Australia's system is a model: https://en.wikipedia.org/wiki/Superannuation_in_Australia
Pensions are a better deal until they catastrophically fail.
In germany a pension comes from your gross salary, is untaxed and moved away. It then will be taxed later when you are retired but because you probably earn a lot less as a retire, you pay less taxes on it.
If you're lucky, you've been getting audit reports about the underfunded pension for years, so you could prepare, but you probably couldn't do anything about it.
If your employer had put the pension funding in a 401k account for you, you would know what you have, and be able to separate from the employer and not have to keep in touch to make sure they're holding their end of the bargain.
> It is a match, if you don't contribute, there is no match.
That choice should be left to the employee.
Why are you upset with how the employee is choosing to do with their retirement?
On paper a well-funded 401k is better. You don't have to worry about the fund collapsing. You're safer against inflation. And your money doesn't disappear when you die. Etc.
12% matching is an insanely good deal for people smart enough to use it well. But you are going to have people who make really bad choices end up in a lurch. So it's a higher-ceiling/lower-floor range of outcomes for each individual.
Obviously, long term capital gains should be part of the equation but if you’re young in a lower tax bracket but a lucrative career, 401k can be a terrible financial decision.
if you are 50+, worked there 30 years, and had your pension frozen after 20 years of work, you are so far behind the curve even if you max out your 401k for your remaining years. You need to do a lot of work and probably invest in high risk stocks to even begin to make up for that 25 years of lost compound interest in your career.
Also: I realize I'm spoiled, but I had quarter matching 401ks in tech (which apparently isn't that amazing to begin with), so I don't see this as an insane deal for the effort and sacrifice they put out.
The main argument for defined benefit pensions is that while they never covered most employees, they did represent money that people got in retirement without doing anything and which "society" would otherwise have been on the hook for to some degree.
I'm just saying, if they're contributing, great, I'd rather it go into a 401k where it's in a specific account for me and I can easily track it and complain timely if it's missing and I can fully separate from the employer when I leave versus going into a pension trust which I have much less visibility and a much longer connection with the company.
Of the four companies I've had 401ks with, one is totally dead, I think. Another is merged into Verizon and may as well be dead. The fourth bought the third and might last until I'd get a pension.
I'm quite happy I have no further financial connection to these companies, and don't have to pay attention to their solvency anymore.
Even if you contribute late, you probably don't need to draw down on the 401k until much later in your retirement to make up the difference between your pension payouts and inflation. So that could still mean a few decades of compounding growth.
There are two reasons you might not want all retirement savings money to be wholly in control of the saver:
1) Some folks are simply really bad at saving, which ends up being rough for others around them and for society, not only affecting them. This reason tends to rub some folks the wrong way on principle, so they may prefer to disregard it, but it is true as far as it goes (principle aside) [edit: I mean doing anything about this for this reason rubs some folks the wrong way, not that they disagree it’s a real phenomenon]
2) Money directly available to people is freed up for rivalrous zero-sum spending. Think: bidding up scarce resources for your kids, like good schools (which can mean housing). In a world where 100% of comp is employee-directed, this punishes responsible savers.
How much "later" do you have? you're 65, life expectancy is 76 IIRC in America. Worse depending on various socioeconomic factors. If I'm not living after some 40 years of labor what was the point of life?
Also, call me paranoid but I wouldn't be surprised if they tried to raise the retirement age like they did in other countries.
>but the assumption would be that the current pension still would pay out as it did before.
Does a frozen pension accumulate interest? If not, I don't see how the difference is ever made up.
Edit: Although it does appear there is a cap to the employer's contribution ($69,000 for 2024 [1]). But I think the general point still stands, why bother to have employer and employee limits.
[1]: https://www.irs.gov/retirement-plans/plan-participant-employ...
A $200k/yr employee with no employer contribution would be limited to $23,500 contribution (in 2025 limits).
[edit] actually that’s not quite true, though, because IIRC contribution rules have to be uniform, to avoid horse-shit like maxing out upper management at $70k and contributing nothing for lower-level employees, limiting them to $23.5k tax-advantaged no matter how much hard try to save, I.e. to prevent the whole damn scheme from benefiting mostly the already well-off more than it’s probably going to regardless.
I guess you could try living frugally and wait it out for as long as you can. The only hope is that you won't die before you even begin to tap into it but I guess more for your family...
I am pretty sure you did not mean it this way, but you're absolutely right.
The pensions that were granted in the 50s and 60s and not funded have left an enormous debt for many companies that the federal government will have to make good.
Even today, the pensions of many police and firemen are underwater and not likely to be solvent.
So pensions are great for company managers who really don't ever plan to fund them properly.
And don't get me started on social security.
They'll pay it when they take it back out. At best they're saving the difference between the bracket rates in exchange for letting your money slosh around the markets for your working life.
There’s nuances around things like divorce, but people overlook just how tax advantaged traditional investments currently are.
I do not think a fund is better than a 401k in terms of returns over investment. But it's for sure easier for the employee, as retirement fund is a complex topic better managed by professionals.
The only reason why a pension is a preferred bargaining tactic is because it creates a strong principle-agent problem for the business, where management are more than happy using tomorrow’s income to pay for today’s problems.
I’ve seen far to many people lose thousands and some tens of thousands by doing so.
Well, except for our crippling lifelong dependency on index funds.
People only need to crack open the piggy bank when shit hits the fan. During those times (layoffs, etc.), the value of what's in the pig is probably depressed to begin with. So your hypothetical scenario is actually worse than you're suggesting, since you pay a 10% penalty on depreciated holdings.
If you legit need the 401k money, they do allow some circumstances for hardship withdrawal penalty free. You just have a higher tax liability that year.
But yes, don't use your 401k for general savings. Depending on your credit you are better off taking out a loan against it.
500k in income 1 year is ~$162k in income tax.
500k in income split across 2 years is $68.5k each year totalling $137k.
It's not massive but it's still a decent chunk of taxes people can avoid.
Years later I got a mortgage and learned what compound interest is.
I'd been underfunding for most of my career. You overestimate collective intelligence.