December 7, 2021

I’m concerned that whole generations of Americans aren’t preparing for retirement. Defined contribution plans like 401ks and IRAs provide tax incentives to save, but our national savings rate is still way too low. There’s also a legacy defined benefit system from before we invented 401ks — pensions. And the pension system has significant problems that are putting millions of Americans at risk.

31 million American workers are in a pension plan. These future retirees will expect regular guaranteed payments. This sounds great for workers –the future is taken care of, right? Maybe. The worrying reality is that pension funds across America are underfunded. A worker who retires at age 67 might draw those guaranteed monthly checks for decades, creating trillions of dollars in long term liabilities. Most of these funds have insufficient capital to pay out all their obligations.

Retirement plays out over decades, so the funds also have years to fix this problem. But not all of them are headed in the right direction. 74% of public sector workers are depending on a pension, but their underfunded retirement plans are also over-invested in risky assets. Fund managers clearly hope that high rates of return will close the gap between assets and liabilities. But hope isn’t a real strategy, and this kind of risk-taking might actually compound the problem. The market goes up and down, but the funds must pay out. What happens in a downturn?

For public pensions, the answer is probably a taxpayer bailout. Nobody wants to see retired public workers who had the promise of a pension, suddenly destitute. Society will end up making them whole. But why should future taxpayers be held responsible for the bad choices we’re making today? Without taxpayer backing, private sector plans are in better shape, but they are still underfunded relative to where they should be. This widespread under funding of retirement plans is irresponsible.

As a professional investor, I want to see everybody thinking about and investing for the long term. The concept of a carefree retirement with a solid pension is not a guarantee. Americans need to step up our savings and our financial literacy. Making decisions about long term financial investing is not a can that should be kicked down the road.

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