I'm not suggesting just anyone should be able to start a fund and call it a cooperative pension and have people start diverting their SS tax into it. That would be a gold-edged invitation to scammers! What I have in mind is creating some way that people can buy into the equivalent of the professionally managed (not self-directed) DBPs that were once commonly available through one's employer, but have now mostly gone the way of the dinosaur. I'm eligible for a defined benefit pension through my job with City government, and there are minimum funding requirements, audits, and other safeguards to make sure that City retireees actually get their pensions, and as far as I know, they always have. Cooperative pension plans, as I envision them, would be subject to the same kind of regulations, but be available through connections other than one's employer.
How is this different from an annuity or a target date retirement fund. The obvious solution to me is to have a program which takes a target date fund and turns it into an annuity.
However, to answer your specific question, the (required) pension insurance would "hold the bag". Now, from what I hear the PBGC that covers existing pension funds doesn't charge nearly enough in premiums to actually guarantee the pensions it covers, and if the pension fund you are depending on goes bust due to bankruptcy of the sponsoring company or whatever, you will probably get a much lower benefit than you were promised. In order for cooperative pension funds to pay the higher premiums necessary to provide adequate insurance, I suppose they'd have to pay a lower benefit for the same salary + years of service than SS would. Some people would think that's a bad deal, and stay in the SS system. Maybe there wouldn't be a stampede out of SS after all, once people saw what the actual benefit offered by a pension coop would be.
There are 4 issues as I see it which combine SS, IRA/401k type plans, and your own suggestion.
1) Is there a need for a minimum goverment insurance program?
2) Is there a need for privately managed investment accounts for IRAs, 401ks and similar?
3) Is there a need for a 3rd program (pensions) available to the general public?
4) Is there a reason all of four of these programs need to be grouped together or funded from one "tax"?
As I wrote, it would be the CPPI (Cooperative Pension Plan Insurance) who would be paying for all that. Even if cooperative pension plans never come to be, we're all still required (through SS taxation) to put the funds needed to keep our heads above water at risk--at risk that the SS sytem will not pay the benefits promised, will delay eligibility, will pay benefits with the right hand and tax them away with the left, or that the government will just print the money to pay everyone "in full" and the resulting inflation will reduce the purchasing power of the benefit as much as a cut in the dollar amount would have done without the inflation.
What I'm proposing is the addition of a fourth leg to the "three legged stool" analogy. Right now a person has at least two, possibly three retirement savings possibilities: Social Security, personal, self-directed savings (IRAs, 401k's etc), and for some, employer pensions. I propose adding the option of allowing individuals to redirect part of their SS tax into a professionally-managed, defined-benefit pension system. The problem with a three-legged stool is that if it loses a leg, it can't stand. If one of the legs of a four-legged stool is lost, there are still three, and at least a chance that it won't fall over. It may not be quite as comfortable as it would have been with four, but at least it's still functional. How much money goes to each leg would be up to the individual, after the SS tax amount. Anyone who wanted to stay 100% SS could do so, and anyone who wanted to go 100% coop could do so (asssuming that there is a solution to the difficulty pointed out by independent). Anyone who wanted to do a self-managed 401k or IRA instead of a coop pension could do that--and given the inadequacy of the average American's investment management skills, my guess is that it would be the people who opt for self-managed plans who would end up on the dole.
Look at my highlighted portion. You assume all retirement plans have 3 legs. I bet many people here have different legs than the ones you mentioned:
1) taxable accounts, IRAs and annuities (no SS)
2) taxable accounts and IRAs (no SS)
3) IRAs and SS
4) Real estate and IRAs
5) Annuities and SS
the permutations and combinations are probably quite large.
A better plan (IMO) would be to
a) provide a government sponsored 401k plan (similar to a TSP) where any person could divert the money to this plan from their payroll. This would not lower the SS contribution though. This would allow anyone with a bad 401k to opt out.
b) provide a government annuity (which returns higher than SS) which would be backed similar to FDIC on savings accounts. I realize there is something which allows annuity contracts to be transferred from one insurance carrier to another, I am suggesting an annuity which is held by the US government and paid out. This would be a more conservative annuity than what you might get at Vanguard, but because it has the US gov't behind it, maybe it gets better press. US government can only invest in Treasuries, I-bonds, TIPs and similar paper (gov't paper), not in equities or anything with a volatile price.
IMO, sending the individual retiree to purchase an annuity is not equivalent to allowing groups of retirees to form a pension fund and have it professionally managed. It replaces a pension fund controller who has a professional duty to maintain the fund in a financially sound condition so that the promised benefits can be paid with a salesperson whose professional duty, if you can call it that, is to sell an annuity no matter what. I can guess who will get the short end of the stick on that deal.
How does a person choose between the pension of Vanguard and T Rowe Price? Someone has to sell something somewhere for this to work.
It is not up to government to take away choices or dictate choices on retirement plans. Anyone which is suggesting to take away a choice is working against what is being done by so many which come to this board.
4 legged plans can be created now. I have a 6 legged plan which I am working on implementing which includes SS, dividends, real estate, 401k, annuity and an inheritance. Even if 4 of the legs fail, my plan can work with SS and 401k.
If you think SS tax is too high, there are other solutions to this problem (other than divert some of the 12.4% of salaries going into SS now).
If something generic is going to be created, realize that healthcare is more directly related to your employer than your retirement plan is. Fix the healthcare from this perspective first, then maybe I might have confidence the government could manage pension funds and retirement plans second.
