Ideas to make Retirement Possible (h/t, Suzanne Bishopric):
Who killed pensions? Can they be resurrected?I thank Suzanne Bishopric, Director at the United Nations Joint Staff Pension Fund, for forwarding me this article. Floyd Norris is an excellent reporter and unlike others, he gets it.
A few decades ago, pensions were almost taken for granted by both public and private employees. They promised that people who worked a specified number of years for one employer would receive a certain amount each month, for life, after they retired. That amount was usually based on their income in the years before retirement.
Today, pensions are almost dead in corporate America — at least for new employees. They live on in government jobs, sometimes protected by state constitutions. But Detroit’s bankruptcy has put its benefits in doubt after a judge said federal law could override the state Constitution. And given that some states and municipalities appear to have promised more than they can conceivably afford, it seems likely that some of those promises will be broken and that courts will find ways to allow that.
Who killed pensions? You can start with the government and the accountants and end with the markets. In the 1970s, Congress passed a law that stopped companies from weaseling out of pension promises as easily as they had in the past. In the 1980s, the accountants changed the rules so that financial statements had to do a better job of recording the cost of such promises.
Those two factors might not have been enough by themselves, but the prolonged weak stock market after the technology bubble burst in 2000 assured that those companies that could end pensions would seek to do so. All pension plans assume returns on their investments. No matter how conservative those assumptions were in 2000, the fact that stock prices were below 2000 levels in 2010 assured that the investments would fall short and that more money than expected would be needed from the corporate, or government, sponsor.
Much has been written about the irresponsibility of some cities and states, which are said to have balanced current budgets by making pension promises that could never be honored. That may have been true in some cases, but the market performance meant that even responsible plans became underfunded. The real differences between the public and private sector were that it was easier for companies to phase out pensions and that government accounting rules made it easier for politicians to ignore the issue.
It is not as if Americans stopped setting aside money for retirement. They still are, although many are not setting aside nearly enough. But 401(k) plans and Individual Retirement Accounts are not pension plans. They are savings plans that are at the mercy of the financial markets, and that rely on workers to select the correct investments. No matter how much you save, you are taking the market risk. And a lot of relatively low-income people are in no such plan. They are in Social Security, of course, but those benefits are not enough to cover even a low-cost retirement.
An important difference between savings plans and pension plans is in how they pay out. You have the legal right to all the money in your 401(k) or I.R.A., and you can leave it to your heirs. That may be fine if you don’t live a long time after retirement, but it raises the specter of outliving your money. You can’t do that with a pension, assuming it meets its obligations. Those who die early effectively subsidize the retirements of those who do not.
There are new proposals that could deal, to a limited extent, with each of those problems. The Obama administration announced last week that it would offer a new kind of I.R.A. — called MyRA — that could be especially helpful to some younger workers. It assures they will earn a decent rate of return while suffering no risk of the market going against them.
But that proposal, which the administration says it can put into effect without congressional approval, has an unfortunate aspect, one that sounds as if it was put in to avoid Wall Street hostility. After workers accumulated $15,000 in the program, they would have to leave it and move to a normal Roth I.R.A. at a financial institution — paying higher fees and risking losses.
The other proposal, by Senator Tom Harkin, Democrat of Iowa, needs congressional approval. It would restore the concept of a pension with guaranteed monthly payments, but without putting the sponsoring company, or municipality, at risk of having to come up with more money. That means that the pension could be vulnerable to a significant, prolonged, market decline. But if designed correctly and conservatively, it might slow, or even reverse, the trend away from pensions.
If that trend continues, the proportion of retirees without pension benefits will grow rapidly in years to come. The phenomenon of people working longer and longer — assuming they can hold on to jobs — will most likely accelerate. Even those with substantial retirement assets may worry how they will fare if they live for a long time.
William B. Fornia, the president of Pension Trustee Advisors, said the median life expectancy of a 65-year-old man is 19 years, meaning he will live to 84. But median means half will live longer, and of course a cautious person would consider that. Ten percent of 65-year-old men are likely to reach 94.
For a 65-year-old woman, the figures are even higher. The median expected age at death is 86, but 10 percent will live until they are 97.
As people choose to work longer, they may inspire resentment from co-workers who think promotions are being blocked by old codgers who won’t leave. There are age discrimination laws that make it illegal to force most workers to retire. And those who do retire may have to turn to their children for help.
“It becomes a burden on the younger generation, and that has a dampening effect on economic growth,” Senator Harkin said in an interview this week. “The retirement crisis is a dark cloud over family relationships, the glue that holds our society together.”
