Is it really as political as that as in "the big bad republicans ate my pension"?
Juicy pensions are on the decline everywhere. The company I started working for at age 23, so many years ago, in all its vertically integrated, multinational glory, provided, at the time, pensions you really could continue living a middle class lifestyle on. I duly got into that pension plan, with the huge pension adjustments that entailed (greatly reduced ability to pay into your RRSP) but that future defined benefit pension was worth it.
Except that $bigco went bust, and when the dust settled, we got cash payout of the some percentage of the deemed value of the accrued pension that they could recover from the financial wreckage, and that was that. No pension at all.
Now I and everyone else is just on defined contribution plans, where between your own and the company's contribution you put in maybe 10% of what it would take to live on, per year. The rest is supposed to miraculously come from compound gains, using the old wisdom that anyone can get 10% per year without effort.
What does that mean in real life terms? Live cheap, far below your financial means - one basic car instead of his & hers SUVs, a basic house in a decent neighbourhood instead of the latest 5K square feet monstrosity and so on, and try to save a good 1/3 of your income for the future. Barring a financial meltdown or runaway inflation, I think we'll make it. The fact that "runaway healthcare costs" are not a factor here helps a lot, though without a company plan, you're on your own for all dental work and (up to a certain age) all prescription drug costs.
Anyway the economics is simply this: Work for 40-45 years and accrue enough to live another average 25 years after you retire. The $$ have to come from somehwere. You see a lot about super juicy public sector pensions in the USA where people can retire in luxury before age 50... probably outliers, as is the "evil people stole the pension fund" situations. On the whole, it's just that people live longer.
The US workforce (at the time) was sold on 401ks as a replacement for pensions, when they’re really for only the highest compensation earners as a tax dodge [1]. Predictably, very few made enough to contribute to a 401k in a manner that would replace the safety of pensions, and now large cohorts nearing retirement are left with little while shareholders captured profits that previously contributed towards funding pensions. Tada!
> "The US workforce (at the time) was sold on 401ks as a replacement for pensions, when they’re really for only the highest compensation earners as a tax dodge..."
pensions don't really make sense though, because they create adverse incentives all around. first, for the pensioner, who transfers future risk to the pension, and by extension to the company, its customers, employees, and shareholders. and second, it's a big pot of money just sitting there begging the greedy to tirelessly and surreptitiously work to siphon off just a tiny spigot of it. and those are just the two most obvious ones.
parhaps the risk profile is too far in the opposite direction, but 401(k)'s could be fixed, for instance, by requiring companies to set up and contribute inverse-proportionally to monthly take-home pay, and tax the company progressively on contributions based on total compensation, so that highly-paid executives who need a 401(k) the least would be discouraged from that avenue of compensation, while the least-paid employees get a (partially-)funded retirement account automatically.
The issue with the 401k is that it is essentially an anti-progressive tax. It is there as a way for the government to encourage and subsidize retirement savings; but it does so by providing a 1:1 deduction on taxable income (with a choice of taking the deduction now or during retirement). This means that you get a greater benefit (read subsidy) if you are at a higher tax bracket; even if you are looking at the benefit in percentage terms instead of absolute.
If you don't pay income tax, you get no benefit from a 401k.
We can go a long way to solving this by just making the subsidy a flat refundable tax credit. If we wanted to make it progressive, we could to the inverse of progressive income tax: by making the first $X get you a Y% credit, with a decreasing credit as you go up in contribution brackets.
yah, 401(k)'s are financially engineered to seem to be for the masses, but they're really designed to advantage high-earners even more. i'd actually prefer to remove the tax advantage altogether (and plow that into an overall more progressive tax structure), but absent that, a credit phase-out would be better than what we have.
