Lawmakers and governors in many states, faced with huge shortfalls in employee pension funds, are turning to a strategy that a lot of private companies adopted years ago: moving workers away from guaranteed pension plans and toward 401(k)-type retirement savings plans.
The efforts come as the governors of Wisconsin and Ohio, citing dire budget problems, are engaged in bitter showdowns with public-employee unions over wages, pensions and collective bargaining rights.
The new plans allow states to set a firm, upfront limit on the amount they will contribute and leave it up to the employee and the financial markets to make the money grow. In a traditional pension system, the employer promises a certain benefit, then must find a way to pay for it.
“… leave it up to … the financial markets to make the money grow.”
Of course, we all know–or at least should know by now–that the financial markets are just as able to make the money vanish.
One needs to look very carefully at these 401(k) type plans. Some may be O.K., but some will be thinly disguised larceny. We should not be surprised to learn that behind these moves to “privatize” government pensions (including Social Security) the people pulling the strings are fund managers and insurance executives who will siphon off must of the “investment” into their private luxuries and retirement. They also can be a way for corporations to pump up their stock prices–think Enron.
Number 1:
[blockquote]Of course, we all know—or at least should know by now—that the financial markets are just as able to make the money vanish.[/blockquote]
Like how the US government makes Social Security disappear by writing IOUs?
Instead of condemning the idea, I’d rather see you follow your good thought on how some plans are okay by suggesting that government ensure that 401(k)s for government workers are transparent and with reputable firms. Because the governments, state and federal, have certainly proven themselves to be no better than the likes of Enron.
Vatican–I was thinking the same thing. We know what we have now doesn’t work. Congress makes Enron look like a bunch of lightweights. I’d love to hear some ideas on how to fix it that don’t involve doing the same thing. Doing the same thing in the same way and expecting a different result is the definition of insanity–unless, of course, you are talking about Microsoft.
Social Security is in fine shape. I’ll probably have it, unless we choose to spend it.
We could always raise the cap, which would certainly make it solvent.
Our 401(k) has weathered the financial crisis in pretty good shape. We were diversified both as to industries and as to risk. It was down, naturally, but many of the funds continued to pay dividends, and it’s back to quite a comfortable level at this point. Same for our after-tax savings which we have put aside in addition to the 401(k). I do know someone who had the bulk of his savings in Bank of America stock, and of course he lost it, but that wasn’t a terribly wise investment plan. Compared to what we put into Social Security vs. the 401(k) and the other savings, the savings are a much better deal than the Social Security measured by expected return (even in these days) and also because we own them and will be able to pass them on to our children if we don’t spend it all.
Well, These are just some of my observations over the years:
Some 401Ks have managers that siphon off annual fees greater than 1%, which should be the high end of reasonable and customary. Some 401Ks have a very limited selection of funds available to invest in, leaving it almost impossible for the employee to put together a portfolio that meets their retirement goals and their tolerance for risk. Some have very small limit on the number of movements from one fund to another and a very small window in which to effect those changes. The real crime in Enron’s 401K was channeling so much into Enron stock and then prohibiting the sale of that stock when execs were dumping their shares right and left. A financial adviser once told me (Oct 87) it was never a good idea to put too much into company stock, because if things went sour, you lost both your job and your retirement funds. I heeded his warning and started reducing the number of shares I had in the company I worked for.
#4 John–SS is NOT in good shape; it is broke, The entire “trust fund” has been borrowed by Congress. The entire thing is on paper. If Congress was a business the Speaker and Majority leader would be arrested for running a Ponzi scheme. The answer to our financial woes is not raising taxes. It is getting Medicare, Medicaid and SS under control. As I said earlier–we can’t keep paying for failed programs and expect everything will be OK.
