5 ms·

The one thing that made them "make sense" to most people was that the average person is/was terrible at personal finance and retirement planning. The company r

The one thing that made them "make sense" to most people was that the average person is/was terrible at personal finance and retirement planning. The company running the pension was a way for the average person to be "guaranteed" a retirement income without having to worry about anything. Remember, corporate pensions were a big thing when the US was at it's greatest economic strength (post-WW2) and the internet with all of its modern tools to make investing much simpler for the average person didn't exist. You had to pay brokers for every single trade or someone else to advise you or you had to just buy and hold a small set of stocks for 30 years and hope those companies would still be around (a fair bet at that time). Back then companies didn't really go under like this. If anything, they got bought by a larger company and merged, but the frequency of that was nothing like today. Today, with health care costs what they are, having pensions and defined benefit plans are insane to me. It's much better for the company to say "we will match x% in a 401k". They are defining their contribution and it has a cap. If anything happens to the company, the employee's funds are safe as the money is already transferred. For the employee, it does require them to manage this money but that's far easier and cheaper today and that money doesn't require the company to be around forever. If things tank, the employee is protected.

Waterluvian 7y ago
Thanks. That's all really quite educational. Does the U.S. have any social program like Canada Pension Plan where: 1. your paycheque is forcibly deducted an amount based on a formula 2. that amount goes into CPP investment 3. when you retire you can get a monthly pension based on the total amount you paid in To me that seems like a sane way to protect people from themselves.
- wmf 7y ago
  That's called Social Security in the US but many people have additional retirement savings because it doesn't pay much.
  - ficklepickle 7y ago
    It is in addition to social security in Canada. We call that OAS. Social security (OAS) gets clawed back if ur over like $70k/year in retirement or so. CPP does not, IIRC.
- SQueeeeeL 7y ago
  We do, but our law makers have been looting social security for decades so it's basically unrealistic to expect most people in the country to see any benefits
  - lotsofpulp 7y ago
    How have lawmakers been looting social security? As far as I know, taxes collected for social security are either paid out as benefits or invested by purchasing US debt. But I don't see any other option of what to do with them (keeping them as cash seems imprudent as they would just lose value due to inflation).
    - turc1656 7y ago
      It's a tax, so they can take part of the money and do other things with it. And they have from time to time. They are not remitting the full tax receipts to the Social Security Administration for disbursement. Which instead of having them buy US debt, actually creates the need to create more US debt because they have obligations to meet and the SSA is locked into certain debt instruments that can't be exited on large scale easily. EDIT: This is not correct. It appears they have borrowed against the SS fund using treasuries, which will have to be back. Or phrased another way - the SS system chose to invest in US debt.
      - lotsofpulp 7y ago
        Any sources? These reports don't support your statements: https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2019/fast_facts19.html#page35 https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2019/f... https://www.ssa.gov/agency/performance/ https://www.ssa.gov/agency/performance/ And I don't know of a debt instrument that can be exited more easily than US Treasuries: https://www.ssa.gov/news/press/factsheets/WhatAreTheTrust.htm https://www.ssa.gov/news/press/factsheets/WhatAreTheTrust.ht... This interview with a prominent actuary who worked in the Social Security admin is also very helpful to clarify the workings of SS: https://us14.campaign-archive.com/?u=bd0d1b66f832083794c33c979&id=d540b66d82 https://us14.campaign-archive.com/?u=bd0d1b66f832083794c33c9...
- turc1656 7y ago
  As others have mentioned, this is referred to as Social Security. I'm not sure how it works in Canada once it's is forcibly deducted, but in the US, it's just a tax like any other tax. The idea is that the government will honor the promises made about the schedule of payments based on a complex formula - but basically it goes by the year you were born and the amount of money you have made over time. People who make less get a larger % of their earnings back from Social Security. The higher earners make more, but there is a cap. Similar to income taxes, there are steps in which you get back varying %'s, which is why those with lower income get more as a portion of their earnings. In this way, the government simply collects money from current earners and then distributes that to the existing retirees. It's not like there is a trust set up and your money is locked away with your name on it. Canada's system may or may not be structured the same way. The idea is that if the government defaults on this, then there are much larger issues anyway. But because it's just a tax they can technically do whatever they want with the money and being the scumbags that they are, they periodically do steal from that money, which is why Social Security is underfunded. Personally, I think the payouts are even pretty respectable, despite what others might think. The average payout is currently around $1,500 per person per month. That's not a lot, but if you have a spouse that's $36,000 a year. Also, one thing that most forget is that even if your spouse doesn't work their entire life (i.e. stay at home parent), a spouse can claim an additional 50% of their spouses as their own. Every person who is married has this option - they can claim their own or the 50% of their spouses (which does not reduce their spouses, it's just on top). For anyone working, it usually makes sense to claim their own unless there is a massive difference in pay. So if one person is scheduled for 2k a month, the other is guaranteed at least 1k or their own if it's higher. Honestly, it's a nice idea and has been working reasonably well for decades. But the issue is that when you look at it with a technical eye, you'll see it's all basically the same structure as a ponzi scheme. The current people taxed don't pay for themselves, they pay for others who came before them. Over time the number of people required to pay for a single retiree has gone up. This indicates a growth requirement in the tax base. Without this constant growth which seems to go up more and more over time, the system fails. People ignore this because they think it's impossible because it's run by government. I'm not so sure that's true.