>pensions don't really make sense though, because they create adverse incentives all around. first, for the pensioner, who transfers future risk to the pension, and by extension to the company, its customers, employees, and shareholders. and second, it's a big pot of money just sitting there begging the greedy to tirelessly and surreptitiously work to siphon off just a tiny spigot of it. and those are just the two most obvious ones.
well if a pension doesn't make sense because it's a big pot of money attractive to greedy criminals then all sorts of big pots of money don't really make sense though, so in that case I don't think that argument really works.
>for the pensioner, who transfers future risk to the pension
this is probably me being silly but how is the pensioner transferring future risk?
actually yes, most big pots of money become poorly allocated (from graft, ossification, or whatever), whether via government, market, or some other mechanism. under uncertainty (which, in the real world, is always), we're better off having 10 relatively decoupled, medium-sized pots over 1 large, more easily corruptible pot, in all ways that matter to a society and economy (not so much to politics, the quest for power, though).
the pensioner has no idea how long they'll live, so the amount of money to save for retirement is uncertain, as is the returns on investment to meet that need. this future risk is transferred to others, as the pensioner does nothing to mitigate them, the company through its pension plan does. risk transference is a key ingredient of adverse incentives (e.g., principal-agent problems).
The problem with pensions is that nobody wants to actually pay for them. It’s a great concept, but nearly impossible to keep financially solvent without growth of the payor base.
Defined contribution plans cannot be fudged with accounting rules or unsustainable growth rates. By definition the money is paid as its accrued.
If people want a defined benefit plan then the market should provide one they can purchase outside of their job. It’s not rocket science to do the math involved for growth vs payout vs life expectancy. The problem is that the math doesn’t add up so nobody would buy it.
> The problem with pensions is that nobody wants to actually pay for them. It’s a great concept, but nearly impossible to keep financially solvent without growth of the payor base.
You mean companies don’t want to pay for them, and instead offer pathetic 401k matching as a compromise. That is the key point: the shift from defined benefit to defined contribution was done to shift profits away from workers. Very similar to college costs going up when public funding for education institutions decreased.
> This paper addresses the relationship between defined benefit pension plans and corporate profits and examines the outlook for defined benefit plans in the wake of the bear market. Due to a soaring stock market during the extended bull market of 1982-2000, together with federal regulations and legislation that shifted funding requirements forward, pension contributions virtually disappeared as a corporate expense for much of the previous two decades.
> Our analysis suggests that in the absence of the stock market boom and the regulatory and legislative changes that reduced funding, the average firm’s contribution to its pension plan would have been 50 percent higher during the 1982-2001 period – 9.9 percent of payroll instead of 6.6 percent of payroll. The downturn in contributions had a significant impact on corporate profits. Lower pension contributions, all else equal, will produce a dollar-for-dollar increase in before-tax profits. Our analysis implies that corporate profits were roughly 5 percent higher than they would have been otherwise. Higher profits produce a feedback effect as they lead to further capital gains and further reductions in contributions.
Excessively generous pensions or those assuming unrealistic market returns are a different issue. Pensions can be sustainable when properly implemented and governed.
High level, the past strip mined the future, and the bill is coming due.
Not just that, but most employees would choose higher paychecks and a 401K option over a company that offered lower paychecks but a substantial pension, even if the net compensation was equivalent.
Pensions become increasingly less attractive as young people recognize that changing jobs every several years is a quicker route to financial career growth than parking long-term at one company with a pension.
I was once acquired into a company that offered the worst benefits I had ever seen (zero insurance contribution, zero 401K match, basically just paychecks and nothing more). I thought it would be a death sentence for recruiting, but it turned out most younger candidates just don’t care at all about anything other than their salary number. We lost a lot of people as they grew older and had families, but younger people didn’t bat an eye at the near complete lack of benefits. We could win a lot of hiring battles by simply offering the higher bottom-line salary number since we had such little overhead. (I left quickly for a better company)
It works in the aggregate in a tragedy of the commons sort of way, but social security taxes will just keep ratcheting up so everyone who didn’t save enough get a basic level of retirement (old people vote reliably, and there are a lot of poor old people on the horizon), probably with means testing starting in 10-15 years. I suppose that’s the best we can hope for considering humans and their terrible risk management and long term decisioning ability, and there’s clearly enough wealth and productivity for government to sink its teeth into. If the private sector couldn’t do it with 401ks or pensions on the front end, government can do transfer payments (social security) and taxes on the backend.
