Pensions are going to cause enormous issues in the coming decades. Almost certainly taxpayers won't stomach paying for them, as happened in Detroit and smaller jurisdictions. Get ready for the implosion!
A 401k is a pension isn't it? Just a defined-contribution pension instead of a defined-benefit pension.
I get a pension at my large young tech company.
My wording is probably off on some of that so an article like this one is probably helpful to flesh out the details:
https://www.fool.com/retirement/2018/06/13/whats-the-differe...
That's specifically a defined benefit pension - just one type of pension. There are many other types of pension. My pension is basically just a big saving account my employer and I both pay into - it's a defined contribution pension.
https://en.wikipedia.org/wiki/Defined_contribution_plan#Unit...
It shifts the burden from employers to employees. As a positive, it means employees are more free to change employers while retaining their retirement / "pension" accounts.
On the other hand, as you suggest, defined benefit was one traditional source of income in retirement that didn't require any action/saving discipline on the employee's part. But that's mostly gone in the private sector now.
Yes that's the way my pension works. It's still a 'pension'!
That's technically correct (for example, you'll see 401(k) accounts referred to as "pension" accounts on their wikipedia page) but people are so used to referring only to defined-benefit accounts as pensions in the United states that they will look at you funny if you call your 401(k) or IRA a "pension." As is virtually happening here.
The problem here is pensions that require future payout over an indeterminate length of time.
Market value is driven by supply and demand. If, for example, you get a sudden glut of people looking to sell their securities - say, because all the baby boomers start dipping into their retirement savings at about the same time - that isn't matched by a sudden glut of people looking to buy those securities, then a lot of retirees are going to suddenly discover that their life savings is basically just evaporating at the very moment when they started to rely on it.
Some Gen Xers and Millennials might remember having seen a small version of this play out a decade or two ago, when everyone tried cashing out of their comic book collection at about the same time.
If the economy is growing at a faster rate than pensioners are increasing their consumption, anything they've "banked" can proportionally hold & increase its value (unless it was very poorly invested).
But if pensioner consumption grows faster than the economy, then there's less stuff to go around. Either pensions are worth less, or a bigger slice of the pie goes to pensioners (e.g. propping up asset prices with cheap money) and young people are screwed over (since they don't have many assets).
The weird politics we're seeing these days is driven by a mix of the latter effects, I believe, amongst other things (like loss aversion in older people with less productive capacity, and cohort effects in communication media choice leading to information bubbles).
Higher productivity, on which all economic growth is ultimately based, requires fewer and fewer people to produce the same amount.
More seriously, it might happen that we get massive automation which means we no longer need humans to create the things that pensioners consume. A "care robot" (see the film "Robot and Frank") would be a game changer here. It's not clear that this is actually going to happen in the next 30 years though.
Politicians bend over to the public employee unions to keep their political support and in turn make very generous pension and health retirement plans that truly are not affordable. Worse, many at the top of the food chain pull down pensions well North of 100k and some hit 250k +. Imagine that, receiving a pension higher than the average salary of a working member of society. However this is what politicians and government employees have engineered behind the scenes. There are two bets being placed here, first being courts will force the states and cities to tax their way back to compliance, the second is a Federal bail out at full $
[0]https://www.forbes.com/sites/adamandrzejewski/2018/10/26/ill...
https://www.nytimes.com/2019/12/24/business/coal-miner-pensi...
???
WV was R+40 in 2016, there's no way it's a swing state .
But the point is that whether or not you get bailed out depends on how much influence you have.
There is no limit to available funds in an economy not on the gold standard. These aren't trillions of dollars in obligations (in the case of these smaller pension plans, not speaking about public pensions such as those in Illinois), and we've burned up a greater sum on air conditioning and lost cash payments in the middle east alone during conflicts. As long as you can get past the "moral hazard" folks and not impact the macro too much (ie inflation), you can get away with a lot when working with funny fiat money.
This is part of what government exists to do, providing security to its citizens. A contract was made, and it should be kept (with pensioners coming first ahead of all other creditors).
Public policy did account for it (ERISA and PPA), and provided for the PBGC to provide a limited backstop, although it's not possible to backstop so many failing pension plans due to erroneous investment return and population growth rate and mortality assumptions.
>A contract was made, and it should be kept (with pensioners coming first ahead of all other creditors).
They are ahead, but there's usually nothing left, and definitely nothing that could satisfy the requirements of a pension. Compounding is a hell of a force, and PPA 2006 didn't come into effect until too late.
And anytime you enter into a transaction with someone, you are subject to counterparty risk, even the government. The US is lucky it has more capacity to print its way out than most countries.
Then public policy did not account for it.
> And anytime you enter into a transaction with someone, you are subject to counterparty risk, even the government. The US is lucky it has more capacity to print its way out than most countries.
Print dollars, transfer from the general fund, or have the Fed start buying up equities and using the cashflow to fund any necessary benefits payments (a somewhat more adventurous twist on the Bank of Japan's role in that country's economy). It's the government's job to be the guarantor of last resort, and they have the tools available to do so.
This is already happening. Defined benefit pension funds and defined contribution pension funds (401k/IRAs) are all invested in the same place: the public stock market and real estate. That's why I think bailouts of public stock market values are basically guaranteed, as long as the US dollar remains relatively desirable.
Individuals may or may not be bailed out, depending on their political power. As I mentioned in another comment, these pension recipients got bailed out because their members are important in elections:
https://www.nytimes.com/2019/12/24/business/coal-miner-pensi...
Keep in mind that half of Americans have no 401k savings. Agree with your point that QE has been beneficial for those who have retirement arrangements that are invested in the asset classes you mention. My concern is that is insufficient to keep a lot of retirees out of poverty and the associated suffering, and a whole lot of political will is going to be required down the road to stomach more drastic measures than the country has traditionally considered.
I mean we've been dealing with this for thousands of years already. A pension is basically just a loan from an employee to an employer. Back when jews had a monopoly on money lending in Europe, every year the townspeople had to decide whether they were going to pay back their loans or just kill all the jews in their town, or at least take their land and send them elsewhere. Most years they just paid back their loans as agreed, but then every few decades when the debt service got too high things tended to go sideways.
The basic issue is that even after thousands of years, we still haven't really figured out what's equitable in terms of how debt should work.
“ The result of those occupational restrictions was to push Jews into marginal roles, considered socially inferior, such as tax and rent collecting and moneylending, which were tolerated as a "necessary evil".”
https://en.m.wikipedia.org/wiki/Economic_antisemitism
But yeah our current system of debt - especially student debt - is messed up.