P&I has recently reported on an OECD report. “The OECD’s “Pensions at a Glance 2017” report analyzed the level of retirement benefits from mandatory public and corporate plans relative to earnings.” The report found that for “full-career workers” with average earnings, the future gross replacement rate averages 53% for men and 52% for women in 35 OECD countries.
Unfortunately, but not surprisingly, the U.S. ranks below median with a gross retirement replacement rate for mandatory plans of just 38%. Again, this is an evaluation of full-career workers in mandatory plans. With the demise of the DB plan in Corporate America, one can forecast without sticking their neck out too far that this ranking will continue to deteriorate.
The greater reliance on defined contribution plans is poor policy based on the fact that untrained individuals are being asked to fund, manage, and disperse a retirement benefit in an environment of modest wage growth, changing employment opportunities, and longevity issues caused by us living longer. There is a far greater likelihood that many of our elderly will be living on social security alone, as retirement benefits prove woefully insufficient.
Much more needs to be done to help our employees prepare for their retirement years, and mandating that they work longer is not the answer for most. Regrettably, this study points out that “reforms have been fewer and less widespread than in previous years”.
The chart below is courtesy of Dan Primack, Pro Rata newsletter from Axios. At first glance, it appears that a significant majority of taxpayers across the income spectrum will receive tax relief and a positive after-tax income boost from the latest tax proposals out of D.C. However, fast forward 10 years to 2027, and the tax relief proves illusionary for most Americans.
According to Primack, a majority of Americans in income percentiles from 0% (not high) to 90% will not only NOT see tax relief, they will actually see a tax increase relative to current tax law. In fact, it is estimated that only 11.8% of those in the lowest 20% of income will continue to receive a tax break, while 32.4% will see their taxes raised and after-tax income fall by -0.1%. I find this quite distasteful. How about you?
If you find yourself in the 40% to 60% bracket, 65.6% of you will see a higher tax bill come 2027, while 58.9% of those in the 60% to 80% income bracket will be impacted by higher taxes. Regrettably, 98.1% of the top 0.1% will continue to receive a tax cut, while their after-tax income grows by 2.0%. I say regrettably because we are negatively impacted by a serious income inequality in this country, and proposed tax changes should be addressing this issue – not compounding it!
I am always interested in articles that address Social Security’s looming insolvency. Today, I had the opportunity to read an article on WealthManagement.com titled, “Solving the Social Security Shortfall” by Mark Miller. The article’s subtitle read, “Solvency is the 800-pound Gorilla in the Room”. It may be the focus of a lot of hand-wringing and discussion, but it is a concern that isn’t valid.
Mr. Miller began his article with the following: “With fewer retirees receiving income from defined benefit pensions, the lifetime annuity income from Social Security will be even more important in the years ahead in protecting seniors from longevity risk.” We couldn’t agree more! The loss of a true retirement plan and significant income inequality have combined to create a potentially disastrous social and economic crisis for most of our workforce.
The issue that we should be focused on is how do we increase the monthly payouts (average is $1,360 or $16,320 annually) currently being received by beneficiaries and those to come for our future retirees. It is not through higher payroll taxes on either the employee or employer, as one will significantly reduce demand for goods and services, while the other will impact job creation.
What we need is the U.S. Treasury to provide additional funds to meet future obligations. Cutting benefits because of the misguided fear of insolvency, especially in an environment where life expectancy is rising, will force millions of Americans into years of poverty and greater dependence on the government’s social safety net.
The U.S. enjoys the benefits of having a fiat currency (unlike those in the Eurozone). As a result, the government never lacks for its own money. According to Warren Mosler from his book, “The 7 Deadly INNOCENT Frauds of Economic Policy”, “there is no operational constraint on the government’s ability to meet all Social Security payments”.
The additional Social Security payouts would stimulate economic growth, create additional jobs, and perhaps increase federal receipts, which would potentially reduce government support in the future. Congress seems preoccupied with tax and healthcare policies, but millions of Americans need substantive action on Social Security (read benefit enhancements) before the fear of insolvency leads to inapprpriate decisions by our legislators trying to “fix” a problem that doesn’t exist.
Here’s another example proving once more that defined contribution plans are nothing more than glorified savings accounts. Non-profit Transamerica Institute published a study in September estimating that nearly 1 in 5 Americans has raided their retirement accounts to pay for family caregiving. As laudable as it is for one to take on this responsibility, using precious retirement assets is the wrong gameplan.
The transition from defined benefit to defined contribution plans has placed much more responsibility on the individual to fund, manage, and disperse a retirement account. Unfortunately, we’ve also made it too easy for participants to stop contributing, take loans, grab the assets prematurely, etc. We reported earlier this month in our latest KCS Fireside Chat that the U.S. Government was permitting hardship withdrawals without penalty for those impacted by the several severe weather incidents in 2017.
It is terrific that many companies in the private sector offer at least some form of a retirement vehicle but we currently have nearly 40% of our employees lacking access to an employer-sponsored plan. For those that do have access, we need to dissuade them from touching those assets prematurely. Median account balances are anemic, even for those nearing retirement. Let’s eliminate the easy access to these “retirement” assets by putting into practice policies to restrict access.
The title would suggest that I find and post an interesting/meaningful chart each and every day. That is a very misleading – sorry. I stumbled across the following chart in today’s WSJ (thanks, FactSet), and I just had to post it. History does repeat itself, especially on Wall Street, and over my 36 years in this industry, I have seen a lot of cycles.
Could we be headed for another Technology-lead equity market crash, or will “this time” be different? Sure, the magnitude of the performance gap isn’t quite as stark, and the technology stocks in question certainly appear to have more sustainable businesses. But, fundamentals eventually matter, and I would suggest that more people pay attention to this chart as extremes continue to evolve and market performance diverge.
I wrote a blog post last week titled, “Change Is Good – Really”, which was penned to address the reluctance on the part of asset consultant research teams to appreciate the need for evolutionary change within an asset manager’s investment process. Here I go again, but in this case, I am referring to an experience that I had just yesterday when presenting to the “Investment” committee for a couple of local unions.
KCS was invited to meet with this group after presenting to a broader group of Trustees for the same two plans in October. The purpose of both meetings was to share with them how critically important it is for plan sponsors to become more aware of their plan’s liabilities (the promise) on a basis much more frequently than once per year. As those that follow KCS know, we believe that a plan’s funded status should drive asset allocation and investment structure decisions, not the return on asset assumption (ROA), which is not reflective of anything going on within the plan.
Before having the opportunity to begin our presentation, I was asked by the plan’s asset consultant to put in layman’s terms what the end game was behind our recommendation. I began by stating again that managing a pension plan should have a cost objective and not one based on return. That by focusing on return, the retirement community has injected too much risk into a process without achieving the desired results, those being a fully-funded plan at modest contribution expense.
At that point, one of the more experienced trustees stated, “50 years ago you (I’m assuming the industry, since I was in the second grade at that time) said that we should build a diversified portfolio of stocks and other investments. Are you saying that was wrong?” Yes, and the trustees (and our industry) should have come to that conclusion a long time ago, too. The DB plans in question have funded ratios (at a true mark to market discount rate) of 62% and 49%. If now is not the time to explore alternative approaches, then when is it appropriate?
Regrettably, DB plans are going away, but they don’t have to. There are strategies that can be utilized that will protect and preserve the promise that has been made to the participants. As a nation, we cannot afford the profoundly negative social and economic consequences of our failure to preserve these important retirement programs. The failure of DC plans to build adequate retirement balances for the “average” participant certainly highlights this fact!