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
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.