Who Can Really “Guarantee” Retirement?
A recent article from Knowledge@Wharton did an excellent, depressing job of explaining how America’s retirement prospects are plummeting. A few fun (that is, alarming) facts:
• “Retirement accounts have lost from $2 trillion to $4 trillion as stocks have tumbled nearly 50% from their peak in 2007.”
• “The nation's top 100 pension plan sponsors saw their pension funds drop by $303 billion in 2008, going from an $86 billion surplus -- relative to the minimum amount required by pension regulations -- at the end of 2007 to a $217 billion deficit at the end of 2008, an analysis by Watson Wyatt found in March.”
• “Nearly one in four workers between the ages of 56 and 65 had more than 90% of their account balances in equities at the end of 2007, EBRI found, and more than two out of five held more than 70% in equities.”
• “The Pension Rights Center, a Washington, D.C.-based consumer organization focused on retirement security, lists on its web site more than 150 companies that have either changed or suspended 401(k) matches.”
Clearly, a lot of people are going to have to work longer.
But does that mean the system is broken? Some people think so, especially when it comes to self-directed investing. The article quotes Alan Glickstein of Watson Wyatt as saying, "The bloom is off the rose to a large degree on the 401(k), and I think there's going to be a renewed interest in coming up with a new retirement plan design."
We've been hearing a lot about this over the past six months. There are certainly some valid criticisms of the defined-contribution system (e.g., 401(k)s, 403(b)s, SEPs, XYZPDQs). It requires that every worker become an asset manager, something most people aren't prepared for (in a country with such low financial literacy). I suspect that most of those "nearly one in four workers between the ages of 56 and 65 had more than 90% of their account balances in equities" regret taking on so much risk.
That said, I don't see any perfect solutions. As the article points out, defined-benefit pensions and Social Security are also underfunded. To bring them in line without cutting benefits, corporations will have to contribute more to pension plans and the government will have to raise taxes. That's not conceptually any different than people with plummeting 401(k) plans having to save more.
Also, regarding pensions , this thought occurred to me the other day: Does it make sense to provide a benefit for people who no longer work for the company? Companies will now have to shift money to underfunded pension plans, which means they will have less money to hire younger workers, less money for research and development (curtailing earnings), and less money for dividends (reducing their stocks' returns, which shortchanges other people saving for retirement, and perhaps the pensioners themselves if they still own company stock or funds that invest in it).
I am in no way suggesting that companies should renege on their benefits; a couple of weeks ago, I visited an uncle who worked for GM for 35 years, and he deserves every penny he was promised. But I submit that people who think defined-benefit pensions – any other type of “guaranteed” retirement plan -- are the solution to the country's retirement insecurity are not seeing the whole picture. What we have learned from defined-benefit pensions, and Social Security, is that it’s very difficult to keep them solvent, either due to the difficulty in forecasting the future or to the ease of kicking the hard choices down the road. Either way, the result is that such programs have to be shored up later, often at the expense of those who are still working.
Perhaps the real lesson is that the retirement of the future will be "guaranteed" (note the quotes) only for people who save and learn like mad.