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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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pension "reform"



  • DING! Well put, @LewisBraham.
  • A bird in a gilded cage is still caged, regardless of whether the bird prefers those sometimes friendly confines (with apologies to Chicagoans.) Even when it is the objectively better alternative, one must still acknowledge the existence of the cage.

    While granting that "job stability" is more of a continuum than a binary state, it's still worth noting that lifetime employment (one end of that continuum) was always illusory in the US., or at least has been since before 401k's were created.

    From Lifetime Employment, U.S. Style, NYTimes, April 17, 1983,
    To be sure, the American companies that have no-layoff policies are in a minority. They include a handful of high-technology companies whose highly skilled workers are considered crucial to the companies' success, but Delta Air Lines is also on the list.
    Similarly, the idea that pensions were the norm is somewhat of an illusion as well. Though at least on this point, a significant minority of private sector employees did provide pensions in the past. 15% in 1940, 25% in 1950, 41% in 1960, 45% in 1970, 46% in 1980, 43% in 1990, 20% in 2006.

    Workplace Flexibility 2010, Georgetown University Law Center, "A Timeline of the Evolution of Retirement in the United States" (2010).

    Viewed strictly from the investment/planning perspective, pension plans are better than self-directed plans, as you've said. In part because the latter require workers to be knowledgeable about investing. In part because a pooling of cash flows - money added for current workers and pensions paid out - makes for less waste compared to retirees having to individually protect against worst case scenarios.

    I remain intrigued that with all the praise heaped upon pensions of long ago, so few people chose to reconstruct them on their own. Almost no one buys low cost immediate annuities (SPIAs). See "annuity puzzle".)

    With respect to the transition from pensions to 401k plans being effectively a pay cut, like you I believe that to be the case. Aside from the dollars involved, the switch benefits employers by shifting risk. Not only the risks of longevity (which is largely diversified away by having many people in a pension plan) and investment performance, but legal liability risks. Until recently, 401k plans were pretty much immune to legal challenge.
  • @MSF Agreed, but my argument is that job insecurity, healthcare and retirement insecurity are a different sort of cage. Here are some different quotes:
    “Hunger makes a thief of any man.” Pearl S. Buck
    “A hungry man is not a free man.” Adlai E. Stevenson
    In other words, poverty itself and the fear of poverty so called free labor--which is really a euphemism for complete and utter job insecurity--creates are their own cages. A person who doesn't have to worry whether they will have a secure retirement, food on the table and decent health coverage is considerably freer in my book than those "free" to hop from job to job at will, but never knowing if they'll have enough to keep a roof over their heads in the end. The person who is always job, income and healthcare insecure will put up with a lot more abuse from an employer as a result.
  • edited March 2018
    "I remain intrigued that with all the praise heaped upon pensions of long ago, so few people chose to reconstruct them on their own. Almost no one buys low cost immediate annuities (SPIAs). See "annuity puzzle".)"
    No way. In an annuity, one's "investment" becomes the insurance company's money. Not to mention the fees. Getting OUT is like shooting yourself in BOTH feet. Granted, one ought to look ahead and reasonably PLAN and figure their own circumstances before ENTERING an annuity. But it's an animal I want no part of.
  • beebee
    edited March 2018
    @msf, interesting that you mention Delta as a company with a "no layoff" policy. Wondering now if the bankruptcy in mid-2000's was strategic in the sense that no one was "laid off", pension obligation were dissolved in bankruptcy, and the "critical employees" kept their job with a 401K plan as a retirement option where a pension once was.

    Whether you are a company, a city, a county or a country...It seems bankruptcy is a pretty effective approach to achieve pension reform.

  • @bee You are correct:
    This has long been a strategy in many industries to avoid fulfilling their obligations to employees. They subsequently emerge from bankruptcy and shareholders reap all the gains the employees lost.
  • @Crash, have to respectfully disagree with you. I happen to think annuities could be a good option for many people if they buy correctly. There is something to be said about a guaranteed income stream, especially during a bear market. I have considered them but don't plan to buy at this point, but who knows down the road.

