Pension Funds a Pending Disaster?

[BigRedBuster]

56 minutes ago, deedsker said:

pen·sion¹

ˈpenSHən/

noun

 

1. 1.

   a regular payment made during a person's retirement from an investment fund to which that person or their employer has contributed during their working life.

Under that definition, an IRA or 401K is a "pension" fund.

I think we all know what I am talking about when I say "pension".

[deedsker]

14 minutes ago, BigRedBuster said:

Under that definition, an IRA or 401K is a "pension" fund.

I think we all know what I am talking about when I say "pension".

They don't have regular payments. They have withdrawals that the user can decide on to some extent. 

[RedDenver]

59 minutes ago, BigRedBuster said:

Under that definition, an IRA or 401K is a "pension" fund.

I think we all know what I am talking about when I say "pension".

I don't think it's clear. I'm mostly confused because you're counting state pension funds as "pensions" but not federal pension funds (aka Social Security). Here's a definition from Investopedia describing the differences between a 401k and a pension plan:

Quote

The biggest difference between a 401(k) plan and a traditional pension plan is the distinction between a defined benefit plan and a defined contribution plan. Defined benefit plans, such as pensions, guarantee a given amount of monthly income in retirement and place the investment risk on the plan provider. Defined contribution plans, such as 401(k)s, allow individual employees to choose their own retirement investments with no guaranteed minimum or maximum benefits. Employees assume investment risks in defined contribution plans.

 

[BigRedBuster]

50 minutes ago, deedsker said:

They don't have regular payments. They have withdrawals that the user can decide on to some extent. 

So, if you go into the options on your IRA or 401K after you retire and set up regular payments to you, then they become a pension?  Sure....

[BigRedBuster]

2 minutes ago, RedDenver said:

I don't think it's clear. I'm mostly confused because you're counting state pension funds as "pensions" but not federal pension funds (aka Social Security). Here's a definition from Investopedia describing the differences between a 401k and a pension plan:

 

I view a pension fund (and I believe the general public does the same) as a retirement benefit that is tied to an employer and that employer promises to pay XXX amount over the span of the person's retirement.

 

SS is not tied to an employer, it's a fund that we all pay into the government as we work and employ people as a social safety net for people as they retire and/or are unable to work.

 

In my view, it is a horrible idea to tie your retirement security to an entity that you do not have any employment tie to anymore.  That is bad for both the employee and the employer.

[RedDenver]

1 minute ago, BigRedBuster said:

I view a pension fund (and I believe the general public does the same) as a retirement benefit that is tied to an employer and that employer promises to pay XXX amount over the span of the person's retirement.

 

SS is not tied to an employer, it's a fund that we all pay into the government as we work and employ people as a social safety net for people as they retire and/or are unable to work.

 

In my view, it is a horrible idea to tie your retirement security to an entity that you do not have any employment tie to anymore.  That is bad for both the employee and the employer.

Ok, I understand where you're coming from.

 

But in order to show that it's "bad", you have to show that the alternatives are better. I've suggested a couple reasons why individual investing may not be better.

 

And what about pensions that aren't managed by the employer? Does that change your opinion at all?

[BigRedBuster]

6 minutes ago, RedDenver said:

Ok, I understand where you're coming from.

 

But in order to show that it's "bad", you have to show that the alternatives are better. I've suggested a couple reasons why individual investing may not be better.

 

 

They are better because you have control over them.  Heck...put all your money into a money market account and you never have to worry about the stock market going up or down.  That would long term be a horrible idea...but...hey...do what you want.

 

I would also have MUCH more confidence in a 401K that is invested in a wide range of stocks, bonds, REITs...etc. knowing those investments may go up or down....than count on a single company remaining profitable and healthy enough to keep funding my retirement.

 

Just look at companies like General Motors and the city of Detroit.  Both of these entities stopped being able to financially fund the Pension accounts.  The ex employees were outraged.....well....what do you expect when you tie your financial safety to an entity like that?

 

8 minutes ago, RedDenver said:

And what about pensions that aren't managed by the employer? Does that change your opinion at all?

 

Who is funding the account so that the ex employee gets the retirement funds from?

[RedDenver]

10 minutes ago, BigRedBuster said:

 

They are better because you have control over them.  Heck...put all your money into a money market account and you never have to worry about the stock market going up or down.  That would long term be a horrible idea...but...hey...do what you want.

