On Mon, Mar 3, 2008 at 10:50 AM, Louis Proyect <[EMAIL PROTECTED]> wrote: > Working Longer: The Solution to the Retirement Income Challenge > by Alicia H. Munnell and Steven A. Sass > Brookings Institution Press, 288 pp., $29.95 (to be published in May) > [........] > > Can 401(k)-style retirement plans be redesigned so that they can replace > an adequate level of pre-retirement income? Regular employee > contributions that are invested tax-free in equities from an early stage > in a worker's career can accumulate to handsome sums. A few years ago, > the Employee Benefit Research Institute (EBRI) in Washington, D.C., > under the direction of Jack VanDerhei, a Temple University professor, > completed a complex analysis of the likely outcomes—simulations based on > samples of actual behavior. Assuming average stock market returns > between 1926 and 2001, the study found that a middle-income worker who > invested in a typical mix of equities and bonds consistently over his or > her working life would be able to retire at age sixty-five with an > income that amounts to a "replacement rate" of about 60 percent of > pre-retirement income, assuming that the accumulated sum were then > invested in an annuity. Social Security benefits, at their current > level, would replace roughly another 25 percent.[4]
Warren Buffett presents a very articulate criticism of optimistic pension projections in his annual letter to Berkshire shareholders: http://www.berkshirehathaway.com/letters/2007ltr.pdf ---------------------------------snip Decades of option-accounting nonsense have now been put to rest, but other accounting choices remain – important among these the investment-return assumption a company uses in calculating pension expense. It will come as no surprise that many companies continue to choose an assumption that allows them to report less-than-solid "earnings." For the 363 companies in the S&P that have pension plans, this assumption in 2006 averaged 8%. [....] How realistic is this expectation? Let's revisit some data I mentioned two years ago: During the 20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% when compounded annually. An investor who owned the Dow throughout the century would also have received generous dividends for much of the period, but only about 2% or so in the final years. It was a wonderful century. Think now about this century. For investors to merely match that 5.3% market-value gain, the Dow – recently below 13,000 – would need to close at about 2,000,000 on December 31, 2099. We are now eight years into this century, and we have racked up less than 2,000 of the 1,988,000 Dow points the market needed to travel in this hundred years to equal the 5.3% of the last. It's amusing that commentators regularly hyperventilate at the prospect of the Dow crossing an even number of thousands, such as 14,000 or 15,000. If they keep reacting that way, a 5.3% annual gain for the century will mean they experience at least 1,986 seizures during the next 92 years. While anything is possible, does anyone really believe this is the most likely outcome? [....] I should mention that people who expect to earn 10% annually from equities during this century – envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about doubledigit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: "Why, sometimes I've believed as many as six impossible things before breakfast." Beware the glib helper who fills your head with fantasies while he fills his pockets with fees. Some companies have pension plans in Europe as well as in the U.S. and, in their accounting, almost all assume that the U.S. plans will earn more than the non-U.S. plans. This discrepancy is puzzling: Why should these companies not put their U.S. managers in charge of the non-U.S. pension assets and let them work their magic on these assets as well? I've never seen this puzzle explained. But the auditors and actuaries who are charged with vetting the return assumptions seem to have no problem with it. What is no puzzle, however, is why CEOs opt for a high investment assumption: It lets them report higher earnings. And if they are wrong, as I believe they are, the chickens won't come home to roost until long after they retire. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