    From CNN Money:
    Do all annuities have high fees?
    No. Some investment companies sell annuities without charging a sales commission or a surrender charge. These are called direct-sold annuities, because unlike an annuity sold by a traditional insurance company, there is no insurance agent involved. With the agent out of the picture there is no need to charge a commission. Firms that sell low-cost annuities include Fidelity, Vanguard, Schwab, T. Rowe Price, Ameritas Life and TIAA-CREF.
  • edited March 2018
    Thank you, @MikeM. That is new info for me. I had no clue that fund houses offered annuities. (Edited follow-up: TRP no longer offers annuities. I just checked.)
  • "If 401ks are such a great deal for employees compared to pension plans, why would companies be so eager to jettison their pensions in favor of 401ks?"

    @LewisBraham- I don't think that anyone would suggest that the present 401k situation is a "great deal". The issue becomes even more confused if we conflate civil service DB pensions with the history of business-controlled DB plans. Many of the abuses (termination or forced-departure shortly before pension eligibility, for one) were pretty much an abuse on the business side, if my recollection is accurate.

    Given that human beings are involved in the design and administration of retirement plans of any type, it's no surprise that everything from nonfeasance through malfeasance extending all the way to outright fraud and theft are sometimes involved.

    Some of the employer abuses have been noted, but the propensity to "game" the system is clearly observable on all sides: employees nearing retirement will sometimes be "temporarily promoted" so as to let them retire at a much higher level than would otherwise be the case. Personally I have seen that happen here in San Francisco. In some jurisdictions civil service employees have succeeded in gaming the system so as to be eligible for much higher pensions than most of us would consider reasonable. For every situation like that one could cite the opposite: failure of the employer to adequately fund even a reasonable pension scheme that had been agreed upon. These sorts of things are certainly not a recent development by any means.

    Certainly the ideal would be a nicely portable well-funded universal DB plan, but that's obviously never going to be an option.
  • By the way...

    I'd like to comment that it's encouraging and refreshing to see a fairly long post dealing with matters that could be divisive, depending upon your point of view, maintaining a very civil and non-confrontational atmosphere. Upon reflection, this is most likely possible because of the absence of a few posters whose commenting style is frequently deliberately and unnecessarily confrontational.
  • In other Pension News:

    Kathleen Pender is reporting in today's San Francisco Chronicle that California is about to introduce "CalSavers", a state-run retirement plan for private-sector workers whose employers don’t offer one. Any employer with at least five employees in California that doesn’t offer a retirement plan would be required to enroll them in a payroll-deduction IRA, although workers could opt out. A pilot program may begin this fall, with a phased introduction, starting with larger employers, beginning early next year.

    At least one employer, Christin Evans, owner of Booksmith on Haight Street, is excited about the plan: “We have employees just out of college or high school, and they’re not able to really think about establishing a retirement plan,” she said. “They are typically struggling to pay rent and meet their basic needs. This tries to address a culture of saving” for low-wage and small-business workers. “I have employees who are quite excited about this possibility,” she said. “It’s also a benefit to me. They are less likely to move on to employers who have richer benefits.”
  • @LewisBraham - we are often in violent agreement and discussing the finer shadings. Let me offer you a variation on your theme: Maslow's hierarchy of needs.

    Indeed basic necessities drive all else.
  • msf
    edited March 2018
    I don't want to get too far into the weeds with annuities here, though I'm happy to take this to a separate thread.

    The reason I mentioned annuities was to offer a different insight into pensions. Pensions and annuities, aside from details such as who pays for them, are different forms of the same "product". Yet despite their similarities, many people think: pensions, good; annuities, bad.

    I've long felt that insurance is not well understood and is underappreciated. The idea that one form (pensions) is desirable while a similar one (annuities) is not, is evidence of that. Of course there are other reasons why people feel annuities are awful. Which leads me to another observation about this digression into annuities.

    As a culture, it seems that over the last several decades we've become much more cynical (or maybe I'm just looking in the mirror). Now it seems that every business is regarded with suspicion; caveat emptor. If a company makes a fair profit on a transaction, it must be ripping us off. Financial institutions (such as insurance companies) in particular, since they're just pushing paper around; that can't cost them anything, can it?

    I'm not saying that many companies are not out to take advantage of us, or that things haven't gotten worse. Nor am I criticizing anyone here. It's just that there is this creeping cynicism that has gotten into everything, and it's unfortunate.

