The Champions of the 401k lament the revolution they started
January 3, 2017 11:53 AM Subscribe

The Champions of the 401k Lament the Revolution They Started “Every great cause begins as a movement, becomes a business, and eventually degenerates into a racket.” --Eric Hoffer. | "The most radical revolutionary will become a conservative the day after the revolution." --Hannah Arendt | "Could you have ruined yourself somehow?" --Hannah and Her Sisters

What Mr. Whitehouse and other proponents didn’t anticipate was that the tax-deferred savings tool would largely replace pensions as big employers looked for ways to cut expenses. Just 13% of all private-sector workers have a traditional pension, compared with 38% in 1979.

“We weren’t social visionaries,” Mr. Whitehouse says.

Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence as the dominant way most Americans save. Some say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days.

Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers while making it easier for companies to shed guaranteed retiree payouts.

“The great lie is that the 401(k) was capable of replacing the old system of pensions,” says former American Society of Pension Actuaries head Gerald Facciani, who helped turn back a 1986 Reagan administration push to kill the 401(k). “It was oversold.”

...

See also: Pensions and Risk Aversion: the Influence of Race, Ethnicity and Class on Investor Behavior

And: Gladwell, Malcolm. The Risk Pool

posted by mecran01 (103 comments total) 46 users marked this as a favorite

I am honestly shocked that the number is as high as 13%. I don't think I know anybody who has a pension benefit of any type.
posted by radicalawyer at 12:00 PM on January 3, 2017 [20 favorites]

Some early 401(k) supporters are learning about its shortcomings firsthand. Mr. Whitehouse, the former Johnson & Johnson human-resources executive, says his 401(k) took a hit after 2008. He could retire if he had to, but if he wants to maintain his standard of living for several more decades, he must continue to work, he says.

The 65-year-old currently lives in Orlando and is in-house counsel for ABC Fine Wine & Spirits, a Florida chain with about 140 stores. He plans to work into his mid-70s.

It would be appealing, he says, to have an old-fashioned pension. “A pension is pretty valuable,” he says.

The poor fella. Having to choose between working into your 70s or selling the vacation home and some of the art prints.

I understand why these folks don't want to own their failure, and honestly, it doesn't matter if they knew the risks or were used by Reagan and other politicians to accomplish the objective of enriching the finance industry and chipping away at support for Social Security. What matters is the outcome, and history should not judge these people kindly for their failure.
posted by tonycpsu at 12:03 PM on January 3, 2017 [15 favorites]

radicalawyer: "I am honestly shocked that the number is as high as 13%. I don't think I know anybody who has a pension benefit of any type."

I do have a pension to go along with my 403(b) plan. It's pretty tiny though, right now it's got like $6500 after three years vs. the $70,000 I've put into the 403(b) in that same time.
posted by octothorpe at 12:06 PM on January 3, 2017 [3 favorites]

The reason why I never liked 401(k)'s is that they co-opt a section of the american population into supporting things that really only work for the super rich.

If your 401(k) has stock in a bunch of huge corporations you might be tempted to support tax policy/regulation that helps them "grow" even if that means the tax burden and environmental fall out negatively affects you.

The stock market is a casino, and that casino defines "winning" as "growing", you must grow and make more profit every year...forever. Eventually companies run out of ethical ways to grow.

Infinite growth on a finite planet is impossible. So what exactly is the point of putting a bunch of money into a 401(k) that supports companies that have to voraciously grow, swallowing up and destroying the very earth you depend on for life?

I mean what sort of world do you plan to retire into?
posted by stilgar at 12:10 PM on January 3, 2017 [107 favorites]

I have a pension, but it's not a defined benefit pension, it's a defined contribution one. Basically, my employer puts the equivalent of 10% of my salary in a pension fund that I manage like a 401k. I can (and do) also put my own money in a 401k (without employer matching, natch).

It's not nearly as good as a true pension like some public sector and union jobs still manage to get, but it is nice, especially when I just started working here at a lower salary and couldn't afford to put much into a 401k. But, I'm subject to the same highs and lows of the stock market and management fees. That I am doing better than a lot of my peers w/r/t retirement savings is largely thanks to that pension fund plus my 401K.
posted by misskaz at 12:10 PM on January 3, 2017 [2 favorites]

I moved all of my retirement investments into things that would go up under Trump back in June. I've made a good profit thus far; but I have no idea where to move them in 6 months or so before the massive slump appears by about next August.
posted by NiteMayr at 12:11 PM on January 3, 2017 [4 favorites]

Next step after the 401k... the 404.
posted by oneswellfoop at 12:14 PM on January 3, 2017 [9 favorites]

Looking forward to stage II, 'privatization' of social security, later this year! Isn't it great? The freedom!
posted by Dashy at 12:15 PM on January 3, 2017 [10 favorites]

I think there's a lot of nostalgia for pensions as they're not perfect either. Private pensions tend to evaporate by getting raided or becoming insolvent which makes them just as unstable in the end as private savings with the added issue that there's often not any transparency into their affairs. Public pensions are a gravy train but that seems unsustainable - sooner or later those are going to stop being offered to new government employees. I think the only positive thing you can say about gold-plated public service pensions is that they seem like the only reason people join the police or firefighting professions, at least in California.

But the article is right on - equity markets are volatile, current returns on low-risk bonds are at historical lows which is great for the handful of people who can afford to buy homes but not great for people saving for retirement. 401ks at least give people a tax shelter for retirement. They could raise the contribution limits which would help some people, but not low-income people. And stupid stuff like backdoor Roth IRA contributions are just a byzantine mess. Some people get more because they're able to figure out the complexity of all this nonsense.

In the end TANSTAAFL seems to be the final word on the matter - you need to have all your compensation paid directly to you, not held back by an employer in a pension, you need to get paid more and then you need to save a significant chunk of your earnings starting in your 20s and keeping on until the last day you work.
posted by GuyZero at 12:15 PM on January 3, 2017 [6 favorites]

So in order to receive this "pension" thingie, you would have to be... what? Employed? At the same place, for some extended period? Sounds like an idea that has not kept up with the times.
posted by Sing Or Swim at 12:16 PM on January 3, 2017 [38 favorites]

Infinite growth on a finite planet is impossible. So what exactly is the point of putting a bunch of money into a 401(k) that supports companies that have to voraciously grow, swallowing up and destroying the very earth you depend on for life?

Pension funds go into exactly the same places that 401k investments go. There's no escape.
posted by GuyZero at 12:17 PM on January 3, 2017 [12 favorites]

I am honestly shocked that the number is as high as 13%. I don't think I know anybody who has a pension benefit of any type.

It's not uncommon for public sector employees to still draw pensions.
posted by tobascodagama at 12:18 PM on January 3, 2017 [4 favorites]

Public pensions are a gravy train

I've been paying about 8% into mine for more than 15 years. The idea that it's a "gravy train" is going to abet those politicians who want to steal that money.
posted by thelonius at 12:22 PM on January 3, 2017 [92 favorites]

Public pensions are not a gravy train. They're old fashioned and reliable, and if you have an honest board which is clear with everyone about the actual costs, they are very stable. The only thing is that you have to make sure that pension contributions keep the fund paid up. What happens, as far as I can tell from looking at the different funds in MN, is that when wages stagnate, public pensions get underfunded because this helps conceal wage stagnation - to keep fully funded, percentage contribution would need to rise when wages are stagnant, and no one likes that.

At the moment, my pension fund (as long as the pension board, now headed by Republicans, doesn't destroy the system out of hatred for working people) is fairly well funded, because the pension managers were honest with everyone and said that we all needed to pay a slightly larger percentage in. I would infinitely rather up my contribution now than have the pension get fucked up - and so would most people, but our conservative lords and masters hate systems that take care of the old.

Lest anyone get confused: I have a union job. Our contract specifies that we contribute X percentage of our wages and our employer matches that percentage. This is not a gravy train. It is a condition of work, negotiated by the union. It's no more a "gravy train" than getting paid anything over minimum wage and getting health care is a gravy train.
posted by Frowner at 12:22 PM on January 3, 2017 [122 favorites]

I am honestly shocked that the number is as high as 13%. I don't think I know anybody who has a pension benefit of any type.

Also those 13% think they have pensions.

The knives are sharpening for attacks on already earned pensions.

Rahm Emanuel was just caught in dumped emails gloating about yanking earned healthcare subsidies from about 10,000 pensioners (who are ineligible for medicare). And that is the Republican's favorite Democratic Party punching bag mayor!
posted by srboisvert at 12:24 PM on January 3, 2017 [10 favorites]

Once we all got pressed into service as our own investment planners, I was hoping to see most of the Lords Of Finance class turned out into the streets as beggars.

Regrettably, they dumped their scut work on us, externalized all the risk (by becoming only middlemen and saving their real advice for *spit* High Net Worth Individuals), and started charging a whole other set of fees. I detest the parasitic finance companies, and was quite sad when the university where I worked shut down the pension program in favor of a 403(b) and then a 401(k).