If one does away with company/government pensions and also Social Security as some on the radical right propose, then one is stuck with a highly volatile income from stocks, bonds, money market, CDs and the like for one’s retirement income. If one is young and working, one can perhaps tolerate a few down markets correcting the up markets in the hope that when the time comes to retire the markets will be in an up cycle. That works, I suppose, if your life is short. The markets were up and down in major ways twice in a decade. That does have a serious impact on those who are already retired and depending on savings to pay the rent, put food on the table, and other necessities.
Social Security is, as a matter of fact, in good shape until 2036. It has a $2.6 trillion trust fund to cover those times when expenses exceed revenues. Yes, we the people have borrowed against those trust funds to pay for wars, tax cuts for the wealthy, subsidies for oil companies and farmers, bailouts of wall street gambling and the like. We are in a period due to several factors including unemployment, underemployment, longer lives and boomers retiring, when revenues do not cover expenses. That means that the nation can no longer borrow from Social Security surpluses to cover wars, tax cuts for the wealthy, subsidies for oil companies and farmers. It also means that some of those IOUs to the trust fund have come due. Here is a five point plan to “fix” Social Security. It will also help fix Medicare (which has a $317 billion dollar trust fund good until 2017) and the general fund deficit. [url=http://eutychus.us/wordpress/?p=121]Fixing Social Security[/url].
#8–Sorry. There is no trust fund in either SS or Medicare. Congress has been borrowing and not repaying it since the 1960’s.
So now it is time for Congress to start repaying the loans.
I think congress would have to pass a bill (much like 403b is the non-profit 401k), but this would be a good idea in this way:
Both 401k and pension took hits the crash of 2008, the difference is individuals saw the decrease where pension fund managers did with a fixed pension. Pensions are promises, often based on prosperity (when the economy is doing well, tax revenue is up, because income and corporate taxes are based on profit) but currently those “promises” have to modified, which is distressing for those trying to plan. However if in a 401k type of situation the employee can decide the desired risk (could have completely avoided the ’08 crash if very risk adverse) the states can contribute much in times of plenty and much less in times of little.
The one huge difference is that the states loose their power of the ten year employee. With a 401k type of system, employees can move back and forth with the private sector, taking their retirement money (contribution & matching or maybe something like the profit sharing IRA in private industry where it’s independent of contribution, there it’d be percentage of time vested). However the employee would take the retirement program with them, such as private & non-profit industry with roll-overs or ability to remain above a certain amount. States would get the freedom to expand and contract contribution with tax revenue without these political circuses and the employee is involved in decision making, so less ethical issues of “should a state really be invested in …” if decision making process [guessing by numbers enrolled, they could get some pretty healthy array of choices in plans].
It is a very different way of thinking, to go from set pension plans to tax efficient earnings, however I think private industry has done much better (with non-profits following with the 403b) in terms feast/famine cycles, especially since government does not have the benefit of a “retained earnings” category that private & non-profits have to smooth some of the high/low cycles.
Number 10:
You claim SS and Medicare have these huge trust funds, you claim SS is funded until 2036, but then you agree that Congress has robbed the trust funds and it’s time for Congress to repay the trust funds. If Congress has taken the money from the trust funds, it’s gone, okay?
You can talk all day about how it’s time for Congress to repay the trust funds, but with a trillion dollar yearly deficit and Congress haggling over two-week continuing resolutions, the idea that SS and Medicare is going to come out of this as they exist now is not a realistic thought.
The odds are better that the US government will default first.
Yes, pension fund managers saw the hit in 2001 and 2008. So did the insurance companies (think AIG) and the government that serve as backup to defined benefit plans and annuities. I will admit that I did not see the hit is some of my retirement instruments/plans and probably would not unless they went bankrupt and the insurers took over.
However, there are any number of problems with “privatized” plans. In every case, substantial parts of the individual’s contribution are diverted to sundry management expenses, including fund managers salaries, bonuses and benefits. And while the fund managers of public pension funds usually do get substantial salaries, bonuses and benefits they are a fraction of those managers on the Street.
