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And Now For The Really Bad News

Brace yourselves.  This week’s Economist — the only real newsweekly in the English language and must reading at the Mead manor, where we would as soon watch network news as read Time or Newsweek — has bad news and really bad news on the pension front.

The bad news is that corporate and public pension plans are horribly and perhaps irredeemably underfunded.  Years of lies, accounting sleight of hand and unrealistic assumptions about returns have now reached the point where private final salary pension programs in the US are now underfunded by about half a trillion dollars.  Small change compared to US public sector pensions, where the pension gap at over $4 trillion is eight times the size, but it looks increasingly as if a lot of people aren’t going to have the money they’ve been told to expect.

That’s the bad news.  The really bad news is worse.  According to the same issue of the Economist, returns on all classes of assets — stocks, bonds, real estate, commodities — could be depressed for years.  Since many pension organizations (and especially the ones in government where they don’t go to jail for using cockamamie accounting assumptions to deceive the public about their financial position) are still using assumed rates of return that are much higher than those financial experts now think likely, the pension gap is likely to grow rather than shrink in years to come.

So your pension is in jeopardy, your portfolio has taken some big hits, and no matter how much you (or your employer) socks away, you won’t get much return on your savings.

What to do?

The best and perhaps only real choices that most of us have involve two changes.  First, save more and make realistic assumptions about your future rate of return.  There is no way around it; if you want to be financially secure or even sort of secure in the future, you must sock more money away now.  Nobody cares as much about your retirement as you do; if you don’t save for yourself you can’t count on the government or a benevolent employer to do it for you.  Save, save, save.  This is true whether you are twenty or whether you are seventy; Americans have let themselves get out of the habit of saving, and we need to get back to it.  Whether your income is large or small, you need to look for ways to cut expenses.  That will help you save now; it will also mean you will know how to retire more cheaply.  We need less Martha Stuart and more Ben Franklin in our national character these days.  Thrift, friends.  It’s a virtue.

Second, and perhaps even more important, adopt reasonable goals.  Stop thinking that the goal of your working life is to get rich enough to quit at 65 and have fifteen years of active leisure.  The goal of a working life is to find ways of contributing to the common welfare that sustain you and your family, that fulfill you and help you to grow.  As you go on in life, you should be looking to keep contributing.  The goal isn’t to play golf at Palm Beach or veg out in front of the tube.  Retirement is a time to change careers: work part time, or work at something you love that pays less — but that still contributes something to your income.

You want a working life that pays the bills but keeps you connected to the world in interesting and useful ways.  These don’t have to be big earth shaking jobs; it can be healthier, more satisfying and morally better to work a few hours a week as a crossing guard keeping in touch with the kids in your neighborhood than to sit around watching daytime TV.  A partial retirement where you work part time and at more user-friendly jobs can be better and more rewarding than total idleness and empty leisure.  Many people with fully funded pensions and ample savings volunteer or go back to work because the boredom and feeling of uselessness become unbearable.

Think of your goal as a long period of partial retirement involving part time and/or community focused work followed by a short period in much older age of living entirely off your savings.  This is a goal that many of us can achieve more easily than the old style of retirement — and makes for a richer, more interesting and quite possibly longer and healthier life.

(Obviously, for the disabled and those in deteriorating health, the situation is different.  Society is going to have to become more generous with disability payments as the length of the working life increases.)

There is bad news and there is really bad news, but none of it has to stop us from living rich and full lives.  Thanks to advances in medicine and a richer understanding of how to fight the consequences of aging, most people in the advanced world can look forward to ten or fifteen more years of active living than past generations.  This is a blessing, not a curse, and I personally would rather retire slowly and gradually than spend those years playing canasta and watching TV.

Slow, gradual retirement isn’t just more affordable; it is a better way to live and a more noble goal.  We can choose to overcome bad news by living better lives.

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  • Jordan

    I had lunch with a college friend a while back. He said he felt secure knowing he had a public pension. I told him I felt safer having the money in private IRA/401k accounts where I control the investments. He told me he didn’t trust the markets. I told him that I could move all of my money into a money-market type holding. I asked him where he thought his pension money was kept. (No answer).

    It’s unclear why the word “private” has become such a dirty word in some circles.

    Of course, the IRAs/401k could be confiscated in theory (e.g. in the form of a mandatory purchase of a gov’t run annuity), but I suspect we’d be more than halfway to open revolt by then.

  • MarkE

    The big increase in savings is the usual response to a severe recession. I agree that in general we Americans should save more. However, I used to be a hyper-miser so as to be prepared for the future, until my wife introduced me to the idea that you never knew how long your particular future might be. It would be a shame to miss many opportunities for enjoyment on our way to the future. Eventually after much heated argument we reached a compromise. We would save for the future but also spend in the present in a balanced but persistent way. We have been happy with this agreement for a long time now. The Aristotelian mean seems to be the virtuous way here.

    Also, the usual over-reaction to saving, although probably necessary and unavoidable, is likely to depress consumption and therefore economic recovery for a longer period of time.

  • Luke Lea

    My life parting advice for my daughter upon leaving college for life in the real world: “Work hard, save much, keep an open mind, and have fun along the way.”

  • David Livingston

    Does this really bad news frighten me? Hardly. Why not? Because at age 71 & 2/3rds I’ve already been retired for forty-one & three-fourths years on the taxpayer’s dime due to having been WIA fighting in Viet-Nam & subsequently been invalided out of the Army. But the pension mess may affect my children.