(Even worse: closing down the 403(b) plan wasn't a "qualifying event" so we can't all over our money into the 401(k) -- which luckily for Fidelity means they can keep charging me mostly fees until I am older, or dead. Thanks, Fidelity!)
posted by wenestvedt at 12:25 PM on January 3, 2017 [7 favorites]

It's not uncommon for public sector employees to still draw pensions.

While they are in the private-sector?

TFA:

Just 13% of all private-sector workers have a traditional pension, compared with 38% in 1979.

What's interesting to me is that one of the the 401k architects was at J&J. When I was working at a company that was in the process of getting purchased by J&J, one of the things I didn't like was that they had a pension instead of a 401(k) -- I didn't like the idea of not having control over my retirement savings.

I also think that there is something super hinky about people complaining about 2008 market losses. Both the Dow and the S&P are up pretty close to 100% since 2008, and even more so since the nadirs of 2009. I know that some people in that time period got screwed by mandatory withdrawals, but unless you were already at retirement age right then, your portfolio should be just fine now unless you purposefully chose to lock in your losses by panic selling.
posted by sparklemotion at 12:27 PM on January 3, 2017 [5 favorites]

So, to be certain I understand contemporary conservative thought, this is a three-step approach:

1. Sell private industry on 401(k)s replacing pensions as a cost-saving measure to companies
2. Mercilessly assault few remaining pension-providing holdouts (specifically public-sector-union-backed governmental employees) as bloated bureaucracies whose entitlement costs are bankrupting the government
3. Whoops, we were wrong, 401(k)s actually suck for employer and employee alike, let's kill their tax breaks

Unless step 4 is "publicly lobby to bring back pensions," then this is an elaborate shell game intended to make the pensioners of 2050 eat cat food straight out of the can. And if you think we're ever going to un-ring that bell, I have a ~~bridge~~ pension to sell you.
posted by Mayor West at 12:28 PM on January 3, 2017 [10 favorites]

> Is this really necessary? If you want to judge someone for his role in stripping the social safety net, that's one thing. But snarking over this guy's lifestyle choices doesn't seem all that much better than comments about welfare queens.

Unlike the apocryphal "welfare queens", this gentleman used his influence to push policy that had enormous risks to the rest of us. The fact that he himself is well-off is not irrelevant to the critique of the sudden not-well-off-enoughedness that has gotten him to reconsider.

> unless you purposefully chose to lock in your losses by panic selling.

"Panic selling", also known as "human beings making very difficult decisions about investment choices they don't understand because they've been forced to participate in a bullshit system." The duration of the Great Recession means that a whole lot of people did in fact have to make mandatory withdrawals, and even among those who had other options, it is not helpful to say they were "panic selling" because the retirement system has to be built for the citizens we have, not the brave, prudent investor type you seem to want them to be.
posted by tonycpsu at 12:30 PM on January 3, 2017 [33 favorites]

Pension funds go into exactly the same places that 401k investments go.

Well, not quite. Most larger pension funds have significant investments in the "alternate classes," including most notably hedge funds (inaccessible to most people) and private equity (inaccessible to practically every single human being in her individual capacity). This raises a whole huge set of other issues, mind you--ludicrous fees, questionable bookkeeping, the unedifying spectacle of pension funds backing ownership out to break unions and, uh, end pensions, and that's before you get to actual corruption--but in theory pension funds are not all in the stock market, nor should they be.
posted by praemunire at 12:35 PM on January 3, 2017 [11 favorites]

Our contract specifies that we contribute X percentage of our wages and our employer matches that percentage. This is not a gravy train.

So not all pensions are structured the same - I'm thinking specifically of San Jose's pensions issue where pensions are seemingly paid out of the current operating budget and now consume a lot of the city's budget - I actually looked for info and it's oddly hard to come by specifics. The firefighter's info page says there are the expected employee and employer contributions but the news reporting makes out like there's no savings fund at all. Regardless, these types of pensions where people are getting $100K+ in perpetuity, often starting before 60, are a pretty good deal and way beyond anything you'd see in the private sector.
posted by GuyZero at 12:37 PM on January 3, 2017

> unless you purposefully chose
> to lock in your losses by panic selling.

The duration of the Great Recession means that a whole lot of people did in fact have to make mandatory withdrawals,

The poor, why don't they just eat cake?
posted by Dashy at 12:39 PM on January 3, 2017 [6 favorites]

I'm guessing the private sector pensions are in old-line unionized jobs like steel, auto, and dockworkers, and only for the most senior members.

I don't think that we'd all have defined benefit plans if the 401(k) hadn't been invented.

Pension funds have gigantic exposures to the stock (and bond) markets. Here's the allocation data for Calpers - 50% in public stocks and another 20% in bonds. I think the relevant difference between a pension and a 401k is not where the money is invested but who bears the risk of not having enough money at retirement (the public or the individual).
posted by Mid at 12:42 PM on January 3, 2017 [2 favorites]

While they are in the private-sector?

Back when unions had power, pensions were the norm rather than the exception in a lot of the private sector.

I also think that there is something super hinky about people complaining about 2008 market losses. Both the Dow and the S&P are up pretty close to 100% since 2008, and even more so since the nadirs of 2009. I know that some people in that time period got screwed by mandatory withdrawals, but unless you were already at retirement age right then, your portfolio should be just fine now unless you purposefully chose to lock in your losses by panic selling.

You mean all those pesky things to panic about, like "food" and "rent" and "living expenses" that the Great Recession brought about to millions of people? What a bunch of Chicken Littles!
posted by zombieflanders at 12:52 PM on January 3, 2017 [7 favorites]

That WaPo article about San Jose is full of mendacity.

The new effort has brought strong opposition from union officials, who say pension benefits for government workers should be decided not at the ballot box but at the bargaining table. They note that hundreds of municipalities have won concessions in recent contract negotiations. Meanwhile, public pension benefits statewide average just $2,600 a month — a reasonable sum, union officials say, given that many retirees are not eligible for Social Security.

So what happened here was that, trustingly, all these government workers paid what would have gone to social security to their state-level employers. Their state-level employers did something with that money such that it is not now available. A $2600/month pension in California isn't that huge, frankly, especially when you consider that it's based on people being told that they didn't need to pay into social security because the pension would be there for them.

This whole mess is CA's fault - probably because they took the pension money and plopped it in the general fund when times were better. And now workers are being blamed.

Pension funds should be sequestered and spent on pensions. When officials raid them, yes, things will turn to shit. But somewhere, someone apparently decided that the city could just pay all the pensions on a rolling basis and therefore they didn't need to actually have, you know, a fund. Probably what used to happen was that employees paid in more than was taken out, in good times when it seemed like there'd be lots of city employees and lots of taxes. So the extra money could just get spent on stuff. Now there's no extra money and no forward planning, and the city wants to screw the workers, who were told that they didn't even need to pay into social security.
posted by Frowner at 12:53 PM on January 3, 2017 [39 favorites]

srboisvert do you have a citation re: that awful mayor? Would like to know more.
posted by Bella Donna at 12:54 PM on January 3, 2017

The fact that he himself is well-off is not irrelevant to the critique of the sudden not-well-off-enoughedness that has gotten him to reconsider.

Well, it does seem contrary to the point that I think you are trying to make, which is that people shouldn't have to know how to manage their own savings. This guy acknowledges that he fucked up, but the cost of his fuck up was that he might have to give up a few luxuries, which is not all that bad, you know. (actually, now that I've played the incognito google search paywall surmounting game and actually read TFA, it seems like the "vacation home and art prints" thing was a kind of gross assumption to make about someone who needs to keep working to maintain his standard of living, but whatevs).

As someone who supports a combination of livable-wage social security PLUS optional tax advantaged private savings for retirement*, I feel like the take away from these articles should be less that "401k's are a bad deal", and more that "given that the US doesn't have the political will to properly fund social security, people who want to maintain their current standards of living when they stop working should be saving more of the money that they actually get, but they aren't." I certainly don't blame any particular person for making that choice, but I think its important that acknowledge that the 3% rule of thumb is unworkable.

Pensions seem like the worst possible answer in the reality that we live in because of the corruption/mismanagement issues that go along with them. At least I can choose to buy zero risk (basically cash) securities with my 401k.

Re: great recession losses/mandatory withdrawals, etc... I thought I had properly couched that comment in the context of the vacation home and art print set (which was what was being discussed), i.e. people who didn't need to be pulling money out of their retirement savings to get by. Obviously, 2008-2009 was a horrorshow for people who needed liquid money to live off of right then.

*to clarify this: I don't think that anyone should have to eat cat food after they stop working. The government should use its revenues (tax dollars) in part to ensure that retirees can live comfortably above the poverty level. I also think that people who have the ability to** and make the choice to live below their means during their working life should be able to reap some benefits of doing so in the future
**I think that everyone should have the ability to make the choice to live below their means. I know that this is not universally true in the US now.
posted by sparklemotion at 12:55 PM on January 3, 2017 [1 favorite]

Pensions don't need to be piggy-banks that can be raided by employers. My mother was a teacher and her pension is managed by the Ontario Teacher's Pension Plan. No one can raid that money for other purposes, so it is safe, and it is also quite well run. I am almost certain that if the teachers had to individually invest their retirement funds their returns would on the whole be much lower and the fees paid would be much higher.
posted by any portmanteau in a storm at 1:06 PM on January 3, 2017 [16 favorites]

So what happened here was that, trustingly, all these government workers paid what would have gone to social security to their state-level employers. Their state-level employers did something with that money such that it is not now available. A $2600/month pension in California isn't that huge, frankly, especially when you consider that it's based on people being told that they didn't need to pay into social security because the pension would be there for them.

