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Retirement Blues
Read The Whole Thing(tm)
If you’ve been following along, you can see that pensions are pretty good.You get them in addition to your salary. They’re managed by professionals who can use the sheer size of the funds to minimize trading costs. They generate a certain monthly value, for life. And you can’t get stupid and spend the funds on a mistress and a red convertible when you hit your midlife crisis.
401(k)s,on the other hand, basically suck. They come out of your salary; that is, the contribution reduces your take home pay, which means you will almost certainly underfund it.
...
So why would companies replace a pretty good pension system with a 401(k) system that sucks? One reason is they stopped caring about employee retention. Pensions are great mechanisms for keeping people on board--you’ve gotta stay for a period of years before you’re fully vested in the plan, and the pension grows as your term of service and salary grows. There was a time when it was the goal of management to retain workers, to hold onto their institutional memory, and reward them at retirement. But that time has passed.
In an environment where workers are viewed by management as easily replaced, there’s no reason to consider employee retention as an important criterion, so getting rid of pensions meant a reduction in labor costs--remember, 401Ks come out of your paycheck, not corporate earnings.
But I think the elimination of pensions has more to do with the reduction in Federal tax rates for high income earners. Under a progressive federal income tax with high marginal rates at the top, pensions allowed big suits to reduce their tax burden by moving income to the time after they’d left the executive suite. ERISA requires that companies offer pensions to everyone if they were offered to senior management, so if senior executives wanted to use them to defer taxes, they had to extend them to everyone. The reductions in tax rates for top earners that began with the Reagan administration and continued through the Clinton, Bush and Obama administrations made it no longer worthwhile for CEOs to provide a decent retirement to their loyal, long term employees.
http://digbysblog.blogspot.com/2012/05/retirement-blues-guest-post-by.html
401(k)s,on the other hand, basically suck. They come out of your salary; that is, the contribution reduces your take home pay, which means you will almost certainly underfund it.
...
So why would companies replace a pretty good pension system with a 401(k) system that sucks? One reason is they stopped caring about employee retention. Pensions are great mechanisms for keeping people on board--you’ve gotta stay for a period of years before you’re fully vested in the plan, and the pension grows as your term of service and salary grows. There was a time when it was the goal of management to retain workers, to hold onto their institutional memory, and reward them at retirement. But that time has passed.
In an environment where workers are viewed by management as easily replaced, there’s no reason to consider employee retention as an important criterion, so getting rid of pensions meant a reduction in labor costs--remember, 401Ks come out of your paycheck, not corporate earnings.
But I think the elimination of pensions has more to do with the reduction in Federal tax rates for high income earners. Under a progressive federal income tax with high marginal rates at the top, pensions allowed big suits to reduce their tax burden by moving income to the time after they’d left the executive suite. ERISA requires that companies offer pensions to everyone if they were offered to senior management, so if senior executives wanted to use them to defer taxes, they had to extend them to everyone. The reductions in tax rates for top earners that began with the Reagan administration and continued through the Clinton, Bush and Obama administrations made it no longer worthwhile for CEOs to provide a decent retirement to their loyal, long term employees.
http://digbysblog.blogspot.com/2012/05/retirement-blues-guest-post-by.html