> High level, the past strip mined the future, and the bill is coming due.
I have no issue with private pensions. If employers want to offer them and employees accept them, have at it. Don’t look to me to find the difference when the numbers don’t add up.
Public pensions are a disaster though. The people making the promises don’t care about being fiscally solvent. They just want to buy votes using your grandchildren’s tax dollars as a credit card.
The earning class will eventually vote with their feet and those municipalities will either force a haircut on the pensioners or beg for a Federal bail out.
I started maxing out my 401k account 25 years ago, back when I was only 22 and making $30,000 / year.
At the time, financially it was a little rough. My wife wasn't working, and I had a ton of debt from school. But, I figured it would be easier to do it then, while I was able and we didn't have kids.
I doubled down on compound interest and the future growth of the global economy. I invested it all in S&P 500. There were several significant down turns. But, eventually the investments started working for me instead of being a sink. Now, on average, I gain about double my salary in investment returns, per year.
So, I totally recommend 401ks highly for people under 25.
However, there are certainly sketchy companies out there offering plans. So, it's wise to compare a fund's fees and expense ratios to ones like Vanguard admiral funds.
Also, I do understand that the major benefits of 401ks go to those in higher tax brackets, but still - it's a solid way to automatically pay one's future self first.
> shareholders captured what previously funded pensions
Hmm, but passive retiree investors, on whose behalf all those institutions like Blackrock are ultimately investing, have probably contributed enormously to a rise in asset values. Shareholders gain a lot from people dumbly saving in investment vehicles, whether pensions or 401ks.
Interestingly enough, net flows of those funds are negative[0] as more and more retirees pull to fund their retirement. The only thing keeping the stock market rising at the moment is in all the buybacks keeping demand up and supply down.
The total amount of buybacks in 2020 was less than $500 billion, but almost $35 trillion in shares were traded. How is it mathematically possible that buybacks are the only thing keeping it afloat?
And yet defined benefit pensions are pyramid schemes that are increasingly top-heavy and too many retirees and not enough workers to pay for their luxurious and impossible retirement benefits.
It is not possible for anyone to work 30 years and then retire for another 30 that pay out their end-of-career salary, that is likely artificially inflated with crazy overtime.
The pandemic relief bills included almost 90 billion dollars in free money to bailout pensions. Pensions are insolvent and require corrupt bailouts to stay alive. It’s all super super gross.
Agree. 401ks were never intended to be a complete retirement plan or pension replacement, and are frankly untested at the scale that they are now being used for. It's a little scary that a tiny carveout of the larger IRS code for pensions was turned into the defacto retirement plan for Americans.
Social security and Medicare are supposed to provide a floor and prevent elderly poverty. We’ve gotten much much richer (which somehow previous generations never get any credit for) and so that floor seems a lot lower than it used to.
Beyond keeping the elderly out of poverty I’m not sure there’s a problem to solve. If people would rather drive a BMW in their 30s than play golf in their 70s who am I to tell them they are wrong?
> We’ve gotten much much richer (which somehow previous generations never get any credit for)
Astute point. I hacn't thought of it that way before.
All the talk about past generations "borrowing from their grandchildren's credit card" doesn't take into account the wealth created for the grandchildren to inherit.
I wonder how these forces balance out when evaluated by economists.
> and try to save a good 1/3 of your income for the future.
But that is what pensions ARE. The people who got them took less money up front because part of their compensation was a defined benefit pension. They WERE saving money by deferring payment.
How is this any different than your 401k suddenly saying “sorry, when we said we were investing in the stock market with your money we actually used it on other stuff, so now your retirement account doesn’t have any money”?
