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The problem with pensions is that nobody wants to actually pay for them. It’s a great concept, but nearly impossible to keep financially solvent without growth

by koolba 5y ago

The problem with pensions is that nobody wants to actually pay for them. It’s a great concept, but nearly impossible to keep financially solvent without growth of the payor base. Defined contribution plans cannot be fudged with accounting rules or unsustainable growth rates. By definition the money is paid as its accrued. If people want a defined benefit plan then the market should provide one they can purchase outside of their job. It’s not rocket science to do the math involved for growth vs payout vs life expectancy. The problem is that the math doesn’t add up so nobody would buy it.

toomuchtodo 5y ago
> The problem with pensions is that nobody wants to actually pay for them. It’s a great concept, but nearly impossible to keep financially solvent without growth of the payor base. You mean companies don’t want to pay for them, and instead offer pathetic 401k matching as a compromise. That is the key point: the shift from defined benefit to defined contribution was done to shift profits away from workers. Very similar to college costs going up when public funding for education institutions decreased. https://crr.bc.edu/working-papers/the-outlook-for-pension-contributions-and-profits-in-the-us/ https://crr.bc.edu/working-papers/the-outlook-for-pension-co... > This paper addresses the relationship between defined benefit pension plans and corporate profits and examines the outlook for defined benefit plans in the wake of the bear market. Due to a soaring stock market during the extended bull market of 1982-2000, together with federal regulations and legislation that shifted funding requirements forward, pension contributions virtually disappeared as a corporate expense for much of the previous two decades. > Our analysis suggests that in the absence of the stock market boom and the regulatory and legislative changes that reduced funding, the average firm’s contribution to its pension plan would have been 50 percent higher during the 1982-2001 period – 9.9 percent of payroll instead of 6.6 percent of payroll. The downturn in contributions had a significant impact on corporate profits. Lower pension contributions, all else equal, will produce a dollar-for-dollar increase in before-tax profits. Our analysis implies that corporate profits were roughly 5 percent higher than they would have been otherwise. Higher profits produce a feedback effect as they lead to further capital gains and further reductions in contributions. Excessively generous pensions or those assuming unrealistic market returns are a different issue. Pensions can be sustainable when properly implemented and governed. High level, the past strip mined the future, and the bill is coming due.
- PragmaticPulp 5y ago
  > You mean companies don’t want to pay for them Not just that, but most employees would choose higher paychecks and a 401K option over a company that offered lower paychecks but a substantial pension, even if the net compensation was equivalent. Pensions become increasingly less attractive as young people recognize that changing jobs every several years is a quicker route to financial career growth than parking long-term at one company with a pension. I was once acquired into a company that offered the worst benefits I had ever seen (zero insurance contribution, zero 401K match, basically just paychecks and nothing more). I thought it would be a death sentence for recruiting, but it turned out most younger candidates just don’t care at all about anything other than their salary number. We lost a lot of people as they grew older and had families, but younger people didn’t bat an eye at the near complete lack of benefits. We could win a lot of hiring battles by simply offering the higher bottom-line salary number since we had such little overhead. (I left quickly for a better company)
  - toomuchtodo 5y ago
    It works in the aggregate in a tragedy of the commons sort of way, but social security taxes will just keep ratcheting up so everyone who didn’t save enough get a basic level of retirement (old people vote reliably, and there are a lot of poor old people on the horizon), probably with means testing starting in 10-15 years. I suppose that’s the best we can hope for considering humans and their terrible risk management and long term decisioning ability, and there’s clearly enough wealth and productivity for government to sink its teeth into. If the private sector couldn’t do it with 401ks or pensions on the front end, government can do transfer payments (social security) and taxes on the backend.
- koolba 5y ago
  > High level, the past strip mined the future, and the bill is coming due. I have no issue with private pensions. If employers want to offer them and employees accept them, have at it. Don’t look to me to find the difference when the numbers don’t add up. Public pensions are a disaster though. The people making the promises don’t care about being fiscally solvent. They just want to buy votes using your grandchildren’s tax dollars as a credit card. The earning class will eventually vote with their feet and those municipalities will either force a haircut on the pensioners or beg for a Federal bail out.
bradleyjg 5y ago
The market does provide it, it’s called a deferred annuity. If you find the pricing disappointing, well then you see the issue with pensions.
- koolba 5y ago
  That’s precisely my point. People don’t want to pay the true cost of taking on a 40 years deferred annuity.

