Why It's Time to Retire the 401(k)

[nitro]

Some useful links on pensions and gives links to legislation being considered:

http://www.knowyourpension.org/pensions/pensionlaw/pension_law.aspx

Notice how the Bush administration passed laws to help corporations save money by adding/ammending pension laws, e.g.,

http://www.knowyourpension.org/pensions/pensionlaw/pensionlaw2004.aspx

 

[slacker]

Quote from nitro:


Hence, solve those core issues on a national level, and the pressure of older workers to continue to need to earn more eases, and guess what, now they can stay competitive longer against younger rivals.

Another problem with pensions and the unions are about to learn is that the company may not exist when they are ready to retire. California is about 2 years away from screwing some of the largest unions in the USA (looking forward to this myself "I told you so...").

Singapore has a mandatory 30%(?) retirement taken out of every paycheck for the individual's retirement and last time I was there I had several conversations on the subject....

What happens to the 'consumer economy' when you take 30% mandatory retirement and then 40% taxes for public works and welfare? Where is the opportunity? Either get a government job or join a union; are those the only the options you want? Both jobs will pay about the same so it really doesn't matter what you do. And, how is the government going to invest all of that money? Returns in that type of economy are going to be flat to non-existent?

At some point you just have to accept the fact that the cure is going to be worse than the problem. If people see that work is rewarded and undisciplined behavior is punished we can turn this around.... If not it is collectivism city for all of us...

 

[Random.Capital]

Quote from nitro:

IThis means you are taking the greatest risk when you are young...

I appreciate what you're tyring to do, but it isn't going to work. Existing pensions are already under-funded, and heavily involved in high-risk investments. In addition to what you've asked for, you would need a massive regulatory overhaul to achieve the desired goals.

I don't see high odds in that happening.

 

[nitro]

Quote from slacker:

Another problem with pensions and the unions are about to learn is that the company may not exist when they are ready to retire. California is about 2 years away from screwing some of the largest unions in the USA (looking forward to this myself "I told you so...").

Singapore has a mandatory 30%(?) retirement taken out of every paycheck for the individual's retirement and last time I was there I had several conversations on the subject....

What happens to the 'consumer economy' when you take 30% mandatory retirement and then 40% taxes for public works and welfare? Where is the opportunity? Either get a government job or join a union; are those the only the options you want? Both jobs will pay about the same so it really doesn't matter what you do. And, how is the government going to invest all of that money? Returns in that type of economy are going to be flat to non-existent?

At some point you just have to accept the fact that the cure is going to be worse than the problem. If people see that work is rewarded and undisciplined behavior is punished we can turn this around.... If not it is collectivism city for all of us...

Your post raises many good issues. I will respond to only one of them by providing a link worth reading:

http://www.heartland.org/publicatio...d_Rules_Have_Led_to_Big_Pension_Problems.html

 

[piezoe]

Quote from nitro:

http://www.time.com/time/business/article/0,8599,1929119,00.html

Is it time to go back to pensions?

I am heartbroken. I see more old people, particularly older women, begging on busy streets. These are not scammers. I understand that the logic doesn't follow between what I see on streets and the 401k situation, but by gawd man, the population is aging rapido and if something is not done, our parents are going to be on the street! I am ashamed to live in the richest nation in the world that has allowed it's elderly to be treated like this.

The 401k system doesn't work, at least not without supplement. It is probably too late for the generation that are now becoming seniors, but must it be so forever?

You are absolutely correct. For purposes of retirement savings, the 401K is much inferior to a properly managed, pooled, defined benefit plan. I have posted extensively on the reasons, so I don't want to repeat here.

The Social Security System is a marvelous example of a well planned, defined benefit plan. However it has been put at risk by Government borrowing from the trust fund to cover Federal budget deficits.

Ideally, rather than allowing people to opt out of all or part of S.S., which would wreck it, we should allow people to make supplemental contributions. Then the Trustees should be permitted to invest in stocks and bonds worldwide following the Norwegian model.

