Re: Calls grow to overhaul 401(k) retirement plans (Los Angeles Times)

mg wrote:

On Nov 18, 5:49 am, Alan Lichtenstein <a...@xxxxxxxxx> wrote:

mg wrote:

On Nov 17, 4:51 am, Alan Lichtenstein <a...@xxxxxxxxx> wrote:

mg wrote:

On Nov 15, 2:11 am, ad...@xxxxxxxxxx wrote:

http://www.ng2000.com/blog/2008/11/10/retirement/

Democrats will want to turn it into a form of Social Security.
Corporations (and Republicans) will want to eliminate the corporate
contribution to 401Ks. Future generations of Americans are in trouble.
Where are they going to get the money for their retirement?

My knee-jerk approach to some solutions is:

1. Pass a law restricting the amount of money and conditions under
which the US government can borrow money from foreign countries. This
will have the effect of raising artificially low interest rates and
will provide people who save for their retirement a higher rate of
return. This will also tend to minimize speculation bubbles that
result when a country spends more money than it makes and it would
enhance our security in the same way being energy independence would
enhance our security.

IMHO, such as law is the same thing as requiring a balanced budget,
since the debt would have to be financed somehow by other means. If
those means and money were available from within our own country, it is
evident that the debt would be sold to them first. The only problem is
the money isn't available, so effectively, given your preconditions,
government would either have to simply print more money with all the
negatives that entails, or more simply cut spending so that there would
be no deficit to finance. Usually Jeff has some extreme views which
ignore some of the politically volatile issues that impact negatively on
his 'solutions,' however, this may not necessarily be one of those, as
per his post.

As far as minimizing speculative bubbles, this solution won't really do
much for that, since markets operate on greed and schemes. Only
regulation of the markets, in particular derivatives and other esoteric
instruments, as well as rules on short-selling will solve that.

2. Index Social Security benefits to money supply and/or the wage
index, whichever is higher. The CPI is to easily manipulated by
politicians and is fraudulent. This type of indexing would limit the
government's ability to transfer wealth from retirees to other
segments of society with hidden inflation.

Again, this is not the solution. Social Security's problem is that if
functions like an annuity, but isn't funded like one. The only way to
make it work is to fund it in the same way as other annuities.
Requiring proper funding would involve no apparent transfer of wealth,
since the aggregate contributions would be earning investment return in
their own right, and thus be independent on the number of current
contributors.

3. Improve the 401k system to provide more options and more education
for participants.

The 401k system is ineffective since the aggregate contributions are
insufficient, as a percentage of income to generate sufficient reserves,
to produce a decent retirement income, given current and projected
future market returns. Defined benefit plans outproduce the results of
401k's and will continue to do so, since defined benefit plans have
significant advantages over 401k's, in that they are large and give
participants the benefits of a larger pool of diversified materials than
any individual 401k participant could ever realize. Thus risks are
minimized and returns maximized. If we are not going to return to
defined benefit plans, which IMHO, we should, as they benefit far more
people, then the 401k plans should be changed as follows:

1) increase the current pre-tax maximums to 15% and their matching
contributions of salary and REQUIRE that they be contributed with a
payroll tax like deduction.

2) Permit individuals to contribute more than the required amount at
their discretion in accordance with the formulas now in use for IRS
Section 403b plans on a pre-tax basis, and require employers to match
half of those increased contributions.

3) Do not permit premature withdrawals under any circumstances, but
develop a system for taking loans against those reserves.

Those simply changes would provide a floor of reserves for retirement
income that would be far more adequate than present reserves generated
by 401k's. Currently, a retiree who wants to receive an income on
retirement of approximately $60,000-$80,000 per year needs reserves
roughly in the amount of $1.25 million to generate that income, assuming
retirement at age 55. Obviously, if one retires later, the reserve
needs to be less, a bit under a million at age 65. But assumes an
interest rate assumption of around 7%, which may or may not be likely.
If one uses a conservative interest rate assumption of 4%, the reserves
at age 55 rise to approximately $1.6 million and to $1.1 million at age
65. And that is based on current salaries. If inflation raises current
salaries, one needs to adjust over 25 years for the increase in
inflation of wages.

I agree that the current 401K system is inadequate to provide enough
funds for retirement, even when combined with SS. I also wouldn't
object to any of your ideas for modifying the 401K program. I think
the best solution is the familiar "3 leg stool" system where a retiree
receives proceeds from SS, his 401K, and a defined benefit plan. I'm
also an advocate of eliminating the income transfer portion of the SS
program. My belief and assumption, however, is that defined benefit
plans for most Americans are history and eliminating the income
transfer characteristic of SS is not going to happen. As a result, I
believe future generations of Americans are in trouble, as I said.

Everything comes full cycle. Defined Benefit plans are history for the
moment. They will eventually come back, however, I agree, not any time
soon, when the public realizes that the alternative is inadequate. the
three leg stool is essentially where all retirement income comes from,
and really is nothing extraordinary. What is extraordinary is that the
Republicans convinced most people that their 401k's can substitute for
the defined benefit leg.


I don't think your calculations using an interest rate of 7% or even
4% are realistic. In order to get a return of 7%, retirees would
probably have to have all of their money invested in equities which is
to risky for retirees and recent events show that figure might be
overly optimistic even with equity investments.

