Asymmetrical Information

What Happened! I was reading your post and was just waiting to get to the point where I violently disagreed with you...only it never came. I agree with every word you said.

In the mean time, do you think I should be worried that my firm is only hiring Alcoholic Skydiving Chainsmokers?

No, but you should cut down on your drinking.

I'd be more worried about flying with Alcoholic Skydiving Chainsmokers Airways. Or with an airline that assumes (and needs to prove) that its employees are in an increasingly risky line of work.

I am a professional Alcoholic Skydiving Chainsmoker. I am available for childrens birthday parties and will even provide a free pinata...though it doesn't always survive the trip down. Sometimes, I forget to open the pinata's chute, but, hey, they were just going to bust it up anyway. I used to bring a monkey with me...but that is a very sad story that I'd rather not get into right now....his name was Zurflu and I miss him very much...though Senator Santorum wouldn't approve of the reasons why.

Sure...but you are assuming that companies are responsible and rightly required to pay for their employees pensions in the first place.

Companies are under no obligation to provide pensions in the first place. If they do provide pensions, there are rules that they are obliged to follow. Some of these rules stem from what happened when Studebaker went out of business. Some of the employees didn't realized that they hadn't been vested with the company for a long enough period of time to be able to draw a pension after their involuntary retirement, and it was reported that there were a few suicides because of this. Is it asking too much that a company not be able to use a fringe benefit in order to cheat their employees?

I'm a little surprised that there are still enough employees in defined benefit plans that this is a serious issue. I had thought most companies had been moving to defined contribution plans for some time now in order to avoid problems like this. I realize it would take some time for changes made to filter through the system, but I would have assumed that underfunded pension obligations is an issue we would be hearing less and less about.

What are the regulations surrounding mortality rates? Are the rates specified by government, as opposed to being assessed by independent actuaries on a case by case basis? What I'm getting at is, is there a chance that mortality rates have been arbitrarily set unrealistically low and the companies have a legitimate beef?

Sean,

I think most companies have moved to defined contribution plans, but older companies tend to have a lot of grandfathered employees under older defined benefit plans; I think this is what the airlines are dealing with. (It's also possible that some of the airline unions wouldn't go along with a changeover.)

Thanks PJ. I'm sure you're correct. I just wouldn't have expected it to be as widespread as the paragraph Jane quoted seems to imply. Perhaps I've overestimated how many companies made the switch, and how early, or underestimated how long it takes for a significant number of the grandfathered employees to clear the system.

Why is "Around the Blogosphere" listed four times under trackback?

From http://www.pensioncoverage.net/pdfs/purcell2.pdf
In 1997 (the most recent statistics I could find) 22.7 million workers were covered by defined benefit plans (down from 30 million in 1983). This is out of a workforce of around 69 million. By 1997 83 % of all contributions were being made to defined contribution plans. Some workers (me, for example, get both a DC and and DB plan).

Kate expresses my sentiments exactly.

I am of the opinion that businesses should not have so much of a role in their worker's private and financial lives. I would rather that instead of benefits and pensions and whatnot they just paid their employees higher wages. Businesses should stick to doing business and let employees take care of their own needs and their own futures.

What a great name, Robin Goodfellow. What a pollyanna! The idea that society can "let employees take care of their own needs and their own futures" is so 1929. You may not realize it now, but it's to your advantage that businesses provide retirement benefits. If they don't, and society has an increasing burden of retired poor schlubs whose paychecks never lasted long enough to invest, you as fastidious retiree taxpayer will be picking up the tab.

Why? I think that falls under "their problem". Perhaps you are under the impression that I think we should continue Social Security, I do not. I think we do need a social safety net, but I think it should be just that, a last ditch method for people who absolutely need it. I don't think our government should coddle and nanny it's citizens. If people aren't smart enough to put aside some of their money for their future then they don't deserve to complain when they don't have anything to retire on.

Nevertheless, the case is enormously clearcut, people are very knowledgeable about their pensions, savings, investments, etc. People do pay a great deal of attention to the state of their 401Ks, IRAs, stock portfolios, mortgages, social security funds, and, as this very thread shows, pension funds. They need to, perhaps, be more knowledgeable on how to "manage" some of those things but most people, I think, are equipped enough to do it so long as they are serious about it. Moreover, having money actually invested in the private sector by people who really care about the rate of return is likely to produce, on average, better returns than keeping money in government treasuries, for example.

"I am of the opinion that businesses should not have so much of a role in their worker's private and financial lives. I would rather that instead of benefits and pensions and whatnot they just paid their employees higher wages."

You're entitled to your opinion but it's not really relevant to the issue. Compensation is a part of the deal between employer and employee. If they agree that a pension should be part of it then it's their business. And of course the employer should be required to maintain its end of the bargain, and, if it's public, to report its pension obligations accurately.

"If people aren't smart enough to put aside some of their money for their future then they don't deserve to complain when they don't have anything to retire on.

Nevertheless, the case is enormously clearcut, people are very knowledgeable about their pensions, savings, investments, etc."

I see. If people don't fit your assumptions that people are rational self interested economic actors then they deserve what they get?

Enron. Discuss.

