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Why the retirement system is failing? January 8, 2009

Posted by shaferfinancial in Finance.
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This is not some big mystery, nor some crisis driven result.  No the retirement system is failing because it was designed to work under very different circumstances.  Blame technology, because it is what has caused the system to fail.

OK, let’s give a little perspective to the situation.  Our current retirement system was envisioned starting in the 1930s with the great society programs.  The government introduced social security and the labor unions in concert with the major manufacturers decided upon a pension system that was funded with current workers and/or current profits. And it worked, initially.  But, there was an undercurrent already destroying the foundation of this system.  That is technological advancement.  You see, back then workers, if they made it to retirement, only lasted 2-5 years, in retirement.  Certainly, there were statistical outliers that lasted longer, but they were so exceptional as to not cause harm to the system.  But technology improved workers lives, by taking over the nastiest jobs and allowing the body destroying manual labor jobs to be done by machines.  And then in the 1960s health care technology started to help people to live longer active lives.  So what was designed to work in the 1930s and 1940s started to crack in the 1980s.  Suddenly, people were living much longer.  Instead of 2-5 years in retirement, if they made it that far, 10-15-20 years or longer were no longer statistical outliers, but the middle of the bell curve.

So what happens is social security is now provided to an ever growing group of retirees.  Company pensions,  the same.  What was a manageable cost is now totally over the top.  Certainly, in the 1940s and 1950s most people could be excused for not seeing this coming down the pike, but starting in the 1980s there is no excuse.  But government bureaucrats, corporate managers, labor union leaders, and, of course, politicians turned a blind eye to this happening.

So what happens is in the 1990s pension fund managers start to realize what is happening, so they demand higher investment returns.  The corporations in turn, take on more risks, in order to feed the pension beast.  And as this process plays itself out, we see the results of this additional risk.  Now in the 1990s corporate managers saw all this in their bottom line and convinced the government and Wall Street to go along with the idea of getting rid of the old fixed income pensions, replacing it with 401Ks and IRAs. 

And this change was accepted for a period of time, because of the rising stock market where most people ended up putting their retirement funds.  The stock market was rising because corporate profits were rising as a result of the increased productivity that came with the computer age.  But, this decade has demonstrated the folly of this arrangement.  Enter into this problem every con man in the world, selling their “fail safe” investment system to riches.  In my opinion the biggest con men are the mutual fund sales people, but that is my axe to grind.   

So, why is the retirement system failing?  Because it was designed for a economy were people died soon after retirement.  But technology changed that fact, and no one has gotten around to rebuilding the system.  Once again, we can monkey with the parts, but the system will never become efficient until we redesign it from the ground up.

Point all the fingers you want, at the government, at corporations, at Wall Street, but the bottom line is that it is totally apparent now.  The ball is in your court.  What are you going to do about it?




1. Mike Rowan - January 9, 2009

I enjoy reading your blog!!! Please check mine out at http://www.erollover.com/blog and let me know what you think of my financial articles as well.

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