It's worse than that. It's not even that people believed their employers and so chose to pay them that money instead of paying into Social Security – deductions like this get automatically withheld from one's paycheck by the employer; there's no choice involved. And there's no way to voluntarily pay into Social Security. From the IRS:

Your employer should be able to tell you if social security and Medicare taxes apply to your wages. You cannot make voluntary social security payments if no taxes are due.

The blame belongs entirely on the employers and pension plan administrators, not on the employees who accepted the benefit package being offered to them.
posted by Lexica at 1:08 PM on January 3, 2017 [17 favorites]

This whole mess is CA's fault - probably because they took the pension money and plopped it in the general fund when times were better. And now workers are being blamed.

So don't get me wrong - I agree completely that whatever pension fund San Jose is using, whether it's CalPERS or something else, is being run badly. Like, terribly badly. And it's not the union's fault for negotiating a good deal for its members. My main comment is simply that it seems unsustainable - the government has agreed to a pension scheme that it simply can't support and ultimately something will give and it's unlikely to be increased taxes to pay the pensions.

The fundamental issue with pensions is that for whatever benefits of scale they have in terms of managing investments, they're ultimately out of the control of the workers and have been known to give people unpleasant surprises the same way major market drops do for 401k holders.

My mother was a teacher and her pension is managed by the Ontario Teacher's Pension Plan.M

In addition to being one of the best-run pensions around they buy a lot of commercial real estate in Ontario which gives them a significant amount of political clout, combined with the voting base of current and former Ontario teachers. Unfortunately not every pension fund can build itself such fortifications from meddling.
posted by GuyZero at 1:09 PM on January 3, 2017 [1 favorite]

> (actually, now that I've played the incognito google search paywall surmounting game and actually read TFA, it seems like the "vacation home and art prints" thing was a kind of gross assumption to make about someone who needs to keep working to maintain his standard of living, but whatevs).

I looked at his LinkedIn page before commenting. He's had director-level positions at Johnson & Johnson, Chase, and several other companies. He's now a chief counsel, and not for some mom-and-pop operation. If that level of income hasn't given him a standard of living that could afford a second home and some art prints, I'll eat my hat, because I've known people with not nearly that much career success who can afford both of those things.

The point is he's not the kind of person who's really felt the pinch from the policy he championed. He just wants to maintain his standard of living -- whatever he imagines that to be -- while other people want to maintain a life of any sort at all. Nitpicking my use of an analogy doesn't change that basic fact.
posted by tonycpsu at 1:10 PM on January 3, 2017 [9 favorites]

You mean all those pesky things to panic about, like "food" and "rent" and "living expenses" that the Great Recession brought about to millions of people? What a bunch of Chicken Littles!

I think this was about the guy in the article blaming 2008:

Mr. Whitehouse, the former Johnson & Johnson human-resources executive, says his 401(k) took a hit after 2008. He could retire if he had to, but if he wants to maintain his standard of living for several more decades, he must continue to work, he says.

I also call bullshit on this. I highly doubt this guy had to draw down his 401(k) to pay for living expenses, in which case the only way for his retirement plan to be so screwed up is if he panicked and sold -- or, more likely, his retirement plan was based on 10% annual returns forever, or something equally unrealistic.

That doesn't mean the whole thing isn't a total racket, just that I don't think this guy has much of a claim to victimhood here.
posted by bjrubble at 1:30 PM on January 3, 2017

It's a good thing they didn't find a good enough victim to write about this, otherwise we might have to be concerned that it's a real problem.
posted by clawsoon at 1:32 PM on January 3, 2017 [18 favorites]

If that level of income hasn't given him a standard of living that could afford a second home and some art prints, I'll eat my hat, because I've known people with not nearly that much career success who can afford both of those things.

The other side of that coin is: iphones cost hundreds of dollars, I can't afford one. Why do my tax dollars have to pay for food stamps for people who waste their money on overpriced apple gadgets?

Making assumptions about how people are or should be using their money is gross and unnecessary here. If you want to make the point that the opinions of the 1% are less valuable/relevant in a debate about where retirement income should come from, that's fine. The "that poor fella" snark doesn't get anyone anywhere though.
posted by sparklemotion at 1:34 PM on January 3, 2017 [4 favorites]

401(k)s are great, I don't know what y'all are whining about. All you have to do is:

Have low enough expenses to contribute a sufficient chunk of your paycheck.
Have an employer that provides you a broad selection of high-quality, low-cost index funds.
Have the {time,expertise,psychic effort} to evaluate the various options and choose the optimal one.
Maintain that level of contribution through all your life changes.
Carefully rebalance your holdings every year -or- Decide that the expenses in a target-date fund are acceptable to avoid rebalancing.
Never change to an employer with a drastically worse plan.
Also save a sufficiently large non-401k cushion that a life crisis doesn't force you to raid it. -or- Don't have life crises (I recommend this one, I don't know why it's not more popular).
Profit!

Really, this isn't so hard. Just be someone lucky who likes math and is well paid. Honestly.

Extensive sarcasm aside, some of this does feel like moving the terror around. Good pension plans are obviously better but I doubt people do due diligence on their potential employers' retirement plans before accepting a job, especially in this economy. How do you compare the risk of giving a loaded give-wall-street-half-your-life-savings 401(k) gun with no safe defaults to people with no training to the risks of a large pension plan just going ¯\_(ツ)_/¯ ? Especially when you're also betting on the stability of that plan over multi-decade timespans.
posted by Skorgu at 1:42 PM on January 3, 2017 [34 favorites]

> The other side of that coin is

As I already said in response to your previous analogy about "welfare queens:", this does not account for the Whitehouse's culpability in eroding public pensions. Food stamp recipients and HR directors who pushed for 401k(s) at the expense of pensions don't belong on the same "coin".

> Making assumptions about how people are or should be using their money is gross and unnecessary here.

Your objection is duly noted.
posted by tonycpsu at 1:47 PM on January 3, 2017 [3 favorites]

I snorted when I saw the quotes from Robert Reynolds about being "retirement ready." That has to be the same Bob Reynolds who happens to be the President & CEO of Putnam Investments. He is a millionaire many times over.
posted by bwvol at 1:47 PM on January 3, 2017 [1 favorite]

A $2600/month pension in California isn't that huge, frankly, especially when you consider that it's based on people being told that they didn't need to pay into social security because the pension would be there for them.

It's not an option at all for whole swathes of public employees. My mother, who spent her career in the public school system (first as a teacher, then as an administrator), isn't eligible for Social Security in any form, including survivor's benefits. (The college professors, by contrast, get SS.)
posted by thomas j wise at 1:51 PM on January 3, 2017 [3 favorites]

The notion that there are tons of pensioned retirees running around at age 60 earning $100K-plus is maybe not quite up there with the welfare queens as a malicious conservative fantasy (i.e., some of them do exist), but it's not that far off. A little common sense could tell you this: no worker gets a pension higher than their highest salary, and how many workers, especially in the public sector, are earning more than $100K? In fact, most people don't get anywhere near 100% of their highest salary, and choosing to draw early usually means a reduction in the annuity.

"given that the US doesn't have the political will to properly fund social security, people who want to maintain their current standards of living when they stop working should be saving more of the money that they actually get, but they aren't."

Also, money should be parachuted to them from the sky by friendly aliens. As a practical matter, these are virtually identical propositions.
posted by praemunire at 2:30 PM on January 3, 2017 [10 favorites]

I don't think I know anybody who has a pension benefit of any type.

I do, but it's not very big--I just managed to get vested before they went to a 401k system. Now I put as much into the new plan as I can and hope that I can keep my job for as long as I'm able. The older I get and the more that old-age benefits get nibbled at by Republicans, the more I wish that I'd done at least twenty years in the military--those benefits are still intact (so far, with some Congresscritters audibly licking their chops at the thought of cutting them).
posted by Halloween Jack at 2:34 PM on January 3, 2017

some of them do exist

usually high officials in State governments
posted by thelonius at 2:36 PM on January 3, 2017

Look, I'm not trying to defend the privatization of retirement plans, but the absolute best way to get screwed is to think it's too complicated.

If you have a 401(k) that offers index funds, pick the one with the lowest maintenance fee, put as much money into it as you can afford, and don't touch it (or even look at it, if possible) until you're actually planning for retirement.

Yes, you do need to be lucky enough to have a job that provides some decent options, and to have enough financial cushion to divert some income toward retirement. I would never think to blame someone for lacking these, people are being screwed in more ways that I can count and nobody should be left completely on their own to handle this stuff.

