Saturday, September 27, 2008

Which is Riskier?

For the past 20 years, traditional pension plans, which paid benefits based on an employee’s years of service and pay, have been gradually replaced by individual accounts loaded with stocks and more exotic holdings, which provide benefits based on fluctuations in the financial markets. Today, only 18 percent of the work force, at most, including government workers and most private unionized workers, still have old-fashioned “defined benefit” plans.

This transformation has largely been the result of government policies that have encouraged, through tax breaks, the creation of 401(k)-type plans and promoted an approach to investing that favors risky stocks and bonds held in high-fee commercial accounts.

So what happened to all of those defined pension accounts?  They collapsed, the companies that provided them went out of business.  It would seem to me that tying your retirement to the long term success of a single company is far riskier than the success of the market as a whole.

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1 comment:

  1. The mobility argument is unassailable, but as a point of fact we should at least acknowledge the existence of the Pension Benefit Guaranty Corporation, a sort of FDIC for pensions.

    THE PBGC does limit benefits of the plans it takes over, however. And of course it is facing a taxpayer bailout. Go figure.