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401(k)'s started to became popular in the 1970s because they allowed management to increase their tax-advantaged compensation relative to labor, whereas defined

by wahern 5y ago

401(k)'s started to became popular in the 1970s because they allowed management to increase their tax-advantaged compensation relative to labor, whereas defined-benefit plans had stricter and more effective rules regarding management/labor compensation disparities. Then during the 1980s as corporate accounting schemes became more sophisticated preference for 401(k)'s and other defined-contribution plans exploded because of how liabilities are calculated. In every conceivable measure pensions are theoretically better for workers and society as a whole. I say theoretically because that's predicated on employers and pension funds (if employer managed) obeying good (translation: dead simple) accounting practices rather than spending all their time and effort figuring out how to subvert them in order to cook their balance sheets to increase their yearly bonuses. Many corporate merger waves since the 1980s have been driven by schemes to drain pension funds (cost "synergies"), and of course states are notorious for failing to fully fund pensions on a YtoY basis (states, unlike corporations, aren't actually required to fully fund pensions[1]). All of these downsides to pensions can be easily remedied. But corporate interests have succeeded in selling the narrative that pensions are unreliable and inequitable, while 401(k)'s are more reliable and equitable. In fact pensions are categorically more equitable, and any less reliability (which is a dubious claim, notwithstanding the many high profile pension failures over the years--nobody reports on someone's 401(k) fund vanishing during a recession) is a consequence of lobbyists phenomenal success in killing legislation and enforcement efforts responsive to corporate financial accounting schemes. Overall reliability of private retirement systems has fallen over the past 40 years, but the decline for pensions was more precipitous simply because they were so damned good before CFO offices became profit centers. Life insurance markets were once dens of fraud and outright thievery, the mortgage backed securities and CDOs of the late 19th and early 20th century. Relatively simple reforms restored the market to nearly unassailable reliability. Though, I suspect the necessary legislation only succeeded after life insurance stopped being the center of growth and profit for financial markets. Legislation regarding private retirement plans likely will only ever make substantial reform once corporations have finished exploiting all opportunities for subverting employee income disparity and asset protections, finally shifting their attention elsewhere. [1] "Fully fund" does not mean paying in the entirety of a worker's expected retirement disbursements. Rather, it means ensuring that each and every year you pay the full fractional share of expected liabilities. Basically the same thing an individual is expected to do when managing their 401(k) contributions.

ghaff 5y ago
While it's not an inherent property of defined benefit pensions, they also tended to be structured in a way that tended to primarily benefit long tenure in an organization--US military being one of the most obvious traditional examples. Switch jobs every few years? You probably weren't going to collect much in the way of a pension. I'm not sure how much the switch has been about "corporate interests." As people became more mobile (for good reasons and bad), the idea of your retirement savings being tied up with a specific (usually large) company became less attractive to employees as well.
- wahern 5y ago
  The answer to that shift in employee tenure is simple: shift away from employer managed pensions to independent management, same as for health insurance. That shift was incomplete because corporate focus shifted to draining pensions and centering compensation packages around mechanisms that favored management and especially executives (401(k)'s, stock options, etc), not adapting pensions to employment trends.
  - ghaff 5y ago
    But, now, if you have a widespread defined benefit pension that's largely independent of employment, don't you now have effectively a shadow version of Social Security?
    - wahern 5y ago
      Yes, except it has less systemic moral hazard since the insurer can't [directly] print money and/or issue endless amounts of debt.[1] I'm not a Social Security cynic; I believe it serves a crucial but limited role in providing economic security. [1] Not per se a horrible thing, but that ability is better preserved for infrastructure and other discretionary investments rather than retirement.
lotsofpulp 5y ago
> But corporate interests have succeeded in selling the narrative that pensions are unreliable and inequitable, while 401(k)'s are more reliable and equitable. In fact pensions are categorically more equitable, and any less reliability (which is a dubious claim, notwithstanding the many high profile pension failures over the years--nobody reports on someone's 401(k) fund vanishing during a recession) is a consequence of lobbyists phenomenal success in killing legislation and enforcement efforts responsive to corporate financial accounting schemes. Those lobbyists must be doing a terrible job, since the Pension Protection Act of 2006 strengthened the reliability of defined benefit pensions. The problem is defined benefit pensions are extremely risky for beneficiaries since the existence of an employer decades into the future is a huge risk, as are changes in a world where things change quickly and many people do not stay at the same job for many years. And they are risky for employers in that expecting every employer to also function as an insurance company selling annuities and survive as long is expensive and ridiculous to execute. That is how you end up with so much corruption and money wasted because so many people have no idea what is going on (and the root cause for taxpayer funded DB pensions being a quagmire since voters have no idea what is going on). There is zero reason an employer cannot just give the normal cost (the present value of the benefit accrued during the year) to an employee, and the employee put it in VOO rather than the employer doing the same and then having to pay actuaries and fund managers. I am happy I do not need to pay finance people who have been obviated by automation.

by wahern 5y ago

ghaff 5y ago

While it's not an inherent property of defined benefit pensions, they also tended to be structured in a way that tended to primarily benefit long tenure in an organization--US military being one of the most obvious traditional examples. Switch jobs every few years? You probably weren't going to collect much in the way of a pension. I'm not sure how much the switch has been about "corporate interests." As people became more mobile (for good reasons and bad), the idea of your retirement savings being tied up with a specific (usually large) company became less attractive to employees as well.

wahern 5y ago
The answer to that shift in employee tenure is simple: shift away from employer managed pensions to independent management, same as for health insurance. That shift was incomplete because corporate focus shifted to draining pensions and centering compensation packages around mechanisms that favored management and especially executives (401(k)'s, stock options, etc), not adapting pensions to employment trends.
- ghaff 5y ago
  But, now, if you have a widespread defined benefit pension that's largely independent of employment, don't you now have effectively a shadow version of Social Security?
  - wahern 5y ago
    Yes, except it has less systemic moral hazard since the insurer can't [directly] print money and/or issue endless amounts of debt.[1] I'm not a Social Security cynic; I believe it serves a crucial but limited role in providing economic security. [1] Not per se a horrible thing, but that ability is better preserved for infrastructure and other discretionary investments rather than retirement.

lotsofpulp 5y ago

> But corporate interests have succeeded in selling the narrative that pensions are unreliable and inequitable, while 401(k)'s are more reliable and equitable. In fact pensions are categorically more equitable, and any less reliability (which is a dubious claim, notwithstanding the many high profile pension failures over the years--nobody reports on someone's 401(k) fund vanishing during a recession) is a consequence of lobbyists phenomenal success in killing legislation and enforcement efforts responsive to corporate financial accounting schemes. Those lobbyists must be doing a terrible job, since the Pension Protection Act of 2006 strengthened the reliability of defined benefit pensions. The problem is defined benefit pensions are extremely risky for beneficiaries since the existence of an employer decades into the future is a huge risk, as are changes in a world where things change quickly and many people do not stay at the same job for many years. And they are risky for employers in that expecting every employer to also function as an insurance company selling annuities and survive as long is expensive and ridiculous to execute. That is how you end up with so much corruption and money wasted because so many people have no idea what is going on (and the root cause for taxpayer funded DB pensions being a quagmire since voters have no idea what is going on). There is zero reason an employer cannot just give the normal cost (the present value of the benefit accrued during the year) to an employee, and the employee put it in VOO rather than the employer doing the same and then having to pay actuaries and fund managers. I am happy I do not need to pay finance people who have been obviated by automation.