About 40 percent of people in the prime working years of 25 to 64 now have no pension or retirement plan, said Diane Oakley, the executive director of the National Institute on Retirement Security, citing the 2010 Survey of Consumer Finances conducted by the Federal Reserve. Among those younger than 34, a majority have no plan.
The Obama plan will offer workers the chance to, in effect, get a Roth I.R.A. administered by the government, starting with as little as $25 and contributing as little as $5 each pay period. At first, it will be limited to some employers who volunteer for the test, but the administration hopes to expand it widely.
That money would be invested in a new type of savings bond, whose yield resets monthly based on the average yield of Treasury securities with maturities of four years or more. Something similar is already offered to federal employees, and the yield last month was 2.5 percent. While the yield will change, the principal value will not decline, as is true of all savings bonds. The money put into the plan would be after-tax income, but all the earnings would accrue tax-free if they were not withdrawn until retirement.
Like other Roth I.R.A.s, it would be limited to those couples making less than $191,000 a year, but the real target group is younger workers who have no savings or retirement account now.
The Harkin proposal would create new pension plans, not tied to a single employer or industry, where retirees would receive annuities that pay until they die. But because there is no government or employer guarantee, there would still be a risk that benefits would need to be reduced if the plan’s investments suffered. Even so, that would provide a lot more peace of mind than is available now to many retirees. While employers could choose to match contributions from workers, they would not have to do so. As a result, the senator says, companies would face almost no expense other than the cost of adding one more deduction to a paycheck.
There is nothing wrong with people working as long as they wish. But there is something wrong with people needing to work long after they want to retire. As the Congressional Budget Office pointed out this week, by assuring access to health insurance at reasonable cost, the Affordable Care Act will remove one impediment to retirement for some people. A pension that promised steady income could remove another impediment for many others.
I covered Obama's MyRA nest egg last week and basically blasted it. It's a joke and will do nothing to bolster the retirement security of millions of Americans who will have to work till they die, if they're lucky enough to maintain a job in their golden years. Most of them will end up on some form of social welfare, adding to the trillions in federal government debt.
Let me go back to what I wrote last week and restate it:
More specifically, what does the U.S. need to really bolster its sprawling retirement system? It needs to adopt a universal pension plan for all Americans and have the assets managed by well-governed large public pension funds that operate at arms length from the government. This is the only surefire way to cure pension envy and make a real long-term difference to the country's retirement system.I stand by those comments and think MyRA should be shelved and President Obama should fire the "brilliant" economists who proposed this silly retirement 'solution'. Just like PRPPs in Canada, MyRA is a form a savings that will end up benefiting the financial services industry looking to gouge consumers with high fees. All these proposals are dead giveaways to banks, mutual fund companies and insurance companies. These proposals do absolutely nothing in terms of bolstering the retirement security of millions of workers anxious about retirement.
Of course, any discussion of privatizing Social Security and moving toward a model that the Canada Pension Plan Investment Board has adopted will be met by opposition from the Left and the Right. But as I stated in my last comment on Ontario's new Technical Advisory Group, good pension policy makes for good economic policy but you must get the governance right or else don't bother implementing any reforms. Without proper governance, America's public pension problem will only get worse.
I know my stuff when it comes to pensions. And when I don't know, I ask smart and experienced experts like Bernard Dussault, Canada's former Chief Actuary. We both agree that everybody loves complicating pensions but they're not complicated. Enhance the CPP in Canada, privatize Social Security in the U.S., and make sure you implement reforms that make sense, building on the success of defined-benefit plans.
Even more importantly, make sure you get the governance right or don't bother reforming pensions. What else? As I stated earlier this week on why Ontario Premier Kathleen Wynne shouldn't hedge her bets on the new pension, if it's not a defined-benefit plan, I say don't bother because it will be a monumental failure. I hate NEST, PRPPs, hybrid plans, MyRA, or anything which allows people to "opt out" of their pension plan (unless it was for health related reasons). Force people to save for retirement, especially the middle class (in Canada, there is an argument to be made that the poor are better off without enhanced CPP).
I know, I sound like a broken record but it amazes me watching politicians in Canada and the U.S. trying to assuage competing lobby groups and basically screwing up what should be a very simple policy to bolster their country's retirement systems.
Below, as cities and states across the U.S. grapple with their pension programs, PBS travels to one country -- The Netherlands -- that seems to have its pension problem solved. Ninety percent of Dutch workers get pensions, and retirees can expect roughly 70% of their working income paid to them for the rest of their lives.
The Dutch and Danes are eons ahead of the U.S when it comes to pensions, which is why they top the list of the world's best pension spots. If pensions are to be resurrected in the U.S., they better stop pandering to Wall Street and start implementing long-lasting reforms that will improve the lives of millions of Americans struggling to get by and now face pension poverty.