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A secure retirement

May 18, 2022
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A Secure Retirement

We need to understand a little of how we got to where we're at. In the US unions function like mini welfare states. They were meant to offer healthcare and a pension as a benefit of membership. Of course everyone deserves these but were a bit stuck with the current arrangement. That doesn't mean we give up on fighting for these as universal benefits. It just means we need to both fight for the best deal within the union and to fight to extend these benefits to all.

In the US retirement has been conceived of as the proverbial three legged stool: Social Security, Pension and personal savings. In other countries it is simply a single expanded version of Social Security. Although this seems fairest it's not the American way. At least not at the moment. Of course in the US almost no one has all three legs. Many, barely have Social Security. Almost no one has a pension or adequate personal savings.

As longshore workers we are some of the few workers who posses the power in the economy to have all 3 legs. If we in the ILA can't secure our retirement who can? It's our responsibility to ourselves and everyone else to get the best deal to establish a good example.

Every port in the ILA has its own retirement scheme. For instance, Philadelphia lost their pension in the 90's and only has a 401K. New York gets $140 a month for every credited year and a 401. The ILA does not have a National Pension Plan.

Some of you may have a couple questions regarding the word pension and how it's different from a 401k. When we use the word pension, we mean a defined benefit. When 401 is used we mean a defined contribution. A defined benefit pension plan pays a defined benefit per month for life. A defined contribution 401 is really only a personal savings account where the contribution toward it is a defined amount, currently $4 an hour. After you retire you can withdraw what you contributed from the 401 but once you reach the bottom that's it.

A defined benefit pension plan works because it is a single giant account with a single asset manager making investment decisions. The way a pension plan can guarantee a lifetime benefit is by spreading out risk amongst all beneficiaries. Almost all pension plans use the actuarial statistics from the Social Security Administration (SSA) to calculate life expectancy. Just recently, on average, American workers lived 20years after retirement at 65. This has no doubt dropped due to covid. Some of us will die before, some after. The pension plan needs to have enough money to pay out 20 years benefits to all participants. In this way everyone is guaranteed a defined benefit for life. Since the pension fund is required meet its liabilities - the monthly pension checks we each hope to receive upon retirement - there is a downward pressure on the asset managers fees in order to maximize to the size of the fund. This is subtle but hugely important.

Let's take a look at the 401K. Each of us has a separate account with it's own asset manager and the expectation we each will make nonprofessional investment decisions. In a sense there are thousands of asset managers for thousands of accounts. Each account is its own private investment savings account, only as large as the combination of what's paid in and on the investment returns. There is no shared risk. 401's are catnip for asset managers who are incentivized to maximize their fees since only the contribution is defined and not the benefit, as is the case with a pension. Due to compound interest these fees really take a significant cut of what you should have earned: 30%, 40%, 50% over a 35 year span.

Couple the 401 with your other personal savings and you have the second leg of the retirement plan.

Social Security is the third. SS is, in fact, a bit of a hybrid. It is a defined benefit based on what you paid into your individual account. However like a defined benefit fund it is a single giant fund with a single asset manager with a downward pressure on asset management fees.