4 ms·

I take the status quo as my starting point. McClatchy just had pension trouble. So does my home state of Illinois. So does this company, apparently. You seem

I take the status quo as my starting point. McClatchy just had pension trouble. So does my home state of Illinois. So does this company, apparently. You seem to think it's possible to just magic a large-scale change in human behavior into existence. It isn't. I think DC+social security is a pretty fair compromise. You're never going to starve if you totally screw up. There's also Medicare to help pay medical expenses. So the worst-case scenario isn't awful. On the other hand, if you want a comfortable retirement with a nice house, travel, etc., you need to be a good steward of a DC plan. I also think having people with a little more skin in the game (the stock market) will help to tamp down this tiresome class politics about how the 1% is screwing everyone over. Pensions are big investors, it's not fair that some investors (pensioners) get bailed out in a bad market environment, whereas others (DC plan participants) don't. Don't forget, pensions don't magically create money, they have to invest and rely on the whims of the market just like DC plan participants. Plus, there are good DC plans. The better ones opt you into a target date retirement fund and automatically invest in a reasonable basket of securities so you don't have to figure it out yourself. Human Interest is a great example of a simple, no-frills plan I've seen. My wife's Schwab account is too complicated. I get that DB might be better in theory but I fail to see how, given the constraints of reality, and human nature, and politics, we aren't going to get a repeat of the current DB fiasco over and over again. Just look at the incentives.

ghaff 7y ago
The other issue is that DB was historically oriented towards lifetime or at least long-term employment at GM, federal/state government, etc. It doesn't have to be that way. I suppose you could have some sort of common pool that employers paid into. You're still creating what's basically a large organization-specific retirement scheme. But if you somehow extend it more broadly, it starts to look a lot like another version of Social Security--which probably doesn't make a lot of sense. I like the fact that I have a DB plan from a prior employer but, as you say, I'm not sure it's a great fit for most situations moving forward.
LatteLazy 7y ago
I strongly agree about the "mix of the two". Though social security is just a defined benefit scheme that's bankrupt and replying on a political bailout so I'm not sure I'd include it. The big issue here though is how to make either work for the average person? A defined benefit scheme where the employer is fiddling the books will fail. A defined contribution scheme where the management company is charging fat fees and pushing risky investments will fail. Can we really trust the majority of people with no financial acumen to tell the difference? I feel like both require the user to swim with sharks right now...
- eldavido 7y ago
  I think DC is about 85% of the way there. All we need are slightly better defaults in how money is invested. Fidelity already does this, I remember signing a big stack of forms to "take the safeties off" to be able to trade it as a raw brokerage account. 401(k) custodians are fiduciaries, btw. Whereas DB, it seems like every place and in every time, there are always incentives to underfund, to cheat, to push liabilities around, to misrepresent them, to dump them on taxpayers. These things are closer to immutable human nature and won't change, IMO. The bigger issue that is NOBODY can really afford to retire given how long people are living, escalating medical costs, and low rates of return. The DC people are just ahead of the DB folks in realizing this, because they're relying on bailouts there isn't enough money anywhere to fund. Illinois is a case in point.
  - LatteLazy 7y ago
    I think there is a more fundamental question here with DC models: human nature. If you tell people to shut up and pay and we'll assure the outcome, they can do that. Thats DB. If you give people an "account" (even with good default investments), people have to manage that. They have to fill it up when they have a bad year, with actual cash from their current accounts. They have to ignore their brother in laws who put all the money in enron and made a bomb and tells you you're an idiot for sticking low fees. They have to pay attention and watch out for changes to fees or laws. And they have to start moving the money to lower risk items and plan 5+ years ahead to retire. And even then, that's just getting the index fund strategy right. The strategy may fail. They have to put money in when a market goes down and take it out when a market goes up. I doubt very much that people will succeed at that. That's the core flaw in the DC model. Personally I think that sort of work is better done centrally.
bluGill 7y ago
The problem with skin in the game is I know of a few people who lost everything to a scam. Now forced to work at WalMart to make ends meet... I hope I avoid that with my skin in the game, but I'm well aware of how easy it is to fall for scams and am thus afraid that I will as I get older.

ghaff 7y ago

The other issue is that DB was historically oriented towards lifetime or at least long-term employment at GM, federal/state government, etc. It doesn't have to be that way. I suppose you could have some sort of common pool that employers paid into. You're still creating what's basically a large organization-specific retirement scheme. But if you somehow extend it more broadly, it starts to look a lot like another version of Social Security--which probably doesn't make a lot of sense. I like the fact that I have a DB plan from a prior employer but, as you say, I'm not sure it's a great fit for most situations moving forward.

LatteLazy 7y ago

I strongly agree about the "mix of the two". Though social security is just a defined benefit scheme that's bankrupt and replying on a political bailout so I'm not sure I'd include it. The big issue here though is how to make either work for the average person? A defined benefit scheme where the employer is fiddling the books will fail. A defined contribution scheme where the management company is charging fat fees and pushing risky investments will fail. Can we really trust the majority of people with no financial acumen to tell the difference? I feel like both require the user to swim with sharks right now...

eldavido 7y ago
I think DC is about 85% of the way there. All we need are slightly better defaults in how money is invested. Fidelity already does this, I remember signing a big stack of forms to "take the safeties off" to be able to trade it as a raw brokerage account. 401(k) custodians are fiduciaries, btw. Whereas DB, it seems like every place and in every time, there are always incentives to underfund, to cheat, to push liabilities around, to misrepresent them, to dump them on taxpayers. These things are closer to immutable human nature and won't change, IMO. The bigger issue that is NOBODY can really afford to retire given how long people are living, escalating medical costs, and low rates of return. The DC people are just ahead of the DB folks in realizing this, because they're relying on bailouts there isn't enough money anywhere to fund. Illinois is a case in point.
- LatteLazy 7y ago
  I think there is a more fundamental question here with DC models: human nature. If you tell people to shut up and pay and we'll assure the outcome, they can do that. Thats DB. If you give people an "account" (even with good default investments), people have to manage that. They have to fill it up when they have a bad year, with actual cash from their current accounts. They have to ignore their brother in laws who put all the money in enron and made a bomb and tells you you're an idiot for sticking low fees. They have to pay attention and watch out for changes to fees or laws. And they have to start moving the money to lower risk items and plan 5+ years ahead to retire. And even then, that's just getting the index fund strategy right. The strategy may fail. They have to put money in when a market goes down and take it out when a market goes up. I doubt very much that people will succeed at that. That's the core flaw in the DC model. Personally I think that sort of work is better done centrally.

bluGill 7y ago

The problem with skin in the game is I know of a few people who lost everything to a scam. Now forced to work at WalMart to make ends meet... I hope I avoid that with my skin in the game, but I'm well aware of how easy it is to fall for scams and am thus afraid that I will as I get older.