Q: In terms of the evolution of America’s retirement health, we’ve moved from defined benefit programs, pensions, to defined contribution. … Describe what’s happening to our retirement health as these [different] instruments are introduced and the rush of people into mutual funds. …
… In my new book, which is called The Clash of the Cultures, I have a chapter on future retirement planning, and it says our retirement system is … headed for a train wreck unless we do something about it.
I start off, simply put, with Social Security, which has to be changed in gradual, small ways to become solvent again. … Then you go to corporate defined benefit plans. They are assuming — and state and local government defined benefit plans even worse — they are all assuming that the market return in their portfolio will be 8 percent a year.
There is no way under the sun that they’re going to earn 8 percent. It’s just impossible. No matter what they do, they’re stuck in a bind given the kind of markets we expect in stocks and bonds. … The best they can really hope for is a 5 percent return unless some wonderful, attractive scenario for the future unfolds, which is really unimaginable. If anything, it’s going to be worse.
So if you think about them compounding their returns at 4 percent instead of the 8 percent that they build into the plan, they’re going to have to start putting a lot of money into those plans. They’re going to be bankrupt.
Those plans have been dying out for a long time.
… They’re dropping out. They’re changing to defined contribution plans, the corporations are. But if you have a bad year, you don’t make any contributions for your employees, the management says, “Can’t afford it this year,” well, that’s the year they should afford it. So the defined contribution system is deeply flawed.
And what it really is — when you look at IRA and 401(k), and particularly 401(k) thrift plans — they are thrift plans. They are not retirement plans. They were never designed to be retirement plans, but we’re using them to build a retirement plan now, and it simply is not going to work.
Chosen excerpts by Job Market Monitor
via John Bogle: The “Train Wreck” Awaiting American Retirement | The Retirement Gamble | FRONTLINE | PBS.
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