It comes from a time when business was slower, more conservative, and more resistant to change…mostly because very little changed.
The pension is one of the most dangerous things in the world. It creates financiers of automotive companies, airlines, manufacturers, and governments. Defined benefit plans are some of the most dangerous things anyone could ever create.
Screw derivatives, these puppies are weapons of mass destruction.
If a financial planner sells you an investment and guarantees a return, he or she could go to jail. When union bosses require companies to guarantee returns years, decades, and even centuries into the future, they get away with it.
Here’s the thing: investors and business owners don’t want to screw with pensions. It complicates the investment process. So many excellent businesses have been ruined by extreme aggressiveness in pension accounting. There is only one way to provide a defined benefit to employees: know exactly how much the company make on capital in the pension (basically predict returns for the broad stock and fixed income market 40-50 years in the future), know exactly when every single employee will die, as well as how much their incomes will increase year over year forever.
Guess what? Projecting all these variables and coming up with a perfect answer is…you guessed it, impossible.
Let’s make a deal
There is a very logical way to deal with the defined benefit pension: get rid of it. Companies can instead contribute a certain amount annually to an employee’s 401k. That way the funds are the workers’ and completely untouchable. That way, the funds can be risked on the prospects of 500 or even 4000 companies, rather than a single company.
Pensions are great when a company manages to be profitable enough to fully fund them. But how many businesses last for a full generation? Very few.
So what’s the solution? Pretty simple – shift the risk of retirement from a company to the employee.
But again, it’s another one of those simple things that will never, ever happen. For whatever reason, unions and their members believe that people trained in manufacturing and manufacturing management should be able to predict the next 50 years of asset returns in the equity markets. The best full-time financiers in the world couldn’t do that.
You know, if Hostess, airlines, and manufacturers were staffed with excellent forecasters of what is impossible to forecast, something tells me they wouldn’t dedicate their capital to fixed low-return assets like factories and airplanes and invest instead in stocks and bonds of other companies. But hey, maybe they’re just irrational investors.