 

I would also have MUCH more confidence in a 401K that is invested in a wide range of stocks, bonds, REITs...etc. knowing those investments may go up or down....than count on a single company remaining profitable and healthy enough to keep funding my retirement.

 

Just look at companies like General Motors and the city of Detroit.  Both of these entities stopped being able to financially fund the Pension accounts.  The ex employees were outraged.....well....what do you expect when you tie your financial safety to an entity like that?

 

 

Who is funding the account so that the ex employee gets the retirement funds from?

First, don't you have the same problem that the financial institution you've invested with can go under just like your former employer? And this is plausible as that nearly happened in 2008, and only the federal bailout prevented it from happening.

 

I completely agree that diversifying spreads the risk of losing your retirement. But then why don't we do that with pensions? I'm basically wondering whether the issue isn't with pensions but rather how we've implemented pension plans. If there was something like a "mutual pension" that was a large grouping of pension plans, then does that make more sense or make it any better? (I'm honestly wondering as I'm just thinking aloud.)

 

I agree that GM or any other corporation is not a reliable way to get retirement money. They aren't stable enough over a person's lifetime plus they're basic motivation of making a profit is at odds with funding a pension.

 

But why can't an entity like the City of Detroit get loans from the federal government to cover it's pension? It's not like Detroit is suddenly going to go away, so even if it takes generations to pay back the loan, it's probably worth it.

[BigRedBuster]

32 minutes ago, RedDenver said:

First, don't you have the same problem that the financial institution you've invested with can go under just like your former employer? And this is plausible as that nearly happened in 2008, and only the federal bailout prevented it from happening.

 

If I own stocks in an account with E-Trade and E-Trade goes bankrupt, I don't lose the money I have invested in the stocks.  If I have a 401K plan at John Hancock, and JH goes bankrupt, I ultimately still own the mutual funds or stocks in those funds.  Now, I may have problems with a money market account I have there, or it may take some time for the entire thing to be sorted out...but....I still own the stocks.

 

33 minutes ago, RedDenver said:

But why can't an entity like the City of Detroit get loans from the federal government to cover it's pension? It's not like Detroit is suddenly going to go away, so even if it takes generations to pay back the loan, it's probably worth it.

 

Because when the City of Detroit had promised large pensions to thousands of workers...then the main industries moved out of the city that were paying taxes....the city had no money to pay the pensions.  OK...say they go get a loan from the federal government....who is going to pay the loan off?  That is what they had been doing and the entire thing ended in disaster because they had no way of paying off debt.  Nobody wanted to move to the city because the taxes had to be so hight to pay off the debt.  The problem just compounds on itself.

Now, take those city employees and if they would have had a 401K type plan, that money would have been THEIR MONEY.  They wouldn't have had to rely on the city staying solvent into eternity to support them.  You get to a point where there are more retired employees living off the company that working employees working to fund it.

[deedsker]

1 hour ago, BigRedBuster said:

So, if you go into the options on your IRA or 401K after you retire and set up regular payments to you, then they become a pension?  Sure....

This is why it isn't a pension. You are making the choice to have regular payments.

 

Tell the SSA you want a lump sum of your benefits tomorrow and see how that goes.

[RedDenver]

30 minutes ago, BigRedBuster said:

 

If I own stocks in an account with E-Trade and E-Trade goes bankrupt, I don't lose the money I have invested in the stocks.  If I have a 401K plan at John Hancock, and JH goes bankrupt, I ultimately still own the mutual funds or stocks in those funds.  Now, I may have problems with a money market account I have there, or it may take some time for the entire thing to be sorted out...but....I still own the stocks.

You're conflating two things that I'm saying. First, if you invest directly in stocks or bonds, then you'll lose all your money if the company of the stock or bond you've invested in goes under. Second, if you hold a mutual fund then some company holds that fund, for example the Vanguard S&P 500 Index is held by the Vanguard corporation. If Vanguard goes under, the fund won't exist anymore and you'll losing your money. The fact that you've used E-Trade or John Hancock to purchase those assets is irrelevant.

