Arnold Kling  

Managing Retirement Accounts

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The Stimulus and the Somme... Black Swans...

The Wall Street Journal reports that recent events have raised doubts about the ability of people to manage their own retirement accounts.


The most obvious pitfall is that 401(k) plans shift all retirement-planning risks -- not saving enough, making poor investment choices, outliving savings -- to untrained individuals, who often don't have the time, inclination or know-how to manage them. But even when workers make good choices, a market meltdown near the end of their working careers can still blow their savings to smithereens.

On the other hand, look at professionally-managed pension funds. The Washington Post reports,

The collapse of the stock market last year left corporate pension plans at the largest companies underfunded by $409 billion, reversing a $60 billion pension surplus at the end of 2007, according to a study released yesterday.

The only difference between amateur management and professional management is that the professionals get bailed out. Corporations will have to plow more earnings into pension funds--or else default on their obligations, in which case taxpayers will do the bailout through the Pension Bemefit Guaranty Corporation. And state and local pension plans, which also lost money, are going to be bailed out by taxpayers.

I fully expect to pay more in taxes to bail out other people' retirement losses than I lost myself in the market.

If anybody else is afraid to manage their own retirement money and wants the government to do it for them, they are welcome to do so. I would prefer to suffer for my own mistakes.


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COMMENTS (5 to date)
KipEsquire writes:
But even when workers make good choices, a market meltdown near the end of their working careers can still blow their savings to smithereens.
Um, anyone heavily invested in equities near the end of their investment horizon has, by definition, not "made good choices."

Doesn't necessarily change the thesis. It just shows that even idiot commentators, such as the Journal's Ms. Laise, can accidentally be right.

R. Pointer writes:

Dr. Kling,

I am interested about the idea that at the end of 2007 pensions were in surplus by 60 billion but now are in the hole 400 plus. Can we say that the surplus must be in excess of 400 billion to ensure long term solvency?

This is related to the idea that when the boomers liquidate their equity portfolios the prices realized will be at a lower level than the calculations forecast, because there will be a surfeit of sellers and a dearth of buyers in the market.

spencer writes:

Given the stock market collapse of 2008 the deficits you are talking about may or may not be large. If the market comes back 25% this year would that completely eliminate the deficit?

I do not know off the top of my head, but I bet you do not either.

I'm suspicious of people tossing around large numbers like this without providing any means of making a realistic judgment about what it means.

John Thacker writes:
I'm suspicious of people tossing around large numbers like this without providing any means of making a realistic judgment about what it means.

This is a fair point. I do think that realistic judgment forces one to believe that pensions that expect to be bailed out will generally be underfunded. In addition, realistic judgment forces one to believe that public sector and other union-negotiated pensions will generally be underfunded, because politicians and executives today will be willing to sell out the future in order to satisfy the unions today and promise benefit increases.

J writes:
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