7 ms·

The real reason for pensions

37 points by tristanj 13y ago

protomyth 13y ago
Isn't the problem not so much with the pension, but the amount being paid into the pension fund vs what is scheduled to payout? Underfunding the plan and unreasonable expectations of the amount the fund will earn are commonly sited problems.
OneOneOneOne 13y ago
I think that a pension is a promise to the employee that should be held. I also think it was silly to offer pensions in the first place since it is not possible to predict the future. People working for cities and other organizations offering pensions should be very concerned by recent events.
- cma 13y ago
  Make commitments, launder out the money through dividends, renege. (not applicable to cities, etc.)
- bradleyjg 13y ago
  A contract is how we formalize promises. Every contract is formed in the shadow of its governing law. Municipal bankruptcies have been a part of the law of the United States since 1937. ∴ no promises are being broken in a meaningful sense.
- ef4 13y ago
  Every debt is a promise that should be held. But in a bankruptcy that's not possible, so it only becomes a question of which promises will be broken and by how much.
- GVIrish 13y ago
  It is difficult to predict the future but when it comes down to it, most of the time when these pensions go belly up, it is due to significant mismanagement and incompetence. I think a big failing of government pension funds (and Social Security) is that there is always a tremendous temptation for politicans to borrow against them, and leave the repayment to someone who will be elected after they're long gone. The next person kicks the can down the road, and sooner or later you're Detroit. With sane and responsible management I'm sure some pensions would fail anyway because there's always the chance of catastrophe. But I've seen enough pension problems that were the result of risky investing, poor forecasting, and irresponsible borrowing that I feel like most of the time the pension needn't have failed or gotten cut.
msandford 13y ago
Which is worse? Taking money from the young (who already have bad prospects) and giving it to the elderly? Or "taking" money from the elderly and "giving" it to the young? I say "taking" in quotes because a pension is a contractual obligation, not a god-given right. Ultimately neither solution is a good one. This is class warfare at its finest. Personally I think the social contract of the US is starting to break down, as is societal cohesion. We're all super civilized when we all have good prospects and everyone's life is improving. As the prospects deteriorate so do people's willingness to participate.
- gohrt 13y ago
  Generally speaking, life gets massively better from one generation to the next. There are exceptions, of course, for nations collapsing in war, and there's pollution and whatnot posing a lurking threat, but overall: If you had the choice, and had to pay for your decision, how much would you pay to live in the 2000s instead living in the 1900s? The elderly deserve their pensions. The young get Modern Progress.
  - christkv 13y ago
    The problem with pensions is that they need a pyramid age distributions. That's to say lots of young people to pay the taxes to fund the top of the pyramid. That scheme is broken in the west so the whole system will creak on until the younger generations cuts the funds. The excessive entitlements granted over the last 2 generations is unsustainable. In Spain many baby-boomers have 2X-3X the pension income of a full-time employee. How is that sustainable ??
    - gohrt 13y ago
      > The problem with pensions is that they need a pyramid age distributions No, they don't, necessarily. There is a balance to be struck with regard to magnitude and length of pension payments. 2-3x the pension income of a full-timer seems excessive at a glance. That doesn't disprove the existence of a reasonable pension scheme.
    - 13y ago
hapless 13y ago
This article proposes that we close the barn door after the horse is left. If my employer offered me a pension I'd laugh in his face. In 2013, a pension benefit's market value is $0. Who actually believes the money will be there when the time comes? After 30 years of private sector firms refusing to fund pensions and passing them off to the PBGC, the public sector is finally getting into the game. No one should surprised.
drcube 13y ago
Pensions are a foolish idea and I seriously hope no one under the age of 50 takes a job with a pension, expecting it to actually materialize. But the workers of the past didn't have our benefit of hindsight, and we should do what we can to keep our promises to them. But seriously, guys, don't offer your employees a pension, and if a potential employer offers you one, laugh in their face. Let us manage our own retirements.
- mathattack 13y ago
  Once could argue the same thing about Social Security. :-) In my view, there are 2 kinds of pensions. One is Defined Benefit, which is crazy to count on. On the other hand, companies can offer Defined Contribution, which is fine. If a company offers a 401K, and makes a 10K contribution, I'm happy. It's 10K more income that will probably get taxed at a lower bracket when I retire.
  - _delirium 13y ago
    Defined contribution is kind of a poor match to future needs on the recipient's side, though, since people do not live fixed and predictable periods of time. You could fix this individually by converting the lump sum to an annuity, but few people seem to do so (it doesn't help that the annuity market is a bit confusing). The end result is that people who live significantly longer than expected run out of money. And they do so at the least convenient time: many people early in retirement could probably go back to work if needed, but a typical 100-year-old, who retired 30+ years ago and now ran out of money, is not in a condition to reenter the workforce. In most countries the backstop is to have a small defined-benefit state pension, so they won't end up literally penniless (in the U.S. this is Social Security, which pays a minimum of ~$9,500/yr). Other countries have tried to move more people into essentially buying annuities to mitigate the varying-lifespan risk. For example most defined-contribution private-sector pensions in Denmark now pay into pension funds (third-party, non-profit organizations) that by default are essentially the purchase of an annuity. You can cash it out as a lump sum upon retirement, but if you do nothing, the default is a traditional monthly pension for life, with the amount dependent on your contribution.
3pt14159 13y ago
