Pensions Aren’t the Answer to Your Retirement Anxiety

The market is down, inflation is up and your retirement prospects aren't looking so good. It's tempting to pine for the old days, when employers provided defined pensions to workers, giving them more certainty in their golden years. Except…. it wasn't quite like that, actually. Defined benefit pensions are overrated. Even in this scary market, you should be grateful to have a retirement account like a 401(k).

The future of retirement should be individual retirement accounts. We should phase out pensions in public sector jobs and make retirement accounts accessible to more people rather than enlarging Social Security.

There are two basic ways to finance retirement. You can save for yourself in your own account — such as a 401(k) — where you decide the amount to set aside, take all the investment risk and then figure out how much you can spend each year when you retire. How much income you have in retirement depends how much you saved, the generosity of your employer in matching contributions, and how much your investments returned. Whatever you don't spend is left for your heirs.

Or you can receive a pension from your employer, where someone else saves for you. You don’t have your own account but you have a claim on a future stream of income that someone else pays until you die — not matter how long that is.

Either of these types of saving vehicles can be sponsored by a private company or the government.

You can see why the defined benefit pension sounds better — someone else who supposedly knows what they are doing takes on all the risk and gives you money. It also seems more efficient. Risk can be diversified across generations; if one cohort retires when the market is up they can subsidize a cohort who retires when the market is down.