Would your response be to tell the people who were investing their retirement in the 401k, “well you should have saved money for retirement”
They were trying to save money for retirement! They saved money they were making now to be used later. Are you suggesting people should only save by stuffing money in their mattress?
Do you think it's a coïncidence that wealth and income inequality in the US as exploded since 1980, the year that Reagan got elected? (Though the Democrats in Congress have been complicit.)
The American oligarchs have put on a concerted effort since the 1970s, and they've largely been succeeded. Good history of the subject published in 2020:
During the 80s, get tough on crime politics mushroomed pensions and healthcare obligations because state/local governments lacked the cash flow for raises during higher inflation times.
Police and fire pensions usually drive this stuff because overtime assigned by seniority spikes salaries and pensions.
The “evil republican” angle is that “fiscally conservative” politicians usually balanced budgets by cutting pension contributions or buying support by reducing local contributions during tight budget times. Democratic legislators and governors did this too, but this type of fiscal behavior is a “conservative” trademark.
States like New York have mostly funded pensions, even with generous pension plans. The “secret” is easy - governments, especially local governments have to pay.
> States like New York have mostly funded pensions, even with generous pension plans.
What exactly do you mean by "states like New York" here? What is it New York-like that makes place have funded pensions? For comparison, two of the New York neighbors, which arguably are most similar states to New York, both culturally and politically, that is, New Jersey and Connecticut, are among worst five in terms of public pension shortfall. Are "evil republican" "fiscal conservatives" to blame for NJ and CT pension problems? How about in Illinois, another one in top 5 most underfunded pensions? Conservatives also pulling the strings there?
Everyone wants a bailout. The multiemployer pensions got one in the third Great Covid Helicopter Drop. But what confidence do we have that we won’t be exactly in the same spot a couple of decades?
Mayor Kilpatrick signed a terrible deal and separately (?) was corrupt and went to prison. Have the voters learned anything? Have their voting patterns notably changed since then?
What about the union representatives elected by the Detroit municipal workers? Don’t they bear some culpability? Have there been a seismic shift there, or are the same old cronies still passing off power one to another?
On the same vein -- look at how many Big Three UAW senior people have been indicted on corruption charges just in the last 5 years... I haven't kept up with all of it but the number is at least in the tens from Chrysler UAW alone.
I'm not up to date with the nuance of the US pension system, but this article seems highly loaded:
> For decades, conservative governors and state legislators [...] have worked to undermine public employee pensions.
> Last year, as the Covid-19 pandemic raged, Senate Majority Leader Mitch McConnell denied governors’ appeals for federal emergency aid because he saw an opportunity to punish states for their pension debts.
And so forth. Granted, I don't know the history behind all of this, but even with the benefit of the doubt these seem very stark takes without any additional context.
In the US there is a "fund" that is suppose to be paid into by Private Companies, Unions and others that is like a Pension Insurance. That fund is Extremely underfunded. If your Company goes bust or the Union implodes, last I heard (many years ago), that fund could only cover a bit less than 50% of your benefits, so you will get a massive cut. Also in the past, if you worked for the Federal or State Gov, you did not get Social Security because you paid into a pension. I do not know if that is still true.
But the Federal Gov through cuts (we all know who pushed those cuts) and Union Busting, is causing the whole pension system to go bust since pensions work only if the Company or Union is growing and people are there to pay into it. Now that union membership is optional in many states, money is not flowing into the fund.
Well, that’s a pretty interesting connection. If you look here, besides one or two states, every state is much much larger than it was 70, 60, 50, 40, 30, and 20 years ago. So, it’s not shocking or absurd to imagine state populations continuing an upward trend and therefore, more people, and therefore, without anyone passing union busting or other anti-union laws and regulations, you would expect union membership in most sectors to grow and have plenty of data to back it up. This isn’t like Mary Kay or Noni Juice or whatever where you have to sell someone on the promise very hard or demand some upfront investment to pay the current membership. Just wait around and people will be born.
