Bad Timing of Investments Harms 401(k)s and Pension Funds

There is an interesting graphic on investment returns in the January 2 New York Times, titled In Investing, It’s When You Start and When You Finish. Thanks to Nat Trumbull for pointing this out to me.

It indicates one of the reasons why 401(k)s have done so poorly. I would argue, though, that even with the best of market timing, they do not perform as well as traditional pensions for retirees.

The graphic also indicates why pension fund investments are doing poorly. Pension funds depend on their rates of contributions, withdrawals (payment of pensions), and investments. The more they depend on investments, the more vulnerable they are to market volatility.

–James W. Russell

Scapegoating Public Employees and Their Pensions

Despite its title, “Public Workers Face Outrage as Budget Crises Grow,” by Michael Powell in the January 1, 2011 New York Times is not a typical public-workers-and-their- pensions bashing piece. It points out that pension fiscal problems have been brought on by states not properly funding them. New Jersey Governor Chris Christie, for example, is refusing to make this year’s required state contribution of $3.1 billion.

These type of pension payment holidays during fiscal crises would be acceptable if they were considered as loans by public employees that need to be paid back during better times. Indeed, public employees could then be seen as heroes who were bailing out state budgets during bad times. But instead they are fodder for self fulfilling prophecies that traditional pensions are not sustainable. No long term pension or retirement savings plan is sustainable if you fail to contribute to it.

The Powell piece provides some balance in its discussion of public employee pensions, including the widespread conservative proposals to replace them with 401(k)s. But it fails to mention the larger context that 401(k)s are sustainable only because they have no guaranteed benefits as do pensions. It also failed to mention that 401(k)s, despite rosy early predictions, have failed to provide adequate retirement incomes. That in turn has created pension envy and resentment that Republicans are playing upon in their scapegoating of public employees.

Unfortunately, the one-sided headline of the article plays into that campaign as indeed have a string of articles and editorials that the Times has been running during the economic crisis. Many readers will just glance at the headline without reading the more more balanced story. The headline will confirm what they think they know, given the dominant media narrative about public employees and their pensions that conservative think tanks have succeeded in implanting.

–James W. Russell

Boomers and Social Security

January 1, 2011

This morning’s New York Times carried a story: “Boomers Hit New Self-Absorption Milestone: Age 65” by Dan Barry that noted that the oldest of the boomers will hit official old age this year. It is a noteworthy demographic fact to comment upon.

If I had been writing the article, I would have made a central theme out of the insecurity of boomer retirement, since their generation—I just missed it by being a late war baby—was massively subjected to having secure traditional pensions replaced by shaky 401(k) stock market investment schemes.

Instead, the only comment Barry made about boomer retirement was in passing:

“About 13 percent of the population today is 65 or older; by 2030, when the last of the baby boomers are 65, that rate will have grown to 18 percent. In addition to testing the sustainability of entitlement programs like Social Security, this wholesale redefinition of old age may also include a pervading sense that life has been what might technically be called a ‘bummer.'”

It is a testament to the success of propaganda campaigns by the opponents of Social Security that journalists like Barry take it for granted that its fiscal sustainability is problematic. Nowhere did he mention that 401(k) were a problematic vehicle for retirement security.

The only danger to Social Security’s sustainability is political not economic: if national politicians do the bidding of the financial services industry and reduce or eliminate its major competitor for retirement savings.

–James W. Russell

The Retirement Crisis and This Blog

The Perfect Swindle is about understanding and finding solutions to the growing retirement crisis facing tens of millions of Americans.

Since 1981 shaky 401(k) schemes that depend on stock market investing have increasingly replaced secure, traditional pensions. The financial services industry encourages the belief that these schemes will produce generous benefits. But 30 years after their first introduction, the first generation to retire under these plans has learned that they produce less than half the benefits of the pensions they replaced.

Even before the stock market crisis of 2008, the signs were everywhere that very few people would be able to accumulate enough wealth through these accounts to ensure financial security. As a result, most people are looking forward to—or rather becoming resigned to—working longer and seeing their standards of living dramatically decline when they do retire.

401(k) benefits are lower than those of traditional pensions because the financial services industry drains considerable management fees, commissions, and profits from the accounts involved; and individual plans lack the advantages of risk pooling that traditional pensions have.

Those who still have traditional pensions, mainly public employees such as school teachers, find themselves under attack for having decent retirement plans. The financial services industry, aided and abetted by conservative think tanks, has mounted a massive propaganda campaign to convince taxpayers with disingenuous scare tactics about unfunded liabilities that their retirement plans should also be converted to 401(k)s.

These same interests would like to further undermine retirement security by privatizing or lowering the benefits of Social Security.

What has and is occurring is a massive swindle in which the financial services industry is raiding the collective retirement savings of tens of millions of people to inflate its profits, which have grown enormously at the expense of retirement security.

This blog is dedicated to exposing and organizing resistance to that swindle.

Who am I? I have researched retirement systems in the United States, Europe and Latin America and written about them in articles and books. The most relevant is Double Standard: Social Policy in Europe and the United States. Through that research I realized how bad the retirement situation is becoming in the United States. I also realized how bad my own retirement situation was since I had a 401(k) like retirement plan. That led to the formation of the Connecticut Committee for Equity in Retirement, a rank and file advocacy group that initiated a union campaign that won the right of public employees in Connecticut to transfer from our failing 401(k) type plan to the state’s traditional pension. We recommend that other employees examine their plans and, if necessary, work toward reforms that will reverse the disastrous trend and restore or create traditional defined-benefit pensions. We are also strong supporters of Social Security, a successful and necessary program that needs to be defended and expanded.

For more information about me, you can go to my website.

This blog will be open to everyone who wants to learn more about the retirement crisis in the United States: accepts its general point of view that defined benefit pensions, including Social Security, are better than 401(k)-type private accounts for ensuring retirement security; and is interested in engaging in progressive retirement reform movements.

–James W. Russell