 

30 minutes ago, BigRedBuster said:

Because when the City of Detroit had promised large pensions to thousands of workers...then the main industries moved out of the city that were paying taxes....the city had no money to pay the pensions.  OK...say they go get a loan from the federal government....who is going to pay the loan off?  That is what they had been doing and the entire thing ended in disaster because they had no way of paying off debt.  Nobody wanted to move to the city because the taxes had to be so hight to pay off the debt.  The problem just compounds on itself.

Now, take those city employees and if they would have had a 401K type plan, that money would have been THEIR MONEY.  They wouldn't have had to rely on the city staying solvent into eternity to support them.  You get to a point where there are more retired employees living off the company that working employees working to fund it.

If Detroit took out a 100-year loan (or bonds), then the cost of paying the retirement out now would be offset in the future because less people would be living in Detroit. Or more people would move to Detroit to get jobs, and that also allows paying off the loan. Entities like Detroit (primarily governments) can do things that people and (most) companies cannot - like carrying multi-generational debt.

 

Portability is indeed a benefit that 401k's have over how pensions have been done, but that doesn't mean pensions are worse. For example, if we each invest individually, then each of us has to account for enough retirement money to last however long we live - including the uncertainty of our lifespan. If instead we invest collectively (like a pension), then we can invest less in total because we'll all live different lengths and we'll only have to invest for the average.

That's just one way pensions can be better than individual retirement investing. Here's some others:

https://www.forbes.com/sites/mattcarey/2017/06/05/5-ways-a-401k-isnt-as-good-as-a-pension/#7476fdd1567f

 

[BigRedBuster]

5 minutes ago, RedDenver said:

You're conflating two things that I'm saying. First, if you invest directly in stocks or bonds, then you'll lose all your money if the company of the stock or bond you've invested in goes under. Second, if you hold a mutual fund then some company holds that fund, for example the Vanguard S&P 500 Index is held by the Vanguard corporation. If Vanguard goes under, the fund won't exist anymore and you'll losing your money. The fact that you've used E-Trade or John Hancock to purchase those assets is irrelevant.

I'm not conflating anything.  As to the bolded part, we already covered that with the "diversification" point.

 

I used E-Trade and John Hancock examples because you said:  First, don't you have the same problem that the financial institution you've invested with can go under just like your former employer? 

 

The financial institution I'm invested with are E-Trade and John Hancock.   Also, if Vanguard as a company goes bankrupt, my funds are still invested in stocks.  If I have 500,000 in the fund and Vanguard goes belly up, my they don't get to keep my 500,000.

[Big Red 40]

Back in the day pensions , medical insurance , and other benefits were ways of attracting and retaining  the best employees. Pensions were paid for by the company , and  used to reward years of good service and help provide a dignified retirement at a reasonable age. 

In today’s world average joe worker (millions of people)  makes barely enough to live let alone save anything . With no pension, destroyed social security/Medicare , ridiculously high medical costs, and high cost of living in general,  he will get the joy of working until he’s dead. Not a good solution to me . 

[RedDenver]

4 hours ago, BigRedBuster said:

I'm not conflating anything.  As to the bolded part, we already covered that with the "diversification" point.

 

I used E-Trade and John Hancock examples because you said:  First, don't you have the same problem that the financial institution you've invested with can go under just like your former employer? 

 

The financial institution I'm invested with are E-Trade and John Hancock.   Also, if Vanguard as a company goes bankrupt, my funds are still invested in stocks.  If I have 500,000 in the fund and Vanguard goes belly up, my they don't get to keep my 500,000.

I thought that the funds were subject to standard bankruptcy court proceedings as a company asset, but it turns out you're right. Mea culpa. But it's not simply because they can't keep your money, it's because of the Investment Company Act of 1940 and how the fund is separated from both the parent company and the party that holds the money (usually a bank). Good job by our government back then setting up those regulations to protect investors. Here's a summary:

https://www.kiplinger.com/article/investing/T041-C001-S001-how-mutual-fund-assets-are-protected.html

 

So I'm more swayed by your argument, but individual investing still can't match collective investing due to issues like lifespan as I mentioned before. But perhaps pensions just aren't a good vehicle for collective investing given their drawbacks.

[Stumpy1]

I don't even count my pension as retirement money to be honest.  I spend most of my time investing into my 401K and into my IRA.  I have set goals on where I would like to be come retirement time and it doesn't include the pension.