But 90% of the time when people tell you it's complicated, it's because they are trying to screw you by selling you actively managed funds or investment "advice" -- both of which are absolute financial losers. The idea that investment takes some particular "expertise" is a bunch of pernicious bullshit being peddled by people who want to take your money, and the most important step toward protecting yourself is to recognize this.
posted by bjrubble at 2:37 PM on January 3, 2017 [13 favorites]

no worker gets a pension higher than their highest salary, and how many workers, especially in the public sector, are earning more than $100K?

And why do people think it's more unjust that a teacher after an entire career should be earning $100k than that a lawyer right out of law school should? This always bugs me. Six figures is a lot of money, but it's not, to me, an appalling amount to think one might be making in a career that required a college education (and probably a Master's degree), by the time you retire, and yet somehow it's unfairly getting rich if you're a 60-something retiring public school administrator, but totally fine if you're a newly-minted finance MBA? These numbers don't exist in a vacuum. Every public school teacher I know retired fairly comfortably--and this is treated as some kind of deep injustice by some people instead of what should be the perfectly normal state of affairs for someone who spent decades teaching in public schools.

It's very "got your cookie" kind of stuff.
posted by Sequence at 2:42 PM on January 3, 2017 [33 favorites]

no worker gets a pension higher than their highest salary, and how many workers, especially in the public sector, are earning more than $100K?

https://en.wikipedia.org/wiki/Pension_spiking
posted by gyc at 3:00 PM on January 3, 2017 [1 favorite]

As someone who is comfortable with being my own investment planner and understands the ins and outs of retirement saving as far as it applies to me, what really bothers me about 401(k) plans is that you have zero choice in the expenses and lousy investment choices involved. Unless you're someone with a lot of career mobility who can make "retirement plan doesn't suck" your make-or-break factor when choosing a new employer, you're stuck with whatever company whose salespeople were best able to schmooze some apathetic and overworked HR drone.

AND YET: we also have this vehicle that is basically identical to the 401(k), except you own it and are free to shop around for custodians just like you are with your other banking business. It's called an IRA. To give you an idea of what being able to shop around gets you, I was paying somewhere around 0.75% to 1% of my 401(k) at my last job every year in fees over what I'm paying in my IRA (which is in the neighborhood of 0.12% right now, sitting in index funds). You can only contribute $5500 a year to an IRA. Whereas you can contribute up to anywhere from $18,000 to $54,000 depending on what your employer kicks in with a 401(k).

So basically, if you want a serious retirement vehicle, you have to contribute to your expensive 401(k), where of course the finance industry can siphon off your savings in the form of huge fees for almost no effort on their part. And this situation is enforced by our current tax laws.

I'm not even going to touch on whether this situation is desirable over having a pension, I'm just saying, even if you accept the idea that everyone should be in charge of their own retirement and investment planning, the current situation sucks.
posted by indubitable at 3:04 PM on January 3, 2017 [15 favorites]

And why do people think it's more unjust that a teacher after an entire career should be earning $100k than that a lawyer right out of law school should?

Because historically - teachers=women and lawyers/MBAs=men - and women should just be doing things out of the kindness of their hearts and not for money - besides, they should be married and have husbands to rely upon. (#cheezeburger)
posted by Gyre,Gimble,Wabe, Esq. at 3:05 PM on January 3, 2017 [11 favorites]

I worked for the University of California for seven years, so I supposedly will have a pension. I paid into the system, and I also worked at about a 30% discount to doing the same job in the private sector. I California doesn't live up to their end I am going to be fussy.
posted by kirkaracha at 3:16 PM on January 3, 2017 [1 favorite]

I have been a professional for over a decade in a creative field, and I have never* had access to a 401(k). Like the home interest tax deduction, the 401(k) is a way to shift the tax burden from the rural/suburban upper middle class (who tend to be investors and homeowners) to the urban and middle/lower middle class (who tend to be renters and non-investors, and whose votes generally count less thanks to the electoral college/gerrymandering). First companies switch from a pension to a 401(k) with a generous match, then they (especially in a weak labor market, if they think they can get away with it) whittle down the match little by little, then they stop offering any kind of retirement plan at all.

I'm not really worried about myself (though I am angry at paying higher taxes than someone who is working at The Right Kind Of Job for The Right Kind of Company) but my friends and colleagues aren't all of them savvy enough to do the research and open up their own IRAs, or they are just more interested in other things. I've helped anyone who has come to me but I don't like to give out unsolicited advice, especially when I know it would be met with 'But Student Loans!' and "But Rent!'. I wish we had a system that wasn't built primarily on enriching financial companies-- though considering who was lobbying for those laws, what did we expect?

*That's not 100% true, I was once eligible for an 'epically bad' plan for 3 months before the company I was working for went under
posted by matcha action at 3:28 PM on January 3, 2017 [2 favorites]

I am honestly shocked that the number is as high as 13%. I don't think I know anybody who has a pension benefit of any type.

Defined benefit pensions are overrated...

I'm a millennial, working for a US multinational, and I am on a defined benefit pension which pays about 65% of my final salary for the remainder of my lifetime once I retire in, say about 35 years...

So I'm set for retirement if

1) I'm not part of any layoffs in the next 35 years
2) The company still exists 50 years from now
3) If the company doesn't renegotiate its pension obligations in the next 50 years

I would not place bets on ANY company still being around 50 years from now. See how fast Nokia and Blackberry rose to prominence and then faded away? Most companies don't even have 50 years history to begin with. It's not even a sure bet that humanity in general or civil society will still exist in 50 years...

The most compelling advantage of defined benefit pensions is that it scales to your remaining lifespan. This makes it much more efficient over a population that has an uncertain death rate - Imagine a cohort of retirees who save for their own retirement with an average death age of 85, some dying shortly after retirement at 70 and some living to 110. If everyone saved enough money to live till 100, most people will have over-saved unnecessarily - that is, they could have used 15 years of living expenses to improve their quality of life while they were still living. Yet some people would live beyond age 100 in poverty. To me this makes no sense. Defined benefit pensions takes the risk away from the individual and spreads the efficiency gains out so everyone has a guaranteed, higher standard of living while they are still alive.
posted by xdvesper at 3:33 PM on January 3, 2017 [7 favorites]

https://en.wikipedia.org/wiki/Pension_spiking

Of course, how could I have forgotten that most public sector employees have the magical ability to grant themselves large raises shortly before retirement?
posted by praemunire at 3:47 PM on January 3, 2017 [5 favorites]

If you have a 401(k) that offers index funds, pick the one with the lowest maintenance fee, put as much money into it as you can afford, and don't touch it (or even look at it, if possible) until you're actually planning for retirement.

Yes, you do need to be lucky enough to have a job that provides some decent options

You also have to have zero conscience about where your money goes--defense, oil, companies destroying the world, etc. Right? I've tried to be conscientious about investments and it's almost impossible (as far as my 401k choices go). So I put it in a money market and get 1% a year. Oh well. (And I'm sure it *still* goes to weapons, finance, health insurance companies, etc. anyway...)

I don't know how anyone with any conscience or knowledge of the world can invest in some of these companies that make billions of dollars per year. Yet they do. So it goes. (For a little while longer ...)
posted by mrgrimm at 3:52 PM on January 3, 2017

I highly doubt this guy had to draw down his 401(k) to pay for living expenses,

I can believe it. I know people of a similar age who, throughout the high-flying years, basically the late eighties to the early 00s, spent money freely on restaurants, vacations, too large houses, cool cars, private schools, flash clothes, and are now regretting it. Those who categorize people refer to them as High Income, Low Net Worth.
posted by IndigoJones at 4:03 PM on January 3, 2017 [1 favorite]

(Pension spiking isn't usually done by raises, it's done by overtime...)

The public employee pension crisis is in many places a crisis of public safety employee pensions -- cops and firefighters. They become retirement-eligible as early as 20 years of service (early to mid 40s age) and are almost all retired by 30 years of service (early to mid 50s age). Active salary levels are high relative to the civil service and benefits are high relative to active salary levels and get even higher for those who take "late" (i.e., 25 or 30 year) retirement. Spiking increases benefits. Disability claims, which are susceptible to abuse, increase benefits and decrease retirement age. Contributions are often under what would be actuarial required, and sometimes far under.
posted by MattD at 4:06 PM on January 3, 2017 [3 favorites]

The public employee pension crisis is in many places a crisis of public safety employee pensions -- cops and firefighters

Others as well, better placed to game the system.
posted by IndigoJones at 4:12 PM on January 3, 2017 [1 favorite]

Contributions are often under what would be actuarial required, and sometimes far under.

