[turc1656]

The one thing that made them "make sense" to most people was that the average person is/was terrible at personal finance and retirement planning. The company running the pension was a way for the average person to be "guaranteed" a retirement income without having to worry about anything.

Remember, corporate pensions were a big thing when the US was at it's greatest economic strength (post-WW2) and the internet with all of its modern tools to make investing much simpler for the average person didn't exist. You had to pay brokers for every single trade or someone else to advise you or you had to just buy and hold a small set of stocks for 30 years and hope those companies would still be around (a fair bet at that time).

Back then companies didn't really go under like this. If anything, they got bought by a larger company and merged, but the frequency of that was nothing like today.

Today, with health care costs what they are, having pensions and defined benefit plans are insane to me. It's much better for the company to say "we will match x% in a 401k". They are defining their contribution and it has a cap. If anything happens to the company, the employee's funds are safe as the money is already transferred. For the employee, it does require them to manage this money but that's far easier and cheaper today and that money doesn't require the company to be around forever. If things tank, the employee is protected.

[adrianmonk]

Also, 401(k) plans were not even possible until a tax law change in 1978 and an IRS ruling in 1981. So there was a lot of time in the pre-401(k) world for things like pensions to evolve. And now that 401(k) plans exist, pensions have gotten way less popular.

I would guess it's mostly old companies who have them. One factor may be that it's tough to transition a company to not having a pension plan once one has been established. At the very least, you create two classes of employees, old employees who have pensions and new employees who don't. It's a form of compensation, so you have to figure out a way to achieve parity in a way that makes everyone feel they're being treated fairly.

[bosswipe]

Well yeah it's much better for the company, especially since that 401k match is a fraction of what they used to put into pensions. More then anything it shows the decreasing power of labor.

[bb88]

> Back then companies didn't really go under like this.

The mean time between job transitions was less. That's partially because pensions created job loyalty even if was through golden handcuffs. If people had to work another 5 years for another 15-20% in your pension, people would do it.

It fell down because:

1. Corporate raiders would buy companies to take the money out of the pension plan. Pensions are by and large unregulated. And pensions are just a bunch of money sitting in an account of which payouts are largely determined by corporate policy instead of by contractual obligation.

2. Companies would fail to pay into their own pension fund based upon overly rosy economic projections that wouldn't come through. This forced companies to declare bankruptcy just to get out of the burden of paying a pension that was promised as part of the salary years ago, even if it was a contractually obligated pension.

3. 401k's became the norm. Because companies now no longer have a separate account they have to manage, and it's only x% (3 or 4 usually) of your paycheck.

In the end it comes down to, how well you trust people to manage your future. Back in the 50's it worked largely well, because people weren't willing to break societal norms.

[lotsofpulp]

>Pensions are by and large unregulated.

Defined benefit pensions have been heavily regulated since ERISA (1974) and PPA (2006).

>Back in the 50's it worked largely well, because people weren't willing to break societal norms.

Back in the 50s, people were barely even getting paid from the pensions. And the population was young, everyone was paying into the funds, instead of receiving from them. And their lives were much shorter. There are consequences to future growth when people start having fewer and fewer children and living more and more years.

[bb88]

> Defined benefit pensions have been heavily regulated since ERISA (1974) and PPA (2006).

To the point of guaranteeing that people got the pensions promised to them? No.

[TuringNYC]

Some pensions are guaranteed (see: https://www.pbgc.gov/), meaning American citizens are on the hook for them. Joy.

[Waterluvian]

Thanks. That's all really quite educational. Does the U.S. have any social program like Canada Pension Plan where:

1. your paycheque is forcibly deducted an amount based on a formula

2. that amount goes into CPP investment

3. when you retire you can get a monthly pension based on the total amount you paid in

To me that seems like a sane way to protect people from themselves.

[wmf]

That's called Social Security in the US but many people have additional retirement savings because it doesn't pay much.

[ficklepickle]

It is in addition to social security in Canada. We call that OAS. Social security (OAS) gets clawed back if ur over like $70k/year in retirement or so. CPP does not, IIRC.

[turc1656]

As others have mentioned, this is referred to as Social Security. I'm not sure how it works in Canada once it's is forcibly deducted, but in the US, it's just a tax like any other tax. The idea is that the government will honor the promises made about the schedule of payments based on a complex formula - but basically it goes by the year you were born and the amount of money you have made over time. People who make less get a larger % of their earnings back from Social Security. The higher earners make more, but there is a cap. Similar to income taxes, there are steps in which you get back varying %'s, which is why those with lower income get more as a portion of their earnings.