Furthermore, the individual participant’s choices are typically limited by the employer–sometimes extremely so. Again, think Enron’s “plan” for its employees. In some cases the employer may provide a good mix of options that really are in the interests of the employees; in other cases, not. I know one of the difficulties I always had with my employer’s 401(k) is that every two years, they would switch management agents and with the switch present us with an entirely new set of options–the old options disappeared and the money rolled over into something else. We would be stuck trying to figure out what our choices really should be–not an easy or simple task.
Therein lies another problem. The “average employee” probably doesn’t really have the “smarts” to know what he is doing when investing. In fact, it is pretty obvious. We know, for example, that when stocks take a dive, billions are pulled from stocks and stock funds and put into “safe” alternatives; and when stocks are bullish, billions are pulled from those “safe” alternatives and put into stocks and stock funds. We should know that this is the guaranteed method to lose big time fast. The moderately smart investor sets his plan, buys at a fixed periodic rate and amount regardless of what the market is doing and holds. The somewhat smarter investor may add to that base a plan to buy on the downside and hold. But that is not how a great many people react.
Probably fund managers are far overrated. The good ones diversify. A major pension fund can easily do that without being killed by brokerage fees. They don’t churn. They follow the basic plan regardless of what the markets are doing at any particular moment. Their results are not necessarily spectacular, but on the long haul they do reasonably well. It is interesting that research has shown that over the long haul monkeys throwing darts at the stock pages do better than the superstar fund managers.
Yes, it is time for the Congress to being paying back what it borrowed.
That will doubtless require cutting spending AND increasing general revenue. There are several ways general revenue can be increased, including 1) decreasing unemployment, 2) increasing economic activity, 3) increasing the GDP, 4) eliminating tax credits, deductions and loopholes and 4) increasing tax rates, particularly in the higher brackets. These will not only reduce the general revenue budget deficits, but also the Social Security and Medicare deficits. #1-#3 will require targeted increases in spending, btw–just as a business wishing to improve its revenue may actually borrow money to invest in research, development, capital investment and human capital investment. (A business does not increase its revenue by cutting expenses.)
Yes, it is absurd that Congress is apparently going to pass a two week continuing resolution. The budget and appropriations for the current fiscal year should have been passed six months ago. The continuing resolutions are evading the issue entirely. In seven months the whole matter of the current fiscal year budget/appropriations will be moot. In the mean time Congress will be dillydallying around NOT adopting budget, revenue and appropriations for the NEXT fiscal year that beings in seven months.
And yes, it is the fault of both political parties. It is, ultimately, the fault of the American people who elect. Both parties have run up the debt. But I would note that the Republican House a few days ago, when they were slashing spending curiously rejected scores of cuts proposed by Democrats. Cut farm subsidies? NO WAY, says the GOP. Cut P.I.L.T. grants? NO WAY, says the GOP, cut troop levels in Europe? NO WAY, says the GOP. If you are going to cut general spending, you must cut those sorts of things along with PBS. Just because they are dear to the hearts of GOP constituencies, is no excuse.
And eventually, the GOP must give up the tax deals for the wealthy 2% and the big corporations. We cannot afford to subsidize them anymore than we are unable to subsidize the poor, the children, the aged, veteran and the disabled.
I suppose it is Vatican Watcher’s wish that the Congress simply file for bankruptcy and default on its obligations. That would be, of course, the most horrendous “non-tax” tax one could imagine.
Septuagenarian:
Sure, pension funds you don’t have to think where any employee controlled retirement, the employee ought to spend a little time learning a small something about financial system. However your negatives pointed out are not anything new that most private sector and many non-profit employee so not already fact. I refuse to believe public employees are less intelligent than others, I’m sure they too can manage (sure some may be greedy on returns and suddenly suffer loss at market changes, others might do a spread or others bonds only).
Contributions should be the same as other sectors by the employee and the employer can make additional (in the private sector 401k its up to 3% income dollar for dollar match and whatever the employer wants on a profit share, I’m less familiar with 403b but I’m sure there a similar system as an inherited account this year saw a employer contribution [guessing like private industry profit sharing contribution]).
