3 ms·

> Those lobbyists must be doing a terrible job, since the Pension Protection Act of 2006 strengthened the reliability of defined benefit pensions. Pensions wer

by wahern 5y ago

> Those lobbyists must be doing a terrible job, since the Pension Protection Act of 2006 strengthened the reliability of defined benefit pensions. Pensions were already dead long before 2006, and inevitable future pension failures baked into the system years and decades earlier. And in any event the PPA heavily favored 401(k)'s, the price extracted by Republicans for creating the Pension Benefit Guaranty Corporation. And the PBGC itself also favored corporations. Nothing about the PPA directly addressed the underlying reasons pensions were failing; the PPA was about creating a soft landing. > 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. They're not risky at all. A pension is just an annuity, the corporate equivalent of employer-provided health insurance vs open market health insurance. Annuities, like life insurance, are considered some of the most reliable investments possible, precisely because of relatively strict, century-old reform legislation. See my response elsethread regarding fully funding requirements and the difference between employer vs independent management. Again, this notion that pensions are fundamentally risky is a false narrative. To the extent pensions are risky, it's only because the laws don't adequately address what in other insurance markets would be considered systemic accounting fraud.

sokoloff 5y ago
There are multiple types of risks in financial instruments. Risk of loss of principal is only one of them. Risk of underperforming inflation is better addressed by equities than annuities. If there was one single "best" investment for everyone, everyone who was well-informed would just buy that. For me (and I think many others), an annuity that ends at death is not my primary goal when considering how to arrange my investments.
- wahern 5y ago
  The larger debate is fundamentally about how policy should channel people to maximize the public good in which equitable outcomes are a crucial component. To my mind, Social Security, pensions, 401(k)s, and the like can all play a part. My larger point about pensions specifically is that there's nothing inherently less risky in pensions from a purely accounting perspective. Actuarial tables were astonishingly precise 100 years ago, and our ability to diversify and insure risk through private markets has only grown while at the same time U.S. monetary stability has achieved undreamed of heights, even considering asset inflation. The basic dilemmas and moral hazards, meanwhile, have largely stayed the same, albeit sometimes obscured by increasing technical complexity. The biggest part of the puzzle concerns public policy. For some reason we keep returning to tired debates about socialist vs private markets or personal freedom vs authoritarianism, like we're still picking sides in an insurgent communist revolution at the turn of the previous century. (The current debates are astonishingly similar to the ones we've had prior, such as over hourly limits, employment disability insurance, and especially Social Security.) It's ridiculous. We have a decent grasp on which basic tools work better in which contexts and why, partly because the science of economics has improved, and partly because the past century saw a large number of social experiments play out at large scales both domestically and especially globally. The immediate question isn't which singular option to chose, it's about how to mix-and-match instruments and incentives. Interactions and second-order effects are still fuzzy, and political cultures do matter, but there are so many tremendous improvements we could make before we hit that next wall.
  - sokoloff 5y ago
    > My larger point about pensions specifically is that there's nothing inherently less risky in pensions from a purely accounting perspective. For the recipient of an earned pension, there is substantially less volatility in future payout (as compared to defined contribution plans). There is some value in that for the individual. For people who are capable to save more than the minimum required in a personal account, an annuity is on-average worse than their own diversified portfolio of mostly equities. But for people saving/earning the minimum pension, capping downside risk has a pretty large benefit and, at least in that sense, I would say pensions are "inherently less risky".
lotsofpulp 5y ago
> A pension is just an annuity, the corporate equivalent of employer-provided health insurance vs open market health insurance. Annuities, like life insurance, are considered some of the most reliable investments possible, precisely because of relatively strict, century-old reform legislation. Exactly, but DB pension funds are not regulated by insurance commissioners the way insurance companies that sell annuities are. I wonder why every taxpayer funded pension and private company pension before PPA 2006 would value an annuity at a lower price than an insurance company would… Since they are the same as annuity, then the employer should just go out and buy people an annuity. Or better yet, give the employer cash and let the employee decide if they want to buy an annuity or not. Insurance companies make single digit profit margins, it is not like having every employer roll their own insurance company was saving anyone any money. > the corporate equivalent of employer-provided health insurance vs open market health insurance. It is not quite equivalent since the company is not the one deciding how to do the actuarial calculations, at least not in a way that can be tilted like having their own people on a pension board of trustees would. Most of the health insurance aspects are taken care of by managed care organizations (aka health insurance companies). It would be equivalent if employers offering DB pensions were hiring insurance companies to calculate the cost of their annuities. But they never would, because annuities are simply very expensive. At the end of the day, compensation for most people in the US was falling or stagnant in real terms for the past few decades (and people were living longer), so offering them properly priced annuities would have made any business untenable, hence businesses jettisoning them in favor of DC plans.
- wahern 5y ago
  All good points. Except I'd say that a major problem with annuities is one of bargaining power and purchaser sophistication, similar to why employer-based health insurance plans are better deals then open market plans even after Obamacare reforms. (Though HMOs like Kaiser seem to have a smaller gap.) Annuity return rates suck relative to pensions and especially stock market returns (ignoring potential long-term risk). But I have the impression that if you're rich or if you're part of a group effort, the returns get better, much like any other class of financial instrument. But I don't actually know if that's true; never looked into it. Similarly, if your annuity terms are bargained by a sophisticated party on your behalf, you'll likely end up with a more optimal cash vs future benefit balance. Whereas if the decision is left up to you, you'll do what the vast majority of people do, which is favor cash. And favoring cash is something even a financially conservative, risk-averse person might do, because to laymen "conservative" means cash in hand. Just a few weeks ago my dad explained to me that he wanted to cash out his old union-provided annuity and stuff the money in a mattress because he was concerned about Biden/Pelosi policies driving higher inflation. I wanted to be like, "WTF!?"[1], but I long ago learned not to argue with cranky old men, though I'm well on my way to becoming one. (It was a tiny annuity, anyhow, started only a few years before he retired. Definitely not worth lecturing anyone over.) [1] Because almost certainly the annuity was inflation adjusted.