    I'd like to echo @Old_Joe in expressing appreciation for the civility here.
  • edited March 2018
    I agree that this has been a civil illuminating exchange. Best to all!
  • @Crash, Fidelity has a nice website and calculator that lets you see what you would receive monthly given your age and $ you are investing (attached below). There are lots of different options that would guarantee income for your wife also if you were to pass. I'm not trying to sell you anything, but it never hurts to explore options. Don't just go with the "annuities are too expensive and only benefit the guy selling them" belief. Times and market options have changed IMHO.

    I think we are about the same age, so my #s will be similar to yours. A quick calculation I did on the web site I attached shows next year when I'm 65, I can invest $100,000 and receive $5,500 per year with a 2% annual increase for inflation, for life. Obviously that's 5.5% return on that investment, increasing for inflation every year. Are you going to get that with your bond income that you like so much - steady stream with an inflation adjustment?

    I also know as interest rates increase, so will that annuity option. In a few years you may get 6-7% on your investment. Waiting a couple years probably would be a good thing in this rising rate environment. Again, not selling the idea. But I wouldn't poo-poo it based on the past. Options have changed and I have considered it myself.

    Fidelity annuity income calculator:

    some of the Fidelity options:
  • beebee
    edited March 2018
    @MikeM, @Crash:
    Remember you are pooling your longevity risk with other annuity owners and so the "longevity of your single premium" (@$100K) lives and dies with your longevity or that of your spouse. Most annuities do not pay a death benefit. Also remember, Insuring two lives often lowers your annuity pay outs.

    Just a little math running a non-annuity option:
    - If, at 65 you put your $100K in a 1% saving account and pulled $5500 every year (plus a 2% inflation increase) you'd be out of money by age 81.
    - A 2% return buys you another year.
    - A 3% return provides inflation adjusted payments until age 84.
    - If you could generate an average 5.5% return (maybe a fund like PRWCX) on your initially $100K you wouldn't run out of dry powder until age 94.
    - By the way, these inflation increases will increase your inflation adjusted payout from $5500 (age 65) to over $9700 (age 94). Inflation is real!
    - If you and or your spouse pre-decease these payouts (die before 94) pass on the remainder to your beneficiary...not the insurer.
    - If you have a one time spending shock you have the flexibility to change your plan, with the annuity option you don't have that kind of flexibility.
    - If you "grow" your invest (it does better than 5.5%) you still have the ability to annuitize some or all of it later (maybe when annuity rates are higher).

    To me, an annuity matches an asset (in this case $100K) to a liability (a required expense).

    If you are finding that your fixed income (from SSI and or pension) does not meet your fixed costs you have two choices. Lower your fixed costs or generate more fixed income. This could be accomplished with a part time job, rental income, a reverse mortgage or an annuity. This also can be accomplished by spending down a well designed retirement investment portfolio.

    Step 1: Lower your fix costs first if possible:
    I will be lowering my fixed costs soon by selling a home and moving into a second home that I own "free and clear". I am lowering my fixed costs significantly because I carry a mortgage on the home I will be selling. In addition, my new home is located in a no income tax state and my property tax costs will be reduced by 80% from the two home scenario. This one decision (sell the my house) will lower my fixed costs by almost 50%.
  • @bee, I am truly grateful that you took the time to go through all that with me. If all the equity in my house belonged to me, things might be lots easier to decide and plan. The deed is now in the names of all 7 kids my parents raised. I'm the oldest, and my wife and I are here now by ourselves. I don't think that what I want to do is impossible, but it seems safer to me to continue to grow my investments for a couple of years, at least. I'm using age 65 as a marker, when Medicare kicks-in. I hope the Bull continues to run. If not, my diversification has been prudent, I think. If I do NOT use an annuity to cover the largest chunk of things, I'll be depending on SS, pension, monthly divs (from Trad IRA, but holding the principle steady, hopefully,) and wife's income. I've lived everywhere since leaving home as a kid. Now I'm back to this hated house I grew up in, but glad it's here for me. No time, money or desire for a mortgage. Not even now. What I have in mind is holding my portfolio for wife, son, other heirs, and living off current income to pay for current expenses. It SEEMS reasonable.
  • msf
    edited March 2018
    "To me, an annuity matches an asset (in this case $100K) to a liability (a required expense)"

    Exactly. Annuities are best suited to satisfying expenses that you can't avoid. Annuities ensure you'll have at least that minimum. Once that's taken care of, you have the flexibility to spend remaining assets on other things without worrying about holding something in reserve.

