- posted 10 years ago
First of all, I want to thank Alexy, for his amazing contributions on helping us understand pensions a little better.
Pensions are very complicated to account for and comprehend. They are not simply retirement accounts setup like an IRA or a 401K, in which the investor/employee allocates a portion of his/her money to invest in a broad array of investment classes, such as stocks (foreign and/or domestic), bonds (high-yield, government, international, corporate, etc.), and cash. Over the course of several decades of employment and contributions, the investor/employee retires, and he/she lives on the investments and capital gains. THIS IS SO SIMPLE TO UNDERSTAND, and there is nothing abstract about this concept at all. Moreover, this scheme cannot ever be bankrupt, since no liability is incurred. , On the other hand, pensions are different: Today's wage-earners pay for today's retirees. Therefore, demographic pressures such as aging of a population, which is occurring in Western countries, can put great strains on pension schemes such as Social Security since fewer employees' contributions are funding their pensions. Moreover, this setup has the ability to become insolvent.
From what I understand, one benefit of pensions as opposed to a retirement savings system is that: " a government-run 401(k) would have [meant that employees approaching retirement in the near future would see] next to no benefits. So US Government created a social insurance program that provides a rolling income shift between generations of workers."
I believe, based on this assertion, that pensions seem to allow a generational income shift. What problem does this solve? From my vantage point, this creates so much disadvantages and complexities in the system.
I took a finance course regarding pension and health benefits of American employees at some of the most recognizable names in industry. Because their pension obligations were so high, that this actually created a huge liability which made the company have a NEGATIVE book value. However, if the company simply implemented a 401K idea like I proposed, that problem wouldn't have happened.