Yesterday during my research for retirement benefits I ended up at several union websites. All unions push the same type of retirement system, defined benefit (DB). This is the type of pension the military provides to their retirees. A defined benefit based system usually has some formula utilized to calculate a specific monetary benefit to the retiree for as long as they live. There is also an option associated with DB to ensure a retiree's survivors can partake of the retirement plan. The designated survivor will get a reduced award amount for as long as the survivor lives. This obviously will come at a price to the retiree as they will pay a premium for this "insurance." The military option is called the Survivor Benefit Plan (SBP).
The other retirement system is called defined contribution (DC). This system is based on the contributions to the system vice the benefit of the system. An IRA or 401(k) plan is a DC system. One of the drawbacks to this system is that the account can reach zero before the retiree has passed on. Running out of money is a just concern.
So which retirement system is pushed by the unions? If you guessed DB, you are correct. In the DB system, the employer is responsible for the system; in the DC system, the employee is responsible for the system. Unions are anti-employer, so, of course, they would be for a system that puts all the burden on the employer. I think unions believe people cannot be trusted to run their own retirement fund; therefore, it should be left to someone else. (There's a covert message in that last sentence!)
Some argue that a retiree should have a three-legged stool approach (Almedia and Fornia, 2008). This approach is one of relying on social security while having both types of plans. A way to look at having all three types is one of diversification, or not having all eggs in one basket.
There are advantages and disadvantages to both plans. In the DB system a huge advantage is only the employer pays into the system (unless it is a public service sector job, then the taxpayer pays a portion while the employee pays another portion). For the most part, union pensions require only the employer to pay into the system. This creates a large pool of money that can be managed by one manager for optimum growth (another advantage). Again, I reiterate, only the employer pays into the system. So a company that pays into a DB system in order to keep the same profit rate will recoup that money a different way: raise the cost of their goods or service. This fact is a disadvantage to the consumer or user of the company.
In the DB system, the benefit is the same for how long the retiree lives. When looking at a DC system, remember, it can run out of money. This is a disadvantage to the DC system. However, a retiree can utilize the DC to purchase an annuity which would then pay a specific amount to the retiree for their life span. In the same report by Almedia and Fornia, they say most owners of DC plans won't do that or know to do that so a DB system is better. Again, a DC owner is not smart enough to take care of themselves, so a system that takes care of them is better.
From an employer standpoint, the DB has a huge advantage over a DC. This advantage lies in the fact that because the money is in one big pot, the employee cannot take the DB with them if they want to change jobs or employers (there's no way to say whose dollar in the account is whose). This makes the employee loyal to the employer thus the employer won't have to find a replacement and spend the money to train them to replace the employee who wants to leave. The DC system, though, is portable. An employee can take their retirement funds with them. In a DB, the funds belong to the employer until the employee retires. In a DC, the funds belong to the employee at all times. Of course, realize that if someone works for a DB system company and is not union, at sometime close to the retirement age, the company just might decide to let that someone go. This way the DB fund will not have to pay the benefits to the employee because the employee did not meet the retirement requirements. So I hope you if work for a DB system company, you are union!
Consider the following: from yesterday my scenario had someone working for twenty years then retiring. They paid $25,200 into a DB system and received $360,000 from the same system. Assuming matching funds actually paid into the system by the taxpayer, this requires a rate of return of over 20% per year to get to that amount. I really don't see a DC matching that. Or can it? But also consider the following, what happens when the retiree dies and has not received all of the funds? Who gets it? Even after paying the survivor, there will be money left over. Who gets that money? In a DC, the funds can be transferred to a survivor. All of the remaining funds (of course, this depends on a half-way decent estate lawyer). If a union has control of the DB fund, who gets the money?
To be honest, I don't like the benefits of the military system under which I retired. If the government doesn't have the money to pay me, how will they pay me? Look at what's happening in Greece. I am dependent on the government. I want to be dependent on me. I've already decided that when I get my second career started, I am going to look for a company or firm that offers a 401(k) or similar plan. This way I'm in control of my money. I'm the one who wants to retire, why should I not be responsible for my own retirement? Someone I met a few months ago, left their job to start their own business because they realized that all the money being brought into the business they worked for was going to the retirees and overhead, leaving not a lot of funds for the company. He left so he could provide for himself now and into the future.
So, who's in charge of your pension?
Mike
P.S. I hope you check out some of the following references:
References:
Credit federal. (2006). Retirement pensions. Financial News. Retrieved 25 May 2010 from http://creditfederal.com/article/articles/126/1/Retirement-Pensions
AFL-CIO. (n.d.). Defined-benefit pensions. Retrieved 25 May 2010 from http://www.aflcio.org/issues/retirementsecurity/definedbenefitpensions/
National association of state retirement administrators. (n.d.) Defined benefit/defined contribution issues. Retrieved 25 May 2010 from http://www.nasra.org/resources/dbdcissues.htm
Dinkytown.net. (n.d.) Investment rate calculator. Retrieved 26 May 2010 from http://www.dinkytown.net/java/InvestmentReturn.html
Almedia, B and William Fornia. (2008). A better bang for the buck: The economic efficiencies of defined benefit pension plans. National institute on retirement security. Retrieved 25 May 2010 from http://www.nirsonline.org/storage/nirs/documents/Bang%20for%20the%20Buck%20Report.pdf
National association of state retirement administrators. (2005). Myths and misperceptions of defined benefit and defined contribution plans. Retrieved 25 May 2010 from http://www.nasra.org/resources/myths%20and%20misperceptions.pdf
Sonnanstine, A and Brian Murphy and Paul Zorn. (2003). List of advantages and disadvantages for DB and DC plans. Retrieved 25 May 2010 from http://www.nasra.org/resources/GRS%20DB%20DC.pdf
CalPers benefit booklet. (2008). Retrieved 25 May 2010 from https://www.calpers.ca.gov/mss-publication/pdf/xxBu0jYBuPcir_pub-2-Aug2008.pdf
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I heard awhile back that if for instance had 100k$ and all of a suddened you died, and you were married but had seperate bank accounts. Uncle Sam gets about half of that 100K$ in taxes before it can be transferd to the spouse.. Call the estate tax or something. Why do they get to tax the money of some who died?
ReplyDelete-Jeff
Estate taxes are a highly debated topic. I was not fully aware of the estate tax so my comment in my blog is definitely a little mis-leading. The water-downed version is if the estate of someone who dies is not worth more than $3.5 million (new tax law will eliminate the estate tax for 2010 then reinstate for 2011 at $1 million, but this is not a given), an estate tax is not assessed. This means for most Americans, there is little, if any, tax paid by an estate. Now the system is very convoluted in calculating the estate value which is where my "half-way decent" estate lawyer comment came from.
ReplyDeleteMost of the proponents of an estate tax don't want the very wealthy to pass their wealth to their successors because it will result in deincentiving work habits of the successor, or in other words, creating lazy rich folk. You can look at this way: what did the son do to earn the money the father left for him? The son was only the son whereas the father worked to earn the money. In other words, "why does he get to be lucky and I don't?"
Check out:
http://www.smartmoney.com/Personal-Finance/Taxes/Will-You-Owe-Estate-Taxes-9554/
or:
http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States
(Note: I usually don't reference wikipedia because I don't feel it is an expert site. My feelings were developed in my college courses where I had several instructors who would deduct points if you cited wikipedia. I normally use wikipedia to get a feel and then visit the references they cite. For today, I include them in the interest of my own time (i.e. I'm being lazy!).
Mike