  - Waterluvian 7y ago
bosswipe 7y ago
Well yeah it's much better for the company, especially since that 401k match is a fraction of what they used to put into pensions. More then anything it shows the decreasing power of labor.
vkou 7y ago
Pensions have two other, incredibly important benefits. 1. They mitigate risk, by pooling it, because some participants die sooner than others, and stop receiving benefits. This helps fund the few people who happen to live longer than expected. 2. They mitigate risk, because they mitigate inflation, because they are, in part, funded by current contributions. The value of money drops as time goes on. If you retired 15 years ago, it is less risky to be receiving 10% of a salary today, then it is to have saved up that 10% 15 years ago. Obviously, a mismanaged pension, that relies on incredibly optimistic rates of return, is going to have you taking a haircut. Even so, having a pension, in addition to your personal retirement savings is a way to mitigate your financial risk.
- lotsofpulp 7y ago
  This is obsoleted nowadays by index funds. You can do the same thing your pension fund does with a 0.04% expense ratio and no agency risk of the pension fund board members being corrupt and "investing" the money for their own benefit.
  - vkou 7y ago
    You did not address either point. An index fund doesn't mitigate the risk of living until you're 92, when life expectancy tables say that you should have died at 84. Group funds pool this risk. Because when life expectancy is 84, for every person that lives to 92, eight people die at 83. Outliving your savings is a catastrophic event in your old age. Group funds act as insurance for this catastrophe.
    - lotsofpulp 7y ago
      Weird, was comment edited? I thought I had responded to a comment about pensions providing diversification. Although I find point # 2 about inflation is mitigated by investing in equity index funds, as I believe the government will prop up equity values as long as it can. And if it can't, then the country has bigger problems to worry about. Anyway, the best thing to mitigate risk of living until 92 and running out of funds is raising kids with the right values or another form of support network. I wouldn't trust any counterparty enough to pay me back decades in the future. Worst comes worst, have some form of suicide accessible.
bb88 7y ago
> Back then companies didn't really go under like this. The mean time between job transitions was less. That's partially because pensions created job loyalty even if was through golden handcuffs. If people had to work another 5 years for another 15-20% in your pension, people would do it. It fell down because: 1. Corporate raiders would buy companies to take the money out of the pension plan. Pensions are by and large unregulated. And pensions are just a bunch of money sitting in an account of which payouts are largely determined by corporate policy instead of by contractual obligation. 2. Companies would fail to pay into their own pension fund based upon overly rosy economic projections that wouldn't come through. This forced companies to declare bankruptcy just to get out of the burden of paying a pension that was promised as part of the salary years ago, even if it was a contractually obligated pension. 3. 401k's became the norm. Because companies now no longer have a separate account they have to manage, and it's only x% (3 or 4 usually) of your paycheck. In the end it comes down to, how well you trust people to manage your future. Back in the 50's it worked largely well, because people weren't willing to break societal norms.
- lotsofpulp 7y ago
  >Pensions are by and large unregulated. Defined benefit pensions have been heavily regulated since ERISA (1974) and PPA (2006). >Back in the 50's it worked largely well, because people weren't willing to break societal norms. Back in the 50s, people were barely even getting paid from the pensions. And the population was young, everyone was paying into the funds, instead of receiving from them. And their lives were much shorter. There are consequences to future growth when people start having fewer and fewer children and living more and more years.
  - bb88 7y ago
    > Defined benefit pensions have been heavily regulated since ERISA (1974) and PPA (2006). To the point of guaranteeing that people got the pensions promised to them? No.
- TuringNYC 7y ago
  Some pensions are guaranteed (see: https://www.pbgc.gov/ https://www.pbgc.gov/), meaning American citizens are on the hook for them. Joy.
adrianmonk 7y ago
Also, 401(k) plans were not even possible until a tax law change in 1978 and an IRS ruling in 1981. So there was a lot of time in the pre-401(k) world for things like pensions to evolve. And now that 401(k) plans exist, pensions have gotten way less popular. I would guess it's mostly old companies who have them. One factor may be that it's tough to transition a company to not having a pension plan once one has been established. At the very least, you create two classes of employees, old employees who have pensions and new employees who don't. It's a form of compensation, so you have to figure out a way to achieve parity in a way that makes everyone feel they're being treated fairly.

