Counterparties: Living longer with less

By Ben Walsh
June 10, 2013

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Americans with $1 million in savings may be in for a dispiriting surprise — they still haven’t saved nearly enough. The problem, reports the NYT’s Jeff Somer, is that bond yields have fallen and life expectancies have risen.

A  65-year old couple with a $1 million nest egg of tax-free municipal bonds that withdraws 4% per year, Somer says, has a 72% chance of running through their retirement savings before they die. The even larger problem is that the millionaire 65-year old couple is far from typical. The median household retirement account balance for Americans aged 55-64 is just $120,000.

“The bottom line,” Somer quotes NYU professor Edward Wolff saying, “is that people at nearly all levels of the income distribution have undersaved”. The result, according to Wolff, is that Social Security will be the primary income source for most retirees, even for retirees who are relatively well off.

Mutual fund managers’ solution to the problem is mandatory savings. BlackRock’s Larry Fink is one of the most visible champions of mandatory investment plans like Australia’s, which have the benefits of removing the market-timing itch and the problem of employers who have no retirement plan at all. Under the Australian model, employers must contribute 9% of pay (rising to 12% in 2020) for their workers. This, Dan Kadlec writes, “increasingly is being held up as a model for the US”.

But all defined-contribution schemes are reliant on the market going up. And no such plan, Tadas Viskanta writes, can treat the market like an “ATM machine from which one can extract guaranteed returns”. — Ben Walsh

On to today’s links:

Unintended Consequences
Gazprom’s demise could topple the Putin regime – Anders Aslund

The Fed
The history of the Fed’s balance sheet, visualized – Sober Look

Big Brother Inc.
There’s never been a more important leak in American history than Edward Snowden’s – Daniel Ellsberg
“The national security apparatus has been more and more privatized and turned over to contractors” – NYT
A look at the VC firm that helps the NSA find startup investments - TechCrunch

Deals
Google is (finally) close to acquiring Waze for more than $1 billion – AllThingsD

New Normal
5 maps that show how divided America really is – Atlantic Cities
Low-paying jobs in retail, hospitality and temp-help accounted for 55% of May’s job gains – Bloomberg

Regulations
Sheila Bair’s financial regulation listicle – VoxEU

Facebook
Facebook is maybe, possibly gonna be included in the S&P 500 within the next year – Bloomberg

Oxpeckers
At CNN, longform reporting loses out to B-roll footage of a guy on a beach every time – Zocalo Public Square

Alpha
In the fight for survival, funds of funds go bespoke – FT

Primary Sources
S&P raises its outlook on US debt to stable – S&P

The Singularity
A Kickstarter for the world’s first remote-controlled cyborg – Christopher Mims

Housing
Fannie and Freddie are worried that mortgage servicing companies are getting too big – Reuters

And, of course, there are many more links at Counterparties.

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Comments
4 comments so far

Yes, the government has been so assiduous about safeguarding my data, I certainly trust them to manage my retirement funds with the same care and diligence. Bring on more mandates!

Of course mutual fund companies want mandatory savings. And Sturm-Ruger wants mandatory handgun education. And the California Raisin Alliance wants mandatory red wine distribution. After all, it’s “for the children.”

“It is difficult to get a man to understand something when his salary depends on not understanding it.”

Posted by Publius | Report as abusive

Publius and you seem to be having a silliness competition here, Felix! :-)

First of all, Publius, who says compulsory savings need to be managed by the government? In Switzerland they are privately run, but still require 5% from each of the employee and employer to be saved each year. All the government did was mandate saving. Your point is bit of a knee jerk.

Felix, “all defined-contribution schemes are reliant on the market going up” is surely disingenous and missing the point; they are reliant on people saving. At the moment it is clear people are not saving enough, even a DC scheme that loses 50% of the money put into it will still have more money in it than the person who did not save at all. That might be a bad scheme in comparison to others, but your point is a bit like saying “don’t ever save, because it’s risky”.

Posted by FifthDecade | Report as abusive

FifthDecade is spot spot spot on. Allowing people not to save essentially mandates that workers and savers heavily subsidize the health risks, the longevity risks of non-savers. Let the government offer a default option and allow people to opt into a qualified private provider if they so chose.

Only people with nothing to lose throw rocks at cops and set cars on fire in the streets. I’d like to keep those images confined to my tv screen and not something I see out my window.

Posted by y2kurtus | Report as abusive

“Let the government offer a default option and allow people to opt into a qualified private provider if they so chose.”

What kind of fee structure do you envision, y2kurtus? Will Wall Street be skimming 1%+ per year for the hard work of punching a few buttons to tell computers to execute pre-programmed strategies or will they settle for “just” 0.1% of the wealth of the country each year?

Besides, we already have mandatory Social Security contributions of 12%+ annually (half from employee, half from employer). You want to layer another 10% on top of that?

Posted by TFF | Report as abusive
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