Comments on: Defined benefit, defined contribution and the hierarchy of needs http://www.creditwritedowns.com/2009/01/defined-benefit-defined-contribution-and-the-hierarchy-of-needs.html Sat, 21 Nov 2009 08:48:41 -0700 http://wordpress.org/?v=2.8.6 hourly 1 By: Nick von Mises http://www.creditwritedowns.com/2009/01/defined-benefit-defined-contribution-and-the-hierarchy-of-needs.html/comment-page-1#comment-2572 Nick von Mises Wed, 14 Jan 2009 10:07:12 +0000 http://www.creditwritedowns.com/?p=4393#comment-2572 As a parable, I think it's like a dissolute playboy inheriting a fortune then squandering it on immediate desires, then writing a bunch of worthless IOUs until people figure out he's broke. The boomers are the playboy. Three years ago all the talk was of "inter-generational theft", especially as housing was out of reach. Now I think the boomers are realising that they can't collect and institutions like the AARP, old-school unions, and public sector groups are going to be the new enemies of the working taxpayer. I think an unpoliticised young person should react by keeping assets offshore. Activists, I'm not sure. I don't really follow issue politics As a parable, I think it's like a dissolute playboy inheriting a fortune then squandering it on immediate desires, then writing a bunch of worthless IOUs until people figure out he's broke. The boomers are the playboy.

Three years ago all the talk was of "inter-generational theft", especially as housing was out of reach. Now I think the boomers are realising that they can't collect and institutions like the AARP, old-school unions, and public sector groups are going to be the new enemies of the working taxpayer.

I think an unpoliticised young person should react by keeping assets offshore. Activists, I'm not sure. I don't really follow issue politics

]]> By: Nick von Mises http://www.creditwritedowns.com/2009/01/defined-benefit-defined-contribution-and-the-hierarchy-of-needs.html/comment-page-1#comment-2571 Nick von Mises Wed, 14 Jan 2009 10:07:01 +0000 http://www.creditwritedowns.com/?p=4393#comment-2571 I've been looking at demographics as a huge time bomb, mainly because of the promises the retirees expect to collect upon rather than the gross numbers of people themselves. I think the high living standards of the entire post-war consensus was a combination of (i) running down the capital stock of the West and (ii) converting payments now into promises to pay later. The former is the reason it now takes two wages to live like one wage used to. It has been masked under women entering the labour force, household debt, global outsourcing, and inflation to jig the numbers so they seemed to go up in nominal terms. The latter was thru social security, pensions and stock market prices that could never survive the boomer liquidation. I've been looking at demographics as a huge time bomb, mainly because of the promises the retirees expect to collect upon rather than the gross numbers of people themselves. I think the high living standards of the entire post-war consensus was a combination of (i) running down the capital stock of the West and (ii) converting payments now into promises to pay later. The former is the reason it now takes two wages to live like one wage used to. It has been masked under women entering the labour force, household debt, global outsourcing, and inflation to jig the numbers so they seemed to go up in nominal terms. The latter was thru social security, pensions and stock market prices that could never survive the boomer liquidation.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/01/defined-benefit-defined-contribution-and-the-hierarchy-of-needs.html/comment-page-1#comment-2573 Edward Harrison Wed, 14 Jan 2009 07:50:29 +0000 http://www.creditwritedowns.com/?p=4393#comment-2573 I take a fairly conservative view on the Coming Generational Storm and social security. I think it is indeed a ticking time bomb. Moreover, Japan's malaise may have much to do with the same generational issues that they got to fist and we are now getting to. In my view, this requires two things: 1. a promotion of mental and physical health amongst younger workers so that they are healthy when they get older. 2. a lengthening of the working years. This view is very much in contrast to Dean Baker, someone I respect, but who sees the generational and social security issues very differently. I take a fairly conservative view on the Coming Generational Storm and social security. I think it is indeed a ticking time bomb. Moreover, Japan's malaise may have much to do with the same generational issues that they got to fist and we are now getting to. In my view, this requires two things: 1. a promotion of mental and physical health amongst younger workers so that they are healthy when they get older. 2. a lengthening of the working years. This view is very much in contrast to Dean Baker, someone I respect, but who sees the generational and social security issues very differently.

]]> By: Nick von Mises http://www.creditwritedowns.com/2009/01/defined-benefit-defined-contribution-and-the-hierarchy-of-needs.html/comment-page-1#comment-2567 Nick von Mises Wed, 14 Jan 2009 07:13:43 +0000 http://www.creditwritedowns.com/?p=4393#comment-2567 I'll agree with the bolded comment, sure. I think it was a more a case of fleecing the shareholders and taxpayers (the "going broke for profit" model) by a pump'n'dump for execs than it was the fleecing of employees. The latter were lied to but it's likely the shareholders or taxpayer will have to make up the shortfall to employees more than the employees simply doing without (for DCs). The age thing is important too. This is about the older generation fleecing the younger. Most changes have involved new workers being denied benefits in order to protect benefits of older workers. When the younger generation finally figure this out en-mass it'll be the end of the unions. I'll agree with the bolded comment, sure. I think it was a more a case of fleecing the shareholders and taxpayers (the "going broke for profit" model) by a pump'n'dump for execs than it was the fleecing of employees. The latter were lied to but it's likely the shareholders or taxpayer will have to make up the shortfall to employees more than the employees simply doing without (for DCs).

