The November 2012 issue of FA included an article by John Bogle: “The New Pension Plan.” While I agree that retirement financing needs some improvements, Bogle seems to be promoting the same old ideas that have been around for years without actually coming up with anything NEW.
The primary problem is suggesting that the way to finance retirement is through a defined contribution (DC) plan. That assumes that by accumulating assets while working, you will automatically be able to buy what you want and need while not working (after retirement). The potential for large-scale inflation makes that anything but a sure thing.
The real issue is, how do you get the working population to share the fruit of their labor with the non-working (retired) class? John’s approach of buying stocks and hoping that someone will buy them from you in retirement so you can buy what you need then is not a fail-safe strategy. An approach that is far more reliable is having a social contract between generations where it is ensured that the working population will share with the retirees. Social Security is such a system.
What is needed is to restructure the system so that it will better provide to the people in retirement and will be financially sound so that every generation will be confident that it will provide for them, too. How to achieve that is a separate discussion.
John promotes eliminating the risk of stock picking, the risk of sector picking and the risk of fund manager picking, leaving only market risk. But what is market risk if it is not just a composite of these risks? Also, if all stocks are owned by index funds, there is no market risk because there is no market. A market only exists if there is actively managed trading.
In his conclusion, John shares his vision of a grand national-retirement plan with all of its positive attributes. As I read it, I thought he was describing the post office. I am sure it would function equally as well.
The real fallacy of Bogle’s approach is thinking that accumulating assets and then selling them will finance retirement income needs. To a limited extent that can work, if you have the right assets and there is a market for those assets. But there are only three reliable ways of financing retirement income. They are to:
1. Work for compensation.
2. Own a business or businesses that share profit with the owner or owners, public or private. Note that a single business may have a shorter life expectancy than you do, so you may have to switch businesses periodically.
3. Participate in a government-mandated retirement system, such as Social Security. Ideally, participation could be increased optionally to provide greater income.
In the past, children supported their parents too old to work by having them live with them. Social Security works the same; the children support the parents. They just do not have to live together.
P.S. I highly support making age 70 the starting age for Social Security and making it include a voucher for medical insurance. Age 70 because you cannot expect the working class to support parents AND grandparents at the same time they are supporting themselves and their children.
Dennis Waitzman, CFP, MBA
Thrivent Financial For Lutherans
Lathrup Village, Mich.