News Analysis -- Pension Reform: Making a Bad Situation Worse?

[Dave Baker]

http://www.benefitslink.com/articles/reform000907.shtml (click)

Provocative. Comments, anybody?

[rcline46]

Ok, let's get started. This country is not a socialist or communist country, not yet. The first gross mistake is that the pension system generates a tax expenditure of $76 billion per year. Sorry, taxes are DEFERRED, not LOST so the author is off base to start. Second, unless pensions are MANDATERD (called Socialism or Communism) then plans will be instituted only if competition demands it or it is a benefit to the owner. If the owner has a better tax incentive for NO plan, the chances of instituting a plan is slim (ok, 401(k) plans excepted, maybe). The only AMERICAN way to increase coverage is to make it advantageous to the owners. The author of the article is incredibly misguided.

IMNSHO.

[Guest Franklin Evans]

I agree with rcline. Plan sponsors look at the tax break first, with employee retention a (arguably) close second.

The article author could be guilty of some creative statistics, as well. Numbers don't lie, but perceptions of the numbers can be easily manipulated.

My preference has always been replacement percentage of active employment income. I don't recall the threshold right now, but hypothetically if the retiree needs a minimum of 75% after retirement, I would like to see the percentage of the population above and below this threshold as a starting point. If 52% of the population are not covered by a private pension program, what portion of that group is at or below the replacement threshold?

[Guest Brooks]

Before we all get too far down the theoretical road to solving the country’s retirement income problem, we would hope to be able to make a small contribution to a common understanding of the real problem, and why it now seems to loom so large.

During the twentieth century, life expectancy increased one-hundred ten days, annually, for one-hundred years! Only a few generations ago, most had begun working well before age 20 - and then toiled until a final illness - the result being that one’s “retirement years” were typically few in number. In short, when the working years are forty or more, and the retirement years are only a few, combined with the retired person generally living in a rural, farm area within a family framework, the financial challenge posed by retirement is minuscule. A “Replacement Income” model we have developed demonstrates that a 3% contribution, growing at 9% - 10.5%, will enable a person 35 years old to retire at age 65 at 95% - 100% of final pay, provided expectancy is 5 years, which it used to be!

Today, many do not begin their career work until after age 20 - and then retire at age 65 (or earlier) - the result being that the “retirement years” for a husband and wife in good health can easily range 20 - 25 when combined. In fact, there is now a 50% chance that, regarding a happily married couple now age 65, one will live to see age 90. When the working years are forty or less, and the retired years are twenty or more, combined with the retired person (or couple) living in a non-rural area, and often not within a secure family framework, the financial challenge posed by retirement is quite significant. Our aforesaid “Replacement Income” model demonstrates that a 3% contribution, growing at 10.5% - 12%, will enable a person 35 years old to retire at age 65 at 60 - 65% of final pay, provided expectancy is 23 years, which it now may be (for a married couple).

Note that the contribution required is the same for both generations - 3%. The two main differences are that the newer generation is assumed to have the opportunity to earn a slightly higher rate of return, and to retire on a diminished percentage income, which has to be stretched over a much longer period (23 years, not 5). Post retirement inflation will be a challenge.

All in all, for “we the people” any solution may well be a Zero Sum Game - and the Law of Unintended Consequences must be recognized and respected. History is powerful evidence that money and power is never separated: i.e., money buys power while power takes money.

Our challenge is to solve this ancient riddle, and “invent” a methodology that is morally, ethically, and legally acceptable to “we the people” . . . and, in conclusion, we respectfully submit that attaining that noble objective will be aided if we are able to share a common understanding of the problem. The "PREPARATION INDEX" (i.e., years worked compared to years retired) has shrunk, in a historical blink of the eye, from perhaps 10:1 to perhaps 2:1 - that is the root of the problem!

In all probability, all of us must (1) save more, and start sooner, (2) earn the highest investment return feasible, for life, and (3) work longer - i.e., retire later.