The age thing is important too. This is about the older generation fleecing the younger. Most changes have involved new workers being denied benefits in order to protect benefits of older workers. When the younger generation finally figure this out en-mass it'll be the end of the unions.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/01/defined-benefit-defined-contribution-and-the-hierarchy-of-needs.html/comment-page-1#comment-2569 Edward Harrison Wed, 14 Jan 2009 03:19:26 +0000 http://www.creditwritedowns.com/?p=4393#comment-2569 Nick, that last part was an interesting bit I hadn't really considered: the transfer of security from younger to older workers leading to unions' demise. At the Big Three automakers that is exactly what is happening, older workers have good benefits that will end up killing the proverbial goose and screwing the younger employees. So, how does a younger person react? By leaving the union, you suggest. It does make sense. And you're right, shareholders and taxpayers were fleeced even more here. Nick, that last part was an interesting bit I hadn't really considered: the transfer of security from younger to older workers leading to unions' demise. At the Big Three automakers that is exactly what is happening, older workers have good benefits that will end up killing the proverbial goose and screwing the younger employees. So, how does a younger person react? By leaving the union, you suggest. It does make sense.

And you're right, shareholders and taxpayers were fleeced even more here.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/01/defined-benefit-defined-contribution-and-the-hierarchy-of-needs.html/comment-page-1#comment-2545 Edward Harrison Tue, 13 Jan 2009 16:01:43 +0000 http://www.creditwritedowns.com/?p=4393#comment-2545 Hi Nick, I understand from your comments, you see the corporation as a collection of individuals (trough the shareholders). Fair enough. However, I am making a different point. To be clear, what I am saying is that corporations have gotten rid of DB plans because they viewed this as a burden which decrease earnings, thus decreasing executive compensation. In order to increase earnings, companies decided to slough off the retirement responsibility onto individuals. This disproportionately benefits the executives of those companies, making the switch to DC another issue directly-related to executive compensation. So, I do not see this as merely an issue of transferring risk between individuals (employees, customers shareholders) but a transfer of risk from corporations, which have over the preceding period been used to enrich insiders, to their employees. The point your making is that society as a whole, i.e. individuals bear the burden of saving for retirement, so under-savings is a burden we all share. In the future, increased savings and decreased consumption will be a collective burden. I agree with this. However, I am also suggesting that <strong>there was a permanent transfer of wealth from employees to corporate insiders</strong> due to the change from DB to DC. Had the switch occurred during a bear market, insiders may not have profited and individuals would have saved more money. Hi Nick, I understand from your comments, you see the corporation as a collection of individuals (trough the shareholders). Fair enough.

However, I am making a different point. To be clear, what I am saying is that corporations have gotten rid of DB plans because they viewed this as a burden which decrease earnings, thus decreasing executive compensation.

In order to increase earnings, companies decided to slough off the retirement responsibility onto individuals. This disproportionately benefits the executives of those companies, making the switch to DC another issue directly-related to executive compensation. So, I do not see this as merely an issue of transferring risk between individuals (employees, customers shareholders) but a transfer of risk from corporations, which have over the preceding period been used to enrich insiders, to their employees.

The point your making is that society as a whole, i.e. individuals bear the burden of saving for retirement, so under-savings is a burden we all share. In the future, increased savings and decreased consumption will be a collective burden. I agree with this. However, I am also suggesting that there was a permanent transfer of wealth from employees to corporate insiders due to the change from DB to DC. Had the switch occurred during a bear market, insiders may not have profited and individuals would have saved more money.

]]> By: Nick von Mises http://www.creditwritedowns.com/2009/01/defined-benefit-defined-contribution-and-the-hierarchy-of-needs.html/comment-page-1#comment-2543 Nick von Mises Tue, 13 Jan 2009 14:24:53 +0000 http://www.creditwritedowns.com/?p=4393#comment-2543 Interesting discussion but I think you skirt the fundamental issue: we are not as rich as our paper statements made us believe. Whether pensions are DC or DB it still relies on somebody picking up the tab. In a bull market you simply get the illusion that no-one needs to due to unrealistic paper valuations of what are essentially unrealised (and non-existent at a macro level) gains. You correctly predict much upcoming populism on the subject but essentially it will be about baby boomers desperately trying to force the tab onto the younger generation. Also, I found the statement on risk/costs being transferred from corporations to individuals misleading. All costs everywhere are bourne by individuals, whether as employees, customers, or shareholders. Putting a pension cost onto a corporation is putting the cost on it's shareholders, who may be people with 401ks invested in that firm. There are definately winners and losers among those individuals, but still individuals. Interesting discussion but I think you skirt the fundamental issue: we are not as rich as our paper statements made us believe. Whether pensions are DC or DB it still relies on somebody picking up the tab. In a bull market you simply get the illusion that no-one needs to due to unrealistic paper valuations of what are essentially unrealised (and non-existent at a macro level) gains. You correctly predict much upcoming populism on the subject but essentially it will be about baby boomers desperately trying to force the tab onto the younger generation.

Also, I found the statement on risk/costs being transferred from corporations to individuals misleading. All costs everywhere are bourne by individuals, whether as employees, customers, or shareholders. Putting a pension cost onto a corporation is putting the cost on it's shareholders, who may be people with 401ks invested in that firm. There are definately winners and losers among those individuals, but still individuals.

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