Yes, Virginia, there really are companies and countries that still aim to provide for their employees for the remainder of their post-employment lives.
In late June, I attended a conference that looked at the future of retirement on a global basis. For someone who never worked at a company with a real defined benefit plan and entered the labor market in the early 1980s, I thought I had entered a time machine and gone back to a socialist fantasyland—actually corporate America in the 1950s and 1960s.
Part of my reaction may reflect personal experience; my first two employers had no savings or retirement plans whatsoever. Friends who worked at IBM joked they had the best of America and Sweden.
The event, sponsored by Pensions & Investments, began innocently enough with an opening session featuring Los Angeles gerontologist Stephen Coles, talking about folks who live past 100 (Hint: Among this group, the male of the species is clearly endangered), and Nobel laureate Robert Merton of MIT, who addressed issues involving retirement, interest-rate risk and global monetary policy.
To understand the scope of the demographic problem some nations face, Coles pointed to Italy. That country will need to either raise its retirement age to 77 or admit 2.2 million immigrants a year to maintain its solvency.
Merton then took over and focused on the world most of us are familiar with—the DC, 401(k) space. It’s the future, and Merton worries the vast majority of participants are focused on the wrong number as they fix their attention on a dollar amount when they should be looking at an income stream.
The upshot, according to Merton, is that almost everybody in a defined contribution plan faces an asset/liability mismatch and many are clueless about how to grapple with it. A deferred annuity involves taking high risk in terms of one’s wealth, and that’s a key reason it’s not popular. However, Merton said that it also entails lower risk in terms of income.
Over the next decade, millions of Americans are going to be forced to face a dilemma about income preservation versus wealth preservation. If interest rates remain low, payouts from annuities will stay at 60% or 70% of what an annuitant could receive in a normal interest-rate world.
In reference to defined contribution plans, Merton questioned whether MIT physics professors with lofty IQs, much less ordinary Americans, could manage their own retirement funds. After all, about $500 billion was pulled out of equities during the financial crisis, and much of it went into low-yielding Treasurys, adding 20% to some investors’ long-term losses of 30% or 40%.
Virtually everyone at the conference agreed it would be necessary to gradually raise the retirement age, including for Social Security, to about 70. But Merton, who tried to avoid getting political, said that if it were done without other adjustments, the result would have major redistributive effects on the population, shifting money to affluent folks who typically live longer. But regardless of what the government does or doesn't do, people are working longer on a de facto basis out of necessity.
After Merton finished, the next session went on to even more global issues, and I guess that’s where the socialistic part of the discussion really struck home. The first speaker was former Maryland Lt. Gov. Kathleen Kennedy Townsend, who founded the Center for Retirement Initiatives at Georgetown University. Its goal, noble indeed, is to help states plan and implement programs for seniors who don’t have pensions.
According to Townsend, the AARP has found there are three words Americans really dislike: “retirement,” “elderly” and “planning.” They also don’t like annuities, she added. That may well be right, but they sure do like guaranteed income.
Then she mentioned the need for all of us to pool our assets collectively. Sounds dubious, but if Gates, Buffett, Soros and the Koch brothers each kick in 10% of their dough, I might start to like this scheme. As we’ll see soon, 10% might just be about the right number for what some folks will be willing to annuitize individually.
The next speaker, Jim Leech, retired CEO of Canada’s Ontario Teachers’ Pension Plan and author of The Third Rail, had some real answers about the benefits of pooling assets. First, Leech addressed the “School of Pension Envy,” described as, “You have a pension and I don’t, so let’s rip yours up.”
Well, count me as a card-carrying member of the School of Pension Envy. The school should be named after an executive like Carl Icahn or former Continental Airlines CEO Frank Lorenzo, since most politicians are double-dippers. For millions of Americans of all political persuasions, it is infuriating to see their taxes going to budget-busting public employee pensions that they, not the public employees, primarily fund. At the same time, the rest of us may be lucky enough to contribute to our measly 401(k)s while paying for public employees to retire in their 50s and travel the world without ever paying diddly-squat for their whopping pensions.
Annuity Aversion, Pension Envy
August 4, 2014
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You ask why so many are electing a lump sum vs. an annuity. For some it may be the fact that annuity rates today are about 60% to 70% of what they will be in a normal interest rate enviornment. If practical it seems best to receive a lump sum, using a tax-free rollover to an IRA, and wait for interest rates to returns to something close to normal before annuitizing. Once you annuitize you are locked in for the rest of your life. Lump sums, on the other hand are also calculated o the basis of current interest rates, so they are about as high as they are ever going to be. The reason some financial advisors are recommending lump sums may be due to the fact that 20-30 years of investment advisory fees to manage that lump sum are certainly going to result in a lot more income for them than the commission they receive from selling an annuity. Hopefully, most are recommending them due to their advantages in the current environment and not based on self-interest..