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Clark Troy
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Clark Troy has worked in the financial services world since 2000, most recently for a registered investment advisor in Durham, NC, where he obtained a Series 65 license. He is currently working assiduously towards a CFP® certification. He worked for years as a management consultant in the... More
  • Biting the bullet on pensions 2 comments
    Mar 12, 2010 12:37 PM | about stocks: TBT, TLT, TIP

    I had a talk with an actuary at a reinsurer the other day. He convincingly made the case that -- from a societal, macro point of view -- defined contribution (DC) plans like 401ks are more expensive and less responsible in the long run than traditional defined benefit (NYSE:DB) pensions.  In short:  DC provides a mechanism for wealth accumulation and transfer, while DB aims to provide for people in their old age, and liabilities expire along with the pensioner.

    That said, given the sorry levels of funding for Social Security, public pensions, and private sector DB plans that have a curious way of wending their way onto public balance sheets, the retirement age will need to rise, period.  We live longer and are healthier than previous generations did, so we will need to work longer. People will need to accept that the actuaries who projected mortality trends when benefit levels were set had no idea that mortality expectations would change and improve as dramatically as they did.  As we age as a society, the only other option is to let in more and younger immigrants, but we don't really have the educational infrastructure to upskill them fast enough to let them earn and produce at higher value-add levels, and there's definitely a lack of political will to see America's ethnic make-up change more rapidly than it already is.

    The federal Pension Benefit Guarantee Corporation was put in place to take over the pension liabilitiies of failed corporations.  It was very helpful to the steel industry as it collapsed, but it can no longer guarantee all pension liabilities:  auto parts maker Delphi was taken under PBGC protection in the summer of 2009.  Salaried employees have seen their benefits cut.  There is litigation pending to block this, but this is the direction things need to and will inexorably trend.

    The new Committee for a Responsible Federal Budget headed by Erskine Bowles and Alan Simpson will have to bite the bullet and raise retirement ages.  They have already half hinted that they will do it. More Republicans need to be appointed to the commission so that it's not just a democrat thing.  Probably Paul Volcker and Paul Ryan both would add credibility, though Ryan will probably steer way clear to enhance his political future and Volcker should really be relaxing at his age rather than bearing the weight of the policy world on his stooped shoulders.



    Disclosure: None. Ginnie Mae funds.

    Disclosure: TIP
    Themes: Treasuries, Municipal Bonds Stocks: TBT, TLT, TIP
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Comments (2)
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  • jimpalermo
    , contributor
    Comment (1) | Send Message
     
    Clark, have you seen any literature on public pension mortality assumptions? I'm concerned that states and cities use assumptions that are too dated, and as such, are not contributing enough to the funds.

     

    Thanks--

     

    James T. Palermo, CFA
    Trustee, Village of La Grange
    5 Apr 2010, 03:42 PM Reply Like
  • Clark Troy
    , contributor
    Comments (149) | Send Message
     
    Author’s reply » Jim, I haven't looked deeply into it, but it certainly would appear to be the case. Swiss Re and Munich Re have big research arms that might have research into this. Other places to look would be actuarial consultancies like Milliman, Towers Perrin Tillinghast, or maybe the research firm Conning. Just googling wil get you a lot.
    6 Apr 2010, 11:27 AM Reply Like
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