Posts Tagged “retirement”

A friend of mine, whose opinion I respect, commented on my last post about why I like pensions:

“I think your post opens you up to some pretty serious critique, though. I mean, essentially what you are saying is, “Why should I have to be responsible for my own future when someone else can be held responsible for me?” Who wouldn’t agree with that arrangement when given the option. What’s more, printing currency is an extremely dangerous way to meet the demands of retirees. The ensuing inflation complications punish everyone else. I think defined benefits are great if a company offers them as an incentive for working for their company rather than the other guy, but that’s about it. I think you also omit the key factor that a company may simply declare bankruptcy if the funds run dry. As an educator and one who pushes for equity in the system, I have to say that I can agree with your observation that most people aren’t equipped to handle risk and retirement planning as a rational choice because they are operating with imperfect information. To me the solution isn’t “Let’s recuse everyone from responsibility and put the burden on the market or the government.” Nor is it the hard-line conservative approach of, “My bootstraps worked just fine, so you’re just SOL.” Instead I say the real path of action lies in increasing educational quality for all. We’ve done so little still in closing the larger social gaps in our society. Now, is that completely realistic? Maybe not. But I think it’s a more positive approach than the other two.”

Here is my response:

“I think your post opens you up to some pretty serious critique, though. I mean, essentially what you are saying is, “Why should I have to be responsible for my own future when someone else can be held responsible for me?” Who wouldn’t agree with that arrangement when given the option.”

This dichotomy is setup far too often. The question is not “Government social services vs. our freedom” or “Government services vs personal responsibility”.  This is not a healthy way to look at social issues; there are no good answers when the issue is framed this way (which might be the whole aim of this framing).

How did any of us get fooled into thinking that it is better to have the freedom to die at home from lack of health care than it is to have the freedom to recover and continue to live a productive life?  Why is  the freedom for the elderly to die in the winter from lack of money to pay for heat more valued than the freedom to live out their years in relative peace?

As for personal responsibility, when we are young, we are cared for by others.  When we are old we are cared for by others.  When we are sick we are cared for by others.  No one accuses you of abdicating personal responsibility for your health to the doctor when you are ill.

Our entire lives are a web of responsibility; often with others depending on us, and often with us depending on others.

In short, a government pension has nothing to do with personal responsibility.

Failing to receive an adequate return on a 401k is not a celebration of personal responsibility.  It is an abdication of the responsibility we have to care for those who cared for us when they were able. Let me repeat:  Private retirement accounts that are at the whim of private financiers is a failure of our responsibility to ourselves.  The only winners in a such a scheme will be the financiers.

And to the point of “Who wouldn’t agree with that arrangement when given the option?” Indeed, who wouldn’t?  If that is the case, I am at a loss to understand why government social services, and government pensions, are such an issue.  Is this really controversial?

“What’s more, printing currency is an extremely dangerous way to meet the demands of retirees. The ensuing inflation complications punish everyone else.”

All money the government spends is printed money.  This is not an issue.

“I think defined benefits are great if a company offers them as an incentive for working for their company rather than the other guy, but that’s about it. I think you also omit the key factor that a company may simply declare bankruptcy if the funds run dry.”

A company going bankrupt is not an issue.  Pensions are federally guaranteed through the Pension Benefit Guaranty Corporation (PBGC), just like bank accounts are guaranteed through the FDIC.

It would be simpler though (instead of needing the PBGC)  if the government just issued the pension directly. Companies make products and services.  Why should Apple be great at making iPhones while at the same time being great at providing retirement or healthcare?  It is easy to see that isn’t and can’t be their core competence.

“To me the solution isn’t “Let’s recuse everyone from responsibility and put the burden on the market or the government.” Nor is it the hard-line conservative approach of, “My bootstraps worked just fine, so you’re just SOL.” Instead I say the real path of action lies in increasing educational quality for all. We’ve done so little still in closing the larger social gaps in our society.”

This is an interesting line of thought coming from someone that works in education (which is true of the writer of this quote).    Can you be educated at everything? Even if you are educated, does that mean you will make the right decision?

Can you be educated at everything?

Life is very complicated these days.  There  are so many things to learn that being an expert in everything is not realistic.  I am very good at HR consulting and helping with the people issues of large companies.  I have no illusions that I am also expert at a fixing a car, or operating on cats, or putting out fires, or making cell phones, or saving for retirement.   However, I am smart enough to know that I shouldn’t have to be.  That is a fundamental insight.  We are so interdependent it is silly to think we need to know everything.  We MUST depend on others.  The personal responsibility trope is a distraction.

Even if you are educated, does that mean you will make the right decision?

No amount of education will allow you to predict returns in the stock market (even average returns over extended time periods).  Education cannot be the answer.

So there we go…that is why I still think pensions are a good idea.

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Retirement is a modern concept; people historically worked until they couldn’t work anymore, at least in some capacity. Regardless, like most people, I would like to retire.  The question is:  How do you get the money?

A Pension is a defined benefit; it pays a fixed amount per year until you die no matter what.  You receive/accrue your pension based on years worked (private sector pensions); you can also accrue based on amount paid in (like Social Security), or simply buy a financial instrument (annuity).

The alternative to a pension (defined benefit plan) for retirement is usually a defined contribution plan (401K), in which you don’t accrue a fixed payment, you contribute and draw against the balance in retirement.

The advantage of a pension is its simplicity:

A fixed stream of payments until you die is very predictable.  It is the best, simplest solution for the retiree.

The retiree knows how much they are accruing each year of service along the way; that is something you can plan around.  They will not run out of money if they happen to live a long time.  This is the kind of security and simplicity everyone would like in retirement.  Life is complicated; retirement shouldn’t be, no?

This is why I like pensions.

If pensions are so great, then why are they so unpopular?

The biggest reason is that companies (and even governments to a certain extent, though they can print money, which is helpful) cannot manage the risk appropriately.

Pensions (like social security) can be unfunded.  There is no social security fund.  The people that pay in (working age) are really giving money directly to retirees.  I could accomplish the same effect by simply mailing my money directly to them.  The government is facilitating a direct transfer payment.  Some risk issues here could be the value of the US Dollar, the life expectancy of retirees, and/or the total population paying into the system. These risks are hard to manage and predict over short and long term time spans. The advantage the government has is that its pension is always solvent so long as the government can issue its own currency.

Pensions that are funded (like CalPERs and other large corporate plans) receive payments from employees (or simply lower their salary, which is an indirect payment) and then manage the pool of money from which to payout the annuity revenue stream promised to retirees.

These plans have to manage even more variables than the government with a smaller population size (leading to more volatility); and they can’t print money.  They must predict how much people should contribute now, then predict a rate of return in the stock market, then make sure they don’t run a negative…and their business/industry must be healthy enough to continue to continue to exist when these people retire (avg life expectancy of a public company is less than 10 years). That is hard to do. The main issue for corporate pensions is that they have assumed a rate of return (historically 7%) for the stock market that hasn’t materialized.

So here is the crux, and why I still like pensions (preferably a government pension which can’t go bankrupt):

All the risk factors mentioned above that large companies and governments find difficult to correctly assess…..also apply to us.

We don’t know how long we will live.  We don’t know what payout amount is adequate.  We can’t predict the stock market.  We don’t know whether we will stay healthy enough to continue working.  We don’t know what the value of the dollar will be.  We are woefully unqualified to bear and assess these risks.

By switching from pensions to 401ks companies are shifting these risks from them to us.  If they have been unable to assess these risks correctly, how would we be able to?

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