Thursday, April 20, 2006

Am I going to make a comparison to Social Security? You know it!

The federal program designed to insure corporate pensions is about to take a series of hits that it simply cannot afford. From the WashPost - “The Next Big Bailout? - Addressing the Insolvency of the Government's Pension Benefit Guaranty Corporation”:

In the 1980s, as the American public realized that many savings and loans were insolvent, they discovered that FSLIC, a government corporation, was itself insolvent. Now as the public is realizing that many pension plans are deeply underfunded and that companies obligated to remedy the underfunding can- and in a number of cases do- go bankrupt instead, they are also discovering that the PBGC [Pension Benefit Guarantee Corporation] is also insolvent.
This article appeared the same day that General Motors announced a $323 million quarterly loss. Aside from health benefits, GM is creaking under the weight of pensions based on promises made when the car maker made huge profits and owned half the U.S. market. But those days are long-gone. Some say that General Motors’ pledge to its workers is sacred and they must keep their promises no matter what. Others believe that honoring these promises made during GM’s salad days set the course for certain bankruptcy.

Surely the same can be said about Social Security, formed in another era with 22 workers for every retiree. Now there are three workers per retiree, heading to two. The immutable laws of demographics and economics dictate that these two workers will have to pay a larger portion of their income to support retirees. Is that fair? Or is it time to face the reality that we cannot keep taking money from younger (poorer) workers and supplementing older (richer) retirees?

It’s comforting to think that the corporation or the government will always be there to support workers in the golden years. But a fat 401(k) is far more secure – and comforting – simply because it’s owned by the worker. Ultimately the only person you can trust in retirement is you.

Cold, but true.

Extra – Will Franklin looks at China’s imploding pension program. It’s all about the demographics.

6 comments:

StargazerA5 said...

Fat 401(k)s sound good in theory, but I do have a major concern about them.

As people put money into stocks and bonds, the price for these increases. This is the source of the increased value of an investment portfolio like a 401(k). Conversely, when people remove money from their portfolios, the prices of stocks and bonds decrease. If enough money is removed, the prices crash, wiping away the value of other people's retirement investments.

You rightly point out that when the Boomers retire, Social Sec will put more out then it will pull in. However, won't the same happen with the stock market when those same Boomers start tapping their 401(k)s and start pulling out more money from the markets then are being put in?

I can't help but wonder if this solution doesn't cause the same problem, but just shifts it to a different, and potentially more damaging, arena.

Anonymous said...

stargazer5

you really need a basic econ course. "putting money into a bond increases the price?" WTF? Some stocks also pay dividends, don’t even have to pull money out, the market pushes it out to you.

StargazerA5 said...

anonymous,

Actually, I was useing basic economics, the most basic of all: Supply and Demand.

While I admit to not knowing much about the bond market, the stock market is very much driven by supply and demand. At any given point in time there are a finite number of stocks available. Since they are bought by a bidding process, if more dollars are available to buy stocks, more stocks are bought causing less supply and driving price up. That more people will sell to the higher prices will have a short term depreciating effect, but I'm refering to long term trends. Trends such as a large influx of retirement money.

So, then, what happens when people want to withdraw funds from their 401(k)-like retirement funds, for instance to retire? They have to sell off some of the stocks they have bought. With the Baby Boomers selling off their retirement investments at roughly the same time frame, there will be a lot of people selling on the market. What happens when sellers outnumber buyers? Prices drop.

My concern is that if we have inflated the stock market through a massive influx of retirement related investments, when we suddenly have a large number of people retireing, we'll have a serious amount of downward price pressure, possibly even a crash if we've over-inflated the market enough.

StargazerA5

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