10 Steps To A Retirement System That Works

This was first published by CFA Institute's Enterprising Investor.

When clients ask you whether the hodgepodge of social security programs, private savings accounts, and employer-sponsored retirement plans that we collectively rely on will be sufficient to provide them with a comfortable living after they stop working, you probably have an easy answer at the ready.

“Ha!”

At least that’s what most advisers say. And statistically speaking they’re often right. Both public and private pensions and retirement savings plans around the world are in a sorry state, so there is little downside to counseling clients to save more money just in case these instruments won’t be enough to support them. The worst-case scenario is that clients will die without spending all their money.

But it’s time for the conversation between clients and advisers to level up. Though meeting the global retirement challenge is a daunting task, it’s also a nuanced one. Reflexive cynicism is not just unhelpful, it’s a missed opportunity.

Think about it: If you are in the business of advising clients and don’t have a working understanding of how their mosaic of private, employer-, and government-based programs works, can you even say you advise them? If you understand their situation but not the global ideal, how will you improve their outcomes?

It’s about more than just your clients, too. Whole countries need to come up with a coordinated approach to help ensure that their citizens don’t end up impoverished in old age.

If someone asks you what we can do as a society to confront the coming retirement crisis, how will you answer? With snark or considered thought? If it’s the latter, I’ve got a hot tip for you:

Keep Reading for the Next Six Minutes

CFA Institute thinks a lot about what a retirement plan should look like, and together with the consulting firm Mercer, developed a nice and easy 10-point list. Don’t let that stop you from reading the whole report, but the list is pretty comprehensive.

If I were you, as I read through this, I’d keep in mind that it’s meant to be relevant at the global level. Every country has its own set of circumstances and the situation where you live might be very different from the lay of the land where I am. Here in the United States, the trustees of the Social Security program are not mincing words. Their 2014 report has, in its third sentence, the following quote:

Neither Medicare nor Social Security can sustain projected long-run program costs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers.

What kind of changes? Well, making sure we fulfill each of these 10 objectives is likely a great start:

  1. The government must establish clear objectives for the whole retirement system, including the complementary roles of each pillar, and incorporate the provision of a minimum income to alleviate poverty among the aged population.
  2. A minimum level of funding should be made into a pension system for all workers with contributions by employers, employees, and the self-employed, as well as for those of working age who are receiving certain forms of income replacement. In effect, this means every worker will have a retirement account with an entitlement to future benefits.
  3. There should be cost-effective and attractive default arrangements, both before and after retirement, for individuals who do not wish to make decisions.
  4. The overall administration and investment costs of each pension arrangement should be disclosed with some competition present within the system to encourage fair pricing.
  5. The retirement system must have some flexibility as individuals live in a range of personal and financial circumstances. This flexibility includes recognizing that retirement will occur at different ages and in different ways across the population.
  6. The benefits provided from the system during retirement should have an income focus but permit some capital payments or withdrawals during retirement, but without adversely affecting overall adequacy.
  7. Contributions (or accrued benefits) at the required minimum level must have immediate vesting and portability. These accrued benefits should only be accessible under certain conditions, such as retirement, death or permanent disability.
  8. The government should provide taxation support to the funded pension system in an equitable and sustainable way, thereby providing incentives for voluntary savings and compensating individuals for the lack of access to their pension savings.
  9. The governance of pension plans should be independent from the government and any employer control.
  10. The pension system should be subject to appropriate regulation including prudential regulation of pension plans, communication requirements and some protection for pension scheme members.

Policymakers, your work is cut out for you. I was actually surprised when I went through the various programs that impact me as a US citizen. I thought that the first objective would be one of the easier ones to fulfill — and was surprised to find myself totally wrong. For instance, the stated mission of the Social Security Administration (SSA) is to “Deliver Social Security services that meet the changing needs of the public.” That’s way too vague to be helpful. What does it even mean?

But at least now we have a framework to organize our concerns around where we used to have only frustration. As you go through the items listed here, consider hooking up with a CFA Society in your country to lobby for the changes that you believe are necessary.

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