In this way, the government simply collects money from current earners and then distributes that to the existing retirees. It's not like there is a trust set up and your money is locked away with your name on it. Canada's system may or may not be structured the same way. The idea is that if the government defaults on this, then there are much larger issues anyway. But because it's just a tax they can technically do whatever they want with the money and being the scumbags that they are, they periodically do steal from that money, which is why Social Security is underfunded.

Personally, I think the payouts are even pretty respectable, despite what others might think. The average payout is currently around $1,500 per person per month. That's not a lot, but if you have a spouse that's $36,000 a year. Also, one thing that most forget is that even if your spouse doesn't work their entire life (i.e. stay at home parent), a spouse can claim an additional 50% of their spouses as their own. Every person who is married has this option - they can claim their own or the 50% of their spouses (which does not reduce their spouses, it's just on top). For anyone working, it usually makes sense to claim their own unless there is a massive difference in pay. So if one person is scheduled for 2k a month, the other is guaranteed at least 1k or their own if it's higher.

Honestly, it's a nice idea and has been working reasonably well for decades. But the issue is that when you look at it with a technical eye, you'll see it's all basically the same structure as a ponzi scheme. The current people taxed don't pay for themselves, they pay for others who came before them. Over time the number of people required to pay for a single retiree has gone up. This indicates a growth requirement in the tax base. Without this constant growth which seems to go up more and more over time, the system fails. People ignore this because they think it's impossible because it's run by government. I'm not so sure that's true.

[jamie_ca]

For comparison's sake, Canada Pension Plan (CPP) is provided across the country except in Quebec (because ofc Quebec has its own thing).

The current contribution rate is 10.2% of your gross pay, it's been 9.9% for at least the past few years but it's being bumped slightly over the next few). If you're an employee, the employer will pay half. That rate is only applicable on income between $3500 and the earnings ceiling of $57,400 (adjusted yearly based on inflation), so this year's maximum total contribution is $5497.80 - again if you're an employee you'll only see half of that deducted.

The Government keeps track of your total contributions, and you can opt to start receiving pension payments back at age 60, 65, or 70 - the later you wait the larger the payment. Generally speaking, you look back at all your contribution years, average your income compared to the earnings ceiling, and then scale it up to the average applicable income over the past 5 years, and the baseline is 25% of that. So if you retire in 2 years, and the average applicable happens to be this year's value, and on average over your working career you earned 75% of the applicable amount, your pension would be (57400-3500)0.750.25, or about $10k/year. Your income this year would have been about $43k, so that's reasonably close to 25%.

Funding is a little weird. The baseline plan is funded so as to supposedly not require increased contributions (but require that contributions do continue perpetually), but they're also adding an enhancement in 2023-2024 of 8% of income earned over the standard earnings ceiling, to a limit of 14% of the earnings ceiling, which is supposed to be a fully-funded benefit.

[pkaye]

Social Security contributions in the US are 6.2% for the employee and 6.2% for the employer. There is a yearly max contribution income threshold which slowly is adjusted every year.

I think you need about 10 years on contribution to get the maximum benefits possible though you can get some of it earlier for permament disabilities. At retirement age the the average of you top 35 years income is used to calculate how much benefits your earned. Those in the lower income bracket get a higher percent and the curve flattens out at higher income.

[ipnon]

It doesn't make sense when thought of as a pension. You are right to point out that it doesn't function as an investment fund. Money is transferred directly from the young to the old.

When Social Security is envisioned simply as a welfare program for people who are too old to support themselves, its structure becomes entirely reasonable.

[jfengel]

"Steal" isn't quite the right word. The Federal Government does collect more Social Security than they require, and uses it to fund current projects. In theory, those projects are all about growing the overall economy, which means more tax revenue later on.

That was something the Baby Boomers inflicted on themselves. They knew that there were fewer children behind them, so they needed to do something to ensure that they didn't run out of money immediately. So they raised their Social Security tax rates to collect more than they needed. And they had to put it somewhere. Long-term federal bonds were a pretty good place to put it, since they pay a bit more than inflation. There was talk about putting it into the stock market, but that would have been a pretty heavy thumb on the economy.

That was in the 80s. That started coming due about a decade ago, and now is in full swing. We always expected that "trust fund" to come down... but for a variety of reasons it came down faster than they bargained for. And for a variety of reasons, the government took that demand for its bonds as a sign that it should grow, a lot -- and somehow managed to borrow yet more money, even though it had a captive audience of bond buyers.

Maybe "steal" isn't the wrongest word. But it's helpful to understand just what they were thinking. (As a Gen Xer, I'd say what they were "thinking" was that their goal was to screw us and our children, which they've done a great job of.)

