Some say that truly successful people are those who are willing to invest their time – and perhaps money – to pursue long-term goals. Long term goals require a certain amount of delayed gratification. Take the high school student who stays in to study so he can get into a good college so he can get into a good law school so he can make a lot of money. He misses out on a Saturday night hanging at a friend’s basement, hoping for the fuzzy, vague prospect of an even better, crazier Saturday night with friends and bottle service in the City some ten years later. Some people can make that tradeoff easier than others. Sacrifice fun now and hope that you have even better fun later.
I think that is why no one, except maybe your financial planner who gets paid to help you, enjoys planning for retirement. When you are in high school, college doesn’t seem too far away. But even now, as a 30-something single man, I feel like retirement seems far off; marriage and buying a house and having kids – and then double mortgaging that house to send those kids to college – all of that seems plausibly on the horizon. But retirement? That’s for my grandparents. Not going to work seems fun, but going to lots of doctors appointments: that doesn’t.
Yes, I contribute to a 401k. But definitely not as much as I should. And I certainly didn’t start saving enough in my twenties, when I would have best maximized my investment, according to all of those fancy charts. Sometimes I think it’s just easier to work until I die.
Perhaps this explains the allure of the defined-benefit pension plan, which are still very common in the public sector, and which I could have had had I stayed in the state’s civil service. Most of them are pretty simple to understand from my, the employee’s, perspective. They are usually something like: when I retire I get 2-3% of my final salary, multiplied by the number of years I worked. For every year of the rest of my life. That could be something like $80k or more a year, before adjusting for inflation. Pretty decent. And how much will that cost me? Well, that’s easy. I don’t need to think about that. My employer deducted it from my paycheck from day one of my job. No withholding form to fill out and to submit to HR. No weighing risks, and doing calculations, and figuring out where to put my savings. When I retire in 30 years, hopefully they did the math right!
Alas, if only we could continue to believe government will do the math right. Quoth the Economist:
American states and cities typically offer their employees defined-benefit pensions based on years of service and final salary. These are supposed to be covered by funds set aside for the purpose. By the states’ own estimates, their pension pots are only 73% funded. That is bad enough, but nearly all states apply an optimistic discount rate to their obligations, making the liabilities seem smaller than they are. If a more sober one is applied, the true ratio is a terrifying 48%.
So they only really have 40k to pay me, when I thought I was getting $80k? When Detroit’s bankruptcy is settled, its pensioners may find that the modest, yet decent, retirement they thought was guaranteed is now significantly discounted. Some will say this is unfair; yet others might say that faced with firing even more police officers and leaving even more potholes unfilled, Detroit is right to say that everyone has to take a cut. Many other states and cities will soon face these tradeoffs. Sadly, just like individuals don’t like planning to saving enough for retirement, it seems employers don’t either.
Ironically, private employers have mostly phased out pension plans because government, albeit the federal government, forced them to plan ahead, by requiring insurance and more honest accounting methods, according to Business Insider. Employees might not have liked it, but private employers decided that individuals should do the retirement planning instead of themselves.
And maybe that’s how it should be. Even if we don’t like it.