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The Loss of the American Dream

(As seen in the June 2013 issue of the APB)

Opponents of defined benefit (DB) plans (traditional, CalPERS-type pensions) argue that these plans are a thing of the past and that they are not economically sustainable.

Their arguments go something like this: “DB plans” were replaced with defined contribution (DC) plans in the private sector and the DB unfunded liabilities are evidence that DBs are too expensive.

These anti-DBers fail to address some major issues:

First, as well documented in a PBS special documentary by Frontline titled “Retirement Crisis,” DC plans have not worked out so well for average workers planning to retire on them. There are several disadvantages of DC versus DB retirement plans. For example, most investors are not disciplined savers and by the time a worker begins to think about saving, it is often too late to accumulate the amount necessary to meet their needs in retirement.

Also, most investors are notorious for selling low and buying high. It is what I call investing by looking in the rear view mirror. The enticement is to invest based on past performance, which is often contrary to future performance, and based on the individual’s emotions. These factors can create very poor market timing.

In addition, the average DC investor is not sophisticated enough to have an appreciation for just how much fees and expenses deteriorate returns. In my “Upside-Down Thinking” article from the May 2011 APB, I discussed how these very issues had resulted in huge discrepancies in investment returns over a recent 20-year period. Institutional pension plans, like CalPERS, earned more than an 8 percent return per annum while individual (401k) investors earned a whopping 5.7 percent less, or a mere 2.3 percent average annual return. When you compound this difference over the life of a career, the end results are astounding.

The absolute best way to make pensions work is to maximize investment returns. And here is the real rub for me when DB opponents argue that DBs need to be replaced with DCs: they are ignoring the fact that they want to replace a proven efficient system (DBs) with a proven inefficient system (DCs). Argue benefit levels all you want, but why argue for a more inefficient process that is proven to leave workers well short of their goal to retire — ever?

When you decide to strip the American Dream away from the American worker, at least be able to justify your position with something other than the empty “It’s not sustainable” argument. I have yet to have one of these pension reform proponents answer what the solution is to all the non-DBers who will be unable to retire — ever! I assume their solution is for the middle class to work until they drop dead. We are just beginning to see how the elimination of traditional pensions are really creating a significant societal change and if workers don’t or can’t work until they drop dead, then their only alternative might be to be completely reliant upon the government and therefore a liability to taxpayers.

It seems remarkable that some would continue to advocate replacing DB plans with DC plans when DC plans have clearly proven to be terribly inefficient, susceptible to Wall Street’s worst practices and completely inadequate for retirement purposes. Whether it is DB or DC, the requirement of saving enough to retire on assumes safe and reasonable returns on a growing investment fund. It is this part of the equation that has completely failed us and the more we push workers into handling their own retirements, the more likely they will have no retirement.

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