[Waterluvian]

Thanks so much for sharing this detail.

With regards to "it's like a ponzi scheme". I completely see what you're saying. But shouldn't it look more like a population pyramid? Where, yes, the word pyramid is in the name, but generally a mature nation won't be top-heavy (except for the baby Boomer issue but that's kind of transient, no?)

My sense is that it should work perpetually so long as a nation doesn't see massive population decline and employment remains reasonably consistent. And in years/decades when there are imbalances, the government can step in and prop it up through other means rather than watching a private corporation file bankruptcy.

I feel like maybe we're judging the long-term efficacy of such a system too early. Right now we're dealing with a one-two punch: baby boomers are retiring and people are living longer. But neither of those are going to increase perpetually.

[turc1656]

I agree that "it should work perpetually so long as a nation doesn't see massive population decline and employment remains reasonably consistent".

But the same thing is true for a ponzi scheme, right? The idea is a never-ending growth from which new people pay the existing. The requirement that the US population must continue to grow - not just stagnate and contain the same number of people, but grow, indicates a ponzi-esque scheme to me. There is a finite amount of resources on the planet. Therefore there is a finite number of people that can be living on this planet. But such systems mathematically require that the number of new people constantly goes up over time. This is indicative of an unsustainable system.

If it were altered in a way such that, for example, there was a 1:1 (payers:recipients) relationship (or less) between the number of payers and the number of recipients, than I'd say that's sustainable because it doesn't require growth. Currently we have ~130M payers and 64M recipients, which means there's a roughly 2:1 ratio. On the surface it looks fine because you think hey people work for 40-45 years and then retire for 20 so 2:1 sounds about right. And it is, but only if you can continue to produce that larger base forever.

[lotsofpulp]

Civilization is a ponzi scheme if you step back far enough, but it's not a useful way to model it. For a more accurate understanding of the way Social Security is structured, I would check these links. The second link is to an interview where it's explained in simple english.

https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2019/f...

https://us14.campaign-archive.com/?u=bd0d1b66f832083794c33c9...

I also have not found a source to substantiate the claim that the US government periodically steals money from Social Security.

[turc1656]

See my other comment(s) in this thread. I have acknowledged that was not in fact true after checking further once called out on it.

[lotsofpulp]

Yes, I hadn't seen that yet. Thanks for acknowledging! I learned the same way when I was researching it too.

[fredgrott]

wrong.. there is a legal trust setup as the funds cannot be used for any other gov purpose say for Trump's wall for example.

[SQueeeeeL]

We do, but our law makers have been looting social security for decades so it's basically unrealistic to expect most people in the country to see any benefits

[lotsofpulp]

How have lawmakers been looting social security? As far as I know, taxes collected for social security are either paid out as benefits or invested by purchasing US debt. But I don't see any other option of what to do with them (keeping them as cash seems imprudent as they would just lose value due to inflation).

[idoh]

It's "looting" in that from the outside looking in, when social security has a surplus, the federal government takes that money and spends it on non-related things. Internally, one part of the government is writing an IOU to another part to make it seem like the money is "invested". So from some super technical and pedantic sense, the surplus is invested, but it is only ever invested in internal IOUs from the same entity to which it belongs, it's not like social security is buying up equity or real estate for the long term.

[lotsofpulp]

Are you suggesting that the US government use social security taxes to purchase equities and real estate?

The purpose of the current system is to make the benefits one receives sort of proportional to the income they earn. Of course it's the government taking in money and spending it, and it's all one government if you zoom out, but it's still useful to categorize certain funds.

[idoh]

Well, I could live with either taking the surplus from that specific program and investing it in the best possible way to cover for well-known coming shortfalls, or saying that it is a generic tax like any other tax. Then at least people would know where it stands.

Instead we have a weird situation where the tax specifically calls out social security, but in reality gets spent on a bunch of unrelated things, with a thin veneer of technicality to make it all hold together.

[turc1656]

It's a tax, so they can take part of the money and do other things with it. And they have from time to time. They are not remitting the full tax receipts to the Social Security Administration for disbursement. Which instead of having them buy US debt, actually creates the need to create more US debt because they have obligations to meet and the SSA is locked into certain debt instruments that can't be exited on large scale easily.

EDIT: This is not correct. It appears they have borrowed against the SS fund using treasuries, which will have to be back. Or phrased another way - the SS system chose to invest in US debt.

[lotsofpulp]

Any sources? These reports don't support your statements:

https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2019/f...

https://www.ssa.gov/agency/performance/

And I don't know of a debt instrument that can be exited more easily than US Treasuries:

https://www.ssa.gov/news/press/factsheets/WhatAreTheTrust.ht...

