401k account "going bankrupt" because too much of it was given to others. Systemic risk is present either way. You're just playing category theory sleight of hand and drawing distinctions between forced savings plans that aren't meaningful.

thereare5lights 9y ago
I don't see how actually having control over where you invest your money in a 401k vs having none whatsoever in a pension is "category theory sleight of hand" or a distinction lacking in meaning.
- beguiledfoil 9y ago
  Do you index or do you actively manage your 401k?
  - thereare5lights 9y ago
    So your argument is that, choosing to index instead of actively manage is the same thing as not having the option at all?
    - beguiledfoil 9y ago
      The risk is systemic either way. Those in this thread feel good about themselves for contributing more than others, but long run they're in the same boat as those 'others'. You never escape systemic risk. The reality is that guaranteed pensions have a track record of getting people to save for retirement. Those programs are gone now and people don't save. The clever reductionists in this thread blame the workers, but placing blame is an exercise that bears only schadenfreude. Personally, I'm interested in lessening systemic risk - and that doesn't mean buying more bonds with shit yield.

hkmurakami 9y ago

Afaik there are some companies that take up the 401k advisor role. $FNGN is one, and I'm sure there are others.

ThrustVectoring 9y ago

The 401k being 100% yours is a somewhat significant downside, too. It means that the funds get transferred to your heirs on death, diverting funds from supporting retirement in general. This can be counteracted by purchasing an annuity, but that usually isn't the route taken by retirees. Overall, it means that saving for retirement is more expensive than it needs to be, since you're also effectively saving for an inheritance too. The pension, on the other hand, effectively collects mortality credits as beneficiaries die and distributes them to survivors. The ideal retirement system would be effectively some sort of actuarially adjusted tontine. Nothing gets left behind when you die - instead, it gets split among surviving retirement savers in an actuarially fair manner.

sokoloff 9y ago
Except for the fact that psychologically, those who think, expect, or worry that their money might outlive them may take significant comfort in that money being passed to their heirs. This may make them more likely to save for retirement, even at the risk of over-saving, because the benefit of that money is not fully "lost" on death. You don't want to (IMO) design a retirement system where the well-to-do have every incentive to opt-out.
- deleted 9y ago
  [deleted]
- ThrustVectoring 9y ago
  Erm, what? Yeah, you want to structure a retirement system where the well-to-do want to opt out. Otherwise, we're giving tax advantages for "retirement saving" that really goes to heirs. How it's currently structured in the US, we do so through contribution limits. If all the retirement system change is make rich people opt out and have poor people who die early pay for the retirement of poor people who die late, it's a smashing success.
  - sokoloff 9y ago
    I see your point, but in any private system where only the poor participate, only the poor pay the fees that allow the system to exist, so you either further disproportionately disadvantage them financially and/or you provide them with notably worse service and support than the well-to-do enjoy for their investments.

gizmo686 9y ago

> I'd love to see "full-service" 401k plans, where employees are forced to contribute at least X% of their income, and all of it is managed by the equivalent of a pension-fund-manager (ideally, invested into low-cost diversified index funds) My employer does something like this. They put money (3% of my salary) into a 401k for me regardless of my own contribution, so I have no option of not saving at least that much (although I still save additional money, because 3% is not really enough). This defaults into a low-cost index fund. However, I still have the option of transferring the 401k to another fund; but I suspect that most people would stick with the default instead of trying to change the investment.

shrikant 9y ago

> Your future benefits are fixed, regardless of market conditions. Unless the pension can't afford to do so because of a market crash, and declares bankruptcy. In which case, anyone left holding the bag will be screwed. AFAIK, "defined benefits" are pretty much unavailable to new entrants. The vast majority of national and employer pension schemes are "defined contribution" only. [In the UK...]

skookumchuck 9y ago

> I'd love to see ... where employees are forced to ... I'd prefer to live in a country free from people who think they are smarter than the rest of us, and that that entitles them to force their ideas on us.