Pension Risk News & Analysis : Pension Governance, LLC : Pension Risk & Investment

As companies and government employers shed their traditional defined benefit ("DB") plan offerings, defined contribution schemes become absolutely and proportionally more important to individuals. In two new papers published by the National Bureau of Economic Research ("NEBR"), authors James Poterba, Steven Venti and David Wise conclude the following:

• Self-directed retirement assets will outflank DB plans by 2010, "even though defined benefit plans remain the most important source of retirement assets for federal, state, and local employees."
• The growth in self-directed retirement assets are influenced by a number of factors. These include (a) expected stock returns and bond yields (b) number of employees permitted to participate (not currently enrolled) and (c) asset allocation mix.

Citing data from the Survey of Income and Program Participation ("SIPP"), the research trio reveals that "only 5.8 percent of 44-yers old had 401(k)-type accounts" some 20 years ago. In 2003, that number had escalated to 44.3 percent. In 2000, per capita retirement assets for individuals about to exit the labor pool, and in their mid-60s, averaged nearly $30,000. A decade from now, available assets are projected to rise to $90,000 (in terms of year 2000 dollars). In 2040, the prediction is that nest eggs will topple $269,000.

Click here to order "Rise of 401(K) Plans, Lifetime Earnings, and Wealth at Retirement" (NBER Working Paper 13091) and "New Estimates of the Future Path of 401(K) Assets" (NBER Working Paper 13083).

Wall Street Journal reporter Jennifer Levitz offers a competing, albeit grim, reality. In "Americans Delay Retirement As Housing, Stocks Swoon," she writes that graying Americans favor longer work lives for a variety of reasons. Preservation of health benefits is one factor. Sagging equity returns in 2000-2002 didn't help, especially for those employees who had allocated a big chunk of their savings to stocks. Of course, no trend exists in isolation. A delay in retirement means younger workers will face more competition for promotions or even jobs though the impact is uneven across industries. Skilled workers are nearly always welcome, being indispensable for many knowledge-oriented businesses. Though written on April 1, her description of a brave new world is no April Fool's joke. Companies are fast being forced to reckon with changing demographics and altered employment patterns.

As a colleague aptly bemoans, the retirement trifecta (Social Security, juicy defined benefit plan payouts and hefty salaries, let alone a job) is a fantasy for most everyone still in the work force. For those who expect to live as well as your grandparents or parents, good luck. Start pinching those pennies hard and often.

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Free market economist Ludwig von Mises wrote that the aim of Socialism is to "transfer the means of production from private ownership to the ownership of organized society." Originally published in 1922, Socialism: An Economic and Sociological Analysis remains a widely read critique of what this famous Austrian refers to as an anti-social and destructive force. While numerous countries have abandoned a statist system (at least in part), an ongoing debate about health care and pensions suggests a reincarnation. Certainly here in the USA, ongoing debates among Presidential candidates keep the topic alive. So too do those who take the pulse of "Joe and Betty Everyperson."

A February 14, 2008 press release, issued by the Harvard Opinion Research Program at the Harvard School of Public Health and Harris Interactive suggests that consensus is nowhere to be found with respect to the delivery of medical treatment and pharmaceuticals. According to the survey results, younger adults consider Medicare a form of socialized medicine and are more favorably predisposed to universal coverage. Not surprisingly, those without insurance view socialized medicient as a good thing. Notwithstanding political party differences, in aggregate, "only 19 percent of the uninsured think that a socialized medicine system would be worse than our current system while 57 percent think it would be better." Those with health insurance are pretty evenly split on the issue. 

Interestingly, politicians and pundits seldom address socialized retirement with the same vigor reserved for medical care. Before he dropped out as a possible Democratic party candidate, John Edwards spoke about his intent to create Universal Retirement Accounts. In late November 2007, we gave then Republican candidate Fred Thompson blog time, posting his video comments about Social Security, wherein he bemoaned the current generational weath transfer from young to old.

Anecdotally, the response to our musical video ("Pension Tension Blues") has been pretty much the same across the board. Viewers appreciate the humor but remark on the seriousness of the situation for many individuals - limited benefits and anemic savings accounts.