A reasonable explanation other than McConnell is a "mean guy" would be that he doesn't feel the federal government should bail out states for making promises they can't keep. After all, if they get bailed out once, it only further enables state and local politicians to keep promising generous future benefits that they won't be responsible for figuring out how to fund.
Come work for us, we pay less than the private sector but future generations will figure out how to pay you a nice retirement package! Oh, I won't be around to be held accountable if they can't, but don't worry Uncle Sam will pick up the tab!
Given that the current government bailed out private pension plans to the tune of $86 billion dollars as part of the latest COVID-19 relief bill [1], I am not concerned that they will soon tackle the government pension funds which have also have shortfalls.
According to the article, the private pension bailout was "paid for" by ending the enhanced unemployment program in August instead of September. Of course, you don't pay for new spending by "cutting" other new spending.
Note that the bailout came with absolutely no strings attached. Apparently nothing went wrong that caused an $86 billion shortfall so no changes need to be made going forward.
Now do college tuitions, bank bailouts, auto bailouts, solar subsidies, oil subsidies, farm subsidies, and all the other nearly countless ways that the government plays around with your tax dollars to put the money into the pockets the current administration and Congress decided was the most important.
I really don't understand what people think when they choose to ignore retirement contributions. What do they think is going to happen when they get old? Seriously, what to they expect to happen? A Government man showing up at their doorstep with a fat suitcase filled with dollars?
Also, IRA, SHMAYARAY. Max out your Roth every year, and then do whatever. I don't see how the taxes for the rest of us are going to go down with the aging population.
Relying on pensions is not ignoring retirement. It is assuming that you will receive the benefit you were promised as part of your compensation. Not getting your promised pension is the same as your 401k balance being confiscated by your broker to cover for their own financial shortfall.
The main difference is that the 401k is a much more transparent product, so this outright theft is not as possible. The flip side of that is that your exposure to the market is more direct (which may not be that much of a flipside, as pension funds are still exposed to the market, but that exposure is more obscured).
> I don't see how the taxes for the rest of us are going to go down with the aging population.
Who says taxes are going to go down? Reading the political winds, the grass roots support for raising taxes is the highest I have ever seen it, and seems to be growing. We are leaving the political era of low taxes independent of the actual fiscal need to raise them.
Employers going bankrupt was always a risk. Why didn’t their elected collective bargaining representatives negotiate for an independently administered, fully funded, bankruptcy remote pension investment vehicle?
That is not what this article is about. These people took jobs that HAD defined pension plans. They took the jobs based on those promised pensions, and planned their savings around the amounts promised.
Then, the pensions went bankrupt and failed to pay what they promised.
This is not people failing to plan for the future. This is people having what is promised them revoked.
I think you're a tad too optimistic congress won't find ways to tax Roth distributions. It's easy to imagine a future with a higher age for qualified distributions and/or distributions over $x or from an account with a balance over $y being classified as non-qualified. $x and $y will of course be chosen to appear to target the "rich", while mostly hitting the middle and upper middle class, just like AMT, the SALT deduction cap, and other "tax reforms".
Well, considering that shitbags like Peter Thiel found ways to make BILLIONS in their Roth (as if Roth was created as a tax haven for the ultra-rich), it will be a tad hard for the donor class I mean Congress to write Roth-taxing laws without screwing themselves.
Have the currently working part of the population pay a tax on their working income, hand this money out to the currently retired part of the population, to some extend proportional to their contribution during their working years.
Just like your healthcare, if laws and incentives affecting your retirement are dependent on someone's else's decisions about where to allocate and how much of the resources you worked so hard to obtain, then you're living under an illusion of independency.
I’m so tired of hearing about the “middle class” because it excludes a huge amount of people that actually make this world work while pretending to be inclusive. It’s super gross.
