Pensions

[Bonam]

We've had a few threads touch on various aspects of the pension discussion recently. I wanted to start one to discuss the general idea/system of pensions.

My contention is that pensions are an inherently bad idea, both for the company/government offering them, and for the people who are promised to receive pensions. Here's why:

From the pension receiver's perspective:

If you are promised a pension from a company/government, there is no guarantee that you will actually ever get it. Even if management/politicians have the best intentions, a company can go bankrupt, and a government can end up so far in debt that it can no longer afford pensions. You may be promised a pension, assume that you will have it to live off in your old age, and then the company that promised it to you may go bankrupt, and you'll be screwed. That is always a possibility, and one that cannot be ignored.

Let's consider an example. Say a company is paying you $60k/year, and is supposed to be saving $20k/year on your behalf that it will pay you later, once you retire, as a pension. Now, your $20k/year that is intended for you is locked in with the company, is likely to disappear if the company does poorly, and places restrictions on you in terms of how long you must work at the company to be eligible to receive it, etc. In contrast, if you were merely paid the $80k/year directly, you could deposit the $20k/year into a retirement account/investment. In this case, you would be guaranteed that bankruptcy of the company would not affect your investment, you would be guaranteed that no matter how long or short you worked at the company, the money is already yours, and it would give you greater flexibility early in life to use that money for things like home ownership, which may improve your long term financial situation.

I know that as an employee, I would always want to be directly paid the money that my future pension supposedly costs the company now, rather than being promised to have it paid to me later.

From the employer's perspective:

It is difficult to predict long term market and economic trends. Competent executives must balance the possibility of potential high demand and growth now, with potential contractions in the future. Managers may be reluctant to hire additional employees if they think the needed work will only be for a few years, since these employees may accrue gigantic future pension liabilities. Such considerations can dampen employment growth in times of economic prosperity. Further, companies that have downsized from past operations can often be burdened with giant pension liabilities that dwarf the present scale of the companies, the same can be true of cities that decline in population or in economic success. This can put them in very tough economic positions.

By paying employees a higher salary while they work, and not incurring any future liabilities, companies could more quickly and succesfully adapt to changing economic conditions, and could be free to hire as many employees as needed when they are needed without worrying as much about future liabilities. This creates enhanced economic growth both for the company, and for the society as a whole.

In summary, my contention is that pension systems should be done away with, and that the estimated costs of providing pensions should be added directly to employees salaries and paid as part of their regular paychecks, and that employees should save for their own retirement. Of course, there is always the concern that some people will fail to save, and that they will then end up dependent on government help in their old age. Such issues can be addressed if needed, such as by requiring that a certain % of paycheck for people below a certain income be deposited in retirement accounts, or by providing tax incentives for doing so.

Thoughts?

Edited September 22, 2013 by Bonam

[eyeball]

Tax the crap out of the 1% and re-distribute most of it's wealth, and that goes double for it's power.

For all we know most pension plans would have worked just fine if it wasn't for the sheer level of venality and corruption within our economy and political systems that have sucked so much hope and potential out of people's futures.

[dre]

We've had a few threads touch on various aspects of the pension discussion recently. I wanted to start one to discuss the general idea/system of pensions.

My contention is that pensions are an inherently bad idea, both for the company/government offering them, and for the people who are promised to receive pensions. Here's why:

From the pension receiver's perspective:

If you are promised a pension from a company/government, there is no guarantee that you will actually ever get it. Even if management/politicians have the best intentions, a company can go bankrupt, and a government can end up so far in debt that it can no longer afford pensions. You may be promised a pension, assume that you will have it to live off in your old age, and then the company that promised it to you may go bankrupt, and you'll be screwed. That is always a possibility, and one that cannot be ignored.

Let's consider an example. Say a company is paying you $60k/year, and is supposed to be saving $20k/year on your behalf that it will pay you later, once you retire, as a pension. Now, your $20k/year that is intended for you is locked in with the company, is likely to disappear if the company does poorly, and places restrictions on you in terms of how long you must work at the company to be eligible to receive it, etc. In contrast, if you were merely paid the $80k/year directly, you could deposit the $20k/year into a retirement account/investment. In this case, you would be guaranteed that bankruptcy of the company would not affect your investment, you would be guaranteed that no matter how long or short you worked at the company, the money is already yours, and it would give you greater flexibility early in life to use that money for things like home ownership, which may improve your long term financial situation.

I know that as an employee, I would always want to be directly paid the money that my future pension supposedly costs the company now, rather than being promised to have it paid to me later.

