"Retirement Assets Growing - But Not Enough"

Sydney M. Williams

Thought of the Day

“Retirement Assets Growing – But Not Enough”

April 26, 2011

An article a week ago in “Money Management Executive” mentioned that 401(k) plans exceeded $3 trillion at the close of last year, with 70% of the assets in equities. The author of the report on which the article was based, Bob Wuelfing, president of RG Wuelfing & Associates writes that last year’s stock and bond performance “helped push total retirement market assets over $16 trillion by year-end 2010.”

The numbers sound and are big, but they don’t come close to what is needed to allow baby boomers a comfortable retirement. First a few statistics:

          * The current workforce in the U.S. is approximately 155 million, which includes 13.5 million unemployed, according to the Bureau of labor Statistics (BLS.)
          * About 25 million are employed in the public sector, including the military.
          * The BLS indicates that 20% of current workers in the private sector – about 23 million – have defined benefit programs and that 80% of non-military public employees (18.4 million) are so covered.
          * About 75 million workers participate in more than 536,000 401(k) plans.
          * Approximately 15 million workers have no retirement plans.
          * The Illinois Manufacturing Extension Center suggests that 69 million workers are over the age of or 48% of the workforce.
          * There are about 79 million baby boomers, including those retired and not working.
          * There are 43 million Americans over the age of 65.
          * Global financial assets are about $175 trillion, of which $60 trillion is in the U.S.

Defined benefit plans were largely a result of the unionization of workers. As unions’ influence in the private sector waned in the 1970s and as companies became increasingly cost conscious, the transition toward defined contribution plans began. In the opposite corner, as states’ and local government workers unionized beginning in the 1960s, defined benefit plans proliferated. Unfortunately, unions, with approval of states’ legislatures, guaranteed unrealistic returns. The Pew Center on the States issued a report yesterday indicating that state-administered pension plans, healthcare and other post-employment benefits are facing a collective trillion dollar deficit. (Granted, the survey was based on numbers from 2009, close to the bottom of the market, but even if the numbers today suggest a deficit of half a trillion dollars, the number is large enough to cause heartache for states and financial pain for taxpayers.)

Defined benefit plans relied on unrealistic growth rates in the underlying assets – usually assuming discount rates of six to eight percent. They also harkened back to a time when large companies were continuously adding to their employee roles, which like Social Security, meant that contributions from younger members were being used to pay off current retirees – a Ponzi-like scheme. Defined contribution plans, on the other hand, depend on personal savings. The employee takes responsibility for the amount of money he antes up and to how it is invested.

The world in which we now live is far different from that of a generation ago. There are today about 100 million workers and some percentage of the 43 million retired Americans who must depend on their own investments to supplement Social Security. Stock market returns over the past twenty years have averaged about 6%, plus about 1.5% in dividends. However, compounded annual returns over the past ten years have been 0.7%.

The question is: what level of financial assets is needed to assure a reasonably comfortable retirement. A rule of thumb is to take your annual needs and multiply that number by 25 or 20, depending on whether one believes in a four or five percent return; for example an income of $50,000 requires financial assets valued between $1 million and $1.25 million. (A million dollars per baby boomer is 30% larger than the entire U.S.’s capital markets.)

Defined contribution plans are a permanent fixture in our lives. Nevertheless, neither the government nor the individuals who must save seem to appreciate the urgency of the situation. Consumers still appear more intent on consuming than in saving or investing. And government seems more interested in discouraging investing and favors taxing small businesses (at least those that report more than $250,000 in income as individual filers) rather than encouraging those businesses to invest and to hire. A comfortable retirement depends upon a rising savings rate and expanding financial markets. Government policy and regulation appear to be lined up against such an outcome.

Over the next eighteen years almost 80 million baby boomers will reach retirement age, joining the millions already there. The government does not have the resources to take care of them. Social Security has reached the point where outflows exceed inflows. Most people have inadequate savings. Home prices, the largest asset for many of these people, have been falling for five years. The capital markets are inadequate to handle the amount of savings necessary, while regulation is chasing more and more public companies and markets offshore. The President, campaigning around the country, demeans those with assets as “millionaires and billionaires” on whom more taxes should be levied, thereby discouraging aspiring young investors. We are facing a crisis. It is approaching fast and Washington is not paying attention.