    "it seems safer to me to continue to grow my investments for a couple of years, at least. I'm using age 65 as a marker, ..."

    Another option, if you're seriously considering an annuity for at least some expenses, is to annuitize now, and start drawing income in a couple of years. That's what a deferred income annuity "DIA" ("longevity insurance") is.

    On the upside, a "DIA" gives you a bigger return on your annuity than waiting two years to buy an immediate annuity. That's because there's a good chance someone else who's annuitized will die in the next couple of years. The insurance company would use his premiums to fund other payouts, including yours. Of course there's also a small chance that you'd be the one to die in the next two years.

    In addition, buying the annuity now removes the risk of losing value in a falling market.

    On the downside of buying a "DIA" now (aside from the possibility of dying before reaching Medicare), interest rates are likely to rise in the next couple of years. In addition, buying now would add the risk of missing out on a rising market.

    I'm not trying to sell this, just present various possibilities.
  • edited March 2018
    Very good stuff @bee and @msf. Actually bee, what made me think about the prospects of an annuity was another article you posted a few months ago that described setting up a retirement income stream to match your budget as two tiered, or a range between ceiling and floor. The author of that article described the two tiers as 1- meeting your "floor" expenses which were the necessities of living, and 2- the "ceiling", which is all the other stuff that you want, want to do and maybe splurge on. 1- the floor, was financed by a 'steady-guaranteed " stream from pension, social security and a purchased annuity if needed. 2- the ceiling was finance from the nest egg. 2- could be reduced in unfriendly market conditions.

    I really like that article (so thank you bee) and built a budget/ income stream spreadsheet to help me visualize financing retirement. And your assessment above that 'an annuity matches an asset to a liability' fits this guaranteed income stream for the "floor" expenses of a budget to a tee. But as you described there are other ways to do it.

    I do see a place for a (low cost) fixed annuity for some people. Down the road maybe me, maybe not. Taking the market out of the retirement financing equation certainly gives some piece of mind for longevity. My gene pool may be "cursed" with longevity. :)
  • edited March 2018
    One suggestion I haven't heard is combining a portfolio of bonds with a long-term call option on the stock market to create your own annuity. In the past this strategy was done with zero coupon Treasury bonds that would mature when you are retiring or in retirement. A small portion of the portfolio would then be invested in call options on the S&P 500 or some similar index. The return from the bonds was meant to cover the cost of the call option so if you held till maturity you would be guaranteed--by the full faith and credit of the US government--to not lose any money while getting a portion of the stock market's returns from the options. Today interest rates may be too low to do this strategy with zero coupon bonds. But one could do it with other bonds, albeit with more credit risk. The fact is, any annuity is really quite like a bond with the insurer's credit risk and the insurer's fees on the annuity to consider. Doing it yourself might be more labor intensive, but actually less risky and produce higher payouts in the end.
  • @LewisBraham, don't give @Ted additional ideas on articles he would like you to write. But I like the idea!
  • What Lewis is describing is how to roll your own equity-linked note, also known as a principal protected note, and probably a lot of other names.

    Here's a good paper on ELNs. Don't let the fact that it was written by Lehman Bros. make you think this isn't a safe investment:-)

    When sold inside an annuity (which is the way you usually see this type of product marketed), these are called equity-indexed annuities. Unless you want the tax-sheltering that the annuity provides, I don't see a reason to go that route.

    The main reason you might want to roll your own is that the financial institutions providing these prepackaged is that they charge a huge fee for the service. Here's a column by Sweedroe citing a couple of papers giving overhead figures of 6.5% - 8% for ELNs.

    Lewis alluded to another reason to roll your own. An equity-indexed annuity is only as sound as the insurer issuing the annuity. Likewise, an ELN is only as sound as the financial institution issuing the note.

    The are also equity linked CDs, that partially address this concern. However, their FDIC insurance only covers the principal.

    Here's Fidelity's page describing clearly and pretty completely, what these "structured products" are and how they work. To see actual inventory, you have to log into Fidelity, but you can do that as a guest.

    Most important, remember that even if you roll your own, you're only getting market price appreciation, not total market return including dividends.
  • ...another reason to roll your own.
    Ahhh, those were the days. I used to be pretty good at it back in the 70's.:)
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