From the employer's perspective:

It is difficult to predict long term market and economic trends. Competent executives must balance the possibility of potential high demand and growth now, with potential contractions in the future. Managers may be reluctant to hire additional employees if they think the needed work will only be for a few years, since these employees may accrue gigantic future pension liabilities. Such considerations can dampen employment growth in times of economic prosperity. Further, companies that have downsized from past operations can often be burdened with giant pension liabilities that dwarf the present scale of the companies, the same can be true of cities that decline in population or in economic success. This can put them in very tough economic positions.

By paying employees a higher salary while they work, and not incurring any future liabilities, companies could more quickly and succesfully adapt to changing economic conditions, and could be free to hire as many employees as needed when they are needed without worrying as much about future liabilities. This creates enhanced economic growth both for the company, and for the society as a whole.

In summary, my contention is that pension systems should be done away with, and that the estimated costs of providing pensions should be added directly to employees salaries and paid as part of their regular paychecks, and that employees should save for their own retirement. Of course, there is always the concern that some people will fail to save, and that they will then end up dependent on government help in their old age. Such issues can be addressed if needed, such as by requiring that a certain % of paycheck for people below a certain income be deposited in retirement accounts, or by providing tax incentives for doing so.

Thoughts?

Most pensions dont work the way you describe. My pension is in a fund managed by a third party. My employer matches my contribution up to 10% of my income. Its in my interest to pay in because the company matches me dollar for dollar. I get a say in how the money is invested (low risk, medium risk, high risk) but the Manager of the fund maintains a feduciary responsibility. If the company I work for goes belly up the status of my account does not change. Most defined contribution plans, and really most pension plans in general are about as risky as buying a diversified stock portfolio.

As for CPP, its really just a piece of the safety social net. The most they pay out right now is about 800 dollars. All it does is ensure we dont have millions of zero income seniors would qualify for welfare if they didnt have CPP benefits anyways. So its good public policy overall. And again, its roughly as risky as the stock market. The CPP investment board has about 200 billion dollars invested in over 5000 publicly held companies world wide, including more than 500 Canadian companies. Its not like the bet the money on poker.

By paying employees a higher salary while they work, and not incurring any future liabilities, companies could more quickly and succesfully adapt to changing economic conditions, and could be free to hire as many employees as needed when they are needed without worrying as much about future liabilities.

The private sector is already moving towards DC plans, where they have little or no worry about future liabilities anyways. They dont guarantee you any minimum monthly income after retirement... they simply put money in a fund for you that gets invested in the stock market. Its mutually beneficial although not as beneficial for the worker as guaranteed income plans.

[Bonam]

Most pensions dont work the way you describe. My pension is in a fund managed by a third party. My employer matches my contribution up to 10% of my income. Its in my interest to pay in because the company matches me dollar for dollar. I get a say in how the money is invested (low risk, medium risk, high risk) but the Manager of the fund maintains a feduciary responsibility. If the company I work for goes belly up the status of my account does not change. Most defined contribution plans, and really most pension plans in general are about as risky as buying a diversified stock portfolio.

If it is some kind of pooled portfolio, then that does nothing but shift the risk from the company you are working for to the company that's doing the investing. If you are the actual holder of the funds/securities in the account you describe, then that is basically what I advocate in the OP.

[dre]

If it is some kind of pooled portfolio, then that does nothing but shift the risk from the company you are working for to the company that's doing the investing.

Nope not at all. You arent guaranteed a minimum monthly income. If the stock market crashes you lose some of your money, same as you would if you kept the money and invested it yourself.

If you are the actual holder of the funds/securities in the account you describe, then that is basically what I advocate in the OP.

You are a holder with limited access. You are subject to an excize tax if you withdraw the money early because the contributions by you and your employer were tax free. It may be what you advocate in the OP but private pensions have already been heading in this direction for about 25 years.

[Bonam]

It may be what you advocate in the OP but private pensions have already been heading in this direction for about 25 years.

Excellent. Hopefully government pensions can follow the same trend as well.

Edited September 22, 2013 by Bonam

[dre]

Excellent. Hopefully government pensions can follow the same trend as well.

Do you mean government pensions like CPP? Or pensions for Government Employees?

[Bonam]

Do you mean government pensions like CPP? Or pensions for Government Employees?

Pensions for government employees.

[Argus]

Tax the crap out of the 1% and re-distribute most of it's wealth, and that goes double for it's power.