Waterluvian 7y ago

Thanks. That's all really quite educational. Does the U.S. have any social program like Canada Pension Plan where: 1. your paycheque is forcibly deducted an amount based on a formula 2. that amount goes into CPP investment 3. when you retire you can get a monthly pension based on the total amount you paid in To me that seems like a sane way to protect people from themselves.

wmf 7y ago
That's called Social Security in the US but many people have additional retirement savings because it doesn't pay much.
- ficklepickle 7y ago
  It is in addition to social security in Canada. We call that OAS. Social security (OAS) gets clawed back if ur over like $70k/year in retirement or so. CPP does not, IIRC.
SQueeeeeL 7y ago
We do, but our law makers have been looting social security for decades so it's basically unrealistic to expect most people in the country to see any benefits
- lotsofpulp 7y ago
  How have lawmakers been looting social security? As far as I know, taxes collected for social security are either paid out as benefits or invested by purchasing US debt. But I don't see any other option of what to do with them (keeping them as cash seems imprudent as they would just lose value due to inflation).
  - turc1656 7y ago
    It's a tax, so they can take part of the money and do other things with it. And they have from time to time. They are not remitting the full tax receipts to the Social Security Administration for disbursement. Which instead of having them buy US debt, actually creates the need to create more US debt because they have obligations to meet and the SSA is locked into certain debt instruments that can't be exited on large scale easily. EDIT: This is not correct. It appears they have borrowed against the SS fund using treasuries, which will have to be back. Or phrased another way - the SS system chose to invest in US debt.
    - lotsofpulp 7y ago
      Any sources? These reports don't support your statements: https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2019/fast_facts19.html#page35 https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2019/f... https://www.ssa.gov/agency/performance/ https://www.ssa.gov/agency/performance/ And I don't know of a debt instrument that can be exited more easily than US Treasuries: https://www.ssa.gov/news/press/factsheets/WhatAreTheTrust.htm https://www.ssa.gov/news/press/factsheets/WhatAreTheTrust.ht... This interview with a prominent actuary who worked in the Social Security admin is also very helpful to clarify the workings of SS: https://us14.campaign-archive.com/?u=bd0d1b66f832083794c33c979&id=d540b66d82 https://us14.campaign-archive.com/?u=bd0d1b66f832083794c33c9...
turc1656 7y ago
As others have mentioned, this is referred to as Social Security. I'm not sure how it works in Canada once it's is forcibly deducted, but in the US, it's just a tax like any other tax. The idea is that the government will honor the promises made about the schedule of payments based on a complex formula - but basically it goes by the year you were born and the amount of money you have made over time. People who make less get a larger % of their earnings back from Social Security. The higher earners make more, but there is a cap. Similar to income taxes, there are steps in which you get back varying %'s, which is why those with lower income get more as a portion of their earnings. In this way, the government simply collects money from current earners and then distributes that to the existing retirees. It's not like there is a trust set up and your money is locked away with your name on it. Canada's system may or may not be structured the same way. The idea is that if the government defaults on this, then there are much larger issues anyway. But because it's just a tax they can technically do whatever they want with the money and being the scumbags that they are, they periodically do steal from that money, which is why Social Security is underfunded. Personally, I think the payouts are even pretty respectable, despite what others might think. The average payout is currently around $1,500 per person per month. That's not a lot, but if you have a spouse that's $36,000 a year. Also, one thing that most forget is that even if your spouse doesn't work their entire life (i.e. stay at home parent), a spouse can claim an additional 50% of their spouses as their own. Every person who is married has this option - they can claim their own or the 50% of their spouses (which does not reduce their spouses, it's just on top). For anyone working, it usually makes sense to claim their own unless there is a massive difference in pay. So if one person is scheduled for 2k a month, the other is guaranteed at least 1k or their own if it's higher. Honestly, it's a nice idea and has been working reasonably well for decades. But the issue is that when you look at it with a technical eye, you'll see it's all basically the same structure as a ponzi scheme. The current people taxed don't pay for themselves, they pay for others who came before them. Over time the number of people required to pay for a single retiree has gone up. This indicates a growth requirement in the tax base. Without this constant growth which seems to go up more and more over time, the system fails. People ignore this because they think it's impossible because it's run by government. I'm not so sure that's true.
- Waterluvian 7y ago

bosswipe 7y ago

Well yeah it's much better for the company, especially since that 401k match is a fraction of what they used to put into pensions. More then anything it shows the decreasing power of labor.

