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The Financial Security of America’s Now and Future Retirees

This article appeared in the June 2019 edition of Nevillewood Living.

Financial Fitness June 2019

It is hard to argue with the conclusion that it has been
a great time to be an investor.  For the
decade that ended December 2018, the stock market has returned over 13% on an
annual basis.  Patient and disciplined
investors have been rewarded with substantial increases in their assets and net
worth. 

Pension plans are some of the largest and most important
investors in the market.  Yet, despite
the decade’s generous market returns, most public pension funds have seen
deteriorating balance sheets.  Their
liabilities (payments owed to current and future retirees) have been growing
much faster than their assets. 

How did this happen?

Several items affected this situation.  First, two market downturns within a short
time period (2000-02 and 2008-09) hit pension plan assets, which struggled to
recover. Cash strapped governments have also fallen behind on plan contributions
and lacked the political will to address benefit levels.

Demographics also played a role.  People are living longer, thus staying on the
pension rolls longer.  The number of
workers has been consistent, but the number of retirees steadily increased. 

How do we fix this situation? 

There has to be some fiscal discipline.  We should want to provide great retirement
benefits to the hard-working men and women who keep our communities safe,
attend to our roads, and educate our children. 
But, the current system is not tenable within most pension plans.  We have to do a better job matching expenses
to revenues for these systems to remain viable. 
This process may result in a painful reckoning, as is often the case
when livelihoods are at stake. 

It may help to compare the evolution of retirement
savings within private industry.  Today,
4% of private sector employees have a pension benefit vs. 60% in the
1980s.  For decades, corporations have
been handing over the retirement savings reins to employees as 401(k) plans
have supplanted pensions as the primary way that corporate employees accumulate
funds for retirement.  While there are pros
and cons to each system, a compelling argument can be made that employees and
their corporate employers are better off going the 401(k) route. 

With a 401(k), an employee has more retirement planning
responsibility, along with the power to customize, tailor investment mix and
risk, and tweak savings rates to match needs. 
Also, a 401(k) account is portable – it goes with you if you leave and
belongs to you even if the company fails. If well managed, the capital
accumulated may provide income during retirement and can be left to children to
build intergenerational wealth. 

From the corporation’s standpoint, allocating dollars
into individual employee’s accounts (i.e., via a match or profit sharing) seems
to be a more efficient use of capital than managing a pension plan on the
balance sheet. 

Same as private industry, governments should perhaps consider shifting their retirement programs to a system that gives employees the tools and education to create their own success.  Principles that built America. 

The opinions voiced in
this material are for general information only and are not intended to provide
specific advice or recommendations for any individual. All performance
referenced is historical and is no guarantee of future results. All indices are
unmanaged and may not be invested into directly.