  • David Livingston

    Am I worried about this threat to pensions? Hardly.

    Why not? Because at age 71 & 2/3rds I’ve been retired for forty-one & three-quarters years on Uncle Sam’s dime due to having been WIA fighting in Viet-Nam & thence invalided out of the Army.

  • Bebe

    Really, Mr. Mead, you’ve been on the Eurocentric East Coast too long when you use the “Economist” to speak on pensions and equity returns. Should I be concerned about the yields for government and the few remaining corporate pensions? If the union members of those inefficient sectors were at all cognizant of the errors of their fund managers, then I might sympathize. Perhaps they could pattern their investing after that of Robert Citron, former treasurer of Orange County CA, who consulted psychics and astrologers while delivering it into bankruptcy in 1994. By the way, his actions were at the height of an “excellent” investment period. My only concern is whether I will be taxed by U.S. governmental entities to “contribute” to the shortfalls in these pension funds. I shouldn’t be surprised…and yet I would anticipate an armed uprising in that event.

    As for the quoted article on asset returns, now there’s a mish-mash of “Economist” reporting: equity yields everywhere appear too high (yet yield is merely one consideration in investing); American real estate is not overvalued (clearly the author hasn’t looked at such major U.S. property markets like New York, San Francisco, and Los Angeles); government bonds will underperform (a stupifyingly obvious point); commodities are hard to value (yes, they are speculative vehicles); corporate bonds are saviors (can one be more selective as to which industries?). And that chart on Real Stockmarket Returns by Percentage is presented without historical relevance.

    You conclude by proffering the bromides of saving more and working usefully during one’s golden years. I prefer your insights on foreign policy.

  • Dave

    All good advice so far as it goes. However, I think Mr. Mead has accidentally left out the most important piece of advice that all Americans should have going forward…

    Refuse to vote for any person at any level of government who does not swear to stop these financial practices and do all in their power to hold accountable those responsible.

    It may perhaps be a pipe dream that any politician would promise this (or keep their word if they did) but I suppose I am still a foolish optimist.

  • lhf

    We need the next president to be one who can strike a reasonable balance between a safety net and a hammock.

    Right now, those who have been resting comfortably in that hammock are reluctant to give it up – witness the sense of entitlement expressed by the OWS protesters. Ditto the Europeans whose social benefits have been reduced.

    We need someone with the leadership ability and rhetorical skill to restore our “can do” optimism and sense of obligation to future generations of Americans. Do I see such a person? Nope. It sure isn’t Obama, but I don’t see it in any of his hopeful opponents either.

  • Kenny

    You’re right, Mr. Mead …. save, save, save.

    And even as you do save, realize that a portion of it will be stolen one way or another by the banks and governments at various levels.

    And as Dave above says, vote against all tax-and-spenders which means shunnig the entire Democrat Party and parts of the GOP

  • WigWag

    “The really bad news is worse. According to the same issue of the Economist, returns on all classes of assets — stocks, bonds, real estate, commodities — could be depressed for years.” (Walter Russell Mead)

    The “smart” money knows that when publications like the “Economist” start lamenting that things could be bad for years, is precisely the time when an investor should start buying equities.

    Conversely, when the “Economist” assures us that things look bright for the forseeable future is the time to sell, sell, sell.

  • Jordan

    @Kenny: “And even as you do save, realize that a portion of it will be stolen one way or another by the banks and governments at various levels.”

    While I can see how some of what you earn will be “stolen” by the government in the form of taxes, can you explain how banks will “steal” that money?

  • Richard F. Miller

    Dear Dr. Mead:

    As many posters have observed in this space, lo these several years, “taming” the ferociously bad arithmetic of unfunded pension liabilities is integral to the delevereging project.

    Your suggestion (and a sound one it is) that individuals look to (or accumulate) their own resources is just a synonym for “building equity,” the antithesis of leverage. Likewise, the notion of changing rules relating to retirement ages and so forth, comes as close to deleveraging as outright repudiation of debt: its wisdom is that it far better to do on our own steam than that of some creditor. (As any good pilot will tell you, better a controlled, horizontal crash landing than an uncontrolled one of the vertical variety.)

    And here’s the thesis: if debt is whittled down by either increasing equity, repayment, or repudiation (the de-leverarging process), then genuine economic growth is akin to building equity, and this becomes the compelling answer to escaping the blue model trap before it traps us.

    Without engaging in any global redesigns, one simply should adopt the policy that anything that advances inventions, applied technology, expanding one’s domestic energy base, and proprietary manufacturing (to name a few) should be encouraged; any barriers to these should be dismantled.

    When national “equity” is rebuilt and debt pared, let the arguments recommence about quality of life, leisure time, and global fairness (whatever these mean.)

    Without restoring our unlevereaged equity, most of the foregoing is beyond our budget.

  • Tom Holsinger

    The rigidity of public employment systems is a major obstacle to turning retirement from a “bright line” full-time employment vs. full-time retirement into a continuum of gradual shift from full-time employment into only part-time as older employees take more and more time off.

    This is due to public pension benefits being based on the highest paid year, or period of several years, before full retirement. This deters long-service public employees from shifting gradually into retirement.

    A lot of public employees would love the opportunity to gradually retire.

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