A group of people collectively bargained for future payouts from an entity that was only represented by its current voters (or in some cases, shareholders). Predictably the pensioners-to-be asked for generous pensions, paid early in life, at the least expense possible. Predictably the public purse was more generous with future payouts that didn't look like debt than it would be with present payouts. Predictably the economy shifted away from uncompetitive and unionised sectors of the economy in Detroit to Austin. Predictably the now-pensioners claim that they paid for pensions and are thus 'owed' them. But from whom? Either they never cared to set up a fund or did and had the state backstop it, and now there is no money. Retiring after 32 years and earning "80% of your best 4 years of pay" for 40 years (remember, they keep paying out when you die because your wife still needs to eat, so we have to handle the statistics to handle the average case) turned out not to be affordable on the tiny percent they put away. What else was ever going to happen?
- mathattack 13y ago
  Ponzi schemes can keep going if you can keep growing. They only die when growth stops. Detroit shows us the truth here. When the companies get strangled, people leave, and Detroit follows suit.
- lsc 13y ago
  >Predictably the now-pensioners claim that they paid for pensions and are thus 'owed' them. Do you think employees are 'owed' a paycheck after they do their month of work? Some jobs, instead of paying you all that money up-front, instead give you a pension. Just because it's deferred 30 years rather than just 30 days doesn't mean it's any less your pay than your paycheck. I mean, you can argue that it isn't sustainable, or even that it's stupid to expect a company to deliver on a promise 30 years from now, but when you are paid in a promise of future pay... you are certainly owed that money.
  - rayiner 13y ago
    Sure, under normal circumstances, but e.g. in bankruptcy employees can be left with unpaid wages. That's the context here.
dangerboysteve 13y ago
You folks should check out this video: http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/ http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
GVIrish 13y ago
Maybe pensions are a bad idea after all, but the bigger implication of this is that it will be yet another thing that dissuades people from public service. Some may say that's a good thing, but if you keep removing benefits of public service, it is only going to reduce the quality of people working for our government. People talk about how bad government incompetence is now, but it can get far worse in the future. Not saying that pensions need to stay, or that they should never be cut. Just saying that if the good reasons to go into public service keep getting removed government is only going to get worse.
- 001sky 13y ago
  it will be yet another thing that dissuades people from public service Lets face it, greed and easy-money is absolutely the wrong reason to be in "public service".
  - dmm 13y ago
    Asking to be paid what you are promised is "greed"?
    - 001sky 13y ago
      Ha ha you should write one liners for [insert special interest here]. The parent is espousing "greed" as a primary means of recruitment. The method of payment my point. People motivated by "greed" is not the type of people one wants in government. Especially If we have to pay them with a form of remuneration is at once both opaque and easily manipulated. In otherwords, if these people (say teachers) are valuable, pay them proper salaries. Don't pay them poor salaries and then promise them a $2 or $5 million dollar pension pot if the "stick around" for 20-30 years. Just pay them fair and square a proper wage from the get-go. The poor pay + gold plated pension thing is just a form of dis-honest pay, where special interests manipulate the system for their own advantage. So, don't negotiate cut-rate payment plans for cut-rate people. Seems simple enough. If you want good people, pay them properly and transparently.
      - 13y ago
rayiner 13y ago
This is the really interesting part of the article: > On Tuesday, a federal judge said Detroit could legally cut the pensions it has already promised to workers as part of its bankruptcy plan. Many state constitutions, including that of Michigan, hold that the government can’t go back on pension promises, and, because of this, cities have generally assumed that they could not touch existing pensions even in cases of bankruptcy. (Instead, many have been cutting pensions for newly hired workers.) But federal law supersedes state law, and, according to Judge Steve W. Rhodes, pension cuts are just fine under federal law. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” he said. Takeaway: Bankruptcy courts > state constitutions. It's a straightforward result of the Supremacy Clause, but is practically very significant.
noclip 13y ago
Then there's this: http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926 http://www.rollingstone.com/politics/news/looting-the-pensio...
redwood 13y ago
What I thought was missing from this article, but insinuated: that Caeser knew: give 'em something so they don't overthrow you. Well the modern economy is reaching such inequality levels that we're going to have to do something or else it'll be forced, and potentially volatile. Guaranteed income seems the best plan.
Adrock 13y ago
Related: I recently was chatting with a retired 401k salesperson who explained to me the real reason for employer-matched contributions. The highest compensated employees, typically executive management, are subject to deferral limits that are based on the contribution rates of the regular employees. > Why is it important for companies to encourage their employees to save? Aside from “it’s the right thing to do,” there are actually compliance reasons why this is necessary. “It helps with nondiscrimination tests,” says Robert Richter, vice president of SunGard’s wealth & retirement administration business in Jacksonville, Florida. He adds, “Highly compensated employees are subject to deferral limits that are based on non-highly compensated employee contribution rates. If non-highly compensated employees defer at low rates, then it will limit the amount that the highly compensated employees can defer. Safe harbor plans are a way to eliminate that test, but in order to use the safe harbor provisions the employer is required to contribute to the non-highly compensated employees either a minimum matching contribution or an across-the-board contribution, even for those who do not defer.” - http://fiduciarynews.com/2013/11/are-401k-plan-sponsors-poised-to-cut-a-popular-feature/ http://fiduciarynews.com/2013/11/are-401k-plan-sponsors-pois...
AndrewDucker 13y ago
I am very glad that in the UK all Defined-Benefits pensions have to be insured, so that if the company goes bust people aren't abandoned.

