

The real reason for pensions - tristanj
http://www.newyorker.com/online/blogs/currency/2013/12/the-real-reason-for-pensions.html

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3pt14159
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?

~~~
lsc
>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.

~~~
3pt14159
I put it in quotes because the group of people demanding it weren't honest
enough for me to feel that they have a moral claim to it.

Companies and cities go bankrupt. This isn't news. This has been happening
since before the Aztec empire started. If you are going to design a pension
for thousands of people you should take care to design it for the worst case
scenario. I would rather take a pension that had a 99% chance of paying out
$500 per month, than one that had a 95% chance of paying out $650 per month,
because the retired should be risk adverse.

Instead the employees were greedy, thought they could double dip by being part
of the huge baby boomer group (thus not paying in a fair share, considering
what they would get out) and retiring handsomely.

Well you can't change reality. At the very bottom of economics is actual real
resources, and if you don't create enough value or save enough value and there
there isn't enough other people to feed from then you must downwardly adjust
your standard of living. Remember Freedom 55? I actually know people that
worked for only 30 years at a government job and are being paid 80% of their
best 4 years (adjusted for inflation of course) for the rest of their life.
This is unsustainable.

~~~
lsc
>Instead the employees were greedy, thought they could double dip by being
part of the huge baby boomer group (thus not paying in a fair share,
considering what they would get out) and retiring handsomely.

The big thing you are missing is that when the boomer pension contracts were
created? you could expect a reasonable return, over and above inflation, on
your T bills. Because safe investments that paid out reasonably existed,
defined benefit pensions were a reasonable thing.

The economic reality is very different now, and the very idea that someone
could make good on a defined-benefit pension is kinda laughable. My point is
that the economic realities were different in the 80s. The big danger in the
80s wasn't that the value of your investment wouldn't go up, it was that
inflation would go up even faster, making your 'defined benefit' worth much
less in real dollars.

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drcube
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
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
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
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.

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hapless
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.

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msandford
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
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
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 ??

~~~
adventured
None of it is sustainable, not even remotely.

Falling populations alone force a requirement for ever higher taxes due to a
downward spiral equation on taxes / people / savings / standard of living. The
next generation always has to pay more for the last (greater population in the
past each cycle), while having less savings and a lower standard of living.

~~~
christkv
Actually for this generations the squeeze are two way. One is higher pensions
the other is higher housing costs. A growth in house equity value is a
transfer between generations as the older generations came into the property
value at the bottom. Norway right now is an extreme example of this as the
high prices of property squeeze out the young from the market and transfers
money to the older generations.

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rayiner
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.

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GVIrish
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
_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".

~~~
GVIrish
I don't think it's greed at all, if you're going into public service a lot of
times you are paid less as a result but it's made up for in the benefits
package. If the benefits package gets drastically reduced, then you're left
with less pay, and less benefits than the private sector.

So maybe some people will still go govvie out of a sense of duty, but for more
than a few people it'll make it a raw deal. Especially considering how
government workers now have to deal with furloughs and shutdowns. Sure, many
people in other fields have to deal with a lot of uncertainty too, but one of
the pluses of gov't work used to be stability. Without stability, it makes the
job even less attractive.

~~~
gaius
Except in the UK public sector salaries are higher than private sector, plus
the gold plated pension, job for life, etc.
[http://www.bbc.co.uk/news/business-14028848](http://www.bbc.co.uk/news/business-14028848)

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Adrock
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-
pois...](http://fiduciarynews.com/2013/11/are-401k-plan-sponsors-poised-to-
cut-a-popular-feature/)

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OneOneOneOne
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.

~~~
ef4
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.

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redwood
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.

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noclip
Then there's this:

[http://www.rollingstone.com/politics/news/looting-the-
pensio...](http://www.rollingstone.com/politics/news/looting-the-pension-
funds-20130926)

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protomyth
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.

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dangerboysteve
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/)

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AndrewDucker
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.

