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pension "reform"



  • edited March 2018
    The 401(k) is a great vehicle for retirement,
    I'm sorry but this simply isn't true. A defined benefit pension plan that promises income for life is almost always better than a 401k plan not just because of that promise for lifetime income but because fees and performance are better in pension plans:
    This is the reason why so many 401k plans have gotten sued in recent years. Many of them stink and are larded with fees and those excessive fees come out of employee contributions instead of out of company assets. The entire burden of retirement is put on employees' shoulders and it is not just that Americans are wasteful as you claim. American workers wages have stagnated for over 30 years and have actually gone down on an inflation adjusted basis for lower-income workers. Many Americans don't have much money saved because quite frankly they're just getting by. There are also two costs that are just killing them--medical expenses and college tuition--which have increased in price way faster than inflation.
  • "Many Americans don't have much money saved because quite frankly they're just getting by."

    @LewisBraham_ I have no argument with the main thrust of your comment, regarding the basic superiority of a defined benefit pension over the 401k semi-ripoff. But Jojo26 also has a valid point regarding the failure of many Americans to either understand or plan for the requirements of retirement. I have personally known quite a number who have actually had pretty good incomes, but squandered them on frivolity without a care in the world for their future. And many of those folks are now in serious trouble.

    Certainly there has been virtually no effort to educate most workers with respect to retirement matters; there has also been a massive lack of interest on the part of many workers to find out about these matters for themselves.

    There's quite a difference between being poor because you tried your damnedest but all of the breaks went against you (no question that lots of people fall into this area), and being poor because it was just too much trouble to worry about the future.

  • Yes, one can find examples of wasteful people on every strata of society, yet as I said earlier it seems we accept it a lot more when those wasteful people who have no sense of personal responsibility are at the top instead of the bottom:

  • Again, no argument.
  • Plenty of my college friends do not make a great living, call it <$50k, yet they will attend multiple concerts, go out and fork over $100+ EVERY weekend on drinks with friends, and take a trip or two each year to a warmer climate (where they go out to eat and drink ). You can't tell me that is smart. We need to do a better job educating our youth.
  • A survey? of 1,000 Americans? First, surveys are very poor indicators these days (Brexit, Presidential election)... In the case of financial well-being, I'd say those with poor habits are unlikely to participate. Second, 1,000 is not exactly a statistically significant sample size, particularly if you're breaking that 1,000 into smaller pieces (age ranges).
  • From @davidmoran's link: " In 2015, the Government Accountability Office estimated that 40 percent of American workers were employed under some sort of “contingent” arrangement like this—from barbers to midwives to nuclear waste inspectors to symphony cellists. Since the downturn, the industry that has added the most jobs is not tech or retail or nursing. It is “temporary help services”—all the small, no-brand contractors who recruit workers and rent them out to bigger companies." Shameful. And the rest of the article is insightful and all-too-correct. More's the pity. My son's out on the Left Coast, slinging coffee and teaching drum lessons for the school district on the week-ends. He's not much of a student in the structured academic sense. Started community college, then left it behind. Member of a band that's been dormant for over a year. Just got told that the house he lives in with mom and stepfather will be sold, so they can go live cheaper elsewhere, because his mother (Boomer) can't manage HER money. He doesn't need a reason to come here to my house on the Right Coast, but all of his prospects and connections are around L.A. He's totally screwed. A Millennial, born 1993.
  • @Jojo26 Surveys are admittedly imperfect, but a lot more scientific, predictive and accurate I would think than a few personal anecdotes about your college friends being wasteful. So critiquing the survey as being a "poor indicator" seems like a pot-calling-kettle-black situation to me.
  • edited March 2018
    I do believe the rise of Consumerism, to the point that it is utterly self-defeating, is a big piece of this picture, re: the Forbes article. A huge number, maybe (probably?) the majority of people today, simply use the individualized, personalized, cookie-cutter frame around their entire lives provided by the Advertising world. Have it YOUR way. And have it RIGHT NOW, when the whim strikes you, just because you CAN. I read long ago that it used to be true that we spent time in order to save money, but now (and this remark is rather dated by now---) we spend MONEY in order to save TIME. Yes...

    Mind you, my use of the term "Consumerism" is not a reference to the need for people to be consumers, in order to meet their needs and wants, or the way government tracks "Consumer Spending." The "Consumerism" I refer to is the result of a total lack of awareness: the lack of awareness about how advertising skillfully convinces people to spend and spend, without regard to a spending PLAN, and without any ethical awareness of the corrosive effect which spending-for-the-sake-of-spending has upon a person's character, as well as the negative effects upon the whole of society. Just ask uncle Donald. (But this idea would not even "compute" for him.)
  • Not much of a spending difference between boomers and millenialls here except for the fact that many millennials don't have families yet and are beginning their careers so they probably eat at home less:
    Millennials spend 44% of their food dollars – or $2,921 annually – on eating out, according to the Food Institute's analysis of the United States Department of Agriculture’s food expenditure data from 2014. That represents a 10.7 percent increase from prior data points in 2010. In contrast, baby boomers in 2014 spent 40% of their food dollars on eating out or $2,629 annually.
    Another one from T. Rowe Price:
  • About that TRP article: actually not a very good American cross-section...