Regardless of your feelings you're missing the point. The middle class is the bellwether of the economy. Though, I don't think you're truly interested in the economy at large.
When middle class wages go up, small businesses open, they employ more people, creating more middle class people, and the cycle continues ad infinitum. The middle class pays the bulk of the taxes since they lack the finances to avoid them, and additionally is responsible for creating the bulk of the jobs in small business. The middle class also leads consumption. See the previous point for why this is important.
If the middle class fails everything below them fails. The only people that win in all scenarios are the ultra wealthy. If the middle class cannot retire, effectively no one can retire. Since their suffering is magnified in the lower economic strata.
The point of the middle class is to create a distinction from the bottom casted in America. The middle class is mostly white. The bottom cast is mostly ADOS or Mexican. This was by design.
Your generation has embraced FIRE in a way a lot fewer in mine ever did. Some people are clearly making it work. Others are taking out more student loans for their third masters degree because their other careers weren’t an authentic manifestation of their inner identities.
For some people, work almost until death might be OK, health permitting. Biden, Trump, Pope Francis (to give a politically balanced mixture ;) ) are all happily working hard well beyond retirement age. For an elderly couple with home paid off, if one still worked part-time in a decently paid job, they could be OK financially without much pension (with some caveats including healthcare costs particularly in US) . I guess, to protect ourselves in old age, we can try to maintain healthy habits, and try to manoeuvre our career to a place with decent part-time opportunities in old age, just as much as save money. This doesn't give any guarantee, but then, saving tons of money doesn't address non-treatable health problems, nothing is certain. I guess in a nutshell, my argument is (a) people might not as screwed financially as they fear, with a little imagination, health permitting (b) OTOH the bigger issue, much bigger than pensions, is healthcare costs and a lack of support for those who fall ill, which could actually happen at any time not just in old age
I cannot get to the entire article (paywalled) -- but I will point out an issue I know is plaguing US municipal and state pensions.
Aside from the permanent administrative staff, many funds are in the hands and political control of people generally wholly unqualified to understand and manage them, and who have at most their elected positions on the line if it goes badly. It's not their money, so what does it matter if they just apply expertise to the fund's management with all the part-time attention of a high schooler?
The amount of rank amateurism in deciding the fate of many, many billions of dollars is incredible. Like less-than-Excel spreadsheet sophistication.
Take a couple of general examples:
-- Many state/local funds estimate or forecast some optimistic annual return % when they set the benefits level. Then they never revisit or adjust contributions to account for when the market returns fall. Or they do absolutely stupid things like increase benefits when a certain year looks better than average ("our hard working state employees deserve to participate in gains in the market, blah blah blah")
-- They'll set labor contracts with no eye towards what the promised benefits will cost 25 years from now. Who cares? The elected officials now won't be around when the bill comes due, and the incentives to not get tossed out of office for being responsible and clamping down on the expensive party are much more real than paying a few dollars more decades from now.
-- My favorite example: under years of mismanagement of rank amateurs (as I named above), Detroit discovered that its pension fund had been habitually paying out "13th paychecks" each year -- an extra check in December above what was planned, as a xmas gift to employees/retirees, because "it looked like our fund was doing well, and these people need that money to make ends meet".
You may be surprised at how bad the situation is in every state and city (with few exceptions) thanks to the bad incentives that these systems create. And few rewards for people who are responsible enough to try to fix it before it becomes critical. People have been pointing to waves of bankruptcy and spiraling costs in the near future, for years now.
And you wonder why we can't fund infrastructure and other nice things.
It's common for every publisher to publish things early. When I worked at a publication, the July edition would hit stands in mid-June. Same thing happens across the industry.
Magazine dates are typically the date the issue is removed from shelves, not the date it first appears. So they likely synchronize with the actual date of print availability.
Magazine issue dates are usually for the month they are on sale, so realistically a month ahead of when you'd buy it if you're buying it as it comes out.