Minor tweaking of current contribution rates is needed of course to make the system sound from an actuarial standpoint because of changing demographics, but that is easily done. The real problem for S.S. now is that the system will have to start redeeming bonds and the Treasury will be redeeming them with dollars that have only a fraction of the buying power of the dollars used to buy the bonds in the first place. That could have been largely avoided had the Norwegian model been adopted say twenty years ago.

 

[nitro]

Quote from piezoe:

... Norwegian model...

Do you have a good link that shows the pluses and minuses of the Norwegian model?

 

[piezoe]

Quote from nitro:

Do you have a good link that shows the pluses and minuses of the Norwegian model?

Their pension fund is invested via their central bank, Norges Bank. By going to their website you can see a list of the pension funds holdings.

<img src=http://www.norges-bank.no/templates/article____69365.aspx>

Right Click on the box, them select view image. The link is:

http://www.norges-bank.no/templates/article____69365.aspx

The pluses and minuses must be inferred from their reports, which are quite impressive.

 

[nitro]

Thanks, that is very interesting.

But I don't see how you can recommend that people invest in this thing given that it has had some very volatile periods. Imo, a retirement fund should never show -40% returns. It should basically keep up with inflation and other costs of living, so something like ~5% real returns with almost no volatility. Anything more than that is a bonus.

For example, my dad has a JPM core bond fund and a "stock" fund detailed in this thread that does just this:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=175250&highlight=dad

Quote from piezoe:

Their pension fund is invested via their central bank, Norges Bank. By going to their website you can see a list of the pension funds holdings.

<img src=http://www.norges-bank.no/templates/article____69365.aspx>

Right Click on the box, them select view image. The link is:

http://www.norges-bank.no/templates/article____69365.aspx

The pluses and minuses must be inferred from their reports, which are quite impressive.

 

[piezoe]

Quote from nitro:

Thanks, that is very interesting.

But I don't see how you can recommend that people invest in this thing given that it has had some very volatile periods. Imo, a retirement fund should never show -40% returns. It should basically keep up with inflation and other costs of living, so something like ~5% real returns with almost no volatility. Anything more than that is a bonus.

For example, my dad has a JPM core bond fund and a "stock" fund detailed in this thread that does just this:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=175250&highlight=dad

If we were talking about an individual retirement plan such as a 401K, then -40% is unacceptable. I agree completely with what you say if the subject is individual retirement plans, and i would not recommend an individual invest exactly this way. Actually for individual plans I prefer only dividend paying stocks early on and adding bonds and money market funds later. However, when you delve into the details of how they, the Norwegian Central Bank, invests the fund you will discover that they include money market funds and bonds. So they have had no problem covering current obligations without having to reach into their risk capital. The acceptable draw down for a pooled fund is greater than for an individual fund because there is near zero probability of everyone retiring simultaneously.

Unless I misinterpreted their report, they have recovered virtually all paper losses from last year already. Quite amazing really. And the long term performance has been very good at keeping them ahead of inflation and growing the fund in real terms. So far, quite a bit better than the performance of the US Social Security Trust Fund.

 

[Nattdog]

the reality is that the concept of retirement is basically a fiction. The traditional mechanism for caring for the elderly was.. ta da! Children and extended family. THe SS system asks us all to be eachother's extended family rather than be tied to individual family units.

"It should basically keep up with inflation and other costs of living, so something like ~5% real returns with almost no volatility. Anything more than that is a bonus."

And who or what is going to be producing the wealth that makes this possible? There is no such thing as a guaranteed real return of 5% with no vol. Never has existed and never will.

The golden era of retimements, job security, all the rest everyone glows about as some ideal was in reality just one more bubble that was bound to destroy itself.

The only way to better care for the elderly is to increase wealth creation through technology, science, and increase in physical invested capital. Same things that have raised all our standards of living.