5 ms·

Traditional “defined benefit” employee pensions in the US were treated as a balance sheet line item. There wasn't a separate, fenced off, account where funds w

by epc 7y ago

Traditional “defined benefit” employee pensions in the US were treated as a balance sheet line item. There wasn't a separate, fenced off, account where funds were secured. In the 1980s it became popular for “corporate raiders” (today’s “private equity”) to target companies with mediocre corporate results but well funded pensions. Because the pension obligations weren't sequestered, you could legitimately take over a company, pay yourself a dividend using the pension fund, strip the company of assets and then run it into the ground. Through it all, the MBAs, the corporate raiders, the bankers would say (and still say) they're just improving the efficiency of these companies.

saiya-jin 7y ago
Is this still true for majority of the US working force? As an European I find it ridiculous that your pension could be wiped out like that, and not be completely separated from employer either managed by state, or dedicated pension fund manager (what I prefer but citizens have no say in this, you have to move state to change this). Companies go bankrupt all the times, small or big. If it gets wiped out, what happens to those people? Getting by on social help, food stamps and super basic healthcare through rest of their lives?
- seanc 7y ago
  In the worst case, yes. Most often as a creditor they get something like 20-50% of their pension. Then people often are forced to sell their house. It's devastating to be sure. And "super basic healthcare" might actually be overstating the case.
- Bartweiss 7y ago
  Does this not happen in Europe also? It's rare for US employees to lose everything, but fairly common for pensions to be reduced to <50% of their promised level. And I thought I'd heard about similar cases by European companies, like Maersk attempting to slash pension payouts even without going bankrupt. (Although I just looked, and apparently Maersk's move was specific to a UK division; perhaps this is another case where UK law sits halfway between the US and Europe? https://www.telegraph.co.uk/finance/personalfinance/2831055/Maersk-move-alarms-pensions-watchdog.html https://www.telegraph.co.uk/finance/personalfinance/2831055/...)
  - mcv 7y ago
    I don't know about other European countries, but in Netherland, it's a major cause for national alarm when a major pension fund is 10% short. This is something that happened after the mortgage crisis (because the money had been invested, and the stock market was way down), and there was a big discussion about whether people should pay extra, or pensions should be cut, or something else. It's certainly not common, and rules were immediately changed to prevent this from happening again. The employer doesn't have access to it unless it's the pension of the single owner of the company. In that case: it's your money, and you can fuck it up if you like. But allowing other people to fuck up your pension is considered to be a terrible idea.
    - Bartweiss 7y ago
      In fairness, this is part of why the US has moved away from employer-managed pension funds. Pensions are still common in government, universities, and certain lifetime-employment industries (e.g. power plants). But even in good, white-collar jobs there's been a shift to 401k matching, where you get a personal retirement fund which your employer funds with some amount of money beyond your normal salary. There are a lot of reasons for that switch: it saves on the administrative headaches of having pensions from several companies, it encourages private retirement savings (because it's "matching"), it saves companies money (because many people don't contribute), and it lets companies keep predictable finances (because it's an investment paid up front, not a lifetime or fixed-dollar obligation). But on the employee side, a lot of the reason people with bargaining power accept it is that they trust 401k funds to stay safe (except from stock market crashes), and don't trust companies to fulfill pension obligations. The downside, as with healthcare and many other things in the US, is that when "good" jobs circumvent the problem, it takes away most of the social pressure to actually solve it for everyone.
      - mcv 7y ago
        Getting it away from the company's budget is definitely an important step, but from what I understand, both old-style US pensions and 401k still fall short of the Dutch pension system, which has companies paying the money for the pensions into independent pension funds, so the pension isn't threatened by bankruptcy or mismanagement from the company, and the pension fund treats it as life insurance that keeps paying as long as you live. It's still not perfect; stock market drops and sudden increases in life expectancy can mean a pension fund won't be fully able to cover its obligations. This happened after the 2008 recession, so new laws demand that the funds need to aim for more leeway in their funding. Of course that means that with a good economy, the fund may end up with a lot of money it's not obligated to pay. For this reason there's a movement to give people a larger share of this risk, both on the beneficial end (when the economy grows more than expected), and effect of economic downturns (which is going to suck for people who retire during an economic downturn). This is actually what my pension does: I have a special kind of pension fund for self-employed freelancers where I seem to own the money in the fund and carry its risks, whereas normally it's the pension that owns the money and the risk. I'm not entirely sure how that works tax-wise, because it is still tax-deductible as far as I know. But if the investments do well, I get more money, and nobody's bankruptcy can cost me my money, which might still be a theoretical (though not actual) risk for a standard pension fund.
- epc 7y ago
  Mostly, no, because defined benefit plans have been all but killed off. Most union jobs have a defined benefit plan, but union representation in the US is under 20% I believe. Pension plans are "insured" by a Federal plan (PBGC) but it does not guarantee 100% coverage and has been under severe strain as the number of pension plans drops.