> Pensions represent more than their economic value. They carry a powerful moral recognition: workers deserve financial stability and the freedom it brings throughout their lives. Municipal and state employees contribute to their pensions with every paycheck, and employer contributions supplement their savings.
I don’t know how it came to be that politicians could promise impossible things to public employees in exchange for power, and when it turned out to indeed be impossible, somehow the taxpayer foots the bill.
I’m under no obligation to carry forward an unsustainable promise. It should have never been promised in the first place. The taxpayer, who gets NONE of this, is not the one who should pay the bill.
The voters elected people who made that promise. Of course taxpayers are on the hook for promises made by politicians.
The taxpayer DID get something for this. They got public employees who took less money up front in return for a good pension. This saved the taxpayers money in the short term.
Under your argument, is the government not required to keep ANY promise? “The government should never have promised to pay back these treasury bills. Taxpayers don’t get anything from redeeming them, we shouldn’t pay off any of the government debt!”
The taxpayer benefits by paying tomorrow for a sandwich today. Government employees trade lower cash compensation for stability and more secure benefits.
I’m sure you get upset when you read about some big company charging billions for some mismanaged project. That’s generally the alternative.
You may not feel an obligation for your government to follow the law and responsibly manage its obligation to pay some 70 year old former librarian her modest pension. Hopefully your understanding about government not meeting obligations holds when you can’t get to work because a highway bridge is closed due to deferred maintenance, or your parents don’t get adequate care because your state health department fails to effectively regulate nursing facilities.
Those failures are all going to happen anyway, because the underlying promises were always unsustainable. The question is whether or not we're happy declaring today's 70-year-old public officials the winners and today's kids the losers.
> 80 percent of the tax benefits go to the top 20 percent of taxpayers.
I hope someday we can all see why this is both amazing and ridiculous...
> In Rescuing Retirement, Ghilarducci and James promote what they call a “Guaranteed Retirement Account” (GRA), a system of federal retirement savings accounts that would combine features of defined benefit and defined contribution plans.
Nice to see a proposal in the article.
> GRAs would be professionally invested and would, Ghilarducci and James argue, generate greater returns than existing 401(k)s by taking advantage of access to the more profitable investments and lower fees that large pools of assets can offer. The accounts would follow workers throughout their careers, even if they changed employers. When the time came, the GRA would be transformed into an annuity, which, alongside Social Security, would pay out a consistent and lifelong income.
I don't know anything about 401(k)s but do they really operate on some foundational condition of less-profitable investments and higher fees?
> “Guaranteed Retirement Account” (GRA), a system of federal retirement savings accounts
Given Social Security, not only as a concept, but how it has been used as a piggy bank by a spendthrift Congress, the likelihood that a GRA would suffer a similar result is close to certain.
"Giving money and power to government is like giving whiskey and car keys to teenage boys."--P.J. O'Rourke
> I don't know anything about 401(k)s but do they really operate on some foundational condition of less-profitable investments and higher fees?
The (HR person of the) employer chooses what to allow in a 401k. Normally you have a dozen funds or so available. And the choice by the employer doesn't necessarily align with the employees interests, as the high fee funds would love to send you that amazon gift card, whereas the low fee funds wouldn't even reach out to you. ;-)
The key is the administrator. This might be Vanguard or Fidelity or it could be a much smaller company, probably local.
Some companies have experienced people looking at many companies and picking one based on the lowest costs and wide selections.
Other companies might pick Joe Blow Company because the salespeople are attractive and the lunches and dinners are expensive. Vanguard might have salespeople if you're big enough but most companies aren't.
Locally, there was a company that got its hands on a lot of union pension money. They took the trustees on safaris in Africa, etc. https://www.wweek.com/portland/article-23437-sept-21-2000-th... In a lot of cases, the people making the recommendations aren't evil but just overwhelmed by the personalized attention that a high-cost alternative can give them.