Many defined benefit plans use exactly that interest rate assumption in
creating annuity factors which are used to determine benefits. So the
rate is not unrealistic. In fact, many of them believe at this juncture
that they will receive an average return of 5%-6% over the next ten
years, even in THIS current economic environment. Because they make
projections over the long term. And those projections include years in
which the returns were a staggering 16% or better. Given that, it is
not unrealistic to assume an average interest rate assumption of
anywhere from 5%-7%. It is the insurance companies, which need to take
their profit which use lower interest rate assumptions, another reason
why defined benefit plans are better. Why pay an insurance company 2%-3%?


Historically, the 30-year bond has probably yielded a real rate of
return of about 3.0%. However, if you look at the 30-year bond
interest rate since about 2004, it's probably ranged between about 4%
and 5% and from that you have to subtract inflation to get the real
rate of return. In order to believe that the long bond has yielded
3.0% in the last 4 or 5 years, one therefore has to believe that
inflation has averaged only about 1% or 2%.

That may be true, but defined benefit plans are diversified to include
equities as well as fixed income instruments. The diversification
accounts for the returns.


I did a personal calculation -- I think it was about a year ago --
that included the cost of materials for a shed, including lumber,
roofing, insulation and wiring, etc., and some sprinkling system
parts, utilities, groceries, and dog food, etc., and came up with an
inflation rate of about 7%. I have also found sources on the internet
that tend to confirm that number. So, if that's the case, retirees
would actually be losing about 2% or 3% per year on their investments.
If you calculate the amount of money needed to retire based on a loss
of about 2% per year, you get a frightening idea of how much trouble
future Americans could be in with their retirement prospects.

Most defined benefit plans, as well as Social Security have COLA's
included, which serve to reduce the effect of inflation, which 401k's do
not. Another reason why 401k's are ineffective. The only way they can
possibly match the defined benefit plans is if they generate a reserve
sufficient enough to be equal to that of the defined benefit plan, which
at present they do not. IMHO, even if they do generate sufficient
reserves, which they never will given current contribution limits, they
will STILL produce less income for retirees because of the low rates of
return available as compared to the interest rate assumption of the
defined benefit plans.


There are some experts that are predicting US equity returns will be
lower in the future than they've been in the past. (Presumably,
they'll be higher in other parts of the world, though). So, I expect
in the future defined benefit plans will outperform 401Ks, but that
would, of course, mean they would cost employers more money unless
they reduced the plan payout to equal the average return of the US
market. It is possible, I suppose, that the outlook might be brighter,
if investors were able to relinquish their preference for US equities.

I have seen those predictions, and they all predict that the so-called 'emerging markets' will outperform the U.S. market. No doubt they will, as is the case even with China today. But the issue is NOT whether or not some other market will outperform the U.S. market, but will the U.S. market provide a sufficient return with whatever it returns to insure an effective long term reserve, sufficient to provide the retirement income required. IMHO, the answer to that question is yes. As I said previously, actuaries of public pension systems are projecting returns for the U.S. market averaging around 5%-6% over the next ten years. Sufficient to provide a reasonable retirement income.

In any case, I don't think the comparison is relevant since I believe
retirement income should consist of income from savings (401Ks),
defined benefit plans, and Social Security. As I said before, though,
I don't believe that defined benefit plans will cycle back. I could be
wrong, however. It wouldn't be the first time.

I do not disagree that retirement income should come from several sources. I do disagree regarding the eventual return of defined benefit plans. In fact, I would not be surprised if such militating begins after this recession is over.
.

Relevant Pages

  • Re: Calls grow to overhaul 401(k) retirement plans (Los Angeles Times)
    ... Where are they going to get the money for their retirement? ... which the US government can borrow money from foreign countries. ... since the aggregate contributions would be earning investment return in ... 401k's and will continue to do so, since defined benefit plans have ...
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  • Re: Calls grow to overhaul 401(k) retirement plans (Los Angeles Times)
    ... Where are they going to get the money for their retirement? ... which the US government can borrow money from foreign countries. ... insufficient, as a percentage of income to generate sufficient reserves, ... 401k's and will continue to do so, since defined benefit plans have ...
    (soc.retirement)
  • Re: Calls grow to overhaul 401(k) retirement plans (Los Angeles Times)
    ... Where are they going to get the money for their retirement? ... since the aggregate contributions would be earning investment return in ... insufficient, as a percentage of income to generate sufficient reserves, ... 401k's and will continue to do so, since defined benefit plans have ...
    (soc.retirement)
  • Re: Calls grow to overhaul 401(k) retirement plans (Los Angeles Times)
    ... Where are they going to get the money for their retirement? ... which the US government can borrow money from foreign countries. ... The 401k system is ineffective since the aggregate contributions are ... 401k's and will continue to do so, since defined benefit plans have ...
    (soc.retirement)
  • Re: Calls grow to overhaul 401(k) retirement plans (Los Angeles Times)
    ... Where are they going to get the money for their retirement? ... which the US government can borrow money from foreign countries. ... since the aggregate contributions would be earning investment return in ... 401k's and will continue to do so, since defined benefit plans have ...
    (soc.retirement)
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