by koolba 5y ago

toomuchtodo 5y ago

> The problem with pensions is that nobody wants to actually pay for them. It’s a great concept, but nearly impossible to keep financially solvent without growth of the payor base. You mean companies don’t want to pay for them, and instead offer pathetic 401k matching as a compromise. That is the key point: the shift from defined benefit to defined contribution was done to shift profits away from workers. Very similar to college costs going up when public funding for education institutions decreased. https://crr.bc.edu/working-papers/the-outlook-for-pension-contributions-and-profits-in-the-us/ https://crr.bc.edu/working-papers/the-outlook-for-pension-co... > This paper addresses the relationship between defined benefit pension plans and corporate profits and examines the outlook for defined benefit plans in the wake of the bear market. Due to a soaring stock market during the extended bull market of 1982-2000, together with federal regulations and legislation that shifted funding requirements forward, pension contributions virtually disappeared as a corporate expense for much of the previous two decades. > Our analysis suggests that in the absence of the stock market boom and the regulatory and legislative changes that reduced funding, the average firm’s contribution to its pension plan would have been 50 percent higher during the 1982-2001 period – 9.9 percent of payroll instead of 6.6 percent of payroll. The downturn in contributions had a significant impact on corporate profits. Lower pension contributions, all else equal, will produce a dollar-for-dollar increase in before-tax profits. Our analysis implies that corporate profits were roughly 5 percent higher than they would have been otherwise. Higher profits produce a feedback effect as they lead to further capital gains and further reductions in contributions. Excessively generous pensions or those assuming unrealistic market returns are a different issue. Pensions can be sustainable when properly implemented and governed. High level, the past strip mined the future, and the bill is coming due.

PragmaticPulp 5y ago
> You mean companies don’t want to pay for them Not just that, but most employees would choose higher paychecks and a 401K option over a company that offered lower paychecks but a substantial pension, even if the net compensation was equivalent. Pensions become increasingly less attractive as young people recognize that changing jobs every several years is a quicker route to financial career growth than parking long-term at one company with a pension. I was once acquired into a company that offered the worst benefits I had ever seen (zero insurance contribution, zero 401K match, basically just paychecks and nothing more). I thought it would be a death sentence for recruiting, but it turned out most younger candidates just don’t care at all about anything other than their salary number. We lost a lot of people as they grew older and had families, but younger people didn’t bat an eye at the near complete lack of benefits. We could win a lot of hiring battles by simply offering the higher bottom-line salary number since we had such little overhead. (I left quickly for a better company)
- toomuchtodo 5y ago
  It works in the aggregate in a tragedy of the commons sort of way, but social security taxes will just keep ratcheting up so everyone who didn’t save enough get a basic level of retirement (old people vote reliably, and there are a lot of poor old people on the horizon), probably with means testing starting in 10-15 years. I suppose that’s the best we can hope for considering humans and their terrible risk management and long term decisioning ability, and there’s clearly enough wealth and productivity for government to sink its teeth into. If the private sector couldn’t do it with 401ks or pensions on the front end, government can do transfer payments (social security) and taxes on the backend.
koolba 5y ago
> High level, the past strip mined the future, and the bill is coming due. I have no issue with private pensions. If employers want to offer them and employees accept them, have at it. Don’t look to me to find the difference when the numbers don’t add up. Public pensions are a disaster though. The people making the promises don’t care about being fiscally solvent. They just want to buy votes using your grandchildren’s tax dollars as a credit card. The earning class will eventually vote with their feet and those municipalities will either force a haircut on the pensioners or beg for a Federal bail out.

bradleyjg 5y ago

The market does provide it, it’s called a deferred annuity. If you find the pricing disappointing, well then you see the issue with pensions.

koolba 5y ago
That’s precisely my point. People don’t want to pay the true cost of taking on a 40 years deferred annuity.