This interview with a prominent actuary who worked in the Social Security admin is also very helpful to clarify the workings of SS:

https://us14.campaign-archive.com/?u=bd0d1b66f832083794c33c9...

[turc1656]

Thank you for this. It appears I was lied to. The person that told me this is not someone who usually neglects to do their research and verify things, so by extension I did not. I have edited my response above accordingly. Much appreciated.

[vkou]

Pensions have two other, incredibly important benefits.

1. They mitigate risk, by pooling it, because some participants die sooner than others, and stop receiving benefits. This helps fund the few people who happen to live longer than expected.

2. They mitigate risk, because they mitigate inflation, because they are, in part, funded by current contributions. The value of money drops as time goes on. If you retired 15 years ago, it is less risky to be receiving 10% of a salary today, then it is to have saved up that 10% 15 years ago.

Obviously, a mismanaged pension, that relies on incredibly optimistic rates of return, is going to have you taking a haircut. Even so, having a pension, in addition to your personal retirement savings is a way to mitigate your financial risk.

[lotsofpulp]

This is obsoleted nowadays by index funds. You can do the same thing your pension fund does with a 0.04% expense ratio and no agency risk of the pension fund board members being corrupt and "investing" the money for their own benefit.

[vkou]

You did not address either point.

An index fund doesn't mitigate the risk of living until you're 92, when life expectancy tables say that you should have died at 84.

Group funds pool this risk. Because when life expectancy is 84, for every person that lives to 92, eight people die at 83.

Outliving your savings is a catastrophic event in your old age. Group funds act as insurance for this catastrophe.

[lotsofpulp]

Weird, was comment edited? I thought I had responded to a comment about pensions providing diversification. Although I find point # 2 about inflation is mitigated by investing in equity index funds, as I believe the government will prop up equity values as long as it can. And if it can't, then the country has bigger problems to worry about.

Anyway, the best thing to mitigate risk of living until 92 and running out of funds is raising kids with the right values or another form of support network. I wouldn't trust any counterparty enough to pay me back decades in the future. Worst comes worst, have some form of suicide accessible.

[vkou]

> Weird, was comment edited?

Yes, I removed part of it, because the arguments about point #2 are, in my opinion, more nuanced than "low cost index funds solve all our problems". There's advantages and disadvantages to non-fully-funded pensions, because of the time value of money, and it depends on the economic climate in which it operates, and on the worker pool that participates. It can work just fine on a national level, but is a mistake for smaller pensions.

> Anyway, the best thing to mitigate risk of living until 92 and running out of funds is raising kids with the right values or another form of support network.

So, you'd burden your retirement-age children with supporting you in your old age? That's going to do great for their own retirements...

The point is that the money is there - but instead of pooling risk between people who can afford it (Other people in your pension cohort, who die earlier), you pool it with people who can't (your aging children), with a backup plan of suicide.

... Or we could just mitigate the risk, with a more diverse pool. With a group fund.

You don't self-insure your car[1], you don't self-insure your house, and you don't self-insure your health. That's because the costs of statistically unlikely events are catastrophic in all three of those cases. Don't self-insure your retirement.

[1] I actually do self-insure my car, but that's because it's worth less than what I make in a paycheque. I don't self-insure liability insurance, though, and I wouldn't want to, even if I could.

[lotsofpulp]

I self insure my car and my house. I have spare versions of both. I don't self insure my health since I'm not that rich yet. I would self insure myself for liability if I was rich enough to have a staff of lawyers, especially since auto insurance liability only goes so far anyway. Or maybe not if they say it's too complicated, but I can't afford that right now anyway so it's a moot point.

Good point about being 92 and having children who are also retirement age. But in my family right now, we have 3 great-great grandparents in 90s being supported by grand children and great grandchildren. It really depends what kind of family you have, and perhaps it's simply not realistic for many, and I'm just super lucky to be in one.

However, I have seen nursing home care and other non family provided care for super old people, and I would rather kill myself if I had to depend on that (I support assisted suicide). I also don't plan on keeping myself alive to get into a state where I have to depend on someone else for basic needs, but who knows, talk is cheap. I haven't seen what kind of care tens of millions of dollars or more can buy at that age, and maybe it's worth it then, but I almost feel like you can't pay someone enough to take care of you the way family would.

>... Or we could just mitigate the risk, with a more diverse pool. With a group fund.

If this is the goal, then isn't the whole country the best pool? AKA Social Security?

[wmf]

Yeah, just staying in index funds until you die is risky. A more standard strategy would be to invest in index funds until you retire, then switch to an annuity that pays you for life. This has the same pooling of risk as a pension.