The Off Chance of Retirement Investing

By Martha M. Hamilton
Sunday, May 6, 2007

Emily K. Kessler's job is all about risk. She's not a stunt double, or a fighter pilot, or even a preschool teacher (think of the germs!). She's an actuary -- she studies risk for a living.

So when Kessler decides something is unduly risky, it's worth listening. Her current concern: retirement plans. Kessler, who works for the Society of Actuaries, wrote the report for a group called Retirement 20/20, a collection of pension and financial experts who took a look at the troubling transformation of our nation's retirement systems.

The new emphasis on 401(k) and other retirement savings plans puts too much responsibility on individuals -- creating too much risk of failure -- so they've come up with six guiding principles to make it work better.

Those include clarifying whether employers should be responsible for retirement security, recognizing that any serious fix also requires improvements in health- and long-term care systems, looking for ways to use markets to reduce risks, and pooling the risks and contributions to produce the greatest benefit to the largest number of participants.

But I'm especially intrigued by their thoughts on how the system needs more flexibility to allow it to change as the world changes.

Right now, we're stuck in time. Sixty-five years old is still considered retirement age -- just like it was in 1935 when it was adopted as the standard. It's been the age at which you qualify for full Social Security benefits -- although since 2003, the qualifying age has been creeping up. If you turn 65 this year, you won't qualify until a full 10 months later. The enshrined 65 is also the age at which most traditional plans pay full benefits.

Congress did a one-time update of Social Security in 1983, starting with folks born in 1938 and then -- ever so slowly -- raising the age for full benefits to 67 for those born in 1960 or later. Raising the age limits again could help deal with Social Security's projected shortfalls. But touching Social Security is about as popular with politicians as being photographed next to Osama bin Laden.

One solution might be a system that automatically adjusts as longevity increases. Postponing eligibility for full retirement benefits reduces the number of years they're paid, and hence, the cost. And private pension plans made cheaper by automatic adjustments might be more attractive to employers, Kessler said.

The ideal pension plan should also reflect new approaches to retirement. "Today's traditional pension plan assumes retirement is an event: One day you are working, the next day you're not," as the 20/20 group put it. There have been attempts in recent years to permit workers to take a partial pension as they phase in to retirement by working fewer hours, including a provision in last year's Pension Protection Act, but it hasn't really caught on.

A better retirement system would protect us from having to individually cobble together enough money to ensure our future -- without knowing how long it will be and whether our savings will be wiped out by some unforeseen event, such as an early job loss or an expensive illness. And it wouldn't force the painful choices that confront families trying to save for a new house, the kids' education or retirement.

Under the defined-contribution system, if you guess wrong -- or life goes wrong -- there's no recourse. As Kessler put it: "If I make a bad decision about retirement planning and don't realize it till I'm 85, what happens then?"

True, there's always Social Security, but Social Security is replacing less and less income as time goes by. Many retirees live on little else, but it's not the retirement portrayed in the glossy magazines or that we imagine during our working lives. And many younger workers worry that Social Security may disappear entirely by the time they hit retirement.

And a better system wouldn't expect us to be our own investment managers. Trust me -- The Washington Post would have never hired me to manage its pension funds.

"Why would any reasonable person think that people not trained in investments would be able to make these decisions in a sensible way?" asked 20/20 participant Zvi Bodie, professor of management at Boston University. "I've been teaching investments for 35 years, so to me it's second nature. But let's take an area like medicine.

"Now, I consider myself a reasonably well informed consumer of medical services, but I wouldn't dream of diagnosing my own illnesses . . . even if my doctor said, 'You know, performing minor surgery is really not such a big deal. I can give you the equipment and a brochure, and you can take care of it on your own.' That's what we're doing now with 401(k) plans."

Any questions about retirement that you'd like to see explored in the column? Please e-mail me

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