And it's unclear to what extent this is a manufactured crisis - by underfunding pension savings they present the situation as untenable and thus pension benefits need to be slashed. But it's also entirely possible that the planning was both sincere and grossly bad. Regardless, defined benefit plans have these issues inherently. (on the flip side, defined contribution plans have the downside of you never really knowing how much money you'll have when you retire)

On 401ks again, after some though I think they would be vastly improved by being uncoupled from employment. There should just be a big IRA program for everyone, similar to the way RRSPs are handled in Canada. The whole issue of being tied to your employer's choice of providers, lack of portability, etc could very easily be removed. Move the paperwork burden from payroll systems to the tax system whey they're already tracking IRA contributions. So many US savings schemes like HSAs and 401ks are just huge balls of paperwork which could easily be eliminated by making the programs simpler and untying them from employment.
posted by GuyZero at 4:25 PM on January 3, 2017 [6 favorites]

I have a pension, but not much. I think I'll be getting $120 or so a month at retirement. I was working for a large publicly traded company in the '00s. A couple of months after I hit five years in (meaning I was fully vested in the pension) they announced that all pensions were frozen. They did up the 401k match, from 3 to 5 percent but it's not the same as having a pension. I was able to at least roll up something of a balance in the 401k plan. I now have to hope nothing forces me to have to raid it.

Contrast this with some co-workers that had been there a long time. They were starting to retire. These people were getting as much or more than they were making on the job via SS and pensions without having to touch their 401k balance. I don't begrudge them that. But I do resent their assertions that the younger workers can do as well as they did. Little or no pensions, possible gutting of SS, a retirement fund at the mercy of the market and life emergencies. The world is changing and not for the better.
posted by azpenguin at 4:33 PM on January 3, 2017 [4 favorites]

This is why I save 40-50% of my gross income in investments that I control.
posted by miyabo at 5:21 PM on January 3, 2017

The problem I have with most pensions is that they depend on you working for the same company until you retire and not a lot of people do that any more. Even if I have a bunch of jobs for long enough to be vested in their defined benefit plan, I'll be getting five different checks.

I have a degree in finance and work for a bank so I don't have a problem managing my 401(k). I get that it's a big deal for a lot of people but I still prefer defined contribution plans.

The other big problem with defined benefit plans is that they're create a great big long-term liability that the company has to carry on it's balance sheet. That and the liability for retiree health benefits were half of it's liabilities. IIRC, the way they solved it was to create a trust that's run independently and is funded by GM. From their end, it works like a defined contribution plan, they deduct the expense and they're done, nothing on the balance sheet. The trust manages the investments and pays out like a defined benefit plan.

Companies don't really need to sustain growth always forever. Investors have an expected return on their investment given whatever the relevant risk(s) is/are. In theory, the company takes all of it's profits and reinvests the funds into every project it can that they think will meet or exceed that rate of return. If they run out of projects before they run out of money, they return it to the investors in the form of stock buy-backs and dividends. Eventually, the company matures and it mostly runs out of projects that will get the ROR they need so the stock price stops going up and investors start milking the cash cow. These are the companies that income funds look for. Those funds, in turn, are good for retirees who would rather have stable income than a lot of growth.
posted by VTX at 5:24 PM on January 3, 2017 [6 favorites]

This is why I save 40-50% of my gross income in investments that I control.

Yeah, I buy a lot of liquor too.
posted by No-sword at 5:42 PM on January 3, 2017 [26 favorites]

> So I'm set for retirement if

1) I'm not part of any layoffs in the next 35 years
2) The company still exists 50 years from now
3) If the company doesn't renegotiate its pension obligations in the next 50 years

#1 could be a problem, sure, but it's not like your benefits disappear when you're laid off, they just get frozen at that level, and if you're still early in your career, you're going to go work for someone else and seek additional retirement benefits anyway.

Re: #2, is your pension not insured by PBGC? If it is, you're still good up to ~$60k/yr (in today's dollars) if the company goes bye-bye. It's possible that could represent a pay cut for you depending on your salary, when the company goes out of business, etc. but it's a reasonable amount to live on once you factor in Social Security.

As to #3, well, a renegotiation requires both parties to agree or some sort of legal judgement that forces one side or the other, but with a 65% of your final salary guarantee, that would seem to represent a better expected value than all but the most generous defined-contribution plans out there, even assuming some risk of it getting whittled down by unforeseeable events in the future.

All private pension programs have their problems -- a far more generous Social Security would be the best way to go for everyone -- but I can't see how the three factors you mentioned significantly change the equation.
posted by tonycpsu at 5:43 PM on January 3, 2017 [5 favorites]

The problem I have with most pensions is that they depend on you working for the same company until you retire and not a lot of people do that any more.

The idea that someone with many years at the same employer is a loser who isn't "agile" enough for today's fast-paced environment and risks "stagnating" coincidentally became popular around the same time that pensions were being replaced with 401ks.
posted by Ralston McTodd at 5:45 PM on January 3, 2017 [13 favorites]

The problem I have with most pensions is that they depend on you working for the same company

Yep. In the past 30 years, I've worked for 8 companies, only 4 of which still exist. I agree that 401k programs have problems, but pensions don't work for everyone either. It would be nice if you could contribute to Social Security the way you do a 401k.
posted by CheeseDigestsAll at 5:48 PM on January 3, 2017 [4 favorites]

One thing you can say about President Nuke 'Em is that we'll all enjoy the same retirement benefits.
posted by maxwelton at 5:56 PM on January 3, 2017 [3 favorites]

But 90% of the time when people tell you it's complicated, it's because they are trying to screw you by selling you actively managed funds or investment "advice" -- both of which are absolute financial losers. The idea that investment takes some particular "expertise" is a bunch of pernicious bullshit being peddled by people who want to take your money, and the most important step toward protecting yourself is to recognize this.

You're absolutely right about it being a terrible system full of liars. That very ecology leads to the predators trying to confuse the prey. I mean you know and I know that only, what, 2 of the things on this page are of any interest at all to someone doing retirement planning. But look at that page! There's charts and asset allocations and sectors and a whole pile of crap that's totally irrelevant for you but boy is it confusing.

For sure you can't trust randomly searching, the first page of search results for "best retirement fund" gets you a list of 29 pages(!) of 'the best' funds, and then this charming page that inexplicably points you at actively managed funds.

Once you know where to start and some key facts the actual mechanics of picking things isn't complicated, it's just arithmetic. But getting there is hella complicated.
posted by Skorgu at 6:45 PM on January 3, 2017 [5 favorites]

I like how the WSJ article divides workers into three mutually exclusive categories: the bottom half of workers, the "middle" 40%, and the top 10%. As if 50th-90th percentiles constitute the middle, where the median income is the bare-minimum entry point to being in the middle.
posted by Maxwell_Smart at 7:29 PM on January 3, 2017 [3 favorites]

401(k) plans were designed for high income executives and they work best for high income executives. The ordinary wage earner is getting screwed. The 401(k) is a highly regressive welfare benefit. The higher your income and the higher your marginal tax rate, the bigger welfare handout you get. That's a terrible deal for the middle class. Why would you support a welfare plan that pays the rich more than it pays the poor? For low income people, a 401(k) has near zero benefit.

Here's a much better plan:

1. Limit tax deductible plans to just an IRA for you and your spouse. $5500 for each is $11,000 a year which is more than 20% of the median household income. If you want to save more than that, you are of the privileged and should do it in your own in a taxable account. Eliminate all 401(k) plans which are welfare for the rich.

2. Use the money saved by eliminating 401(k) tax deductions to provide richer Social Security benefits. Social Security is the safest pension plan in the country, it can never go broke, and it has unlimited resources to weather any economic crisis, unlike any other pension plan.
posted by JackFlash at 10:15 PM on January 3, 2017 [7 favorites]

“The great lie is that the 401(k) was capable of replacing the old system of pensions,” says former American Society of Pension Actuaries head Gerald Facciani, who helped turn back a 1986 Reagan administration push to kill the 401(k). “It was oversold.”

A cautionary tale how welfare reformers would be wise not to rush towards a universal basic income plan, because it will likely mean that long defended food stamps, social security programs, minimum wage, and earned income credit will be immediately vulnerable. In other words, it may backfire if it isn't already a libertarian trap. Right now food stamps are sacred cows of the agriculture lobby. Social Security exists because retirees cross political lines to protect it above all else. Minimum wage today is a simple base wage floor with very popular support, but tends to die slowly regardless. Earned income credit would be replaced in the same bill, which will be a conservative coup. They will later blame it for every social ill imaginable, like welfare, and use it as a political anvil. In the realm of entitlements, an elimination strategy is to bait and switch if they can't demonize. Would-be reformers might consider expanding housing vouchers, which typically has years-long waiting lists and local landlords ready for political support.
posted by Brian B. at 7:39 AM on January 4, 2017 [3 favorites]

401(k) plans were designed for high income executives and they work best for high income executives.

I would argue the opposite, given the relatively low cap ($18k) on 401(k) contributions. Middle class earners need to save much more than that each year for a comfortable retirement, given that average returns of the stock market are now lower than they were when the 401(k) program was instituted.
posted by gyc at 9:16 AM on January 4, 2017 [3 favorites]

I think that's mainly a definitional argument regarding "middle class" and "high income." It is true that the higher your marginal rate, the more valuable the tax benefit of the 401(k), so higher earning people get a larger benefit. It is also true that the 401(k) does nothing for people who do not earn enough to save. So, like the home mortgage deduction, the 401(k) is a benefit that tends to favor higher earners or the "upper middle class" broadly construed.