vkou 7y ago

Pensions have two other, incredibly important benefits. 1. They mitigate risk, by pooling it, because some participants die sooner than others, and stop receiving benefits. This helps fund the few people who happen to live longer than expected. 2. They mitigate risk, because they mitigate inflation, because they are, in part, funded by current contributions. The value of money drops as time goes on. If you retired 15 years ago, it is less risky to be receiving 10% of a salary today, then it is to have saved up that 10% 15 years ago. Obviously, a mismanaged pension, that relies on incredibly optimistic rates of return, is going to have you taking a haircut. Even so, having a pension, in addition to your personal retirement savings is a way to mitigate your financial risk.

lotsofpulp 7y ago
This is obsoleted nowadays by index funds. You can do the same thing your pension fund does with a 0.04% expense ratio and no agency risk of the pension fund board members being corrupt and "investing" the money for their own benefit.
- vkou 7y ago
  You did not address either point. An index fund doesn't mitigate the risk of living until you're 92, when life expectancy tables say that you should have died at 84. Group funds pool this risk. Because when life expectancy is 84, for every person that lives to 92, eight people die at 83. Outliving your savings is a catastrophic event in your old age. Group funds act as insurance for this catastrophe.
  - lotsofpulp 7y ago
    Weird, was comment edited? I thought I had responded to a comment about pensions providing diversification. Although I find point # 2 about inflation is mitigated by investing in equity index funds, as I believe the government will prop up equity values as long as it can. And if it can't, then the country has bigger problems to worry about. Anyway, the best thing to mitigate risk of living until 92 and running out of funds is raising kids with the right values or another form of support network. I wouldn't trust any counterparty enough to pay me back decades in the future. Worst comes worst, have some form of suicide accessible.

bb88 7y ago

> Back then companies didn't really go under like this. The mean time between job transitions was less. That's partially because pensions created job loyalty even if was through golden handcuffs. If people had to work another 5 years for another 15-20% in your pension, people would do it. It fell down because: 1. Corporate raiders would buy companies to take the money out of the pension plan. Pensions are by and large unregulated. And pensions are just a bunch of money sitting in an account of which payouts are largely determined by corporate policy instead of by contractual obligation. 2. Companies would fail to pay into their own pension fund based upon overly rosy economic projections that wouldn't come through. This forced companies to declare bankruptcy just to get out of the burden of paying a pension that was promised as part of the salary years ago, even if it was a contractually obligated pension. 3. 401k's became the norm. Because companies now no longer have a separate account they have to manage, and it's only x% (3 or 4 usually) of your paycheck. In the end it comes down to, how well you trust people to manage your future. Back in the 50's it worked largely well, because people weren't willing to break societal norms.

lotsofpulp 7y ago
>Pensions are by and large unregulated. Defined benefit pensions have been heavily regulated since ERISA (1974) and PPA (2006). >Back in the 50's it worked largely well, because people weren't willing to break societal norms. Back in the 50s, people were barely even getting paid from the pensions. And the population was young, everyone was paying into the funds, instead of receiving from them. And their lives were much shorter. There are consequences to future growth when people start having fewer and fewer children and living more and more years.
- bb88 7y ago
  > Defined benefit pensions have been heavily regulated since ERISA (1974) and PPA (2006). To the point of guaranteeing that people got the pensions promised to them? No.
TuringNYC 7y ago
Some pensions are guaranteed (see: https://www.pbgc.gov/ https://www.pbgc.gov/), meaning American citizens are on the hook for them. Joy.

adrianmonk 7y ago

Also, 401(k) plans were not even possible until a tax law change in 1978 and an IRS ruling in 1981. So there was a lot of time in the pre-401(k) world for things like pensions to evolve. And now that 401(k) plans exist, pensions have gotten way less popular. I would guess it's mostly old companies who have them. One factor may be that it's tough to transition a company to not having a pension plan once one has been established. At the very least, you create two classes of employees, old employees who have pensions and new employees who don't. It's a form of compensation, so you have to figure out a way to achieve parity in a way that makes everyone feel they're being treated fairly.