18 ms·

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

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.
- mathattack 13y ago
  The problem with defined benefit is there are always unknown risks. You can say that the government, or an insurance company will pick up the tab, but what if they fail? If the amount of the benefit is large enough (retirement savings for a generation) it's impossible to guarantee. Small #s yes, large, no. Many intelligent people don't believe a small system like Social Security will hold.
  - deleted 13y ago
    [deleted]
bradleyjg 13y ago
Defined contribution can be transformed into defined benefit if the contribution is a deferred annuity. The reason pension obligations can be discharged in bankruptcy and 401k contributions can't+, is because the former is a contractual obligation to a future stream of payments, while the latter is a transfer of vested property. Neither employers nor unions like this idea however because they both like to use pensions as a slush fund. Some workers also might not like it because annuities don't have great returns. +There is the unlikely possibility of a clawback of 2 years at most.

_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.

mathattack 13y ago
The problem with defined benefit is there are always unknown risks. You can say that the government, or an insurance company will pick up the tab, but what if they fail? If the amount of the benefit is large enough (retirement savings for a generation) it's impossible to guarantee. Small #s yes, large, no. Many intelligent people don't believe a small system like Social Security will hold.
- deleted 13y ago
  [deleted]

bradleyjg 13y ago

Defined contribution can be transformed into defined benefit if the contribution is a deferred annuity. The reason pension obligations can be discharged in bankruptcy and 401k contributions can't+, is because the former is a contractual obligation to a future stream of payments, while the latter is a transfer of vested property. Neither employers nor unions like this idea however because they both like to use pensions as a slush fund. Some workers also might not like it because annuities don't have great returns. +There is the unlikely possibility of a clawback of 2 years at most.