So whatever your party affiliation or philosphy, there is one thing on which we should all agree. The retirement benefits "issue" is fast becoming a public policy pain point, in the US and elsewhere. And since so many of us embrace that "It's the economy stupid," know that we are all impacted as tax policies, available credit, borrowing costs and wages change as a result of corporate and government decision-making about post-employment schemes.

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I caught a few minutes of the November 28 Republican Party presidential debate while exercising at the gym. Though I did not watch the entire event, the clip about Social Security is noteworthy. In response to a viewer's question about entitlement spending, former Senator Fred Thompson described an impending tsunami. He suggested that one stance would entail protecting the younger generation from his peers (Baby Boomers and older). His reference to current funding woes as a moral issue as well as an economic issue is not unique. Read "Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It" by prominent banker Pete Peterson.

This blog has discussed Social Security before. We agree with the now famous Law and Order television star. The younger generation is going to get squeezed big time if entitlement programs continue unchecked.  Increased longevity, staggering national debt (a problem not unique to the U.S.). and what can only be described as a horribly deficient savings rate are some of the many factors that will make life difficult for Gen Xers. The economic toll will be significant and long-term in nature. It does not take a rocket scientist to know that higher taxes (inevitable without changes in benefit payouts) mean lower disposable income. Fewer dollars in the wallet mean reduced spending and that, as some pundits suggest, slows economic growth.

Given the gravity of the "retirement problem," might we entice CNN/YouTube to sponsor a national debate (Republicans, Democrats, Independents, etc) that focuses exclusively on entitlement spending and (hope springs eternal) viable solutions?

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If you read Thank You For Smoking (and/or saw the video), you understand Christopher Buckley 's ability to put things in perspective with humor. With his new book Boomsday, he seems to have done it again. The plot takes generational warfare to new heights. According to the book description on Amazon.com, escalating Social Security expenses compel "Cassandra Devine, a charismatic 29-year-old blogger and member of Generation Whatever" to suggest that "Baby Boomers be given government incentives to kill themselves by age 75." As you can imagine, the book is creating controversy. Click here to read more.

We've written extensively about the looming financial crisis due to increased lifespans. Click on the Demographics folder to access previously published posts (on the left hand side of the home page of this blog.)

Living longer if you are healthy, and have economics means, sounds like fun. Who wouldn't want to take a course in the classics or travel the high seas with family and friends? Unfortunately, for the younger folks who will be forced to foot the bill through higher taxes, things are not quite so grand. This is not to put blame on senior citizens. (Let's face it. We're all heading in that direction.) Unfunded benefits have never been a good idea.

If you don't mind some dismal reality with your coffee, check out The Coming Generational Storm: What You Need to Know about America's Economic Future by Laurence J. Kotlikoff and Scott Burns or Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It  by Peter G. Peterson.

The questions remain. Who has the power to solve what many believe is an imminent retirement system meltdown (including Social Security and Medicare)? What precludes them from doing something now? What is the consequence of playing ostrich, ignoring red flags and staying with the status quo? Take our 2 minute "Pension Crisis" survey and tell us what you think. Click here to start.

This post is written the day after April 1 by design. This is no April Fool's Day gag. Crushing "pay as you go" programs are here to stay until courageous leaders step up to the plate and take action or economies around the world implode.

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If you think means testing of benefits is well, mean, then get ready to defend yourself, if you can. In the just released, long-awaited "best seller", Budget of the United States Government-Fiscal Year 2008, President Bush lays out his plan to tax the wealthy. Click here to download all or part of the budget.

According to Financial Times reporters Caroline Daniel and Krishna Guha ("Bush wants to means-test middle-class benefits," February 5, 2007), the $2.9 trillion budget "represents a challenge to parts of the system of entitlements enacted as part of the Great Society agenda of the 1960s."

Key questions arise, some of which are listed below.

1. What constitutes "wealthy" and how often will the definition change?

2. How will wealth be measured for purposes of means testing? Income? Property? Private Benefits? Gross? Net? Nominal? Real? Adjusted by Geographic Region or Household Size?

3. Is means testing really fair?

4. Would privatization of federal benefits empower more people financially by changing incentives to save?

5. What is the likely economic impact of means testing?

6. How will companies and municipalities be adversely affected by means testing of Social Security and Medicare or will they gain?

