Detroit thread. Post Kwame, Monica, and $1 houses here.

[Jacob]

Well many are also in the lurch when their company disappears or can't afford to pay out the pensions.

Then the DB plans have been terribly designed and managed to the point of either gross incompetence or fraud.

A properly run DB plan is adequately funded and managed and does not rely significantly on the continued success of the company. Now, if interest rates and regulatory change means there's a shortfall in assets compared to liabilities, and the company is unable or unwilling to cover that, then members should expect to see a decrease in benefits (unless there's a properly managed guarantee scheme in place to backstop them, of course).

But if DB plans are subject disastrous wipeouts due to company bankruptcy then either they've been terribly designed and managed, the relevant regulation is a complete shambles, and/ or significant fraud is involved.

Yes, DB plans are expensive all told (and that's an argument against them in some contexts), but if they rely on the company being a going concern they're basically failures.

[CountDeMoney]

Smells like communism, Xiacob.  And that shit just don't float in this toilet of a forum.

[DGuller]

Very good point being driven here, Jacob.  Your wife educates you well.   

Unfortunately, her older colleagues are partly to blame, since they went along with with assumptions they should've known were utterly unrealistic, and that resulted in pension plans being significantly underfunded.

[Jacob]

Jacob: if I'm reading your post correctly, your biggest beef with DC plans seems to be the ability to take money out and spend it before retirement.

No, my big beef with DC plans is that they move previously distributed risk to individuals without compensating for that risk transfer in any way - financially, legislatively, or otherwise - and in the majority of cases the individuals lack the basic skills to manage that risk.

It's a recipe for disaster. You'll be seeing (or not seeing, if they're out of sight - but they'll still be there) a much greater proportion of old people in poverty in the coming decades. Of course, there'll be narratives constructed that it's their own fault, that it's the result of unavoidable economic realities, that this newer higher proportion isn't actually any higher, and so on and so forth; but the fact is that it will be due to deliberate policy choices that predictably will have these outcomes.

The ability to withdraw funds from DC plans is part of the overall situation, of course, and it plays into a larger picture of financial pressure on Americans, but ultimately it is just one piece of the picture.

[Jacob]

Very good point being driven here, Jacob.  Your wife educates you well.   

Unfortunately, her older colleagues are partly to blame, since they went along with with assumptions they should've known were utterly unrealistic, and that resulted in pension plans being significantly underfunded.

Well... not her specific older colleagues. I believe the situation is significantly less fucked up in Canada. I mean, there's definitely a move towards DC over DB plans, and it's somewhat problematic, but I don't think it's being driven nearly as hard as in the US we don't have the shambolic mismanagement and design (and regulatory schemes?) of DB plans which seems to be a feature of the US plans.

And we have Medicare, the lack of which puts additional pressure on Americans planning for retirement (though Obamacare may help that, I'm not sure).

[Admiral Yi]

No, my big beef with DC plans is that they move previously distributed risk to individuals without compensating for that risk transfer in any way - financially, legislatively, or otherwise - and in the majority of cases the individuals lack the basic skills to manage that risk.

Sure they do.  You gain upside potential that you don't have with a DB plan.

Your comment about inability to manage risk suggests to me you think people can wheel and deal options and futures and other zero sum derivatives.  You can't.  You get a finite list of vetted investment funds.

[Savonarola]

Turning pensions into a primarily individual responsibility may be ideologically sound, and it may have done wonders for the economy (I don't know if it has); but as a matter of economic reality it has left the majority of Americans in the lurch when it comes to their retirement.

Well many are also in the lurch when their company disappears or can't afford to pay out the pensions.

Corporate pensions are insured, at least up to a point.  Government pensions usually are not; which is why this such a big issue for Detroit.

[Jacob]

No, my big beef with DC plans is that they move previously distributed risk to individuals without compensating for that risk transfer in any way - financially, legislatively, or otherwise - and in the majority of cases the individuals lack the basic skills to manage that risk.

