> Pensions are much cheaper than individual private plans and place various financial risks on the party that can actually afford to manage it (and spread it across the entire employee base).

This is obviously false given the underfunded states of pretty much all taxpayer funded pensions in the US.

> Being a large professionally managed fund, it's in a great position to do so, and it even spreads the cost around! I don't have to pay some insurance company a huge premium to get an annuity, the pension gives me the annuity at cost and probably with much better terms.

A pension fund manager is not doing anything more special than a simple target date retirement fund does. The job has been automated away. The only savings comes from shafting future taxpayers, which is why almost no non taxpayer funded entity offers DB pensions anymore.

Also, there exists a defined benefit pension plan for all US residents called Social Security. But the federal government has the power to issue new money, which no one else does.

>This is obviously false given the underfunded states of pretty much all taxpayer funded pensions in the US.

You have confused two different but related issues. Let me be more explicit.

My pension fund provides all employees who join with certain benefits. Let's say over the course of 50 years we look at what it costs to provide these benefits in some constant dollars and it's 100 bucks. I claim that the cost for all employees using individual retirement accounts to achieve the same benefits as the pension, they would have to had paid e.g. 110 bucks. I can't prove this claim but can provide some explanation:

Each individual fund is much smaller and is paying much higher fees, both management fees and transaction type fees.

Each individual is much harder to insure than the group and has to go to a for-profit insurer to get an annuity (as they have with the DB pension). They pay the risk and for the insurer's profit.

Each individual has to manage pre-retirement market risk and pay a price to do so, e.g. they're using target date funds and the money is in low-yield bonds for the last few years before they retire, losing returns at exactly the time it's most costly.

The question of funding is separate. It's up to my employer to decide if they want to set aside the whole 100 bucks up front that the pension costs or if they only want to set aside 80 bucks. So, either the pension is fully funded, or 20 short, either way it's cheaper.

I do not see why costs arising from agency risk, as seen pervading the US on state and county and city levels, should be disregarded.

> Each individual fund is much smaller and is paying much higher fees, both management fees and transaction type fees.

Compared to Vanguard/Fidelity/Schwab/Blackrock/etc offerings that are easily available in any brokerage/IRA/401k?

> Each individual is much harder to insure than the group and has to go to a for-profit insurer to get an annuity (as they have with the DB pension). They pay the risk and for the insurer's profit.

And yet insurers are able to pay annuities without needing the power to tax entire populations. There is clearly a disconnect between the theory and practice, due to the aforementioned agency risk.

> Each individual has to manage pre-retirement market risk and pay a price to do so, e.g. they're using target date funds and the money is in low-yield bonds for the last few years before they retire, losing returns at exactly the time it's most costly.

Another way to look at it is they are invested in lower volatility investments because they are at a point in their life where they can not afford volatility.

> The question of funding is separate. It's up to my employer to decide if they want to set aside the whole 100 bucks up front that the pension costs or if they only want to set aside 80 bucks. So, either the pension is fully funded, or 20 short, either way it's cheaper.

Yes, it is cheaper and great for those who are early enough in the scheme to be a benefit recipient, which is why I specified older employees who compose union leadership in my original post.

It is not cheaper for younger taxpayers and younger government employees shunted into lower paying tiers of the pension. I have a sister in law who is 7 years older than my other sister in law. Both work for a state government, and the older one has worked a lower paying job her whole life than the younger, by at least $20k per year. However, the older one will retire with a benefit worth at least 2x as much as the younger one.

>I do not see why costs arising from agency risk, as seen pervading the US on state and county and city levels, should be disregarded.

Fair point, but individual accounts have similar issues. People give their money to wealth advisors or whatever all day long.

>It is not cheaper for younger taxpayers and younger government employees shunted into lower paying tiers of the pension. I have a sister in law who is 7 years older than my other sister in law. Both work for a state government, and the older one has worked a lower paying job her whole life than the younger, by at least $20k per year. However, the older one will retire with a benefit worth at least 2x as much as the younger one.

I'm arguing that benefit-for-benefit, the pension does it cheaper. It would be cheaper for a pension to provide your older sister's benefit and cheaper for a pension to provide your younger sister's benefit. But yeah, this kind of thing is fucked up and I don't know why unions agree to it.

>which is why almost no non taxpayer funded entity offers DB pensions anymore.

In fairness, my (utterly non-expert) understanding is that tax law changes factored in as well. Though, to the degree they understand that pension funding isn't "free," a lot of employees would prefer to do their own saving, including in tax-advantaged accounts, without strings attached.