You need the money to be there in forty years. What happens if, say, US stocks did in that time what Japanese stocks did in the past decades, and you bet wrong? Asking average people to be good at finance is potentially a big ask.
I don't want to "bet" with my long term investments intended to provide for basic survival. Instead I want to deploy things to a weighted average of equities (small, big, domestic, and world), bonds, and other assets (real estate) and occasionally rebalance (take profits).
And, one doesn't need some magical financial acumen to do this. You can buy a "target retirement" fund which simply holds things in a ratio (based on financial industry consensus) recommended for your retirement age.
Nothing worse than if your manager screws up and loses everything, which is far more likely. Especially since the criteria for choosing who's going to manage these massive funds is going to be gamed.
The inflation adjusted annual return with reinvested dividends of the Nikkei is 1.3% annual over the past 30 years. Not great, but hardly a catastrophe.
Anyway, the general strategy is to move from stocks to bonds and then government bonds the closer you get to retirement. Definitely not something you need a money manager for
Vanguard ETF recommendations, the last-ditch concealed weapon of every contingency-focused investor in online discourse for like the last 20 years. :-) Funny to see that here.
I am guessing the last part means on average. As a sole investor, the fees on any fund will always be higher than what is available to an institutional investor. And this would make quite a big institutional investor.
Providing retirees with cash, which they then use to independently procure good and services across millions of individuals, is fundamentally inefficient.
Instead, we should treat each retiree as a ward of the state, and provide them with Government housing, cell phone and plan, food (cooked or ingredients), and a limited amount of electricity/water - plus a small stipend for private purchases.
The other fault of the current system is that we link retirement to age - instead, it should be linked to health: if you can continue working, you should be expected to do so.
With the savings, we can eliminate regressive taxes like sales taxes (or just enable the currently totally unsustainable system to keep functioning.)
Can't you replace "retiree" with citizen/employee and use the same argument to advocate for a planned economy and/or company towns? ie.
"Providing citizens with cash, which they then use to independently procure good and services across millions of individuals, is fundamentally inefficient.
Instead, we should treat each citizen as a ward of the state, and provide them with Government housing, cell phone and plan, food (cooked or ingredients), and a limited amount of electricity/water - plus a small stipend for private purchases."
> The other fault of the current system is that we link retirement to age - instead, it should be linked to health: if you can continue working, you should be expected to do so.
Please no. People should not have to work until they cannot work anymore. Our incredibly flawed system of today is still miles ahead of your proposal.
Juicy pensions are on the decline everywhere. The company I started working for at age 23, so many years ago, in all its vertically integrated, multinational glory, provided, at the time, pensions you really could continue living a middle class lifestyle on. I duly got into that pension plan, with the huge pension adjustments that entailed (greatly reduced ability to pay into your RRSP) but that future defined benefit pension was worth it.
Except that $bigco went bust, and when the dust settled, we got cash payout of the some percentage of the deemed value of the accrued pension that they could recover from the financial wreckage, and that was that. No pension at all.
Now I and everyone else is just on defined contribution plans, where between your own and the company's contribution you put in maybe 10% of what it would take to live on, per year. The rest is supposed to miraculously come from compound gains, using the old wisdom that anyone can get 10% per year without effort.
What does that mean in real life terms? Live cheap, far below your financial means - one basic car instead of his & hers SUVs, a basic house in a decent neighbourhood instead of the latest 5K square feet monstrosity and so on, and try to save a good 1/3 of your income for the future. Barring a financial meltdown or runaway inflation, I think we'll make it. The fact that "runaway healthcare costs" are not a factor here helps a lot, though without a company plan, you're on your own for all dental work and (up to a certain age) all prescription drug costs.
Anyway the economics is simply this: Work for 40-45 years and accrue enough to live another average 25 years after you retire. The $$ have to come from somehwere. You see a lot about super juicy public sector pensions in the USA where people can retire in luxury before age 50... probably outliers, as is the "evil people stole the pension fund" situations. On the whole, it's just that people live longer.