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I agree pensions are superior in the aspect of forced retirement savings as some people won't save and thus don't even get the matching from the company. We need to separate that argument into those that do and don't.
Let's run some numbers assuming someone's getting 50% of their ending salary as a pension and that they are retiring today at an ending salary at 80k...then a 40k annual pension at age 65.
If you start out making 22k a year, 3% raises until age 65 you are then making 80k.
Assuming an average investment return of around 7% (very doable longterm in the stock market) and you have a little over $1million in your 401k at that time. (6% contribution + 6% company match).
The two unequal points of comparison are:
1) You contributed half the money in the 401k so to be apples to apples let's cut the 401k total to maybe 700k (it gets messy depending upon what you'd choose to do with that 6% in the pension scenario. Maybe you don't save it at all....or you'd put it all in a roth or you'd put it after tax into the stock market....)
2) A pension is a life annuity. If you die, it's gone or greatly reduced for the spouse while the 401k could be passed on. So to be apples to apples here....let's convert the 401k to an annuity as well.
You can typically get maybe 6% of your investment as an age 65 life annunity so 6% x 700k would be 42k. I just mean this as a ball-park reasonable comparison to show what happens for those that DO save money into their 401k can reasonable get into the same ballpark at the pension people.
Other big considerations:
a) 401k is much safer from inflationary forces than most pensions.
b) Pensions are susceptible to company funding and even the financial health of the city or state if you have a public pension, it's not really safe either.
c) 401k is portable. Pension is not. For the person that works 40 years at the same place then the pension is probably the better deal. For the guy that works 6 different places over 40 years, they're probably better off with the 401k as long as they are participating.
Anyway, there you go. I'm speaking as someone that has 2 pensions from prior employers a 401k and a defined contribution plan at my current employer.
All of the problems of pensions are a matter of law and enforcement.
The 401k is fundamentally flawed for the vast majority of workers.
Either something works or it doesn't work.
The 401k exists in the real world not hypotheticals.
The problems with the 401k are numerous and large and those problems are why it doesn't work for the vast majority of workers.
First problem with 401k's(and to be fair its also a problem with pensions) a huge percentage of workers don't have access to them.
78 million Americans work for employers that do not sponsor a retirement plan
Part of the problem is that only 50.6 percent of Americans work for an employer that sponsors a retirement savings plan. But even among full-time workers between the ages of 21 and 64, the group most likely to be offered a retirement plan at work, just 54.8 percent utilized the retirement account or pension plan, down from 55.3 percent in 2007.
Second problem with the 401k and its largest problem is that it wasn't design to be a retirement vehicle for average workers.
A company lobbied Congress to allow it to pay highly paid Corporate execs with this deferred retirement plan, thus the 401k in the IRS tax code was born.
The fact is the 401k is designed to hide the income of highly compensated workers.
The median wage according to the SSA website in American is a little over $28,000 in 2013.
The vast majority of workers never earn more than $75,000 a year.
The third problem is 401k's requires consistent employment over decades periods of time without any financial hardships. This means no divorces, long periods of unemployment, take a huge pay cut, work for an employer that doesn't offer a 401k, major illnesses for you or a spouse or children or parents.
The workers who can work 40years and not face at least one of those issues is minuscule, which means inevitably they are going to go to their 401k during these high financial risk times which erodes their 401k.
Finally, for most of its history many 401k's had terrible choices, high fees, many 401k's were made up of just company stock.
And finally already companies are starting to play around with the company match portion of the 401k.
Some companies instead of paying the company match the whole year, opt to pay the company match as a lump sum at the end of the year.
This robs workers in two ways, first you don't get the benefit of that compound interest on the company match for the full 12 months, finally if you lose your job before the end of the year the company doesn't have to pay the company match.
Finally, we have the actual record of the 401k not theory with actual American workers. The reality of the American worker with the 401k is not some thought experiment of how if everything goes perfect for someone how the 401k is great.
The actual record of 401k's is dismal. This is not even debatable. The 401 hasn't worked for the vast majority of workers.
We don't have to do thought experiments and use made up examples, the evidence that it doesn't work is right there in the fact that it isn't working and is no where near working for the vast majority of workers.
All of the problems of pensions are a matter of law and enforcement.
The 401k is fundamentally flawed for the vast majority of workers.
Either something works or it doesn't work.
The 401k exists in the real world not hypotheticals.
The problems with the 401k are numerous and large and those problems are why it doesn't work for the vast majority of workers.
First problem with 401k's(and to be fair its also a problem with pensions) a huge percentage of workers don't have access to them.