37 points by tristanj 13y ago

Isn't the problem not so much with the pension, but the amount being paid into the pension fund vs what is scheduled to payout? Underfunding the plan and unreasonable expectations of the amount the fund will earn are commonly sited problems.

OneOneOneOne 13y ago

I think that a pension is a promise to the employee that should be held. I also think it was silly to offer pensions in the first place since it is not possible to predict the future. People working for cities and other organizations offering pensions should be very concerned by recent events.

cma 13y ago
Make commitments, launder out the money through dividends, renege. (not applicable to cities, etc.)
bradleyjg 13y ago
A contract is how we formalize promises. Every contract is formed in the shadow of its governing law. Municipal bankruptcies have been a part of the law of the United States since 1937. ∴ no promises are being broken in a meaningful sense.
ef4 13y ago
Every debt is a promise that should be held. But in a bankruptcy that's not possible, so it only becomes a question of which promises will be broken and by how much.
GVIrish 13y ago
It is difficult to predict the future but when it comes down to it, most of the time when these pensions go belly up, it is due to significant mismanagement and incompetence. I think a big failing of government pension funds (and Social Security) is that there is always a tremendous temptation for politicans to borrow against them, and leave the repayment to someone who will be elected after they're long gone. The next person kicks the can down the road, and sooner or later you're Detroit. With sane and responsible management I'm sure some pensions would fail anyway because there's always the chance of catastrophe. But I've seen enough pension problems that were the result of risky investing, poor forecasting, and irresponsible borrowing that I feel like most of the time the pension needn't have failed or gotten cut.

msandford 13y ago

Which is worse? Taking money from the young (who already have bad prospects) and giving it to the elderly? Or "taking" money from the elderly and "giving" it to the young? I say "taking" in quotes because a pension is a contractual obligation, not a god-given right. Ultimately neither solution is a good one. This is class warfare at its finest. Personally I think the social contract of the US is starting to break down, as is societal cohesion. We're all super civilized when we all have good prospects and everyone's life is improving. As the prospects deteriorate so do people's willingness to participate.

