Saturday, June 7, 2014

The Retirement Question

The global surprise, no surprise at all, is that public retirement systems will not provide the retirements that workers are expecting.  In the US, social security is the most obvious example.  Anyone under the age of 45 in the US will get a reduced social security benefit or, perhaps, no benefit at all.  State and local government employees are in for a rude shock as well.  Almost all of the state and local government employee pension plans that fall in the "defined benefit" category are woefully underfunded.  So, when "covered" workers, globally, reach their retirement ages in the next generation they are in for a big, big surprise.  No money.

All of this is well known and thoroughly documented.  There isn't really a debate going on here, except for those who simply want to hide from the truth.  Numbers are numbers.

Defined benefit retirement systems are based upon two incorrect premises: 1) Everyone needs to retire; 2) The sponsor (government, whatever) will properly fund these systems.  Both of these premises are false.  Retirement is a modern concept.  No one retired in the 17th century, unless forced by disability.  In the modern western countries, most folks of independent means do not retire.  Is Warren Buffett retired?

Politicians dreamed up the idea of retirement so they could put in place defined benefit systems and garner votes.  Of course, as usual, these same politicians opposed proper funding for these systems, so that the notion of paid retirement was a dream but not a reality.  This was bi-partisan cynicism.  In the US, politicians of every stripe still defend defined benefit systems without owning up to the fact that they are a dream for everyone, but a reality only for the lucky few who get their money before the system runs out of money, which the system is guaranteed to do.

What people really need, as they grow older, is security.  But the "social" part is a cruel hoax.  The way to get security is to grow assets.  "Defined contribution" systems grow assets.  Defined benefit systems consume assets.  The largest pension system in America is 100 percent funded - TIAA-CREF.  This is the "defined contribution" system that academics use to fund their retirement.  These same academics who support social security and publicly funded pension systems, are not in the system that they defend.  By definition, a "defined contribution" system cannot be underfunded.  So academics are safe.  Their retirements are assured, though most do not really retire.

The cruelest hoax of all is that these "defined benefit" plans, even when funded, provide zero (other than spousal or minor children) benefits at death.  There is nothing to leave to the next generation.  Whereas, defined contribution plans can be preserved for future generations.

But, why is retirement a good plan?  Retirees get herded into communities of other retirees and hidden away from the rest of society.  Why is this a good idea?  People with means rarely do this.  They keep right on working.  Some folks cannot work indefinitely for health reasons, but aside from health issues, why should anyone retire?  People should do what they want to do and defined contribution plans, by building wealth, provide older folks with options -- to retire or not to retire as they choose.

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