What is also not widely known, I don't think, is that some people/employers can contribute up to $54k per year (for tax year 2017) into a person's 401(k) through the "employer match," which can be as large as $36k. High-earning employees can (and do) negotiate this sort of benefit with their employers. That somewhat answers gyc's point about the relatively low limits.
posted by Mid at 10:15 AM on January 4, 2017 [3 favorites]

You have to be kidding. $18,000 is a low cap? How many middle class households do you think can afford to save that much each year. Keep in mind that this is for each spouse. So together they can put away $36,000 a year without taxes. But it doesn't end there. If they are over age 50 they can each put away an extra $6000, for a combined total of $48,000 without taxes. In the 39% tax bracket that is a welfare handout from the taxpayers of nearly $19,000 per year. Really, you think people who have the means to put away $48,000 per year should have a government welfare handout of $19,000?

But wait there's more. Many companies make a matching contribution, which is also tax deferred. Typically up to 6% of wages. Since it is a percentage, guess who gets the biggest tax-deferred contribution. The employees with the biggest wages.

But wait there's more. High income employees can also contribute up to $54,000 after taxes. Together with spouse, that means $108,000 each year of tax advantaged savings subsidized by taxpayer welfare. And through a loophole, they can then roll the after-tax portion directly into a Roth IRA and never pay a dime of taxes on those savings ever again.

But wait there's more. The two spouses can also contribute to their IRAs -- up to $6500 each if over age 50 -- for another taxpayer $13,000 of taxpayer subsidized savings per year. And through another loophole they can roll that $13,000 into a Roth IRA and never pay another cent of tax on those savings ever again.

So let's total it up. This couple can put away over $120,000 of taxpayer subsidized savings each year. Around $20,000 of that is a direct handout from the taxpayers. Most of the rest can remain tax free forever.

Now let's look at the lower income individual. In fact let's just look at the average household which has a median income of around $55,000. If they are quite frugal, they might be lucky enough to save 20% of their income, $11,000. That will fit in their two IRAs. A 401(k) plan is of no use to them at all because they don't have any more money to put into it.

And how about the subsidies for this average household. If they have a kid or two then they are probably in the 10% tax bracket which means their IRA is subsidized by around $1100 per year. Compare that to the high income individual who gets a taxpayer welfare boost of $20,000 per year.

That's the best case for a middle income family. What about low income families? The 401(k) and IRA provides them with zero, zip, zilch because they are in the 0% tax bracket.

This is the kind of welfare benefit program you want to support? A welfare program that pays the rich 20 times what it pays the average middle class family and pays nothing to low income families.

But hey, if you are fortunate enough to have a high income and lots of extra money to save, no one is stopping you. You can save as much money as you want. You don't need an IRA or 401(k) welfare benefit to do so.

These 401(k) and other defined contribution plan subsidies cost taxpayers $80 billion a year, the bulk of which goes to high income people. Better to take that $80 billion and use it to provide better Social Security benefits.
posted by JackFlash at 10:25 AM on January 4, 2017 [18 favorites]

The whole stripping out of defined-benefit plans to substitute defined-contribution plans was, on average, a disaster, but coupled with the gutting of existing defined-benefit plans through pleas of financial exigency it has become one of the biggest cons ever perpetrated on the American worker. My conservative father always rationalized the hugely larger incomes of owners by the assertion that assumption of risk was deserving of large rewards, and so workers, being paid regularly a known, predetermined amount, don't have enough risk to deserve more pay. By making some of the pay defined-benefit retirement and then taking the benefit away through mergers, bankruptcies, and buyouts, industry made sure the workers were also taking risks and should have been paid more. One way or the other, companies need to step up, either by paying directly or using their considerable lobbying power to make sure the government guarantees livable retirements for all.
posted by Mental Wimp at 3:11 PM on January 4, 2017 [4 favorites]

JackFlash, I don't disagree with your overall point but I do have some bones to pick:

If they are over age 50 they can each put away an extra $6000, for a combined total of $48,000 without taxes.
The two spouses can also contribute to their IRAs -- up to $6500 each if over age 50 -- for another taxpayer $13,000 of taxpayer subsidized savings per year

I was under the impression that when you "defer" taxes by contributing to a 401k/IRA, you do have to pay taxes when you begin withdrawals. So inititally they are recieving a break, but they do have to pay it later (of course retirement income is probably less than what they would have made working so the tax is less, but it's not zero. And that's assuming tax laws don't increase in the interim.)

High income employees can also contribute up to $54,000 after taxes.
If they put after-tax money into a 401k, I would not consider this "tax-advantaged", since they did pay taxes on the income.

And through another loophole they can roll that $13,000 into a Roth IRA and never pay another cent of tax on those savings ever again.
Aren't Roth IRA's funded with after-tax income? So that $13k has already been taxed once, and there will not be taxes to pay at retirement. I'd always heard the advice that a Roth IRA is better because you are paying the taxes now, when you can afford it, instead of when you retire, when maybe you can't and maybe the tax laws have changed.

This couple can put away over $120,000 of taxpayer subsidized savings each year.
Taxes are being paid or going to be paid on all the savings at some point. Unless you are advocating paying double taxes on income, when you earn it/save it and when you withdraw in retirement?

There is an issue with the fact that none of these plans require you to pay capital gains tax on the money your savings made. That is the real subsidization, not in whether you deferred taxes or paid them before retirement.
posted by LizBoBiz at 6:17 AM on January 5, 2017 [1 favorite]

Liz, the gains on Roth accumulations are not taxed. That's the advantage for Roth IRAs and Roth 401ks.
posted by Dashy at 6:57 AM on January 5, 2017

I was under the impression that when you "defer" taxes by contributing to a 401k/IRA, you do have to pay taxes when you begin withdrawals.

Yes, but deferral of taxes has a cost to the government, otherwise where's the benefit. It allows gains to compound untaxed and there is the time value of money. You pay taxes years later with cheaper dollars. And as you pointed out, you are often in a lower tax rate. It is a net loss to government revenues.

You can't simultaneously say that tax deferral is not a benefit with costs and at the same time say please don't take it away from me. There ain't no free lunch. There is a welfare benefit and there is a cost to that benefit.

One of the big benefits of an IRA, especially for high income families, is that you can pass on your IRA to your heirs so that the tax deferral can continue into the next generation for another 50 or 70 years as it is slowly parceled out over your heirs' lifetime.

>High income employees can also contribute up to $54,000 after taxes.
>If they put after-tax money into a 401k, I would not consider this "tax-advantaged", since they did pay taxes on the income.

Yes, tax-advantaged is exactly what it is called. Even though they pay taxes on the money they pay in, they do not pay taxes on dividends, capital gains and income earned while in the tax-advantaged account. The gains compound untaxed, perhaps for decades.

But even more important, because of a loophole, they can roll the after-tax portion of their 401(k) into a Roth IRA and never pay a dime of tax on their gains ever again. And neither do their heirs.

If you don't think this is an advantage, consider how it is different from money you earn that is not sheltered. In both cases you pay taxes once, but in the case of the Roth you never pay taxes again on the gains. Even if after-tax money is not put in a Roth, tax deferral has a value and a cost to government.

Taxes are being paid or going to be paid on all the savings at some point. Unless you are advocating paying double taxes on income, when you earn it/save it and when you withdraw in retirement?

First off, since IRAs can be inherited, taxes might not be paid for many decades. There is a time value of money. Second, they may be paid back at a much lower tax rate in retirement. Third, gains compound untaxed.

Again, if you are arguing that this tax deferral has no value, then why would you miss it? That is because it is actually quite valuable, especially to high income individuals, and it has a cost. The Congressional Budget office is required by law to make that calculation each year and it costs over $80 billion -- the bulk of which goes to high income individuals. That's a lot of money for a welfare program for the rich. That's more than spent on food stamps.

You see economic pundits wring their hands over the causes of inequality. Is it globalization? Is it automation? Well perhaps, but mainly it is the result of the economic rules that the rich make, like the 401(k) rules that allow them to accumulate great wealth to the disadvantage of the poor. The 401(k) is a welfare benefit that primarily benefits the rich.
posted by JackFlash at 8:23 AM on January 5, 2017 [4 favorites]

But even more important, because of a loophole, they can roll the after-tax portion of their 401(k) into a Roth IRA and never pay a dime of tax on their gains ever again.

This is not a loophole, or at least if it once was it no longer is. It's explicitly allowed by the IRS.

Also, for many amounts of income 'tax-deferred' is indistinguishable from tax-free. Once all your income comes from previously-saved retirement accounts, you can optimize your withdrawals so that your tax-deferred income never tops the deductions available (around the 15% tax bracket) then pull from capital gains (at 0%) for more spending money.

Some of the examples get a bit contrived, for example this one from 2011 where $100k/yr in expenses incurs zero income tax. Furthermore, you can convert traditional (tax-deferred) funds into Roth (tax-exempt) funds whenever you want. If have a low-income year for any reason, two spouses can move something like $58k into Roth without paying any income tax. You can do all sorts of silly planning with ORP.
posted by Skorgu at 11:05 AM on January 5, 2017 [1 favorite]

Americans Are Putting Billions More Than Usual in Their 401(k)s (from Bloomberg) - the tl;dr is that auto-enrollment of employees into 401k plans resulted in a 0.6% increase in 401k deposits from 2015 to 2016 which is a lot of money.