    "T. Rowe Price surveyed workers of both generations who were contributing to their workplace 401(k) plans. Admittedly, Americans who are committed to saving for retirement are more likely to embrace better financial habits."
  • edited March 2018
    Another one:
    That's three surveys/studies now proving the same point. I get that a lot of people hate millennials, but I think it is just a classic hating the younger generation thing. When boomers were kids older generations hated them too. It is a rather tiresome trope, aside from the fact that everybody is different and it makes no sense to judge an entire generation any way. The usual knee-jerk refrain from older folks is a complaining "kids today." As if when they were kids in their twenties they weren't making mistakes too. As if twenty-somethings haven't always been sort of rash idiots throughout all time, and old folks haven't always been close-minded and judgmental of youth throughout all time. All of that said, I actually think millennials are better informed and more money conscious than previous generations because A. they grew up during the 2008 stock crash unlike boomers who've had it easy economically most of their lives and B. they're all wired to financial information on the Internet all the time. Yes, young people make mistakes and maybe spend a little too much sometimes on things they don't need. It's called being young.
  • Not much of a spending difference between boomers and millenialls here except for the fact that many millennials don't have families yet and are beginning their careers so they probably eat at home less:

    Millennials spend 44% of their food dollars – or $2,921 annually – on eating out, according to the Food Institute's analysis of the United States Department of Agriculture’s food expenditure data from 2014. That represents a 10.7 percent increase from prior data points in 2010. In contrast, baby boomers in 2014 spent 40% of their food dollars on eating out or $2,629 annually.
    Another one from T. Rowe Price:
    That difference is 11.1% between Millennials and Baby Boomers... That's material if you ask me, especially considering they're generally going to be earning substantially lower incomes.
  • "I get that a lot of people hate millennials, but I think it is just a classic hating the younger generation thing."

    Why on earth would anyone "hate" an entire generation? Not identify with them, perhaps, not understand them well, OK, but "HATE"???
  • Lewis, that's ridiculous. Didn't the "greatest generation" say the same about baby boomers? I think I heard all that in the late 60's and early 70's!
    millennials are privileged, cocky, entitled, lazy, impatient and so much more. However, in my extensive experience as a workplace leadership speaker, I've found that the reason that previous generations have a challenge with millennials boils down to this:

    Millennials remind older professionals of who they once were.
  • edited March 2018
    not a bad line

    In working with them and being the parent of two, I have found many of the generalizations true except for the lazy part, though I am sure many are. But otherwise my God do they work hard. Also, often, work smart.
  • Example of underfunding? We have a school district in Michigan that made no contributions to the pension fund for over a year, despite being required by union contract. They "just didn't have the money."
  • Let me take you back to those golden days when "everyone" had a pension.

    Back then, you had to have ten years with the company to even qualify for a pension. I worked at a company that offered a pension of 2% * (years worked) * (final average salary). I had been there 9.5 years when I received an offer of a superior position elsewhere. Glumly, I turned them down so as not to lose a pension (They declined to add several years seniority to compensate.) Fortunately, six months later they came back and offered the position again.

    I remember a letter to the editor of Chemical & Engineering News. This was back in the 70s. The writer was irate that many workers received no pension at all because of job insecurity (or moving to a "better" job). He could not understand why companies could not have a portable pension, so that, for instance, if you worked for eight companies, they would all pitch in to provide 2% of your final salary. I remember thinking at the time what an idiot the guy was for not understanding why, and what the result would be. He was also sure that companies were terminating men just short of ten years to avoid any pension liability at all.

    The company my father worked for had a pension. But it was also well-known that they would "encourage" men to retire, or move on, by their mid-fifties. If they didn't get the hint, it was likely they would be transferred to a really undesirable job assignment or location. You would think having a 401(k) instead of a pension might reduce the company's incentive to dispose of you, and you would be much more likely to end up with at least something ...
  • @WhollyTerriers- Thanks for the reminders. You are absolutely correct, and we tend to forget about the bad things that happened in "the good old days".
  • Didn't some companys with over funded pension plans get raided for that very reason.
    I'm sure more than one retiree got the shaft on those deals.
  • @Derf- yep, that has a familiar ring to it also.
  • A ways up the comments, LBraham cited a study claiming defined-benefit plans outperform defined-contribution plans by 0.7%. Now, I may have misread the brief, but the authors that perpetrated the study seem to have done a lot of fancy calculations to answer a question that probably nobody cares about.