gohrt 13y ago
Generally speaking, life gets massively better from one generation to the next. There are exceptions, of course, for nations collapsing in war, and there's pollution and whatnot posing a lurking threat, but overall: If you had the choice, and had to pay for your decision, how much would you pay to live in the 2000s instead living in the 1900s? The elderly deserve their pensions. The young get Modern Progress.
- christkv 13y ago
  The problem with pensions is that they need a pyramid age distributions. That's to say lots of young people to pay the taxes to fund the top of the pyramid. That scheme is broken in the west so the whole system will creak on until the younger generations cuts the funds. The excessive entitlements granted over the last 2 generations is unsustainable. In Spain many baby-boomers have 2X-3X the pension income of a full-time employee. How is that sustainable ??
  - gohrt 13y ago
    > The problem with pensions is that they need a pyramid age distributions No, they don't, necessarily. There is a balance to be struck with regard to magnitude and length of pension payments. 2-3x the pension income of a full-timer seems excessive at a glance. That doesn't disprove the existence of a reasonable pension scheme.
  - 13y ago

hapless 13y ago

This article proposes that we close the barn door after the horse is left. If my employer offered me a pension I'd laugh in his face. In 2013, a pension benefit's market value is $0. Who actually believes the money will be there when the time comes? After 30 years of private sector firms refusing to fund pensions and passing them off to the PBGC, the public sector is finally getting into the game. No one should surprised.

drcube 13y ago

Pensions are a foolish idea and I seriously hope no one under the age of 50 takes a job with a pension, expecting it to actually materialize. But the workers of the past didn't have our benefit of hindsight, and we should do what we can to keep our promises to them. But seriously, guys, don't offer your employees a pension, and if a potential employer offers you one, laugh in their face. Let us manage our own retirements.

mathattack 13y ago
Once could argue the same thing about Social Security. :-) In my view, there are 2 kinds of pensions. One is Defined Benefit, which is crazy to count on. On the other hand, companies can offer Defined Contribution, which is fine. If a company offers a 401K, and makes a 10K contribution, I'm happy. It's 10K more income that will probably get taxed at a lower bracket when I retire.
- _delirium 13y ago
  Defined contribution is kind of a poor match to future needs on the recipient's side, though, since people do not live fixed and predictable periods of time. You could fix this individually by converting the lump sum to an annuity, but few people seem to do so (it doesn't help that the annuity market is a bit confusing). The end result is that people who live significantly longer than expected run out of money. And they do so at the least convenient time: many people early in retirement could probably go back to work if needed, but a typical 100-year-old, who retired 30+ years ago and now ran out of money, is not in a condition to reenter the workforce. In most countries the backstop is to have a small defined-benefit state pension, so they won't end up literally penniless (in the U.S. this is Social Security, which pays a minimum of ~$9,500/yr). Other countries have tried to move more people into essentially buying annuities to mitigate the varying-lifespan risk. For example most defined-contribution private-sector pensions in Denmark now pay into pension funds (third-party, non-profit organizations) that by default are essentially the purchase of an annuity. You can cash it out as a lump sum upon retirement, but if you do nothing, the default is a traditional monthly pension for life, with the amount dependent on your contribution.

3pt14159 13y ago

A group of people collectively bargained for future payouts from an entity that was only represented by its current voters (or in some cases, shareholders). Predictably the pensioners-to-be asked for generous pensions, paid early in life, at the least expense possible. Predictably the public purse was more generous with future payouts that didn't look like debt than it would be with present payouts. Predictably the economy shifted away from uncompetitive and unionised sectors of the economy in Detroit to Austin. Predictably the now-pensioners claim that they paid for pensions and are thus 'owed' them. But from whom? Either they never cared to set up a fund or did and had the state backstop it, and now there is no money. Retiring after 32 years and earning "80% of your best 4 years of pay" for 40 years (remember, they keep paying out when you die because your wife still needs to eat, so we have to handle the statistics to handle the average case) turned out not to be affordable on the tiny percent they put away. What else was ever going to happen?

