US Retirement Crisis – Bad and Getting Worse

Since the launch of KCS in August 2011, we have had as our mission the preservation of defined benefit (DB) plans as the primary retirement vehicle.  Unfortunately, the use of DB plans continues to wane, and today there are fewer than 24,000 DB plans in the US.  The private sector has been hit particularly hard with only 10% of companies using DB plans covering only 18% of the workforce.

We continue to believe in our mission, as we forecast that there will be economic consequences and perhaps social ones, too.  In a recent study by the Center for American Progress, titled “The Reality of the Retirement Crisis”, by Keith Miller, David Madland, and Christian E. Weller (January 26, 2015) the magnitude of the problem is brought front and center.  I would encourage each of you to read the report because if nothing else, it will hopefully get you more focused on the importance of funding your retirement, as early as possible.

Highlights (perhaps lowlights):

  • Millions of Americans will likely have to reduce their annual consumption by a significant margin in retirement
  • It is estimated that nearly 50% of US households are in danger of having insufficient assets to meet retirement needs
  • According to a recently released household survey conducted by the Board of Governors of the Federal Reserve System, as of 2013, approximately 31 percent of Americans reported having zero retirement savings
  • As of 2013, the median retirement account balance among all households ages 55 to 64 was only $14,500, and these are near-retirement households.
  • The NIRS suggests that more than 2/3rds of 55-64 year olds will fall short in retirement
  • Importantly, a couple in retirement should expect to spend more than $220,000 on healthcare expenditures alone
  • Given the weak savings rates, where are those assets to come from?

As you can see, KCS personnel may have sounded a bit like “Chicken Little”, but our concerns haven’t been unfounded. Regrettably, there isn’t much that can be done at this time to protect the 55-64 cohort, but there are game plans that can be instituted to help those that follow.  However, time is of the essence! The failure to help our workforce retire with dignity is unacceptable and the ramifications profound.

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KCS Fourth Quarter 2014 Update

We are pleased to share with you the KCS Fourth Quarter update.  As you will note, 2014 was a poor year for Pension America, and specifically, funded status, as liability growth far outpaced asset growth. Here is the link to the KCS quarterly:

http://www.kampconsultingsolutions.com/images/kcsfcjan15.pdf

Please don’t hesitate to reach out to us if we can be of any assistance to you.

Eurozone QE Bad for US DB Plans?

Clearly the global equity markets have been inspired by the announcement from Europe that the ECB will engage in a “QE” program designed to stimulate economic activity in the Eurozone through the purchase of Euro $1.1 trillion in sovereign debt.  Given the positive market reaction how might this bond buying program negatively impact US DB plans?

Unfortunately, most consultants and plan sponsors remain fixated on the asset side of the pension equation (ROA as Holy Grail), and given that focus they will be heartened by this news.  Well, given the robust rally in the bonds of the Euro participants, in which yields on government debt continue to fall (precipitously) it is highly unlikely that the US Federal Reserve will have much impact on US interest rates in the foreseeable future.

Currently, the US 10-year Treasury is trading at a yield of 1.83%, while the equivalent German and Japan 10-year yield 0.33% and 0.24% (1/23 @ 11:40am).  Given the announced purchase of European sovereign debt, those yields are likely to fall further (at least in Germany’s case).  As such, the much greater yielding US debt will likely become attractive to foreign investors, further driving down the yields on our government debt.

The present value of US pension plan liabilities will likely continue to grow at a faster pace than the assets given the continuing fall in rates.  Since most US DB plans are underweight US fixed Income (at least long duration / high quality bonds), the asset / liability mismatch will continue to create funding problems for pension America.  DB plans need to mitigate this risk by focusing more attention on their plan’s liabilities.  Just because interest rates appear low based on recent history, there is no guarantee that rates will rise anytime soon. Most DB plans, but especially cities and states, cannot afford the contribution volatility that arises from a plummeting funded status.

KCS on the radio

We are happy to share an interview with you from the  “On The Money” radio program at 970 AM with Mike Vitoria.  The discussion took place yesterday, and related to retirement and pension issues.  Here is the link – https://soundcloud.com/on-the-money/otm-1-3-15.  If you decide to listen, Russ’ segment begins about 1/3 of the way into the broadcast.