Gyroscopic Investing

We subsidize a lot of things to steer behavior (savings, mortgages, etc) and there is a cost associated with it. I believe the current SEC effort to broaden the defintion of fiduciary will hopefully go along way in cleaning up the way financial services are provided the rank and file America, including 401(k) plans. Personally, I think all 401(k) plans should include both low cost and actively managed fund alternatives. The problem with implementing such a choice spectrum is the compensation structure of the financial advising community.

stone wrote: Are US military pensions also run like that (ie with no asset base, just paying current retirees from current workers?

US military pensions are paid by the federal government like any other federal expense (including Social Security, Medicare, current military salaries, etc etc).  Other than the Social Security "trust fund" (Social Security took in more in taxes that it paid out between about 1983 and just about now, see http://en.wikipedia.org/wiki/Social_Security_Trust_Fund), there are no assets set aside to pay any obligations of the US Government.

KSActuary wrote: We subsidize a lot of things to steer behavior (savings, mortgages, etc) and there is a cost associated with it.

I supose Warren Moslers point was that it is inexplicable why we choose to subsidise such a method of pension provision. The administrative burden of having everyone buying stocks etc; keeping them for 50years and then selling them is huge in comparison to simply collecting current earnings from current workers and transfering them to current retirees in the manner of military pensions. It seems to me that one way or another current people of working age have to grow food, provide utilities etc for the elderly. How you go about organizing that is just a matter of administration. Administrating it by having everyone buy up stocks when they are in their 20s in the hope that someone will buy them back fifty years later seems to me about the craziest method imaginable. The only reason why it "worked" for the boomer generation is because they were the first generation to try it en-mass. If you have a transition towards having a massive influx of new money into the market, then that bloats it up. Once that has happened it has happened. It is not an ongoing process IMO.

rickb wrote: US military pensions are paid by the federal government like any other federal expense (including Social Security, Medicare, current military salaries, etc etc).  Other than the Social Security "trust fund" (Social Security took in more in taxes that it paid out between about 1983 and just about now, see http://en.wikipedia.org/wiki/Social_Security_Trust_Fund), there are no assets set aside to pay any obligations of the US Government.

I suppose the entire USA is the asset used to pay the obligations of the US Government.

stone wrote:

KSActuary wrote: We subsidize a lot of things to steer behavior (savings, mortgages, etc) and there is a cost associated with it.

I supose Warren Moslers point was that it is inexplicable why we choose to subsidise such a method of pension provision. The administrative burden of having everyone buying stocks etc; keeping them for 50years and then selling them is huge in comparison to simply collecting current earnings from current workers and transfering them to current retirees in the manner of military pensions. It seems to me that one way or another current people of working age have to grow food, provide utilities etc for the elderly. How you go about organizing that is just a matter of administration. Administrating it by having everyone buy up stocks when they are in their 20s in the hope that someone will buy them back fifty years later seems to me about the craziest method imaginable. The only reason why it "worked" for the boomer generation is because they were the first generation to try it en-mass. If you have a transition towards having a massive influx of new money into the market, then that bloats it up. Once that has happened it has happened. It is not an ongoing process IMO.

Unfavorable demographic trends will also seriously undermine the arrangement you are describing above.

Unfortunately, when demographics turn bad there isn't a lot you can do.  Under such conditions, pay as you go arrangements start to malfunction as the ratio of workers to retirees get out of whack, and a system where workers save up and liquidate assets as needed in retirement also doesn't work with bad demographics because in such a situation there are too many sellers relative to buyers to generate the price levels needed to meet the expected asset returns on which the retirement saving was premised in the first place.

It's surprising how poorly understood the effects of demographics seem to be when it comes to the design of sound retirement programs.  One simple solution (that people would never accept) would be to maintain the same ratio of workers to retirees by modifying the retirement age as needed.  This means that in the 1980-2000 period in the U.S. the retirement age would have fallen a little every year, while in the period starting in about 2010, the retirement age should be rising every year to keep the worker to retiree ratio in balance, which is important not only for designing sound retirement programs, but also in maintaining a healthy economy (i.e., it's not possible to have a healthy economy when everyone is retired and no one is actually working).

OTOH, when the demographic tailwinds are working well, it can make the politicians, central bankers and CEOs look like geniuses when they were really just lucky to be at the controls during an exceptionally favorable demographic environment.

Medium Tex, I guess the proportion of tax intake that gets spent on pensions for retirees simply has to increase in a pay-as-you-go system whenever demographics mean that there are lots of retirees and few workers. We have 10% under/unemployment and looking after elderly people isn't an unobtainable skill. There doesn't seem to me to be a problem over and above an administrative one. Simply give the retirees money so that they can (indirectly) employ unemployed people by buying the stuff they need.

