Tuesday, April 13, 2010



We all live in a world that is not exactly like the world we think we live in. Either the world is warped or our perceptions of it are. My friend H worries about retirement and how it can be paid for. I think about how rich the country is and surely there is enough surplus to supply the needs and many of the pleasures of those of us, like H and myself, who are retired. I say I am coasting. I don't do a lick of work that anyone would pay me to do. Fortunately I have enough savings that the interest and other income that comes to me is sufficient to pay for my own needs and pleasures.

In the bad old days when Social Security was started and large companies and government agencies offered their employees the promise of a comfortable retirement to offset the rather low wages that they paid them the plans were what we now call "defined benefit" plans. That is, no matter how much or how little your own contribution to the plan was the plan would pay you at least a fixed income for the rest of your life after you retired. In the case of Social Security the benefits would increase according to the rate of inflation.

It was possible to create and operate such plans because the pay-out period for the employee was rather short, on the average. The retirement age was set at 65. Statistically, the life expectancy of a retiree was only about 18 months. I was told once that on the average, typical retirees from the company for which I worked would live only a year and a half after retirement. Clearly a defined benefit plan worked very well under that circumstance. It worked so well that the money paid into the plan exceeded the pay-out. Company managers could borrow money from the plan when things were a little tight and wouldn't have to worry about paying it back right away.

During the last thirty years or so it seems that the life expectancy for us old geezers has increased. At the time I retired, I learned that if I lived to be 70 1/2 the government then assumed that I would live to be 87. Hence, I should take money out of my IRA account and pay income tax on it at a rate that would use it all up by the time I was 87 years old. That rule was changed a few years ago and I still have quite a bit of money in my IRA accounts.

You can imagine the strain this unplanned longevity is having on retirement plans. Most companies that are setting up such plans today provide a "defined contribution" plan. The combined contributions from the employee and employer are invested in an annuity in which the pay-out is set by an actuarial calculation of the probable remaining life span of the retiring employee. Alternatively, the money collected is put into a savings account or a Roth IRA which is then simply given to the retiree to spend as he chooses.

H is worried about the retirees who retired when the retirement plans were still "guaranteed benefit" plans. My own retirement income from firms I used to work for will continue at its present level as long as I live. The longer I live the more I cost those former employers. I don't wish them ill, but if I did I would enjoy every minute of my life thinking about how by living a long time I am having my revenge. H worries about the employers. He thinks of how poor General Motors is now trapped by having to continue paying the luxurious pensions of all its former emloyees, a number of persons considerably larger than its present work force. Those greedy unions should agree to allow General Motors to terminate the pensions and provide a fixed sum of money for each retiree. I may have mentioned before that H has a rather low opinion of labor unions.

In my thinking, General Motors is getting what it deserves. It resisted strongly any proposals to provide a government-funded pension for each employee, with the funding provided in large part by a fee on General Motors. The company wanted to control the pension plan because at the time it was a useful tool for recruiting skilled workers. I suspect that today the company might look more favorably on a government-guaranteed pension for its retired workers.


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