by wahern 5y ago

sokoloff 5y ago

There are multiple types of risks in financial instruments. Risk of loss of principal is only one of them. Risk of underperforming inflation is better addressed by equities than annuities. If there was one single "best" investment for everyone, everyone who was well-informed would just buy that. For me (and I think many others), an annuity that ends at death is not my primary goal when considering how to arrange my investments.

wahern 5y ago
The larger debate is fundamentally about how policy should channel people to maximize the public good in which equitable outcomes are a crucial component. To my mind, Social Security, pensions, 401(k)s, and the like can all play a part. My larger point about pensions specifically is that there's nothing inherently less risky in pensions from a purely accounting perspective. Actuarial tables were astonishingly precise 100 years ago, and our ability to diversify and insure risk through private markets has only grown while at the same time U.S. monetary stability has achieved undreamed of heights, even considering asset inflation. The basic dilemmas and moral hazards, meanwhile, have largely stayed the same, albeit sometimes obscured by increasing technical complexity. The biggest part of the puzzle concerns public policy. For some reason we keep returning to tired debates about socialist vs private markets or personal freedom vs authoritarianism, like we're still picking sides in an insurgent communist revolution at the turn of the previous century. (The current debates are astonishingly similar to the ones we've had prior, such as over hourly limits, employment disability insurance, and especially Social Security.) It's ridiculous. We have a decent grasp on which basic tools work better in which contexts and why, partly because the science of economics has improved, and partly because the past century saw a large number of social experiments play out at large scales both domestically and especially globally. The immediate question isn't which singular option to chose, it's about how to mix-and-match instruments and incentives. Interactions and second-order effects are still fuzzy, and political cultures do matter, but there are so many tremendous improvements we could make before we hit that next wall.
- sokoloff 5y ago
  > My larger point about pensions specifically is that there's nothing inherently less risky in pensions from a purely accounting perspective. For the recipient of an earned pension, there is substantially less volatility in future payout (as compared to defined contribution plans). There is some value in that for the individual. For people who are capable to save more than the minimum required in a personal account, an annuity is on-average worse than their own diversified portfolio of mostly equities. But for people saving/earning the minimum pension, capping downside risk has a pretty large benefit and, at least in that sense, I would say pensions are "inherently less risky".

lotsofpulp 5y ago

> A pension is just an annuity, the corporate equivalent of employer-provided health insurance vs open market health insurance. Annuities, like life insurance, are considered some of the most reliable investments possible, precisely because of relatively strict, century-old reform legislation. Exactly, but DB pension funds are not regulated by insurance commissioners the way insurance companies that sell annuities are. I wonder why every taxpayer funded pension and private company pension before PPA 2006 would value an annuity at a lower price than an insurance company would… Since they are the same as annuity, then the employer should just go out and buy people an annuity. Or better yet, give the employer cash and let the employee decide if they want to buy an annuity or not. Insurance companies make single digit profit margins, it is not like having every employer roll their own insurance company was saving anyone any money. > the corporate equivalent of employer-provided health insurance vs open market health insurance. It is not quite equivalent since the company is not the one deciding how to do the actuarial calculations, at least not in a way that can be tilted like having their own people on a pension board of trustees would. Most of the health insurance aspects are taken care of by managed care organizations (aka health insurance companies). It would be equivalent if employers offering DB pensions were hiring insurance companies to calculate the cost of their annuities. But they never would, because annuities are simply very expensive. At the end of the day, compensation for most people in the US was falling or stagnant in real terms for the past few decades (and people were living longer), so offering them properly priced annuities would have made any business untenable, hence businesses jettisoning them in favor of DC plans.

wahern 5y ago
All good points. Except I'd say that a major problem with annuities is one of bargaining power and purchaser sophistication, similar to why employer-based health insurance plans are better deals then open market plans even after Obamacare reforms. (Though HMOs like Kaiser seem to have a smaller gap.) Annuity return rates suck relative to pensions and especially stock market returns (ignoring potential long-term risk). But I have the impression that if you're rich or if you're part of a group effort, the returns get better, much like any other class of financial instrument. But I don't actually know if that's true; never looked into it. Similarly, if your annuity terms are bargained by a sophisticated party on your behalf, you'll likely end up with a more optimal cash vs future benefit balance. Whereas if the decision is left up to you, you'll do what the vast majority of people do, which is favor cash. And favoring cash is something even a financially conservative, risk-averse person might do, because to laymen "conservative" means cash in hand. Just a few weeks ago my dad explained to me that he wanted to cash out his old union-provided annuity and stuff the money in a mattress because he was concerned about Biden/Pelosi policies driving higher inflation. I wanted to be like, "WTF!?"[1], but I long ago learned not to argue with cranky old men, though I'm well on my way to becoming one. (It was a tiny annuity, anyhow, started only a few years before he retired. Definitely not worth lecturing anyone over.) [1] Because almost certainly the annuity was inflation adjusted.