I suppose the "social security trust fund" is just such a shift in the proportion of tax used to fund retirees. When the boomers were working, not much of their pay roll tax was needed to pay for their parents' pensions, so the excess tax was "accounted for" with the growing  "social security trust fund". Now that more pension needs to be paid out than is coming in in pay roll tax, that is accounted for by drawing down the social security trust fund. Either way it is just entries in a spread sheet. The reality is whether there are working age people available to grow food, provide utilities etc for current retirees. There are so there isn't a problem.

Most people lose money in their 401ks, therefore the government should get rid of them and replace it with a government sponsored retirement vehicle.

Most people are too careless to handle firearms so the government should ban them and hire more police and increase police powers.

Most people are too stupid to eat a proper diet, so the government should require specific diets for everyone.

We could be safer, healthier, and have a nicer retirement if everything in our lives was run like the DMV! 

TripleB wrote: Most people lose money in their 401ks, therefore the government should get rid of them and replace it with a government sponsored retirement vehicle.

Or you could just stop telling people that 401(k) plans can do something that they can't.

Recognizing the flaws in the 401(k) plan design doesn't suggest what would be a better replacement.

I actually think that a cash balance plan approach would use the money currently going into 401(k) plans more effectively.  No government involvement would be needed.

MT,

What is a "Cash balance plan approach?"

To me, calling a 401k a "retirement fund" is just semantics... yes there are way too many people that misunderstand retirement plans, but when we have an existing annuity program called social security, I don't think a privatized savings program in form of 401k plans and IRA's are un-called for.  I hate plenty of things about 401(k)'s, so I wish they'd give IRA's the nice high limits 401(k) plans enjoy, but I don't see tax-deferred "retirement" accounts as being too bad of an option.  People just have to understand there ARE safe options available, and tools to use to estimate retirement income based on the wealth heald in these accounts.

Japan has their post office banks where people save massively. It is really a government system anyway IMO. Cash in general is really a government system anyway. I know what Triple B is getting at when he says it is best to just let people sort things out on their own. But if people are going to sort things out on their own then don't have all the tax breaks and state encouragement of 401k systems. Just have the state totally ignore retirement issues. Basically the traditional way is to have people look after the old people they know/are related to. That is probably the free market solution. Personally that seems a bit uneven to me. I do think it is better to try and do better. Having a very simple, low admin, state system such as military pensions seems to me to be the "low bullshit" option.

I also think that in general, the way to ensure that government is kept in check is to fight hard for simplicity. If something is simple enough that every idiot fully understands it, then every voter will see when it is being done wrong. That goes for pensions, the monetary system etc etc.

All of that Warren Mosler link about retirement seems pretty spot on to me. I thought he said the bit I've pasted below pretty well. I think it is notable that he himself has worked his entire life in the finance industry. I think he made the largest ever trade  (something with Japanese government bonds).

"Let’s look at it this way. 50 years from now when there is one person left working and 300 million retired people, that guy is going to pretty busy since he’ll have to grow all the food, build and maintain all the buildings, do the laundry, take care of all medical needs, produce the TV shows, etc. So what we need to do is make sure those 300 million retired people have the funds to pay him? I don’t think so! This problem obviously isn’t about money. What we need to do is make sure that one guy working is smart enough and productive enough and has enough capital goods and software to be able to get all that done, or those retirees are in serious trouble! So the real problem is, if the remaining workers aren’t sufficiently productive there will be a general shortage of goods and services and more ‘money to spend’ will only drive up prices, and not somehow create more goods and services."

moda0306 wrote: MT,

What is a "Cash balance plan approach?"

A traditional defined benefit plan provides a benefit based upon a formula such as years of service x final average pay x a fixed percentage.

A cash balance plan provides a fixed contribution for each participant annually based upon a percentage of compensation.  The investment return on these assets can be determined a few different ways, but a safe way is to stipulate the return in the plan and invest the assets to target that return (this approach requires a more bond-heavy approach).

In both cases, the final benefit is expressed as a life annuity, with an optional lump sum under some plan designs.

In both cases as well, the plan sponsor bears the investment risk rather than the plan participant.  This is, to me, a key difference from 401(k) plans.

In my view, no employer ever has to offer a retirement plan, but if they are going to offer a retirement plan and assume the role of fiduciary with respect to plan participants, they should design a plan that can actually achieve the stated goals of the program.

Medium Tex, I hope I haven't misunderstood you but couldn't that system lead to otherwise good companies going bust because they had screwed up in providing pension obligations to workers decades before? It seems to me that we want car makers that are good at making cars rather than car makers that are good at designing pension plans (or rather that were good at designing pension plans decades before).

stone wrote: Medium Tex, I hope I haven't misunderstood you but couldn't that system lead to otherwise good companies going bust because they had screwed up in providing pension obligations to workers decades before? It seems to me that we want car makers that are good at making cars rather than car makers that are good at designing pension plans (or rather that were good at designing pension plans decades before).

General Motors?

American Airlines?

