Is Retirement Past its Prime?
Last week I attended an interesting and informative CFA Institute sponsored talk by Michael Falk of ProManage on the above topic. He points out that, while the nature of retirement is an individual choice, societal implications and fiscal viability of these individual choices will be determined by demographics in the context government policy. The goal of his talk is to “generate thoughtful exchange for long-term economic and investment market planning purposes”. Michael Falk’s presentation was a U.S. perspective, however many aspects of his analysis are applicable to Canadians as well.
I won’t belabor the coming shift in dependency ratio (the ratio of ‘not 16-64’ to those ’16-64’ years old) but Falk points out that its possible implications include: lower GDP, higher inflation, higher cost of capital and lower investment returns. Here is a summary of his “current state of affairs” and some of the potential “solutions” that he tables for consideration.
Current State of Affairs • Pooling of risks is the key to success of lifetime income programs but: (1) the Social Security system that started out as social insurance(safety-net), became a national pension plan and (2) defined benefit pension plans are being replaced by defined contribution plans at an accelerating rate.
• Individuals invariably (1) under-save, (2) get on their savings only a fraction of the return offered by the market and (3) are debilitated by the large list of investment choice they are offered in their retirement plans
• The threat is that if retirement results in inactivity then the result is increased morbidity and mortality;
• Medicare liability may be 6x higher than that of Social Security
Solutions
• Phased retirement driven by: individual financial, corporate productivity and social motivations; part time work income of $10k/year is like having an extra $250K of assets
• Defined contribution plan architecture, i.e. default should be: to be enrolled, to automatically increase contributions and to manage assets professionally (e.g. life-cycle plans)
• U.S. Social Security to include means testing (or the new 65 may have to be 73) and Medicare to require physicals and ‘end-of-life statements’
• Longevity insurance scheme to secure lifetime income with the benefit of risk pooling
• Enhanced financial literacy
• Build on the growing realization that “family, friend and fitness are more important than money” (HSBC 2006 survey) in retirement
I won’t belabor the coming shift in dependency ratio (the ratio of ‘not 16-64’ to those ’16-64’ years old) but Falk points out that its possible implications include: lower GDP, higher inflation, higher cost of capital and lower investment returns. Here is a summary of his “current state of affairs” and some of the potential “solutions” that he tables for consideration.
Current State of Affairs • Pooling of risks is the key to success of lifetime income programs but: (1) the Social Security system that started out as social insurance(safety-net), became a national pension plan and (2) defined benefit pension plans are being replaced by defined contribution plans at an accelerating rate.
• Individuals invariably (1) under-save, (2) get on their savings only a fraction of the return offered by the market and (3) are debilitated by the large list of investment choice they are offered in their retirement plans
• The threat is that if retirement results in inactivity then the result is increased morbidity and mortality;
• Medicare liability may be 6x higher than that of Social Security
Solutions
• Phased retirement driven by: individual financial, corporate productivity and social motivations; part time work income of $10k/year is like having an extra $250K of assets
• Defined contribution plan architecture, i.e. default should be: to be enrolled, to automatically increase contributions and to manage assets professionally (e.g. life-cycle plans)
• U.S. Social Security to include means testing (or the new 65 may have to be 73) and Medicare to require physicals and ‘end-of-life statements’
• Longevity insurance scheme to secure lifetime income with the benefit of risk pooling
• Enhanced financial literacy
• Build on the growing realization that “family, friend and fitness are more important than money” (HSBC 2006 survey) in retirement
RetirementAction.com 