Private retirement plans solve financial insecurity for elderly…?

by reader Jack

Diogene’s Lantern: Can We Shed Some Light On the Issue

Angry Bear has had a long series of conversations regarding the issue
of Social Security and the projections concerning its long term financial viability. The many threads which focus on this issue have been initiated, for the most part, by postings by Bruce Webb.

Webb’s series concerns itself primarily with those projections, which are based on the Low and Intermediate Cost Assumptions generated by the Office of the Chief Actuary. Personally, I have some questions about the wisdom of relying on actuarial “assumptions” which attempt to quantify events that are years in the future, often as many as seventy-five years down that road.

Statistical analyses that utilize assumptions, continuously step away from veridical measurement of any set of data. When one reads the reports referred to in many of these discussions the word assumption occurs frequently. None the less, the arguments rage on. Bruce Webb seems to have made a very convincing case to support his hypothesis that the Trustee’s reports tend to be too pessimistic in regards to the financial health of Social Security now and in the future. (Thanks for being so contrary)

Tangential to the issue of financial viability is the question of resolution and correction. What are the proposed alternative approaches to the possible financial insolvency of Social Security? That is an entirely rhetorical question as it is not meant to suggest that there is any likelihood of the system or the Trust Fund, which is intended to supplement that system, is in danger of insolvency at any time in the foreseeable future.

Bruce wrote:

Why oh why are economic conservatives running down America’s future by adopting Intermediate Cost economic assumptions? Or are they just pretending to accept those assumptions to sell Personal Account plans implicitly requiring better growth? Because as Dean Baker pointed out in his 2004 No Economist Left Behind challenge, you don’t get to have both.

One of the frequently suggested approaches to resolving the unlikely premise of insolvency is to create a system of privately funded retirement accounts. Such private accounts are generally described by their adherents as being either supplemental to Social Security or, alternatively, a replacement to Social Security.

Often these discussions, regarding such a system of private accounts take place without reference to current examples. That is peculiar. There is little need to make assumptions in regards to a system of private accounts because there are already several examples of such retirement accounts that have been in place for at least twenty-five years, maybe longer. Examples are: IRAs, the various types of 401s and, of course, good old fashioned personal savings and investment accounts. It is the IRA and 401k accounts that can be said to most closely approximate the private retirement accounts that are being suggested as the supplement to, alternative to, or replacement for the Social Security retirement system.

This being the case a question comes to mind. Why is it so difficult to discover an analysis of the success of the Defined Contribution (DC) accounts system? The term, DC account, was coined as a means of differentiating such a retirement fund from the old fashioned company pension, the Defined Benefit Plan. I like that differentiation between the two. One is a benefit and the other is your contribution.

The question that keeps coming up in my mind is, who are you contributing to and is there any benefit to your making those contributions? It is not as though there is a shortage of thoughtful papers written on the pension alternatives issue. The problem as I see it is that there is little to find that provides quantitative analyses of the success of privatization plans as retirement alternatives. There are many such analyses of social security, as good or bad as those thoughtful papers may be, but few scholarly investigations to the Defined Contributions plans, be they IRA, 401k, or what have you in the aggregate. Also, as one begins to investigate the available research in the area of Defined Contribution plans it becomes obvious that there are many different parameters on which to measure the success of such plans.

Given that the Defined Contribution plan, privatized retirement funding to the layman, is being tossed around as though they were the best thing since sliced bread, it seems reasonable for those with the skills, time and inclination to address the success, or lack there of, of such plans.

The available materials range from obtuse to arcane as I researched the issue. Few are definitive. Many are an obvious effort to support an ideological point of view or make sales. I will try to look at the actual financial adequacy of such plans.

How much does the average individual put in to the IRA or 401, and how much is left after many years, many fees, reported hidden costs, and much turbulence in the market? Are these plans really the alternative to Social Security as a protection from poverty in old age?
by reader Jack

(Jack, my sincere apologies for the lack of your name…i scheduled the post and have just come back on line)

(useful links appreciated-rdan)