5 ms·

The simple answer is that group mortality is easier to estimate and plan for than individual mortality. At 65, you do not know if you are going to live to 70 o

The simple answer is that group mortality is easier to estimate and plan for than individual mortality. At 65, you do not know if you are going to live to 70 or 101, so you need to plan your 401k accordingly, pessimistic. Couple that with the fact that many many americans could not save enough to last to 101, but could last until 72. So they are left with the choice of living more poorly than they should or running out of money. Defined benefit makes way more sense, some people "win" by living longer, others lose. But there is much less stress in the meantime.

lotsofpulp 7y ago
Defined benefit might make sense on a societal level, aka Social Security benefits in the US. On an employer level, it does not make sense as they have no idea if they will exist in the next 10, 20, 30 years, especially with automation and globalization changing the economic environment very quickly. Which is exactly what real life shows, as companies are jettisoning defined benefit pensions to stay competitive. On an individual level, a pension plan also doesn't make sense, as you can do what pension fund managers do via target date funds and save the money spent on paying the pension fund managers. And avoiding the corruption risk of employers underfunding and fund managers malinvesting. If you want protection that you will have income until you die, one should purchase an annuity. However, a much cheaper and better idea in my opinion, is raising a family that will support you in your old age, because it's prohibitively expensive to purchase the kind of care that comes from loving relationships in your old age.
- rileymat2 7y ago
  At an individual level, You can invest the same way, the problem is, you don't know how long you will live. Which was my main point. There are annuities, but my research into those has come up with very high costs with lots of fees.
  - lotsofpulp 7y ago
    >There are annuities, but my research into those has come up with very high costs with lots of fees. Yes, as most non taxpayer funded employers have found out, and reduced their offering of defined benefit pensions accordingly. My point is that no one has the ability to protect and afford against the kind of long term risk that you are talking about, and the best model I've seen to address it is when children and grandchildren take care of their elders.
    - Spivak 7y ago
      I agree that no individual can reasonably plan for to have enough money for 0-30 years but I disagree that nobody has the ability to spread that risk around. If your pool is the whole country then it’s very manageable sans the human problems that any large government / financial institutions run into at scale.
      - lotsofpulp 7y ago
        Why would one ignore "the human problems"? It's the very reason defined benefit pensions don't work outside of a population and economic boom. Pretty much every developed nation is raising retirement ages and reducing benefits to grapple with the fact that there is less wealth being created in their countries. No one can "manage" automation and labor from China/India/etc taking out a huge portion of your middle class.
  - skybrian 7y ago
    But why is that? It seems like there should be a way to offer a simple annuity product profitably.
    - lotsofpulp 7y ago
      Predicting the future is extremely difficult (if not impossible).
    - ghaff 7y ago
      There are. But I think you're hearing a lot of people not liking the cost associated with significantly de-risking a future annual income stream. Annuities can certainly make sense, including ones that, for example, you can get by donating appreciated assets.
      - skybrian 7y ago
        How does that work? If you're getting an annuity in return for donating something, that doesn't sound like a donation?
        ghaff 7y ago
        Charitable organizations (basically 501(c)3s in the US) don't have to pay tax on the appreciated value. So annuities offered by those organizations may take advantage of that tax benefit. In many cases, it will still be a net donation relative to other options, especially insofar as you can't pass on residual assets to beneficiaries, but it is one way of taking advantage of tax law to create an annuity.
- ghaff 7y ago
  The other issue is that defined benefit pensions were historically oriented around long-term employment with a single entity. This is most obvious in the case of the US government but pension benefits in general tended to be maximized when you stayed with one employer for a long time. This worked out pretty well for me [added: it's been through 2 changes in ownership but it's still available for payout] but, if instead you look on 2-5 year job tenure being far more common today, a lot of people would end up with little or no pension under typical defined benefit pension terms.
- DataWorker 7y ago
  Have you run the numbers on the cost of raising a family? I agree it’s the best strategy but I’m not sure it’s cheaper. I do believe it pays many psychic dividends, but I’m not sure it’s cheaper but I’ve not done the math.
  - lotsofpulp 7y ago
    I don't believe it's quite possible to put numbers on the benefits of being part of a tribe that has your back, but I doubt any realistic amount of money can get you the kind of care that family (and friends) can. Assuming a birth costs $5k to $10k, and the kid costs $20k per year for first 5 years for daycare, and then $3k per year, ballpark $200k, not adjusted for inflation, plus tons of time spent teaching and raising them, should buy you a relationship worth much more. But you also have to be surrounded by the right people and culture, so it's super complicated to calculate. But most successful families I know are successful because they can rely on each other to help each other out, and there are exponential benefits to knowing someone who knows someone, so as their networks expand, so do yours.
mherdeg 7y ago
This is an interesting view. For some reason I had never considered that participating in a large employer's defined-benefit pension fund might be kind of equivalent to signing up for a tontine with a bunch of your peers and all putting your cash in SPY for the duration.
nradov 7y ago
That's what annuities are for.
sokoloff 7y ago
Defined benefit for sustenance level probably makes sense (which is more or less what Social Security is if you've worked a typical career). Defined contribution allows for the transfer of wealth to heirs at death, which many people find a preferable and more fair-feeling way to deal with the fruits of one's labor than to have it revert to the annuity provider (private or public).

