One of the big accomplishments of the labor movement in the 1900s — both in the U.S. and in other industrialized countries — was the concept of pensions (both public and private).  The basic concept behind pensions was to guarantee workers that, when they got too old to work anymore, they would have a guaranteed payment for the rest of their life.

Of course, with the decline of the labor movement, there has been a movement away from “defined benefit” plans to “defined contribution” plans.  From the workers perspective, a defined benefit plan offered two significant advantages:  1) if something went wrong, the company had to make up any shortfall caused by bad investments; and 2) the company would hire a competent money manager to properly invest the funds dedicated to the pension plan.  From the perspective of upper management, a defined contribution plan had two major advantages:  1) the company’s contribution was set in stone regardless of whether that investment ended up being sufficient; 2) the most economically savvy (i.e. the financial types that tend to ended up in the top tiers of companies) could get more from the pensions by making slick investment decisions while the average worker was left with measly investment gains (and maybe even losses if the default investment ended up going down the tubes).

At the public level, the big pension plan in the U.S. has been Social Security.  Social Security has always been a variation on a defined contribution plan.  But it has also always been a “pay as you go” type plan.  These two features has always combined to create a “crisis on the horizon” situation for Social Security. Continue Reading...