3 ms·

Why does anyone provide a pension now? 401ks are much more financially prudent.

lotsofpulp 6y ago
It's mostly taxpayer funded entities that provide defined benefit pensions now, since in the US, they are exempt from any laws about setting aside any money for the future benefits. This works well for politicians and senior government employee union members, who can be promised lavish benefits in the near term, at the same time as advertising low taxes to the non government employee voters since they can just make up numbers for how much they need to save to pay the benefits. They won't do it so brazenly as to simply set aside $0 for benefits promised today, but it happens by using extremely liberal discount rates (~8%) to make future liabilities look less than they are. For reference, non taxpayer funded entities are subject to Pension Protection Act of 2006, which requires pension plans to use highly rated corporate bond yield curves, around ~4%. Each percentage increase in discount rate, roughly, makes the amount of money you need to save today 10% to 20% less (since you're assuming greater investment returns). Legislators can also just not pay the recommended amount. For example, in a government pension plan, the actuaries comes back with a funding recommendation of $1B to pay for the benefits accrued this year (which is already understating costs due to liberal assumptions). The leaders or legislators will just say we don't have $1B this year, but let's do $500M, and then amortize the rest over the next 10 years. Maybe the governor or mayor promised no tax increases, maybe they want to push tax increases or budget cuts to after they move onto their next political office. You can keep this rob the future to pay for today scheme going for a few decades while people are having lots of kids and the tax base is growing and income from taxes is growing. But it comes to a head, like it is now, eventually.

It's mostly taxpayer funded entities that provide defined benefit pensions now, since in the US, they are exempt from any laws about setting aside any money for the future benefits. This works well for politicians and senior government employee union members, who can be promised lavish benefits in the near term, at the same time as advertising low taxes to the non government employee voters since they can just make up numbers for how much they need to save to pay the benefits. They won't do it so brazenly as to simply set aside $0 for benefits promised today, but it happens by using extremely liberal discount rates (~8%) to make future liabilities look less than they are. For reference, non taxpayer funded entities are subject to Pension Protection Act of 2006, which requires pension plans to use highly rated corporate bond yield curves, around ~4%. Each percentage increase in discount rate, roughly, makes the amount of money you need to save today 10% to 20% less (since you're assuming greater investment returns). Legislators can also just not pay the recommended amount. For example, in a government pension plan, the actuaries comes back with a funding recommendation of $1B to pay for the benefits accrued this year (which is already understating costs due to liberal assumptions). The leaders or legislators will just say we don't have $1B this year, but let's do $500M, and then amortize the rest over the next 10 years. Maybe the governor or mayor promised no tax increases, maybe they want to push tax increases or budget cuts to after they move onto their next political office. You can keep this rob the future to pay for today scheme going for a few decades while people are having lots of kids and the tax base is growing and income from taxes is growing. But it comes to a head, like it is now, eventually.