Saturday, October 22, 2016

The Solution to the Retirement Crisis

The New York Times ran an excellent article today talking about how teachers have been boondoggled into retirement plans which end up giving little to no gain. With easily over a million dollars in retirement savings stolen per teacher (if we account for the full opportunity cost) state governments and school districts have done a terrible service to teachers.

My home state of Washington is no exception. The Department of Retirement Systems has three types of plans which teachers can buy into. They are all defined benefit plans. Using this calculator I find that they require a certain amount of your paycheck to be donated to the pension plan in order to get any return. When I compare this to a very simple 8% return with the S&P 500 there is absolutely no situation where the defined benefit plan outperforms the index fund. It is always better to go with the defined contribution index fund plan than a defined benefit plan. If not just that, then because with the defined contribution plan you have a balance which on death you can pull the money out of and pass on to your children and grandchildren. With a defined benefit plan that money might go to your descendants or to the fat cats on Wall Street depending what your plan says. This is a no-brainer.

The solution to the retirement crisis for people currently enrolled in these schemes is to outlaw fees which dissuade people from moving their money to a different type of plan. This will force Wall Street to provide better products. If the product is working well, there is no reason to change. This will give millions of teachers the ability to switch their money to plans which actually give them a return on their money and hopefully bankrupt these corrupt banksters. Done.

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