Both systems have overhead costs. I’m not sure what your point would be. The Employer sees most on both systems and any funds costs are pretty invisible (the overhead cost you referenced is still there, but because pension is a promise, in theory fix, the employee does not care about the overhead, with 401k & 403b the employee generally does not care about overhead as well, but can see them if desired).
It is a huge sea change of thinking. that is for sure. However, #13 is not addressing the issue that pensions are being cut at state and local levels (in cases in the news, several unions already agreed to the cuts). So retirement “promises” are based on if it’s a good year, which seems as unstable as 401k problems to me. The employee controlled path allows for revenue fluctuation, but the employee has whatever contributions made in more prosperous times. I think in times of budget surpluses, most the electorate would be tolerate of a one-time extra contribution to employee retirements – reason one-time is so it’s passed each year based on that year’s budget. When there are budget surpluses, it means the economy is doing well and there profits to be taxed, generally state & county budgets are of less concern when during the “good times.” What employee controlled verse pension allow for is a contraction when the electorate is very concern about state and local budgets.
So one of the benefits to doing away with the pension concept is removal of state employee retirement from political football. There would be a sense of Social equality (meaning all share in the pain of tough economic cycles) which is what seems to be permitting the current items in the news (not GOP platform, the the swing-vote which is needed for any party to take a strong stance – I think those are two separate items). Thus I can see states interested in following private/non-profits, not in a union busting sense but because it does take this issue off the table, if unions accept, it’ll be much for the same reason.
Putting the risk of pensions onto individual 401(k) plans is a recipe for disaster. Most individuals are not suited to long term money management, by either temperament or skill (even professionals have a hard time). It is much more costly to have all these individuals hit with fees than to have centralized professional management (of course those fees are what has Wall Street salivating). And in a future with poorer and poorer jobs available and likely more interruptions in employment, it will be difficult for individuals to maintain their allocations to their 401(k) plans and to avoid the need to raid them when personal disaster strikes. [Advertising spam deleted by Elf] But it is consistent with the determination of this country to needlessly self-destruct. We seem to be driven by some inexplicable collective dynamic to do so.
KAR, I would make several points. First, for both 401(k) and 403(b) the employer, not the employee, determines what choices are available in the plan. For both kinds of plans there are two kinds of administrative costs: 1) the cost of the PLAN administrator and 2) the cost of the particular plans the company and PLAN offer. For the 401(k) plan the employer may offer limited options (e.g., company stock–think Enron) which may or may not be good for the employee but are good for the employer. A “good” 401(k) plan may offer a range of options from which employees may choose. Some may be low cost indexed mutual funds, others may be high cost managed mutual funds, some may be annuity type funds and a low return, no growth money market fund may be in the mix. The 403(b) plans are typically annuities which invariably have extremely high loads and costs–and the employee has no other options other than investments outside of the 403(b) plan offered by the employer.
Second, many people–even well educated ones–do not have the knowledge and skills necessary to make good choices from the limited options offered to them. Yes, one can argue that people can be educated. But, I’m sorry, that isn’t really realistic. Even professionals with Ph.D.s in finance make grave, fatal mistakes. Certainly we witnessed that in the crash of 2008. How is the high school graduate working two shifts at minimum wage going to have the time to acquire the knowledge and skills to even have a modest level of skills and knowledge to have success where even the professionals fail?
Quite frankly these schemes to “privatize” public programs all are conceived to accomplish two goals: 1) to destroy the public programs and 2) enrich private corporations and their executives and managers who will siphon of billions for themselves. There is absolutely no way that corporations that pay extravagant compensation to their top employers; millions on lobbyists, PACs and lawyers to evade taxes and regulation; millions on marketing, advertising and sales commission can operate with less overhead that government agencies that pay their administrators and workers far less and do not have most of these expenses.
Jason, I quite agree. Follow the money and see who is pushing these schemes and financing the organizations and media that propagandize for them.