78 million Americans work for employers that do not sponsor a retirement plan
Part of the problem is that only 50.6 percent of Americans work for an employer that sponsors a retirement savings plan. But even among full-time workers between the ages of 21 and 64, the group most likely to be offered a retirement plan at work, just 54.8 percent utilized the retirement account or pension plan, down from 55.3 percent in 2007.
Second problem with the 401k and its largest problem is that it wasn't design to be a retirement vehicle for average workers.
A company lobbied Congress to allow it to pay highly paid Corporate execs with this deferred retirement plan, thus the 401k in the IRS tax code was born.
The fact is the 401k is designed to hide the income of highly compensated workers.
The median wage according to the SSA website in American is a little over $28,000 in 2013.
The vast majority of workers never earn more than $75,000 a year.
The third problem is 401k's requires consistent employment over decades periods of time without any financial hardships. This means no divorces, long periods of unemployment, take a huge pay cut, work for an employer that doesn't offer a 401k, major illnesses for you or a spouse or children or parents.
The workers who can work 40years and not face at least one of those issues is minuscule, which means inevitably they are going to go to their 401k during these high financial risk times which erodes their 401k.
Finally, for most of its history many 401k's had terrible choices, high fees, many 401k's were made up of just company stock.
And finally already companies are starting to play around with the company match portion of the 401k.
Some companies instead of paying the company match the whole year, opt to pay the company match as a lump sum at the end of the year.
This robs workers in two ways, first you don't get the benefit of that compound interest on the company match for the full 12 months, finally if you lose your job before the end of the year the company doesn't have to pay the company match.
Finally, we have the actual record of the 401k not theory with actual American workers. The reality of the American worker with the 401k is not some thought experiment of how if everything goes perfect for someone how the 401k is great.
The actual record of 401k's is dismal. This is not even debatable. The 401 hasn't worked for the vast majority of workers.
We don't have to do thought experiments and use made up examples, the evidence that it doesn't work is right there in the fact that it isn't working and is no where near working for the vast majority of workers.
1) Is moot. Didn't used to be that all workers had pensions either....which is why there is social security.
2) The 401k works just fine for "average workers" as long as they contribute and get the match. The max you can put into a 401k in a year is about 16k of your own money, plus the company match. That's doing a REALLY crappy job of hiding the income of "highly paid corporate execs" lol.
3) Now this one is ridiculous, people with pensions are even more impacted by layoffs given how the calculations stack and yes, a spouse can go after pensions in divorce too. That one makes no sense as it's an INFERIOR feature to a 401k.
Basically, the only legitimate point you have is that without mandatory participation the 401k doesn't get taken advantage of by enough people.
On the other hand your company can't change the rules and take large portions of your 401k away just as you get ready to retire by changing rules or underfunding it. It's more protected against inflation. It keeps a worker more mobile and able to shift jobs without having to worry about losing their standing in the pension calculation.
So, for some people that save and participate in them I will take a 401k over a defined benefit pension ANY day. For those that refuse to participate and get the company match etc. then it's worse as they don't have anyone forcing them to save for retirement (other than social security.)
If you have a pension then when you retire you have the option of an annuity (your pension check) or a lump sum payout. The lump sum payout is always less then taking the annuity pension. Different companies treat lump sum payouts differently as there is no one set rule on that.
Just like if you take an early retirement..you get a cut in pension.
Now if you do take a lump sum you can roll it over to a brokerage firm (Fidelity, Vanguard, etc) and use it to buy an annuity which is the same as a pension (monthly checks).
Only now you don't care if your company goes bankrupt because your money is not managed by them.
Yup, except my payout was over a decade before the rule changes on the lifetime calcs which meant a much larger payment than under the current formularies.
1) Is moot. Didn't used to be that all workers had pensions either....which is why there is social security.
2) The 401k works just fine for "average workers" as long as they contribute and get the match. The max you can put into a 401k in a year is about 16k of your own money, plus the company match. That's doing a REALLY crappy job of hiding the income of "highly paid corporate execs" lol.
3) Now this one is ridiculous, people with pensions are even more impacted by layoffs given how the calculations stack and yes, a spouse can go after pensions in divorce too. That one makes no sense as it's an INFERIOR feature to a 401k.
Basically, the only legitimate point you have is that without mandatory participation the 401k doesn't get taken advantage of by enough people.
On the other hand your company can't change the rules and take large portions of your 401k away just as you get ready to retire by changing rules or underfunding it. It's more protected against inflation. It keeps a worker more mobile and able to shift jobs without having to worry about losing their standing in the pension calculation.
So, for some people that save and participate in them I will take a 401k over a defined benefit pension ANY day. For those that refuse to participate and get the company match etc. then it's worse as they don't have anyone forcing them to save for retirement (other than social security.)
