Siggy made fun of me for hypothetically collecting a pension... (#1572927) which was very timely, as I was just taking notes for some pension-related articles/material.
TL;DR: it's all the same
The concept of pension is one of moving economic value across time... but "value" isn't a tangible, fungible, durable thing but exists in a fleeting consumer's moment and more importantly, in the real goods and services available at a given moment.
...which is why bitcoin as an "economic battery" is so asinine.
...which is why pensions as a concept is so stupid.
...which is why debates over social security/defined contributions or benefit completely miss the point.
If you have a monetary regime where the money buys the same things, plus/minus a little (like gold or gold-denominated assets during the classical gold standard) -- because gold, like most metallic currencies, are mean-reverting #1556942 -- "pensions" don't matter. You just stack up savings, and then in retirement you run down the pile of savings. End of.
In a fiat monetary regime where the money buys fewer things every year, you can't use money to move across time. The two roundabout ways we've found are: 1) buy real/scarce assets like houses and stocks -- and this accounts for the 401(k) etc, 2) entrust it to some form of collective, like a goverment in a pay-as-you-go (PAYG) scheme, which, being infinitely lived and able to tap into the real goods and services of the future (=taxation), can credibly commit to return "value" to you at retirement. I've posted about some of this before (#867043, #1407453)
...so this entire convo about whether businesses ought to use defined contribution or defined benefit pensions is kind of boring:
Pensions were on their way to becoming a relic in corporate America. Now some companies are bringing them back. The lost benefit is being revived by a small but growing number of companies to settle negotiations with labor unions or win over employees in fields where recruiting and retaining workers is especially competitive.
FINANCIALLY and ECONOMICALLY SPEAKING, they amount to the same thing:
- tapping into asset markets (globally)
- tapping into a government credibly promising to deliver real goods and services (again, via money)
And whether the company hands you extra funds that are then locked up in an account you nominally control (=a 401(k) type structure) and that you invest in assets isn't meaningfully different from the company a) setting funds aside and invest it for the long haul from which they pay you a "salary" (=pension) after you retire, or b) handing it over to a pension fund professionally managing the investments for 40 years and then they pay you a post-retirement salary.
It's all the same, and I'm really not convinced one is better than the other.
One benefit would be the liquidity and duration profile of investments available: private equity (or bitcoin #1079069) in accounts readily available for trade by retail customers is a bad idea, objectively speaking. People will just trade themselves out of value.
Locking up funds, thus barring any early withdrawal or sells or runs, for decades opens up more investment opportunities #934175, #877076 -- and honestly, it's the most natural buyer/benefactor of illiquidity premium.
Here's our pal Matt Levine musing on the theme
One of my little hipster theories around here is that the financial industry misses pension funds. In the olden days, US workers got their retirement income from big pension funds managed by professional managers. Those big funds could invest some of their money in pretty spicy stuff: They had a lot of money, so putting 1% of it in spicy stuff was a meaningful allocation, and they had a pretty predictable schedule of liabilities, so they could buy opaque illiquid stuff that wouldn’t pay off for years. The financial industry loves selling investors opaque illiquid stuff, and pension funds were great investors in private equity and other alternative assets.
Then, no more centralized pension pots… but individual managed retirement savings, we want 401(k) and we want to own (and squander!) our shit ourselves:
A 401(k) plan is in some technical sense a big pooled investment vehicle, but not really: Most 401(k) investors can pick their own investments, and they tend to have the normal desires of retail investors. They want daily prices, immediate liquidity and low fees.
It is harder to put spicy stuff into 401(k) funds, though people try. And the spicy stuff that gets sold to retail investors has some bad characteristics, for the sellers: Private credit funds have gotten withdrawals and bad press this year in part because they allow withdrawals, which they do to appeal to individual investors.
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Anyway, Den deserves all the pensions. GIMME GIMME GIMME #1572877