Sure, making promises you can't keep is not good business, but that's an argument for being more careful about the promises you make, not for getting out of the promises business altogether.

The pattern of companies screwing up their pension plans is normally more driven by greed than incompetence (though incompetence does play an important role).

I am also telescoping a lot of different concerns I have into one broad rant.

TennPaGa wrote: If multi-billion dollar corporations weren't smart enough to know how to invest in a retirement plan, how do employees stand a chance on their own?

That is my basic frustration in a nutshell.

I don't necessarily have a solution, I just see this problem and the ways in which it is concealed, re-framed and misunderstood and it frustrates me.

TennPaGa wrote: If multi-billion dollar corporations weren't smart enough to know how to invest in a retirement plan, how do employees stand a chance on their own?

Isn't that kind of the reason that 401k's came about to begin with?

In other words, when it became clear that many companies would not be able to afford paying out defined benefit pensions to their retiree's, they came up with the 401k. 

There might be one worker left, but he'll be at the machine controls for over 300 million robots.  Check this video out for a taste of the future:

http://www.youtube.com/watch?v=Qbu5jRyCpoY

MG

stone wrote: "Let’s look at it this way. 50 years from now when there is one person left working and 300 million retired people, that guy is going to pretty busy since he’ll have to grow all the food, build and maintain all the buildings, do the laundry, take care of all medical needs, produce the TV shows, etc. So what we need to do is make sure those 300 million retired people have the funds to pay him? I don’t think so! This problem obviously isn’t about money. What we need to do is make sure that one guy working is smart enough and productive enough and has enough capital goods and software to be able to get all that done, or those retirees are in serious trouble! So the real problem is, if the remaining workers aren’t sufficiently productive there will be a general shortage of goods and services and more ‘money to spend’ will only drive up prices, and not somehow create more goods and services."

I think you'll find this interesting as it may be another taste of the future:

"The Chile Pension system (Spanish: Sistema Previsional) refers to old-age, disability and survivor pensions for workers in Chile. The pension system was changed by José Piñera, during Augusto Pinochets military government on November 4, 1980 from a PAYGO-system to a fully funded capitalization system run by private sector pension funds. Many critics and supporters see the reform as an important experiment under real conditions, that may give conclusions about the impact of the full conversion of a PAYGO-system to a capital funded system. The development was therefore internationally observed with great interest. Under Michelle Bachelet's government the Chile Pension system was reformed again."

http://en.wikipedia.org/wiki/Pensions_in_Chile

MG

stone wrote: Japan has their post office banks where people save massively. It is really a government system anyway IMO. Cash in general is really a government system anyway. I know what Triple B is getting at when he says it is best to just let people sort things out on their own. But if people are going to sort things out on their own then don't have all the tax breaks and state encouragement of 401k systems. Just have the state totally ignore retirement issues. Basically the traditional way is to have people look after the old people they know/are related to. That is probably the free market solution. Personally that seems a bit uneven to me. I do think it is better to try and do better. Having a very simple, low admin, state system such as military pensions seems to me to be the "low bullshit" option.

I also think that in general, the way to ensure that government is kept in check is to fight hard for simplicity. If something is simple enough that every idiot fully understands it, then every voter will see when it is being done wrong. That goes for pensions, the monetary system etc etc.

Machine Ghost, the transition from a pay-as-you-go to an asset holding system will obviously jolt the asset markets and so initially will see a surge in asset prices. That will primarily benefit those who own assets from BEFORE the transition but it will also give the illusion that the asset holding system is working fine. The tide won't go out to reveal reality until the system reaches equilibrium decades down the line. It is a nightmare experiment in that it takes many decades to see the result. Imagine if the US social security system became privatized with the proviso that it could only be invested in rare (pre 1900) postage stamps. People currently holding such postage stamps would do very nicely. People who entered relatively early on might do OK. At equilibrium it would just be a churn around of people putting money in and taking it out as with any of these systems but there would be a totally unnecessary  hiatus and transfer of wealth during the transitions. Stocks are no different from stamps in that reguard It is just a totally redundant froth of nonsense layered over what in essence is a very simple issue.

MediumTex wrote:

TennPaGa wrote: If multi-billion dollar corporations weren't smart enough to know how to invest in a retirement plan, how do employees stand a chance on their own?

That is my basic frustration in a nutshell.

I don't necessarily have a solution, I just see this problem and the ways in which it is concealed, re-framed and misunderstood and it frustrates me.

Yes!  These are exactly the thoughts I had when I heard that the pension (that was never mentioned while I was considering the job...) was changed into a cash balance plan.  And finally, the cash-balance plan was thrown out the window and now my employer just contributes up to 8% of my salary to my 401k (2% outright and 6% match).

So, now I have no problem taking time _during work_ to manage my retirement planning since they thought it'd be cheaper to cut the costs of a defined benefit plan ~13 years ago....

mike