by epc 7y ago

saiya-jin 7y ago

Is this still true for majority of the US working force? As an European I find it ridiculous that your pension could be wiped out like that, and not be completely separated from employer either managed by state, or dedicated pension fund manager (what I prefer but citizens have no say in this, you have to move state to change this). Companies go bankrupt all the times, small or big. If it gets wiped out, what happens to those people? Getting by on social help, food stamps and super basic healthcare through rest of their lives?

seanc 7y ago
In the worst case, yes. Most often as a creditor they get something like 20-50% of their pension. Then people often are forced to sell their house. It's devastating to be sure. And "super basic healthcare" might actually be overstating the case.
Bartweiss 7y ago
Does this not happen in Europe also? It's rare for US employees to lose everything, but fairly common for pensions to be reduced to <50% of their promised level. And I thought I'd heard about similar cases by European companies, like Maersk attempting to slash pension payouts even without going bankrupt. (Although I just looked, and apparently Maersk's move was specific to a UK division; perhaps this is another case where UK law sits halfway between the US and Europe? https://www.telegraph.co.uk/finance/personalfinance/2831055/Maersk-move-alarms-pensions-watchdog.html https://www.telegraph.co.uk/finance/personalfinance/2831055/...)
- mcv 7y ago
  I don't know about other European countries, but in Netherland, it's a major cause for national alarm when a major pension fund is 10% short. This is something that happened after the mortgage crisis (because the money had been invested, and the stock market was way down), and there was a big discussion about whether people should pay extra, or pensions should be cut, or something else. It's certainly not common, and rules were immediately changed to prevent this from happening again. The employer doesn't have access to it unless it's the pension of the single owner of the company. In that case: it's your money, and you can fuck it up if you like. But allowing other people to fuck up your pension is considered to be a terrible idea.
  - Bartweiss 7y ago
    In fairness, this is part of why the US has moved away from employer-managed pension funds. Pensions are still common in government, universities, and certain lifetime-employment industries (e.g. power plants). But even in good, white-collar jobs there's been a shift to 401k matching, where you get a personal retirement fund which your employer funds with some amount of money beyond your normal salary. There are a lot of reasons for that switch: it saves on the administrative headaches of having pensions from several companies, it encourages private retirement savings (because it's "matching"), it saves companies money (because many people don't contribute), and it lets companies keep predictable finances (because it's an investment paid up front, not a lifetime or fixed-dollar obligation). But on the employee side, a lot of the reason people with bargaining power accept it is that they trust 401k funds to stay safe (except from stock market crashes), and don't trust companies to fulfill pension obligations. The downside, as with healthcare and many other things in the US, is that when "good" jobs circumvent the problem, it takes away most of the social pressure to actually solve it for everyone.
    - mcv 7y ago
      Getting it away from the company's budget is definitely an important step, but from what I understand, both old-style US pensions and 401k still fall short of the Dutch pension system, which has companies paying the money for the pensions into independent pension funds, so the pension isn't threatened by bankruptcy or mismanagement from the company, and the pension fund treats it as life insurance that keeps paying as long as you live. It's still not perfect; stock market drops and sudden increases in life expectancy can mean a pension fund won't be fully able to cover its obligations. This happened after the 2008 recession, so new laws demand that the funds need to aim for more leeway in their funding. Of course that means that with a good economy, the fund may end up with a lot of money it's not obligated to pay. For this reason there's a movement to give people a larger share of this risk, both on the beneficial end (when the economy grows more than expected), and effect of economic downturns (which is going to suck for people who retire during an economic downturn). This is actually what my pension does: I have a special kind of pension fund for self-employed freelancers where I seem to own the money in the fund and carry its risks, whereas normally it's the pension that owns the money and the risk. I'm not entirely sure how that works tax-wise, because it is still tax-deductible as far as I know. But if the investments do well, I get more money, and nobody's bankruptcy can cost me my money, which might still be a theoretical (though not actual) risk for a standard pension fund.
epc 7y ago
Mostly, no, because defined benefit plans have been all but killed off. Most union jobs have a defined benefit plan, but union representation in the US is under 20% I believe. Pension plans are "insured" by a Federal plan (PBGC) but it does not guarantee 100% coverage and has been under severe strain as the number of pension plans drops.