What a field day for the economists and politicians!

Editor's Note:
Check out the online U.S. debt clock. Hit the refresh button a few times for a real scare as estimated indebtedness increases by large amounts within a matter of seconds.

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A three legged stool is often used to describe retirement planning: private savings, pension benefits from employers and Social Security. The problem is that each leg is becoming increasingly wobbly. We already know that the national savings rate in the U.S. and elsewhere is anemic at best. Pension plans are either non-existent at countless companies or undergoing radical transformation in the form of rescinded benefits, transfer of risk to employees (via a defined contribution plan) or complete termination.

Making matters worse, Social Security trustees have just rung the alarm bell on what many thought was a safe bet. According to the recently issued trustees' report for 2006, "the fundamentals of the financial status of Social Security and Medicare remain problematic under the intermediate economic and demographic assumptions. Social Security's current annual surpluses of tax income over expenditures will soon begin to decline, and will be followed by deficits that begin to grow rapidly toward the end of the next decade as the baby-boom generation retires."

The trustees acknowledge that the program passes a "short-range test of financial adequacy" but "continues to fail our long-range test of close actuarial balance by a wide margin. Projected OASDI tax income will begin to fall short of outlays in 2017, and will be sufficient to finance only 74 percent of scheduled annual benefits in 2040, when the combined OASDI trust fund is projected to be exhausted."

How much worse can it get?

The year 2040 may seem an eternity away but not when you take into account the miracle of technology and its effect on longevity. Living longer is arguably a gift but what happens when people who live for another twenty to thirty years past retirement run out of money? (Check out a May 9, 2006 conference about aging and the impact on financial markets, sponsored by the North American Securities Administration Association.)

Far from trivial, people may simply not have enough money to get by. Working longer or exiting retirement to work again are possible solutions. In fact, some seniors find that they prefer to work. However, what if employers resist hiring older workers? What if some jobs require physical stamina that may not exist as one's body ages? According to a new survey released by the Metropolitan Life Insurance Company, working past sixty may be driven more by financial necessity than desire.

One thing is clear. Things have got to change. Otherwise, be prepared for a tumble as one or more of the stool legs break.

Note: OASDI stands for "Old-Age, Survivors, and Disability Insurance".

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As retirement plan losses mount, the inevitable finger pointing ensues. In a recent survey of visitors to this blog, an overwhelming 96 percent of people agree that a pension crisis looms large. What's interesting is that multiple parties are getting the blame, with the lion's share going to U.S. Congress, plan fiduciaries, pension consultants, governors, regulators and board members.

Here are the results so far.

"Assuming you think there is a pension crisis, who do you think is responsible?" (Respondents were allowed to pick more than one answer.)

Attorneys: 10 percent
Auditors: 14 percent
Board Members: 31 percent
Chief Executive Officers: 24 percent
Employees: 17 percent
Governors and Other State Officials: 31 percent
Money Managers: 10 percent
Pension Consultants: 34 percent
Plan Fiduciaries: 45 percent
Regulators: 38 percent
Retirees: 7 percent
Shareholders: 3 percent
Taxpayers: 7 percent
U.S. Congress: 41 percent
Honorable Mention: IRS, Unions, Actuaries

When asked who can fix things, U.S. Congress, board members, plan fiduciaries and regulators took the lead. Interestingly, while pension consultants and state legislators are cited as part of the problem, they are not given much credit for being part of the solution. Only 21 (18) percent of respondents pick pension consultants (state politicians) as likely rescuers. Perhaps this stems from a feeling that the "pension crisis" must be addressed at the top in terms of tax, financial and accounting incentives and constraints.

Regarding Social Security, 76 percent worry about a current crisis.

An eye-popping 96 percent of respondents agree that "most people are ill-equipped to invest their own money for retirement planning purposes". The sorry state of financial literacy has been discussed in several posts and countless articles elsewhere by investment pundits. Regulators are clearly concerned too. On April 11, IMF Director Hausler emphasized the exposure of retail investors to a wide array of complex risks, adding that a "low level of financial literacy, combined with extensive risk taking, is politically an explosive brew."

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