More Things to Worry About

The morning after the election, I wrote a post on our country’s long-term priorities. #3 on the list was retirement savings.

While the retirement savings problem predates the current crisis, the decline in the value of financial assets has made it tougher all around. One reader pointed me to a particular aspect of the problem I wasn’t aware of. Earlier this year, the Pension Benefit Guaranty Corporation (PBGC) shifted its asset allocation from 15-25% equities to 55% equities. The PBGC, which is part of the federal government, guarantees private-sector pension plans and is funded by premiums paid by those plans; if a company’s pension fund goes bankrupt, the obligations are shifted to the PBGC. This, as Zvi Bodie and John Ralfe pointed out back in February, is particularly problematic for the PBGC, because then an economic downturn has a triple impact on the fund: first, as equity values fall, company pension funds face larger funding gaps; second, as companies go bankrupt, their pensions get shifted to the PBGC, increasing its liabilities; third, as equity values fall, the PBGC’s assets fall, increasing its funding shortfall. Bodie and Ralfe argue that increasing the proportion of equities may increase the expected return, but only at the cost of increased risk, in any timeframe.

(By contrast, because the Social Security Trust Fund is invested in Treasury bonds, it should be doing OK. Long-term concerns about Social Security funding, of course, are still valid.)

2 thoughts on “More Things to Worry About

  1. The implosion of the American banking system will have far reaching long term effects on every American rich and poor. As unemployment approaches double digit numbers in 09. The government deficit in 09 will approach 1.7 trillion not including bail out funds that should surpass 3 trillion as the government tries desperately to prop up the big banks. With out significant job growth the annual deficit will be in the trillions for the next several years.

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