    According to their calculations, returns to a DB PLAN (that is, benefiting the COMPANY running the plan) have been higher than returns gained by an average DC plan (that is, benefits actually accrued to employees). Does anybody care that that would justify the company needing to contribute 0.7% less to the plan to satisfy its obligations? The study is NOT a comparison of what employees would receive.

    According to an article in Governing Magazine, “In Montana, 25-year-old employees hired after 2011 must work 36 years before accumulating employer-financed benefits from the state’s Public Employees’ Retirement System. New Ohio teachers of the same age retiring after 2026 will similarly need to work 35 years in order to earn employer-backed benefits from the State Teachers Retirement System of Ohio.” I’m thinking those folks not lasting with the same employer for 35 years would have probably been far better served by a 401(k).
  • edited March 2018
    @WhollyTerriers- That would depend on whether the plans that you cite have a vesting provision, and if so, what the details of that might be.

    Again, you do raise valid issues with respect to losing benefits if you leave an employer before retirement. Working for multiple employers over a job career is much more common now than it was when I was 25.
  • I’m thinking those folks not lasting with the same employer for 35 years would have probably been far better served by a 401(k).
    I'm thinking not:
    The outcomes of many 401k plans have been very poor for the majority of participants. It is easy to blame the participants for that until one realizes how wages for many Americans haven't kept pace with inflation and that companies pushed the conversion into a 401k system specifically because it was cheaper for them to put the burden of retirement on their employees. 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? Wouldn't a great deal for employees entail a not so good deal for employers having to pay for the greater costs of 401ks compared to pensions? Or is this one of those mythical unicorn win-win situations where both employees and employers benefit?
  • msf
    edited March 2018
    The paragraph is lifted from "How Long Must New Hires Work to Get Pension Benefits", Governing Magazine, May 8, 2014. That article builds upon the study, How Long Must State and Local Employees Work to Accumulate Pension Benefits?, Urban Institute, April 30, 2014.

    From the abstract of the Urban Institute study: "Virtually every plan requires employee contributions. In half of those plans employees must work at least 20 years before their future benefits are worth more than those contributions."

    In other words, assuming the employee could get the same return for those contributions by investing in a DC plan such as a 401k, the employee would get more out of the DC plan than out of a DB plan (pension), unless the employee continued to work for 20+ years.

    The main reason for that is that pensions are backloaded - usually pensions are computed as a function of the number of years you work times your final salary. So they're pretty worthless for several years, until you rack up a lot of time on a single job, and also achieve a higher salary.

    They were designed in an era when lifetime employment was much more common. They were also designed to shackle employees to their employers.

    Vesting rules have evolved to address the trend toward greater mobility. As noted in the Christian Science Monitor (1981), "Before 1974, a three-decade stint in one job was the rule in order to be ''vested'' in a corporate pension program. ... Many young workers, of course, are job-hoppers. So one major change brought about by the 1974 passage of ERISA (Employee Retirement and Income Security Act) was the use of tax incentives to lower the vesting ''cliff'' to 10 years."

    In the real "golden days", vesting was not ten years as Wholly Terriers wrote, but decades, left entirely up to the employer's discretion. In 1989, those ten years for vesting were cut in half, as noted in a letter to the NYTimes.

    The problem that the Urban Institute effectively identified was lack of pension portability. It seems, though, that this has been addressed as well. Here's a 2016 paper stating that "nearly all state retirement systems have features that allow for preservation of retirement income benefits, even for those employees who decide to change jobs." (Haven't read, yet.)

    Take away the vesting problem, take away the portability problem, and what one is left with is the conclusion of the paper that Lewis cited - employees will do better with DB pensions than with self-directed DC plans.
  • edited March 2018
    @MSF Seeing the promise of income for life in retirement as "shackling employees to their employers" is one way of looking at the situation. Another is a promise of job stability and security that no longer exists. It is interesting this notion of "free labor" that is mobile embedded in that concept. I think it comes down to an ideological difference in the definition of freedom. The left sees freedom as "freedom from want"--freedom from worrying about healthcare, housing and retirement security. The right sees freedom as "freedom to want"--freedom to acquire as much wealth for yourself as possible, switch jobs whenever you desire, start a business but with no security whatsoever if your endeavors fail. I think there were a lot of middle class families in the old days who liked the idea of lifetime employment. I also think making these pension benefits portable and actually providing universal healthcare unencumbered by the need for employment would create an ideal situation of freedom from want and to want. Many people don't want to leave their jobs to start a business or go back to school because of the healthcare benefits they provide. It is or was a similar situation with pensions.

    But it would be very interesting to see how much it costs companies to finance a pension plan versus a 401k. In reality, I think in most cases the 401k was really a backdoor pay cut for employees that bolstered profits for companies since the death of the pension system. As did eliminating the concept of lifetime employment. Fire the high paid long-term employees with pensions, hire lower paid new ones and give them a 401k instead. When they become too high paid, fire them too and get new ones. And all the while keep selling employees on the idea that this is somehow good for them.
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