You are arguing hypotheticals and ideology.
Again right now, not theory, not fantasy, not ideology, well over 70% of people who have 401k's have less than $100,000 in the 401k. This fact is proof the 401k doesn't work for the vast majority of workers.
You are insisting against objective reality that the 401k works for average workers.
Where is the proof it works for the vast majority of average workers?
Every statistic I have seen about the 401k shows its not working for the vast majority of average workers and is really only benefitting a very, very small percentage of highly paid workers who would have saved for retirement anyway.
The median income of workers in 2013 is $28,000. The median workers who are earning between $20,000-$35,000 aren't going to save $18,000 or $10,000 or even $5000 in a 401k. And without putting in big money year after year for many years, the 401k is useless as a retirement vehicle and the vast majority of workers can't afford to put in big money year after year.
The whole premise of the 401k is based on having enough income every year that you can meet your basic needs and have excess income to use towards retirement.
Once one looks at the actual pay rates of Average workers and sees that the vast majority make under $75,000 a year for their whole working career, and that they don't get 3% raises every, in fact they get laid off, take pay cuts, don't get raises for many many years, work for employers who don't even have a 401k, the ineffectiveness of the 401k for the vast majority of workers becomes apparent.
In fact, last stat I read was that 11% of workers had 401k's with $250,000 or more in them. This means that the percentage of workers that have $500,000 is minuscule probably under 2% of workers with 401k's
This is another fact that shows the 401k its not working.
Again right now, not theory, not fantasy, not ideology, well over 70% of people who have 401k's have less than $100,000 in the 401k. This fact is proof the 401k doesn't work for the vast majority of workers.
You are insisting against objective reality that the 401k works for average workers.
Where is the proof it works for the vast majority of average workers?
Every statistic I have seen about the 401k shows its not working for the vast majority of average workers and is really only benefitting a very, very small percentage of highly paid workers who would have saved for retirement anyway.
The median income of workers in 2013 is $28,000. The median workers who are earning between $20,000-$35,000 aren't going to save $18,000 or $10,000 or even $5000 in a 401k. And without putting in big money year after year for many years, the 401k is useless as a retirement vehicle and the vast majority of workers can't afford to put in big money year after year.
The whole premise of the 401k is based on having enough income every year that you can meet your basic needs and have excess income to use towards retirement.
Once one looks at the actual pay rates of Average workers and sees that the vast majority make under $75,000 a year for their whole working career, and that they don't get 3% raises every, in fact they get laid off, take pay cuts, don't get raises for many many years, work for employers who don't even have a 401k, the ineffectiveness of the 401k for the vast majority of workers becomes apparent.
In fact, last stat I read was that 11% of workers had 401k's with $250,000 or more in them. This means that the percentage of workers that have $500,000 is minuscule probably under 2% of workers with 401k's
This is another fact that shows the 401k its not working.
This thread is not about 401Ks though. This is about a change to employer provided pension funding.
401Ks have been discussed with the government and the proposal is that the government take ownership and manage it as well as mandate min contributions from paychecks.
Optional of course. And the woman who presented that is a consultant to Hillary now.
I'm waiting to see what Hillary proposes regarding retirement.
This thread is not about 401Ks though. This is about a change to employer provided pension funding.
401Ks have been discussed with the government and the proposal is that the government take ownership and manage it as well as mandate min contributions from paychecks.
Optional of course. And the woman who presented that is a consultant to Hillary now.
I'm waiting to see what Hillary proposes regarding retirement.
Yes, it is about pensions and the rule change. I wrote one sentence about 401k's sucking, and that point was responded to.
The 401k was created by the government.
In terms of any changes the government might make to the 401k, well that's always up for debate. A future government could always end the 401k program period. It's only existed since 1980 I think.
I just know that the 401k as the main retirement vehicle doesn't work for the vast majority of workers and really only benefits a very, very small percentage of mostly highly paid people.
I have both a 401k and a pension. And all I know is that the amount of the pension Ill collect every month for the rest of my life in order to be matched by a 401k would have to be at least $1,000,000.
Whereas the pension money is only contingent on me showing up to work at this company until I retire.
Statistically, the percentage of workers who ever get to $1,000,000 in a 401k is extremely extremely rare.
Again right now, not theory, not fantasy, not ideology, well over 70% of people who have 401k's have less than $100,000 in the 401k. This fact is proof the 401k doesn't work for the vast majority of workers.
You are insisting against objective reality that the 401k works for average workers.
Where is the proof it works for the vast majority of average workers?
Every statistic I have seen about the 401k shows its not working for the vast majority of average workers and is really only benefitting a very, very small percentage of highly paid workers who would have saved for retirement anyway.
