Occupy defined-benefit pension funds!
I’m working my way through The Occupy Handbook, your excellent one-stop shop for analysis of the financial crisis and everything about it. A lot of really big names have pieces here: among the authors you’ll find Michael Lewis, Paul Krugman, Gillian Tett, John Cassidy, Raghuram Rajan, Bethany McLean, Daron Acemoglu, Carmen Reinhart, David Graeber, Nouriel Roubini, Pankaj Mishra, Ariel Dorfman, Barbara Ehrenreich, Peter Diamond, Brad DeLong, Martin Wolf, Scott Turow, Robert Reich, David Cay Johnston, Eliot Spitzer, Lawrence Weschler, Tyler Cowen, Jeff Madrick, Dan Gross, Jeff Sachs, and even Paul Volcker. (Full disclosure: I’m in there too.)
One author who might not be familiar to a financial audience is Arjun Appadurai, who has an excellent short chapter entitled “A Nation of Business Junkies”.
“Business news was a specialized affair in the late 1960s,” he writes. “Now it is hard to find anything but business as the topic of news in all media.”
Look at the serious talk shows, and chances are that you will find a CEO describing what’s good about his company, what’s bad about the government, and how to read his company’s stock prices…
Turn to the newspapers and things get worse. Any reader of the New York Times will find it hard to get away from the business machine. Start with the lead section, and stories about Obama’s economic plans, mad Republican proposals about taxes, the euro crisis, and the latest bank scandal will assault you… Turn to the sports section: it is littered with talk of franchises, salaries, trades, owner antics, stadium projects, and more. I need hardly say anything about the Business section itself, which has now become virtually redundant…
Go through the magazines when you take a flight to Detroit or Mumbai, and there is again a feast of news geared to the “business traveler”. This is when I catch up on how to negotiate the best deal, why this is the time to buy gold, and what software and hardware to use when I make my next presentation to General Electric.
I thought of Appadurai’s chapter earlier today when I was talking to a fund manager at a conference in DC. He was talking about the move from defined-benefit to defined-contribution pension plans, and was bemoaning the fact that people who invest in defined-contribution plans have seen returns not only below the returns in the stock market or the bond market, but even below the level of inflation. The solution, he said, was more education: we had to teach people about the power of diversification, the intelligence of passive investing, and so on and so forth.
My feeling was that such attempts would never work. The investment returns of people with defined-contribution pensions are woefully low — much lower than the returns seen by the managers of defined-benefit schemes. And the difference, to a first approximation, is rents being extracted by the financial-services industry. That’s the industry which does all of the educating: so it’s unrealistic to assume that it’s going to educate people and thereby reduce its own income.
Besides, as Appadurai says, the US population has never been more educated about matters financial than it is now. We can try to improve the level of education even further. But a little financial education can be a dangerous thing, if it instils overconfidence. And what’s more, there’s zero empirical evidence that educated investors have higher realized returns. Besides, you can’t hope to effectively educate everybody.
Much better, I think, to allow people to invest alongside the defined-benefit scheme of their employer, and accept the returns of that scheme. Most employers still have some kind of legacy defined-benefit scheme, and those schemes, as a rule, tend to be invested pretty sensibly. Those pension funds should accept defined-contribution money alongside their defined-benefit money: it would beef up their AUM and thereby their negotiating power, while at the same time delivering higher returns to the company’s employees.
Some employees, of course, will think that they are very clever and will be able to get large returns for themselves. But most of us aren’t that hubristic, and consider asset-allocation decisions and the like to be something of a chore. Give us the opportunity to outsource those decisions to somebody acting on our behalf, and we’ll jump at it. We might not get the same implied returns as the lucky people on defined-benefit plans. But at least we’ll have our money professionally managed, at little or no cost.