And although it can be debated how much incentive the government needs to give people to save, the US savings rate has been dropping for decades until recently to levels that are pretty low relative to other developed countries so it's not a bad thing that there's some inducement to save.
posted by GuyZero at 11:57 AM on January 5, 2017

This is not a loophole, or at least if it once was it no longer is. It's explicitly allowed by the IRS.

What do you think a loophole is? Loopholes are permitted by the IRS. They are creative interpretations of the law that were never originally envisioned by lawmakers but generated by intense lobbying efforts of tax lawyers and accountants. The IRS rewrites the rules in accordance with the lobbyist's desires using their creative interpretation of the law. That's a loophole. Loopholes are not illegal. They are perfectly legal which is what makes them a loophole and so valuable to the rich.

The original law regarding Roth IRAs limited the size of the annual contributions and phased them out for higher income levels. These unanticipated loopholes allow unlimited contributions to Roth IRAs regardless of high income, contrary to the original intent of the law.

Once loopholes are established, they are very difficult to close because of lobbying by the benefactors of the loophole. Taking away a loophole, even though unintended, makes people mad.
posted by JackFlash at 1:49 PM on January 5, 2017 [5 favorites]

I don't know, JackFlash, I'm with you on the big picture but I wouldn't call the Roth conversion rules a loophole. Congress changed the law in 2010 to permit the conversation regardless of income level. That makes it more than a creative interpretation of existing law - it was a legislative change deliberately intended to permit these conversions. Now, of course, it was a change in an x-thousand page tax bill that nobody but lobbyists ever read, but by that definition the entire tax code would be a loophole. I do generally agree that these programs help people that don't need the help. It will be interesting to see if the Republicans really eliminate a lot of the Schedule A deductions like state/local taxes and mortgage interest, as they have been threatening to do. You can cheer for that one at least!
posted by Mid at 3:44 PM on January 5, 2017

Do you understand how that works? As the 2010 law was written, they expected people to make conversions of pre-tax IRAs. The government gets some extra revenue right now. Everything is fine.

Except that isn't what people did. What people did was put money into after-tax IRAs, which have no income limit, and then the very next day, exploit the 2010 law to convert the after-tax IRA to a Roth IRA.

So they inadvertently changed the law on income limits for contributions to a Roth IRA into a no limit Roth IRA. The key distinction is that the 2010 law was intended for Roth conversions. But inadvertently, it actually became a loophole around the Roth contribution law. Contribute to after-tax IRA today, convert to Roth IRA the next day. This is a loophole around the Roth IRA contribution income limits.

Worse, people didn't stop with just converting traditional IRAs. They went on to convert portions of their 401(k)s, up to $54,000 per year.

Now under the original Roth law, you must prorate the pre-tax and post-tax portions (you still do for regular IRAs) and pay tax on the pre-tax portion. But since they never anticipated the conversion of post-tax 401(k)s, there is no prorating rule for 401(k)s. You just take out the post-tax portion, ignoring the pre-tax portion, and send it to a Roth IRA absolutely tax-free, without prorating. This is obviously contrary to the prorating intent of the IRA law which still applies to regular IRAs.

In 2006, they introduced the Roth 401(k) and put in the same limits for contributions as for regular pre-tax contributions, $18,000 per year currently. But what happened instead, because of the unanticipated loophole, people were suddenly rolling $54,000 of post-tax contributions into a Roth IRA, even though the 2006 Roth 401(k) law originally put on limits of $18,000.

These are unanticipated loopholes as a result of seemingly minor and benign 2006 and 2010 tax revisions that are a tax bonanza for the rich. They can now accumulate multi-million dollar IRAs that neither they nor their heirs will ever pay tax on.
posted by JackFlash at 4:35 PM on January 5, 2017 [2 favorites]

The thing to keep in mind is that loopholes are perfectly legal. That is what makes them so valuable. Don't confuse a legal loophole with illegal tax evasion.

Allow me an analogy. Congress passes a law making it illegal to step over a line drawn on the ground. Now you can't just step over the line when no one is looking. That isn't a loophole. That is illegal evasion of the law.

But them some clever lawyer says, what if I go in the opposite direction all the way around the world and end up on the other side of the line. Well, shucks, Congress didn't think of that but the law doesn't expressly forbid it. That's a loophole. Completely legal but contrary to the original intent of the law.

And once a loophole is established, it is very difficult politically to take it back. Heck, even the carried interest loophole for hedge fund managers, hated by virtually everyone except a couple hundred insanely rich people, seems to be impossible to close.
posted by JackFlash at 4:40 PM on January 5, 2017 [3 favorites]

I am honestly shocked that the number is as high as 13%. I don't think I know anybody who has a pension benefit of any type.

*raises hand* My previous job had a 401k AND a Pension plan. I stayed just long enough to get vested on the Pension Plan. And barring any major changes to the future, I'll collect a small monthly pension.

I have two uncles that in the 70s/80s worked at a place that eventually went bankrupt but when they retired they got the pension, which they both had forgotten about until the recently retired.
posted by 922257033c4a0f3cecdbd819a46d626999d1af4a at 5:46 PM on January 5, 2017

Yeah, I think we just have differing definitions of a loophole. In my mind, before the IRS commented the after-tax-to-Roth conversion was a loophole. It's a sort of unintended consequence of a set of provisions, sure but it's ambiguous and always risky that a ruling will come down against it. Once the IRS decided, explicitly endorsing that interpretation though it just became accepted tax law.

It's bullshit but the IRS decided it was their intent by explicitly clarifying it.

But yeah, we're definitely just noodling around on semantics here and I think nobody disagrees on the actual meat.
posted by Skorgu at 6:02 PM on January 5, 2017

It's bullshit but the IRS decided it was their intent by explicitly clarifying it.

That's not the way these tax letters come down. Usually it is because an IRS auditor discovered something questionable in an audit that no one had ever seen before. As in my analogy, some aggressive tax lawyer walked around the world to the other side of the line for the first time, testing the boundaries. So they flag it, do an investigation, call for public comments from tax preparers and tax lawyers (who coincidentally always come down on the side of most liberal interpretation, no surprise) and then they write a letter outlining their findings. If the law is ambiguous and doesn't expressly forbid this unforeseen loophole, then they have to approve it, even if that wasn't the original intent of the law. They aren't doing this just out of the blue as clarification. They are doing this because some tax return somewhere has challenged the boundaries of the law and they have to respond.

The IRS writes a letter indicating that the unexpected tax maneuver is legal under the law as written. They give notice to Congress that they will have to fix the loophole if they don't like it. It's an unintended loophole and perfectly legal until closed by Congress. Just because a loophole is declared legal doesn't mean it isn't an unforeseen loophole. By definition all loopholes are legal. If they weren't legal they wouldn't be loopholes. They would be tax evasion.

In this case it is clear that Congress never intended to have unlimited Roth IRAs because, unlike any other kind of retirement account, they are a dead weight loss to the government. That is why they put rather restrictive limits on contributions to them. The loopholes allow unforeseen abuse of these contribution limits.
posted by JackFlash at 6:50 PM on January 5, 2017 [2 favorites]

But it was Congress that changed the law in 2010, not a tax letter ruling and not the IRS. I'm in full agreement that the policy makes no sense, but I don't think the policy result was as unexpected or unforeseen as you are saying. Once you say that people can convert regular IRAs into Roths without any limit on the amount of conversion or income level phase-out, and without any limit on the number of times someone can do it -- which is what congress said -- then you've opened the door to exactly what is happening now. I agree it's irrational from a policy perspective, but the result is not a great leap or strange side effect from the congressional legal change.

Look at it this way - Mtt Romney has tens of millions in an IRA (this came out in the last election). Congress said in 2010 that Mitt can convert that IRA to a Roth. That was plainly a foreseen result of the law - not a loophole or weird consequence. Mitt is an extreme example but clearly Congress was saying that people with very siazable IRAs can convert them into Roths. That's basically the same as allowing "unlimited Roths." Why is that policy result (a one time giant conversion) any more or less absurd or terrible than allowing people to do annual conversions into the future? Both suck from a policy perspective. Both defeat the idea of limits on the amount someone can put in a Roth. Both generate some tax revenue now in exchange for less revenue later. It's not all that different. You seem to be saying that a policy result must have been unforeseen because it's such awful policy, but I'm afraid the awful policy is more deliberate than that.
posted by Mid at 6:08 AM on January 6, 2017 [1 favorite]

I'm kinda surprised folks aren't stuffing their mattresses instead. Unlike a 401k, the rich have to destroy the dollar if they want to get at your funds. Putting it into the stock market, not being rich yourself, seems like putting a target on your back.
posted by Strange_Robinson at 7:02 AM on January 6, 2017

Yep, I have a pension, too. Faculty in the University System of Georgia can choose between a 403b (401k equivalent for non-profits) or the state public school teacher pension system. To me, it was a no brainer to go with the pension.