The median income of workers in 2013 is $28,000. The median workers who are earning between $20,000-$35,000 aren't going to save $18,000 or $10,000 or even $5000 in a 401k. And without putting in big money year after year for many years, the 401k is useless as a retirement vehicle and the vast majority of workers can't afford to put in big money year after year.
The whole premise of the 401k is based on having enough income every year that you can meet your basic needs and have excess income to use towards retirement.
Once one looks at the actual pay rates of Average workers and sees that the vast majority make under $75,000 a year for their whole working career, and that they don't get 3% raises every, in fact they get laid off, take pay cuts, don't get raises for many many years, work for employers who don't even have a 401k, the ineffectiveness of the 401k for the vast majority of workers becomes apparent.
In fact, last stat I read was that 11% of workers had 401k's with $250,000 or more in them. This means that the percentage of workers that have $500,000 is minuscule probably under 2% of workers with 401k's
This is another fact that shows the 401k its not working.
1) I've already shown how mathematically you can accumulate sufficient 401k monies over a career to provide reasonable retirement income. This is scalable to wage level.
2) Waving your hands about misfortunes like layoffs etc. that pensions are also even MORE vulnerable too is nonsensical. Second time I've explained this to you but you are back again.
3) Complaining about low wages and 401k's? Seriously, WTF do you think pension payouts are based off of? Oh yeah, their wages.
Lastly (and number 3), current workers with 401k's are still a long way from retiring. What you are doing is taking a pool of workers that are probably on average 20+ years from retiring, citing their CURRENT balance and then proclaiming AH HA! That's not enough to retire on. Really? I'm 45 and by my projections my 401k will roughly triple between now and 65 yet you are citing my current balance as being not enough to retire on. You just went "All Baltimore" on math and logic there.
I have to admit that I've made a major mistake here. I thought that if we got on a non-political topic that I could have a rational discussion with you. Instead, I've rapidly determined that you really just don't have the skill set to have this conversation as your grasp of even basic concepts like present value are missing.
Instead of keeping an open mind, you are now just repeating the same debunked points, I mean wow....not getting raises is bad for your 401k but not for a pension?
Anyway, I'm out. If you care to argue further I can put you in touch with my friend who worked 25 years for GM and got laid off by their problems and now works somewhere else. He'll get about 10 cents on the dollar for that DB pension. Fortunately where he is now has both a DC pension and a 401k so he doesn't have to roll the dice that it wouldn't happen to him again.
This thread is not about 401Ks though. This is about a change to employer provided pension funding.
401Ks have been discussed with the government and the proposal is that the government take ownership and manage it as well as mandate min contributions from paychecks.
Optional of course. And the woman who presented that is a consultant to Hillary now.
I'm waiting to see what Hillary proposes regarding retirement.
I can get behind making 401k participation mandatory to some extent but you run into the same problems with Obamacare. There are a lot of people out there that have already completely red-lined their finances. They have credit card debt, student loans, car payments and can't\won't afford even the $100/mo for health insurance or to put 5% of their 30k salary into a 401k.
Trust me, I have a friend in this boat. They're not giving up their bar nights or vacations etc. to instead put the money in their 401k. They'd probably be without health insurance too if it wasn't employer provided to them.
In short, you make it mandatory and you anger voters, mostly young voters. Hillary isn't going to do that unless it has some monsterous phase in (see Obamacare) so that she doesn't have to take political heat over it. (see Obamacare)
If you have a pension then when you retire you have the option of an annuity (your pension check) or a lump sum payout. The lump sum payout is always less then taking the annuity pension. Different companies treat lump sum payouts differently as there is no one set rule on that.
Just like if you take an early retirement..you get a cut in pension.
Now if you do take a lump sum you can roll it over to a brokerage firm (Fidelity, Vanguard, etc) and use it to buy an annuity which is the same as a pension (monthly checks).
Only now you don't care if your company goes bankrupt because your money is not managed by them.
If it is true, defined benefit pension plan you can't do much about it. If you have left the company and they have an offer to give you a cash settlement now (lump fund) as someone else did earlier (percentage payout), take it. A percentage payout is where they give you a percent of the value of the plan of what it would be if you waited until an ordinary retirement date.
My personal thoughts are, not advice to anyone, I would take the percent payout and invest the money with a no load mutual fund with Vanguard or Fidelity or maybe both and diversify using their options. You can almost certainly do better in their funds than you will in a defined benefit program.
Given tens of millions sucked the equity out of their homes during the housing bubble and used it to live substantially beyond their means, while it lasted, how many would have the self control necessary to deprive themselves and go the distance?
People need to get real honest with themselves before taking action.
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