In 1953 the top marginal tax rate in the United States was 93%. Somehow, the rich got by anyway. Now it's 35%. However, there are so many loopholes in the tax laws, written in, for the most part, due to bribes given to politicians by the wealthy, that the richest Americans pay considerably less than that. There was an article the other day, for example, showing how the Waltons, one of American's wealthiest families, owner of Wal-Mart, manage to get around inheritance taxes using charity trusts.

[Argus]

Pensions for government employees.

Bonam won't be happy until all of Canada, save for the walled enclaves of the wealthy, resemble giant African slums, and old people are eating dog food and drinking sewer water.

Edited September 22, 2013 by Argus

[Shady]

It's not really pensions that's the problem, it's the type of pensions. Defined benefit pensions plans have been moved away from for the most part, because they're essentially a pyramid scheme. The problem with them is that the benefits the pensioner gets from them far outpaces what the pensioner has actually contributed. They're mostly used still in the public sector. Which leaves Joe Q Taxpayer to make up for the short fall.

Most pensions now aren't promises for a few decades in the future. Many companies have programs where they match dollar for dollar an empolyees RSP contributions, so you're getting much more than a promise in the future. They also have defined contribution pension plans, which aren't the same kind of pyramid scheme the old type of plans were.

[dre]

Pensions for government employees.

That will take longer but dont worry we will get there. The utter contempt our corporate backed political class shows for workers pretty much guarantees that.

[eyeball]

In 1953 the top marginal tax rate in the United States was 93%. Somehow, the rich got by anyway. Now it's 35%. However, there are so many loopholes in the tax laws, written in, for the most part, due to bribes given to politicians by the wealthy, that the richest Americans pay considerably less than that. There was an article the other day, for example, showing how the Waltons, one of American's wealthiest families, owner of Wal-Mart, manage to get around inheritance taxes using charity trusts.

That's why I keep referring to power in these threads on wealth. I see little reason why the two shouldn't be given equal time because where there is one there is always the other.

Apparently we have millions of paper shufflers managing the world's wealth but next to nobody aside from a few political insiders managing the power that goes with it. We need the paper shufflers to expand the scope of their efforts and include the influence of power when processing their economic decisions and prognostications.

Ever heard of HACCP? Hazard Analysis Critical Control Points was developed for the purpose of approaching food safety in a systematic preventative way but it has found applications in other process' as well where quality control is essential for human safety. I wonder if we could use a similar approach to our governance?

It shouldn't be rocket science.

Principle 1: Conduct an analysis of hazards and measures to control them

Principle 2: Identify critical control points where measures can be applied

Principle 3: Establish critical limits for each critical control point

Principle 4: Establish critical control point monitoring requirements.

Principle 5: Establish corrective actions.

Principle 6: Establish record keeping procedures.

Principle 7 Establish procedures for verifying the HACCP system is working as intended.

[Topaz]

I can see workers not getting their pensions from companies, but when have you ever heard of workers, working for the government NOT getting their pensions, especially MPP's. MPs Senators or PM's???? Although, if government keeps getting bigger and bigger like the present one, they could run into trouble with reductions.

[eyeball]

when have you ever heard of workers, working for the government NOT getting their pensions

How about Tsarist officials once the shit finally hit their fan?

[Bonam]

The utter contempt our corporate backed political class shows for workers pretty much guarantees that.

See but that's where we disagree. It's not a matter of contempt, it's a matter of moving to a system that is more secure, more beneficial, and more sustainable for everyone, both workers and employers. That was the whole argument in my original post.

[dre]

See but that's where we disagree. It's not a matter of contempt, it's a matter of moving to a system that is more secure, more beneficial, and more sustainable for everyone, both workers and employers. That was the whole argument in my original post.

You didnt describe a system thats more beneficial for everyone though. You basically described 401k's. And when I say contempt Im not talking about pensions specifically. Im talking about about the assault on labor thats been happening for the last few decades, by the political class and their corporate backers and the fact that workers get a smaller piece of the pie than at any time in modern history.

Edited September 23, 2013 by dre

[Moonlight Graham]

Bonam, on 22 Sept 2013 - 01:48 AM, said:

If it is some kind of pooled portfolio, then that does nothing but shift the risk from the company you are working for to the company that's doing the investing. If you are the actual holder of the funds/securities in the account you describe, then that is basically what I advocate in the OP.

I worked for an employer that had the same pension scheme as the one Dre talked about. I had pretty good choice in what I wanted to invest the money in. When I quit that employer, those funds could be moved to my personal RRSP at no cost, or I could do whatever I wanted with that money (including cash it out, like money in any RRSP, though I had to pay the tax on it of course).