You trust the people of Georgia not to totally fuck you over at some point in the next umpty years for no better reason than it's convenient? Man, I don't even trust the people of New York that far, and it's coded into the state constitution here.

Pretty much every other prof I know who had a choice between one of their state pensions and the 403b ended up going with the 403b because (a) given the risks of being a new assistant prof and only working there 5 or 6 years, the pension plan is usually really REALLY bad, and (b) the 403b is immediately just your money in your account and the state can't take it away if they or their voters decide that they don't actually want to pay your pension after all.
posted by ROU_Xenophobe at 7:19 AM on January 6, 2017

Mid, you may be misunderstanding the conversion law and the loophole. As the law intended, they wanted people like Mitt Romney to convert his large IRA to a Roth. That way the government collects taxes on IRAs that could be deferred decades even to the next generation.

But that isn't what happened. Mitt Romney would be crazy to pay a huge tax bill and lose his tax deferral. What happened instead is what is called in the tax business a "backdoor" Roth. People were able to shovel unlimited amounts of money not giving up tax deferral as was intended, but that was instead money that was already post-tax anyway, they weren't giving up anything, and convert it to never taxed in the future money.

Even tax professionals were surprised at the discovery of this loophole. This loophole was discussed a lot in the tax professional community over the first couple of years. Many tax professionals were convinced it must be illegal because it was so crazy, and recommended not trying it, but gradually, because the IRS didn't challenge it, more and more people began using the "backdoor" Roth. And with that encouragement, they extended it to 401(k) conversions which is a true free lunch. Any high income person would be crazy to not take advantage of the loophole because it was zero cost to the individual and a dead weight loss to the government.

If you don't believe me, talk to Barrack Obama who put a provision in his 2017 budget proposal to specifically close the "backdoor Roth" loophole. Of course that isn't going to happen since Trump was elected.

The only reason tax loopholes like this are worth discussing is because they can explain a lot of the income inequality that seems to baffle the pundits. Rich people write the laws and they make rules and preserve loopholes that favor themselves.
posted by JackFlash at 8:29 AM on January 6, 2017 [3 favorites]

You trust the people of Georgia not to totally fuck you over at some point in the next umpty years for no better reason than it's convenient? Man, I don't even trust the people of New York that far, and it's coded into the state constitution here.

Pretty much every other prof I know who had a choice between one of their state pensions and the 403b ended up going with the 403b because (a) given the risks of being a new assistant prof and only working there 5 or 6 years, the pension plan is usually really REALLY bad, and (b) the 403b is immediately just your money in your account and the state can't take it away if they or their voters decide that they don't actually want to pay your pension after all.

It's a really well-rated pension plan. I plan to stay here through my career. And I would much rather stand in solidarity with hard working public school teachers than gamble on the stock market on my own. Sure, I may get screwed, but so do most barely middle-class folks with a 401k/403b. I'd still rather throw in my fortune with other people than go it alone.
posted by hydropsyche at 8:32 AM on January 6, 2017 [2 favorites]

Yeah I'm not sure I'm following but I'm not sure you're right either. If we are talking about wealthy people, then their IRAs are basically always going to be composed of after-income-tax dollars because of the income level phase out on the IRA deduction. The full phase-out is $118k in income for 2016 joint filers. So it wasn't surprising or unexpected when Congress told those people that they could convert their post-income-tax IRA contributions into Roth IRA that they would do. In fact, I would be pretty surprised if many people with incomes lower than $100k have interest in a Roth conversion because they probably have other savings (or non-savings) priorities before delving into stuff like this and/or it's just not worth it to them.

Somewhat separately, Mitt would not always be crazy to do the conversion. If Mitt thinks his IRA holdings are going to greatly increase in value over time, he is smart to pay tax on them now in the conversion, let them grow, and never pay tax on them when he takes them out of the Roth. I don't think this incentive structure was unforeseen - it's a pretty obvious effect of permitting Mitt to do the conversion.
posted by Mid at 10:28 AM on January 6, 2017

I'm kinda surprised folks aren't stuffing their mattresses instead. Unlike a 401k, the rich have to destroy the dollar if they want to get at your funds. Putting it into the stock market, not being rich yourself, seems like putting a target on your back.

SF yoga instructor’s life savings stolen from home safe

When Janet Stone lost half her life savings in the 2001 stock market crash and again in the national economic meltdown of 2008, she had enough with the banks and other financial institutions.

The 48-year-old San Francisco single mother and yoga instructor withdrew what was left of the nest egg she’d been stashing away in a bank since she was in her 20s, invested in a home safe and hid the key somewhere she thought no one would ever find.

But in a shocking twist, Stone went bust for a third time.

On Dec. 14, a burglar pried open the door of her home near Mount Davidson Park, broke into the trusty safe and swiped her life savings of more than six figures as well as jewelry and precious family heirlooms. Even the contents of her two young daughters’ piggy banks were stolen.

posted by Lexica at 11:03 AM on January 6, 2017 [2 favorites]

“It felt like they knew exactly where the safe was. It felt like they were in the house before,” Stone said, adding that she is very open with her home and often rents it out on Airbnb.

A good rule of thumb with crime in general is that it is almost always someone you know. Certainly random stuff happens, and that small percent becomes the focus for so many people.
posted by Strange_Robinson at 3:24 PM on January 6, 2017

That doesn't really address the issue, and calling it random and claiming the focus is somehow wrong seems really dismissive. If anything, it makes it worse because storing cash is more likely to be known and more of it is likely to be stolen.
posted by zombieflanders at 3:39 PM on January 6, 2017

Ms Stone's case was most assuredly not random.
posted by Strange_Robinson at 3:47 PM on January 6, 2017

To be certain my point is made - if you're gonna stuff your mattress, don't rent your place out on Air B and B.
posted by Strange_Robinson at 3:50 PM on January 6, 2017

Maybe we shouldn't be blaming the victim? Especially when we're talking savings (which are insured through the FDIC) instead of investments.
posted by zombieflanders at 3:56 PM on January 6, 2017 [1 favorite]

In re pensions and losing your pension: it's harder for the state to take away people's pensions than I think folks realize. The good people of Minnesota could vote, for instance, to get rid of the state pension system by fiat, but how would that play out?

Let's say that I have worked for the state for twenty five years in a number of different roles, paying dutifully into the system. Over the years I contribute perhaps eighty thousand dollars directly out of my paycheck, and as per my contract, my employer matches the funds as part of my non-paycheck compensation. I reach 67 and decide to retire. The state decides to get rid of the pension system, fuck you, sucker.

What am I going to do? I am going to sue, and so is every other civil servant who was vested in the system. And the question of the suit: What responsibility does the state have in re returning my money? The state has had quite a lot of my money for 25 years and presumably must return it - they can't just dissolve the pension system and keep my $80,000. But if I had invested that $80,000 myself, I would have a lot more than $80,000, probably. At the bare minimum, the state owes me that $80,000 plus the interest I would have accrued over time, but I think I could make a case that the state owes me more, or maybe damages of some kind. And then there's the question of the employer match - that's my actual compensation from my employer. What is owed to me there?

(If I am laid off from my actual job, I don't get the employer match - I only get it as part of my pension pay-out. But what happens if there's no pension system any more? That was the actual compensation that was in my contract.)

I'm not saying that government can't do shitty things to people by fiat, but it's not as simple as saying "we made a law that says you don't get your pension, too bad".
posted by Frowner at 6:19 PM on January 6, 2017 [2 favorites]

Which is why cuts to pension systems usually come through cuts in COLA or else through changing eligibility - it takes longer to vest, or everyone who isn't fully vested at the time of the change gets a different, worse deal, etc. It is easier for corporations to actually just loot the pension fund because they can actually just...take the money. States' economies work really differently.
posted by Frowner at 6:21 PM on January 6, 2017 [1 favorite]

A well-run pension is a thing of great beauty, much like a non-corrupt police force, a politician who cares more about constituents than donors or a business that cares about good labour practices. Enjoy it if you have one, most people don't.
posted by GuyZero at 8:30 PM on January 6, 2017 [1 favorite]

Inflation will steal the money in the mattress over time. Also, do you think cash in a safe is covered by a homeowner's policy? Article did not say.
posted by Mid at 6:34 AM on January 7, 2017

The problem for me is this stuff seems to happen so regularly, it quits looking like it was a well intended act that went sour, and begins looking sinister and quite deliberate. At some point the abused has to give the finger to the abuser, and go their own way.

For the evidence based community, what would the return on investment look like comparing all these retirement vehicles versus stuffing ones mattress? The mattress folks have to contend with inflation. On the legitimate side, you're looking at a fuzzy ten year cycle of financial crisis, during which who knows what solutions will be found.
posted by Strange_Robinson at 10:16 AM on January 7, 2017

You need about 2-3% return per year to beat average inflation (long term average, can be higher or lower in a particular decade). Here are the historic averages.
posted by Mid at 10:37 AM on January 7, 2017

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