« Book Report: Eats, Shoots & Leaves | Main | Theme Song »

High Risk? Low Return? or what?

Your Humble Blogger’s left-labor blog hero Nathan Newman points to a NYT article that discusses the effect of switching from old-fashioned defined-benefit pensions to new-fangled defined-contribution retirement accounts.

In the article, Mary Williams Walsh says that “virtually all” the studies showing current retirees to be wealthier than the last generation simply ignore the major asset of the last generation’s retirees: their pensions. That is, the studies compared the currently common system, with the major assets being houses, cash reserves, and stocks (mostly through 401k plans and the like), with the previous one, with the major assets being houses, cash reserves, and pensions, but they left out the pensions. Is it possible that those were honest studies?

Anyway, the main problem is that somehow we went from a low-risk low-return system to a high-risk high-return one. That’s fine for the affluent, who can simply add a HRHR plan onto some basic assets, but not great for those of us who have little savings other than our through our employer-assisted plans. I would rather have a LRLR plan, because I don’t want to be old and poor. I wouldn’t mind being old and rich, someday, but being old and comfortable, or even old and solvent, would be fine. I would gladly trade away my shot at old and rich for a guarantee of old and solvent (or at least, a guarantee of solvent if I grow old).

The problem, as I see it, is that I can only really get a LRLR plan (with my employer or my family’s employers contributing) if lots of other people want one. And they don’t. Perhaps they’ve been duped by the phony numbers, or the whole bizarre Dow-Jones-in-the-daily-news thing, or perhaps I’m just on the wrong end of the culture stick this time. I suspect it’s the latter, and I suspect that it’ll be a while before the cultural emphasis changes from rich to not-poor, from HRHR to LRLR. I don’t want the whole country to suddenly become risk-averse, you understand, but ... um ... yes, I do.

This is what happens when parents fail to teach their children to shoot craps.



I'm not sure I understand -- if you want a LRLR account, can't you just put your personal defined contributions into treasure bills or similarly LRLR assets? The fact that most people have their retirement money in stocks doesn't mean that you have to; there are still LRLR assets out there, and you can still put your money into them. (As you should when you approach retirement age, since big short-term fluctuations matter a lot less when you're thirty than when you're sixty.)

Well, and that depends on your employer, and your employer's plans. I can buy t-bonds myself, of course, but so could my grandfather. If my employer is going to match, or contribute at all, it gets to restrict my options. I've just looked through my options under my previous employer, and even the most LRLR options are scarcely guaranteed (I believe they are shares in a conservatively-invested bond-heavy fund). It's not a pension.
Of course, even pensions aren't iron-clad. The employer can seek bankruptcy protection from creditors, including pensioners, and that is happening more frequently than it used to, I believe. And, obviously, there are costs associated with defined-benefit plans which could be actual economic problems, I suppose, although not as bad as having everybody invested in a speculation game, trying to get rich.


Huh; I haven't looked into it too closely, but I thought most retirement plans offered a money market fund as an option, which is about as safe as it gets.

Noam Chomsky has something about this in Propaganda and the Public Mind ... google has these sites... still looking for a relevant excerpt.

Unrelated to this topic exerpts: http://www.southendpress.org/books/PAPMexcerpt.shtml

Hm. Can't find just now.

Got it!

Q: Is Social Security broken? Does it need to be fixed?

Chomsky: Even before getting to that, how come people are talking about it? Just a few years ago, this was called the third rail of American politics. You couldn't touch it. Now the question is, "How do you save it?" That's quite an achievement for propaganda.

If indeed the economy is going to undergo a historically unprecedented slowdown as far into the future as we can see, then the stock market is going to undergo a sharp slowdown, too. You can't have it both ways. This is not a particularly radical criticism. You can read it in Business Week.

The Social Security Act said, "We care if some other elderly person starves. We don't want that to happen." The idea of putting it in the stock market, though it's framed in all sorts of fraudulent gobbledygook, is to break down that sense of social solidarity and say, "You care only about yourself. If that guy down the street when he gets to be seventy starves to death, that's not your problem. It's his problem. He invested badly, or he had bad luck." That's very good for rich people. But for everyone else, it depends on how you evaluate the risk. Social Security's been very effective in that respect. Starvation among the elderly has dropped considerably.

Post a comment

Please join in. Comments on older posts will be held for moderation. Don't be a jerk. Eat fruit.