Sure they do.  You gain upside potential that you don't have with a DB plan.

Potential upside is a component of risk, it is not inherently compensation for it. Turning that over to the individual may be ideologically sound, but it is directly counter to the purpose of a pension, which is to provide security in retirement. Now, DC plans can be (and are) definitely part of the picture in planning for retirement, but "potential upside" is no good to the people who were unwise or unlucky enough not to experience it.

Your comment about inability to manage risk suggests to me you think people can wheel and deal options and futures and other zero sum derivatives.  You can't.  You get a finite list of vetted investment funds.

The degree to which you can make choices and the education required to make them appropriately is separate from the fact that with a DC plan you assume the risk for those choices and the market in general, whereas with a DB plan you do not.

[Admiral Yi]

OK, I take your point about assuming risk.  However, DB plans, especially the public non-insured variety, carry their own type of risk, as Detroit employees are finding out.

DC plans possess other advantages over DB plans: money already paid out can't be renegotiated, and you don't have to vest for X years before you're eligible.  You spend one day on the job, that 401k money is your private property.

[CountDeMoney]

You spend one day on the job, that 401k money is your private property.

Which you're actually loaning out to somebody else to gamble with in the meantime. 

But hey, I haven't tossed in an OCCUPY STRONG shitcock slogan yet today.

[Admiral Yi]

Which you're actually loaning out to somebody else to gamble with in the meantime. 

You don't have to put it in a bond fund.  You could purchase equities instead.

[Jacob]

OK, I take your point about assuming risk.  However, DB plans, especially the public non-insured variety, carry their own type of risk, as Detroit employees are finding out.

The Detroit situation is a profoundly shocking example of mismanagement and irresponsible policy decisions. If it's anything other than some rare constellation of incompetence and malfeance and rather an indication of a system wide weakness, then the pension situation in the US is pretty dire indeed.

DC plans possess other advantages over DB plans: money already paid out can't be renegotiated, and you don't have to vest for X years before you're eligible.  You spend one day on the job, that 401k money is your private property.

There are definitely advantages to DC plans over DB plans, absolutely; and both have their role in good pension policy. No doubt about it. What I'm saying is that the wholesale shift away from DB to DC plans on a systemic level is going to leave a lot of losers in the next decades, especially combined with the apparently thoroughly incompetent regulatory framework set up for DB plans. Somewhere along the way, someone pulled a few fast ones, and the members of DB plans were basically robbed like a bunch of Hungarian beet-farmers.

... but yeah... I guess if the overall DB picture is a dire as the Detroit City worker's situation seems to indicate, I guess DC plans look more attractive individually since they're not going to disappear from under you. You make a good point on that. But that's basically down to someone breaking the DB plans and fucking them over, because that's not how you properly manage DB plans.

But holy fuck what a mess. There's going to be some unpleasant chickens coming home to roost on that one (barring major overhauls and backstopping - which seems unlikely - or a massive expansion of Social Security or equivalent schemes).

[Jacob]

Corporate pensions are insured, at least up to a point.  Government pensions usually are not; which is why this such a big issue for Detroit.

Though apparently the PBGC is in a pretty shitty situation too, with rates being set by Congress and the PBGC being prohibited from differentiating between plans. They have - according to wikipedia - $102B in liabilities against $79B in assets. Not a very sound set up, it seems.

[MadImmortalMan]

with a DC plan you assume the risk for those choices and the market in general, whereas with a DB plan you do not.

Somebody does. You better trust that person. And hope his name isn't Hoffa or that he isn't a Greek politician.

[Jacob]

with a DC plan you assume the risk for those choices and the market in general, whereas with a DB plan you do not.

Somebody does. You better trust that person. And hope his name isn't Hoffa or that he isn't a Greek politician.

I happily live in a country where the regulatory framework is rather solid and consistently removed from partisan battle. I mean, it's not as if the way to fund and maintain a DB plan is a mystery; but yeah, you do need someone to keep the plans protected against political raids and fraud.