Saturday, May 30, 2009

Clock Work?

In recent weeks, those favoring a government solution to the issue of retirement security/savings have championed the soundness of Social Security. Despite (or perhaps because of) a recent Trustees report that revealed that the markets had taken a toll on Social Security’s finances, Alicia Munnell, director of the Center for Retirement Research, noted, “The system has enough money to pay full benefits for decades, although for a few years less than previously reported because of the financial/economic crisis.” And so it has.

The same thing is true of the nation’s private pension plan insurer, the Pension Benefit Guaranty Corporation (PBGC), and in fact that point was made repeatedly by Charles Millard, the former director of that agency, as he was repeatedly questioned about the wisdom of championing a new, although hardly radical, IMHO, asset allocation shift that would have resulted in an asset allocation of 45% in fixed-income, 45% in equities, and 10% to alternative investment classes. The agency's previous policy set an equity investment target of just 15-25%, although the actual level of equity investments was 28% at the end of fiscal 2007, and 30% at April 30 (see “PBGC Funding Gap Ballooning as Plan Terminations Increase”).

That shift has reportedly been halted, at least for the moment, ostensibly because of questions about contacts that Millard had with money managers hired to implement the policies (see “Solis Asks PBGC To Halt New Investment Strategy”), but IMHO, the real “problem” was its move away from a predominantly fixed-income-oriented portfolio.

So, here we have two enormous bodies of capital—both run by the federal government; both tasked with making periodic payments stretching over decades; each with what, IMHO, seems to be an extraordinary reliance on fixed-income investments.

Now, don’t get me wrong—I completely understand the importance of preserving capital (particularly these days), and I’m hugely appreciative of any expression of fiscal restraint on the behalf of the federal government (particularly these days).

Still, despite the acknowledged purpose of these enormous pools of capital—to provide retired workers with a reliable stream of income—most of that “purpose” is still decades away. That’s the good news. On the other hand, we know that both systems, left unchanged, will not have enough money to fulfill the obligations they now have on their plate (much less those that have yet to manifest themselves), based on the current projections.

And yet, with lots of time to go, and huge obligations to be met, it looks as though the federal government is, effectively, trying to run out the clock.

That, of course, is a perfectly viable strategy if the game is almost over, or if you are sitting on a very comfortable lead. On the other hand, the sports world is full of situations where a team went into a “stall” too early, only to lose that lead—and the game.

It would be a mistake of mythic proportion to try to invest our way out of the deficits currently confronting these systems, any more than an individual participant should aspire to compensate for a career of under-saving by betting everything on risky investments.

However, I’m having a hard time understanding how the government’s unwillingness to adopt even the most modest asset allocation reforms will do anything to mitigate the situation—and may well be exacerbating the problem. And when that clock runs out, we’ll all lose.

—Nevin E. Adams, JD

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