lotsofpulp 7y ago

Defined benefit might make sense on a societal level, aka Social Security benefits in the US. On an employer level, it does not make sense as they have no idea if they will exist in the next 10, 20, 30 years, especially with automation and globalization changing the economic environment very quickly. Which is exactly what real life shows, as companies are jettisoning defined benefit pensions to stay competitive. On an individual level, a pension plan also doesn't make sense, as you can do what pension fund managers do via target date funds and save the money spent on paying the pension fund managers. And avoiding the corruption risk of employers underfunding and fund managers malinvesting. If you want protection that you will have income until you die, one should purchase an annuity. However, a much cheaper and better idea in my opinion, is raising a family that will support you in your old age, because it's prohibitively expensive to purchase the kind of care that comes from loving relationships in your old age.

rileymat2 7y ago
At an individual level, You can invest the same way, the problem is, you don't know how long you will live. Which was my main point. There are annuities, but my research into those has come up with very high costs with lots of fees.
- lotsofpulp 7y ago
  >There are annuities, but my research into those has come up with very high costs with lots of fees. Yes, as most non taxpayer funded employers have found out, and reduced their offering of defined benefit pensions accordingly. My point is that no one has the ability to protect and afford against the kind of long term risk that you are talking about, and the best model I've seen to address it is when children and grandchildren take care of their elders.
  - Spivak 7y ago
    I agree that no individual can reasonably plan for to have enough money for 0-30 years but I disagree that nobody has the ability to spread that risk around. If your pool is the whole country then it’s very manageable sans the human problems that any large government / financial institutions run into at scale.
    - lotsofpulp 7y ago
      Why would one ignore "the human problems"? It's the very reason defined benefit pensions don't work outside of a population and economic boom. Pretty much every developed nation is raising retirement ages and reducing benefits to grapple with the fact that there is less wealth being created in their countries. No one can "manage" automation and labor from China/India/etc taking out a huge portion of your middle class.
- skybrian 7y ago
  But why is that? It seems like there should be a way to offer a simple annuity product profitably.
  - lotsofpulp 7y ago
    Predicting the future is extremely difficult (if not impossible).
  - ghaff 7y ago
    There are. But I think you're hearing a lot of people not liking the cost associated with significantly de-risking a future annual income stream. Annuities can certainly make sense, including ones that, for example, you can get by donating appreciated assets.
    - skybrian 7y ago
      How does that work? If you're getting an annuity in return for donating something, that doesn't sound like a donation?
      - ghaff 7y ago
        Charitable organizations (basically 501(c)3s in the US) don't have to pay tax on the appreciated value. So annuities offered by those organizations may take advantage of that tax benefit. In many cases, it will still be a net donation relative to other options, especially insofar as you can't pass on residual assets to beneficiaries, but it is one way of taking advantage of tax law to create an annuity.
ghaff 7y ago
The other issue is that defined benefit pensions were historically oriented around long-term employment with a single entity. This is most obvious in the case of the US government but pension benefits in general tended to be maximized when you stayed with one employer for a long time. This worked out pretty well for me [added: it's been through 2 changes in ownership but it's still available for payout] but, if instead you look on 2-5 year job tenure being far more common today, a lot of people would end up with little or no pension under typical defined benefit pension terms.
DataWorker 7y ago
Have you run the numbers on the cost of raising a family? I agree it’s the best strategy but I’m not sure it’s cheaper. I do believe it pays many psychic dividends, but I’m not sure it’s cheaper but I’ve not done the math.
- lotsofpulp 7y ago
  I don't believe it's quite possible to put numbers on the benefits of being part of a tribe that has your back, but I doubt any realistic amount of money can get you the kind of care that family (and friends) can. Assuming a birth costs $5k to $10k, and the kid costs $20k per year for first 5 years for daycare, and then $3k per year, ballpark $200k, not adjusted for inflation, plus tons of time spent teaching and raising them, should buy you a relationship worth much more. But you also have to be surrounded by the right people and culture, so it's super complicated to calculate. But most successful families I know are successful because they can rely on each other to help each other out, and there are exponential benefits to knowing someone who knows someone, so as their networks expand, so do yours.

mherdeg 7y ago

This is an interesting view. For some reason I had never considered that participating in a large employer's defined-benefit pension fund might be kind of equivalent to signing up for a tontine with a bunch of your peers and all putting your cash in SPY for the duration.

nradov 7y ago

That's what annuities are for.

sokoloff 7y ago

Defined benefit for sustenance level probably makes sense (which is more or less what Social Security is if you've worked a typical career). Defined contribution allows for the transfer of wealth to heirs at death, which many people find a preferable and more fair-feeling way to deal with the fruits of one's labor than to have it revert to the annuity provider (private or public).