The AARP has been lobbying for passage of the bailout bill. The reason seems pretty obvious–lots of seniors have lots of stocks in their 401(k) plans, and they’re worried about their nest-eggs.
The three big take-aways from this, I think:
(1) Many investors have been foolish. Any person who is heavily invested in stocks and yet who is counting on his investments to pay living expenses in the current year has failed to truly account for his tolerance for risk in allocating his investments. I’m no expert, but it seems to me that as investors age and as the time approaches when they will need their savings to live, they ought to be shifting gradually away from stocks and into bonds, maybe even into government bonds. The boom times (and, no doubt, slippery securities salesmen) have blinded people to the true risks of a crash in stocks.
(2) The reliance of seniors on stock investments for living expenses means the bailout will pass whether or not it’s a good idea. I heard an interview on the radio this morning in which an AARP spokesman said that more than 100,000 AARP members had called their representatives demanding that the bail-out be passed. This is one constituency Congress does not want to cross, even if it means passing the buck to younger workers and taxpayers.
The move from defined benefit plans to defined contribution plans has been disastrous for many. I don’t mean to suggest, necessarily, that DB plans were working out all that well. Due to lax accounting standards and funding requirements, many plans were underfunded, placing heavy burdens on employers that affected their competitiveness with foreign employers and with domestic employers who did not offer traditional pensions. But it seems obvious now that many individual investors were not up to the challenge of managing their market risk.
Here is my pie-in-the-sky suggestion:
Employers should be encouraged, through appropriate tax incentives, to offer a defined benefit plan rather than a defined contribution plan to employees. However, rather than asking the employers to take the investment risk, for each dollar of future benefit that they promise, let them deposit an actuarially determined amount with the government, and let the government invest the money and guarantee the benefit. (The government already guarantees benefits up to a set limit. This would relieve individuals of the risk of poor decisionmaking, relieve employers of long-term future obligations to employees based on past work, and, incidentally, dramatically reduce the fees that the securities industry takes for managing pension money.
What do you say?
TedF
You know, after I wrote this, it occurred to me that what I’m proposing already exists and has a name–social security!
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p>I guess my proposal would mean an increase in the employer portion of the social security tax, probably a decrease in salary, and provisions to deal with such issues as portability and the self-employed.
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p>TedF
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p>My two cents/points:
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p>(1) “many investors were not up to the challenge of managing their market risk.” I think it’s too early to conclude that. True, most indices are down since 3Q07, but even the WORSE performing indices measure positive over 5, 10 years. Personally, I’m down under 10% this year, but for 07 — one year alone — was up well over 12%. I don’t think the data supports your statement. I’ll make a broader and unrelated statement: Many investors weren’t up to investing, but rather were too interested in spending so investment managing was moot.
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p>(2) Government investing money and guaranteeing the benefit. Look at the Mass (underfunded) Pension plan. It appears to be well managed — although it’s damn annoying I can’t find financial statement on a current basis — but there’s too great an incentive for politicians to politicize the i) benefits (more stuff for the voters, yea!!) and ii) investments (don’t invest in evil oil, Somalia, China….)