mathattack 13y ago
Ponzi schemes can keep going if you can keep growing. They only die when growth stops. Detroit shows us the truth here. When the companies get strangled, people leave, and Detroit follows suit.
lsc 13y ago
>Predictably the now-pensioners claim that they paid for pensions and are thus 'owed' them. Do you think employees are 'owed' a paycheck after they do their month of work? Some jobs, instead of paying you all that money up-front, instead give you a pension. Just because it's deferred 30 years rather than just 30 days doesn't mean it's any less your pay than your paycheck. I mean, you can argue that it isn't sustainable, or even that it's stupid to expect a company to deliver on a promise 30 years from now, but when you are paid in a promise of future pay... you are certainly owed that money.
- rayiner 13y ago
  Sure, under normal circumstances, but e.g. in bankruptcy employees can be left with unpaid wages. That's the context here.

dangerboysteve 13y ago

You folks should check out this video: http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/ http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

GVIrish 13y ago

Maybe pensions are a bad idea after all, but the bigger implication of this is that it will be yet another thing that dissuades people from public service. Some may say that's a good thing, but if you keep removing benefits of public service, it is only going to reduce the quality of people working for our government. People talk about how bad government incompetence is now, but it can get far worse in the future. Not saying that pensions need to stay, or that they should never be cut. Just saying that if the good reasons to go into public service keep getting removed government is only going to get worse.

001sky 13y ago
it will be yet another thing that dissuades people from public service Lets face it, greed and easy-money is absolutely the wrong reason to be in "public service".
- dmm 13y ago
  Asking to be paid what you are promised is "greed"?
  - 001sky 13y ago
    Ha ha you should write one liners for [insert special interest here]. The parent is espousing "greed" as a primary means of recruitment. The method of payment my point. People motivated by "greed" is not the type of people one wants in government. Especially If we have to pay them with a form of remuneration is at once both opaque and easily manipulated. In otherwords, if these people (say teachers) are valuable, pay them proper salaries. Don't pay them poor salaries and then promise them a $2 or $5 million dollar pension pot if the "stick around" for 20-30 years. Just pay them fair and square a proper wage from the get-go. The poor pay + gold plated pension thing is just a form of dis-honest pay, where special interests manipulate the system for their own advantage. So, don't negotiate cut-rate payment plans for cut-rate people. Seems simple enough. If you want good people, pay them properly and transparently.
    - 13y ago

rayiner 13y ago

This is the really interesting part of the article: > On Tuesday, a federal judge said Detroit could legally cut the pensions it has already promised to workers as part of its bankruptcy plan. Many state constitutions, including that of Michigan, hold that the government can’t go back on pension promises, and, because of this, cities have generally assumed that they could not touch existing pensions even in cases of bankruptcy. (Instead, many have been cutting pensions for newly hired workers.) But federal law supersedes state law, and, according to Judge Steve W. Rhodes, pension cuts are just fine under federal law. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” he said. Takeaway: Bankruptcy courts > state constitutions. It's a straightforward result of the Supremacy Clause, but is practically very significant.

noclip 13y ago

Then there's this: http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926 http://www.rollingstone.com/politics/news/looting-the-pensio...

redwood 13y ago

What I thought was missing from this article, but insinuated: that Caeser knew: give 'em something so they don't overthrow you. Well the modern economy is reaching such inequality levels that we're going to have to do something or else it'll be forced, and potentially volatile. Guaranteed income seems the best plan.

Adrock 13y ago

Related: I recently was chatting with a retired 401k salesperson who explained to me the real reason for employer-matched contributions. The highest compensated employees, typically executive management, are subject to deferral limits that are based on the contribution rates of the regular employees. > Why is it important for companies to encourage their employees to save? Aside from “it’s the right thing to do,” there are actually compliance reasons why this is necessary. “It helps with nondiscrimination tests,” says Robert Richter, vice president of SunGard’s wealth & retirement administration business in Jacksonville, Florida. He adds, “Highly compensated employees are subject to deferral limits that are based on non-highly compensated employee contribution rates. If non-highly compensated employees defer at low rates, then it will limit the amount that the highly compensated employees can defer. Safe harbor plans are a way to eliminate that test, but in order to use the safe harbor provisions the employer is required to contribute to the non-highly compensated employees either a minimum matching contribution or an across-the-board contribution, even for those who do not defer.” - http://fiduciarynews.com/2013/11/are-401k-plan-sponsors-poised-to-cut-a-popular-feature/ http://fiduciarynews.com/2013/11/are-401k-plan-sponsors-pois...

AndrewDucker 13y ago

I am very glad that in the UK all Defined-Benefits pensions have to be insured, so that if the company goes bust people aren't abandoned.