Bernard, I don't think anyone should get screwed out of their pensions, if a business promises a decent pension (or health care, or whatever) to their employees then they damned well better follow through. However, this case, like so many others, including Enron, shows how often it's not a good idea for employees to unduly rely on the benevolence of their employer. This is hardly the only example of such indications. Companies fairly often raid pension funds to help build fancy tall buildings, and the problems with the recording artists pension (AFTRA) are legendary, for example. Personally, I think all these shenanigans demonstrate how unwise it is to leave large sums of money in a fund where the only way it stays safe is by the consistent benevolence of management. With investment funds the situation is, if things are set up properly, different, because their self interest should be parallel with the interest of the investors (it's not always, but it is often enough to be decently reliable).

I would suspect that if you looked at the personally managed "retirement" investments and pensions that they would be, on the whole, just as reliable as any of the employeer managed funds. I don't have the resources to dig up the hard data on that but I'm very confident it's the case.

As for the people who got screwed on Enron's 401k's, yes, that's their fault too. What are commandments 1 through 5 for any investment strategy? Diversify, diversify, diversify, diversify, diversify. If anybody has ever pursued investment advice diversification has to be the first, last, and middle thing they drill into your head. The reason those poor Enron employees lost a lot of value in their 401k's was because they didn't diversify. They saw Enron's stock zooming high and thought they could get rich. They were gambling, not investing. Not every Enron employee got screwed over completely, the smart ones kept their investments diversified and sensible. This is really just common sense, 5 minutes with any investment professional or with any serious investment resource would yield this. In this day and age, with a kajillion investment books and websites out there, there's really no excuse for not being knowledgeable about any investment plan you are participating in or relying on.

The notion that people who lack the literacy, the effort, and/or the foresight to pickup and read a $15 book on investing, so that they won't screw up the investment of many thousands of dollars and so that they won't have to live in a cardboard box when they retire, should be rewarded with a nice comfy retirement regardless, strikes me as remarkably bizarre, and ill-advised.

So, at what critical mass of "idiots" does the assumption that people are rational self-interested economic actors become untenable?

Not to pick a fight or derail, I'm simply curious.

The idea is constantly being refined. But there's a problem with people who use the "people aren't rational self-interested economic actors, and therefore we need government regulation" -- thoes irrational actors are going to be voting for whatever program you want to replace their individual choice. Throw in the known dysfunctions of government, and you tend to get something that fails even more spectacularly than Enron.

Robin,

so does that mean stupid, but hardworking people, who can't grasp concepts such as those in an $15 book on how to invest should just suck it up? What about bright, but unrealistic people, who figure they can invest money "later"? I'm not saying everything should be in the hands of corporate giants or social security, but you're being as unrealistic as those who say the government should provide everything for everyone. Join us here on Planet Earth sometime.

Robin,

I agree with much of what you say in your response. Certainly it's true that investment "professionals" have put a great fog over managing investments when the correct strategy for almost everyone is quite simple. Don't try to pick stocks or time the market, diversify, minimize transaction costs and taxes, be aware of your own risk tolerance.

Of course there's a huge amunt of babble that obscures this, and that makes it difficult for even well-intentioned and intelligent individuals to sort it out. The problem is not buying a book, it's knowing which book to buy.

But that's not what I was saying. What I was saying was that it's perfectly reasonable, and none of our business, if an employer and employee to make a deal where part of the compensation is a defined benefit retirement plan. Maybe the employee doesn't want to spend the $15, or, more likely, isn't sure which $15 book to buy. Or maybe the employee isn't very bright, or is aware of his own lack of discipline, as Kate suggests, and is better off with a defined benefit plan. I see no reason why that is a bad idea in any of these, or other, cases.

Are stupid people just not entitled to a "comfy retirement" under any circumstances?

And if they make this deal I think it's perfectly sensible for the government to act to protect the employee. After all, I thought that even hard-core libertarians conceded the need for government to enforce contracts, and what is a defined benefit plan but a contract?

Relevant Question: Do pension plans give employers some accounting loopholes that make it more attractive for the employer to offer pension+wage, rather than just a higher wage? Perhaps even to the point that a pension program will give a larger net benefit than higher wage alone, invested later by the employee? (Seriously -- I don't have an answer to that one, any thoughts?)

Robin: I'm no fan of a nanny state, and I do generally trust people to make rational decisions. But for better or worse, when handed the bulk of that value now, many people simply will not make wise investment decisions and thus leave nothing for the future -- rationality does not always have good distance vision, especially in lower-wage jobs. One way or another, even if you delete things like Social Security and pare the entire safety net system down to base essentials -- society WILL bear the costs of that indiscretion.

A homeless elderly man may be getting exactly what he deserves if he lived high on the hog from a good paycheck and didn't save for retirement, but that isn't going to make him vanish, say, when he gets clipped by a car and is unquestioningly admitted to the emergency room (by law -- cannot be turned away on account of insurance or economic status). Who pays for that? Or if he starts stealing food -- who pays for that, since he never will? -- and if he is imprisoned -- who pays for that?

So long as the employer pension option remains popular as an unmandated, mutually-agreed-upon settlement between employer and employee at the time of hiring, I tend to think of it as better than many of the possible alternatives. And it doesn't prevent people from setting aside additional income with which to pad their retirement if they anticipate that the pension program won't deliver as much as they would prefer.

Anony-mouse,

I believe that, like many benefits, the pension contribution is not taxable to the employee when made. So given a choice between (wage plus pension) and (wage) employees might well prefer the former even if the pre-tax total, and hence cost to employer, is less.

The other advantage to pension contributions (NOT employee deferrals) is that no payroll taxes (FICA, unemployment, or workmen's compensation insurance) is paid on pension contributions

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