The pensions you speak of in the OP, where they are only paid out at a certain age and will be wiped out if the company goes out of business, well those I don't agree with similar to you. As for government pensions, they are far less riskier, however I think governments should guarantee that money, and take your tax contributions and invest them in a separate, untouchable (to them) account where the money can gain value through investments. There's no reason a government shouldn't be able to pay for pensions unless they misappropriate that money and spend our contributions on other things besides investing those funds for future pension payouts. As dre also said, CPP is used in many respects as a social safety net to help prevent seniors who may have invested their money poorly/in low quantities/not at all from going on welfare.

Edited September 23, 2013 by Moonlight Graham

[Argus]

Ever heard of HACCP? Hazard Analysis Critical Control Points was developed for the purpose of approaching food safety in a systematic preventative way but it has found applications in other process' as well where quality control is essential for human safety.

The critical control point is the money being fed to politicians and their campaigns, either directly or through various PACs. Unfortunately, the US Supreme Court says this is an element of freedom of speech.

[Argus]

See but that's where we disagree. It's not a matter of contempt, it's a matter of moving to a system that is more secure, more beneficial, and more sustainable for everyone, both workers and employers.

You think slavery is better for workers? Because that's where we're headed.

[Wilber]

^{The problem with DB pensions is the way they have been set up and regulated. Companies are not required to make contributions unless the plan is underfunded. Pension plans were set up by companies that had young work forces and for decades benefits were paid entirely by employee contributions. This is combined with government regulations that prohibited plans from being more than 10% over funded because they didn't want that much tax revenue deferred. Fast forward, a large portion of the work force has aged, retirements are increasing, the markets and economy stagnate, the plans go into deficit, the companies can't pay their share and you have a perfect storm. The convenient targets are the so called greedy employees, even though they were the only ones contributing all through the good years when the companies were paying nothing.}

[Argus]

^{The problem with DB pensions is the way they have been set up and regulated. Companies are not required to make contributions unless the plan is underfunded. Pension plans were set up by companies that had young work forces and for decades benefits were paid entirely by employee contributions. This is combined with government regulations that prohibited plans from being more than 10% over funded because they didn't want that much tax revenue deferred. Fast forward, a large portion of the work force has aged, retirements are increasing, the markets and economy stagnate, the plans go into deficit, the companies can't pay their share and you have a perfect storm. The convenient targets are the so called greedy employees, even though they were the only ones contributing all through the good years when the companies were paying nothing.}

Plans don't become underfunded overnight. It's very simple math, and the companies involved knew very well they should have been making contributions for years, but chose not to in order to enhance quarterly profit reports and thus contribute to the fat bonus cheques management takes home. The same sort of thing happened with governments, especially in the US.

[Bonam]

You think slavery is better for workers?

I would have expected better from you than such empty rhetoric.

[Wilber]

Plans don't become underfunded overnight. It's very simple math, and the companies involved knew very well they should have been making contributions for years, but chose not to in order to enhance quarterly profit reports and thus contribute to the fat bonus cheques management takes home. The same sort of thing happened with governments, especially in the US.

Yes they should have but even then, government regulations prohibited the plans being over funded by more than 10%, so as long as employee contributions were keeping the plan fully funded, the company couldn't contribute more than 10% even if they had wanted to. The over contribution limit since has been raised but that didn't help plans that had already gone into deficit.

[Argus]

I would have expected better from you than such empty rhetoric.

It's not empty. I truly do see us as being on the path to a future corporatist state, where countries are run by a few gigantic corporations and the elections are merely farces to legitimize corporate control.

If you look at how some of the Tea Party nuts get elected and stay elected you can see this in action. Sure their actions go against the needs and interests of their constituents. But so what? The electorate is so turned-off, so disinterested, they rarely really know what's going on. And as long as slick election ads (paid for by wealthy backers) can lie enough to convince the yokels to vote them in again the system works fine. And then you have corporate propaganda outlets like FOX blithely telling all the yokels that no, what these people are doing IS in their interests. No, low taxes for rich people will help the poor! Low taxes and cutting regulations for rich corporations will HELP ordinary people! Honest! All those pensions and benefits? They're Bad! BAD! Getting rid of them all will HELP ordinary people! Honest! Just listen to our experts explaining it all! Government is bad! Everything government does is bad! Environmental protection is BAD! Public health care is BAD! Cut taxes again and again so government can't do anything! That will HELP ordinary people!

A sizeable number of people buy that stuff. You can see some of them here. Others just don't know and don't care and don't vote.

Edited September 24, 2013 by Argus