From a mental accounting point of view, yeah, it's nice that I'll have some "free" money coming in from decades ago but it was presumably not actually free in that offered benefits presumably factored into pay scales at some level.

No, it was the Pension Protection Act of 2006, and the accompanying adoption of International Financial Reporting Standards (IFRS) that made DB pensions a nonstarter. In conjunction with the advent of nearly free equity index funds.

The former made it so no more fantasy discount rate assumptions could be used to understate liabilities by 30%+. The latter made it so paying the costs of active fund managers was a waste of money when you get the same results with a 0.03% to 0.06% expense ratio passively managed fund.

Again, discount rate assumptions don't directly affect the cost of the pension. The liabilities will be what they will be. Returns will be what they will be, though of course assumptions impact the amount of risk you take as you attempt to achieve the assumed return.

And even with passively managed indexes the pension fund will win. Who's paying fewer basis point for this index fund, you or the billion dollar pension fund? If they achieve similar results then still the pension will have you beat.

I think we are referring to costs in different contexts.

If I may switch to a different term, the outgoing cash flow will be what it will be, the question is where and when and from whom is the incoming cash flow?

In the context of this thread, apparently some of it will be from people who pay parking meters for the next 70 or so years. Is that what the plan was when this cash flow was promised to voters and recipients 20, 30, 40 years ago?

>In the context of this thread, apparently some of it will be from people who pay parking meters for the next 70 or so years. Is that what the plan was when this cash flow was promised to voters and recipients 20, 30, 40 years ago?

I don't know about the City of Chicago but most pensions were pay-as-you-go til the 80s or 90s, so the voters then probably agreed that they should pay benefits for retirees then and future citizens and taxpayers should pay for benefits now. The advent of the pension fund means that it's now more common for taxpayers today to set aside a separate fund from which some or all future benefits will be paid. Just a different way of doing things.

Thanks.

Related to the index funds, although a lot of people lost quite a bit of money during the dot-com bubble popping, that period also democratized and made buying and selling stocks/index funds/other mutual funds much less expensive and accessible.

401(k)s had been around for a while but it was probably around then that online trading was really normalized as opposed to something that investment professionals largely handled for you out of sight out of mind.

Another argument is the risk of early death means that the earned benefit resulting from a lifetime of work defaults to the pension plan (as part of the agreement) rather than to the heirs of the person who worked a lifetime and suffered the early death.

Many people are OK with that tradeoff, but nowhere near everyone is.

Most pension plans offer the possibility of a cash out or transfer of actuarial benefit to a 401k-type plan. Except in the case of accidental death where there genuinely is no time to do so, if you were sitting on your deathbed you could at least theoretically take the money and run. And most pension plans offer death benefits while you're active so the calculation may not be so cut-and-dry whether the pension is better or if you'd have been better off with an individual account.

But yes, you can certainly find individual cases where a specific person would have been better off with 401k for this or other reasons. My claim is that it's systematically better for almost everyone and better overall.

Taxpayer funded pensions frequently come with cushy terms that allow a spouse to continue receiving benefits after the retiree dies, called joint and survivor benefit.

That DB pension still has interest rate risk over a period of decades. And, although with some exceptions (charitable trusts and the like), an equivalent annuity is mostly not a great investment for individuals, there are a lot of other ways to manage risk if you're happy with a modest 6% or whatever return. For starters, I can buy long-term treasuries although that may be too safe by itself. And almost certainly wouldn't be the optimal investment for an early-career employee who may be starting to think about saving for a house down payment.

I'm perfectly happy to have an early-career pension coming that I probably didn't really think twice about at the time. However, overall, myself and I imagine most of the people here would prefer to invest their own money rather than count on the pension from the company they worked for long ago (assuming they worked for them long enough).

But maybe you just prefer effectively being forced to save at a low-risk rate which is what a DB pension is.

>That DB pension still has interest rate risk over a period of decades.

That's the employer's problem, not the pensioner's. Again, the large corporation that can afford to manage the risk is forced to, rather than the individual retiree.

>But maybe you just prefer effectively being forced to save at a low-risk rate which is what a DB pension is.

No, it's an effective guarantee of the benefits I'll receive upon retirement. I don't invest in anything as part of the pension.

Now, I'll agree that some individuals would long-term beat the 6% that the pension fund will get (presumably with higher risk).

But for the entire employee base to each individually beat it seems very unlikely to me. Even to collectively beat it and accept that some unlucky duckies will eat dog food when they retire, I think is not very likely.