Naked Capitalism guest-blogger Leo Kovilakis continues to blog up a storm on the problems of state pensions. He aptly points out all the risks of a defined-contribution plan. But in my opinion, he doesn't go nearly far enough.
Someone wrote me that defined-contributions are the future and that "people must assume responsibility for their financial health as well as their physical health. We cannot expect the government to take on such responsibilities because that is not the way evolution (real world) works."
But as I have written before, the shift to define-contribution (DC) plans is not the solution. Most people cannot deal with the stress of investing their own money or selecting between funds that are offered to them. It is important that people start doing their own due diligence and build up some knowledge on investments, but the reality is that most individuals cannot handle these responsibilities.
This is why I recommend we scrap private pensions altogether and create several large public defined-benefit plans that are capped at a certain size. These funds would follow the highest standards of governance and they would be managed by professional money managers whose interests are aligned with their stakeholders and pension beneficiaries.
In my opinion, this ignores the 800 pound gorilla in the room: pensions never work very well. Not for individuals, not for companies, not for the government. Predictions are hard, especially about the future--and predicting what you'll need forty years off is a fairly unhealthy activity. Who knew my English degree would actually turn out to be an investment good rather than a consumption good?
Everyone is very good at picking out the flaws in the pension systems they don't like. Basically, there are three entities who can save for your future:
- Some company
- The government
Liberals are very good at pointing out why you are not very good at saving for your future: you are not an actuarial universe. If you make the mistake, as my mother did, of retiring into the teeth of a financial crisis, you will find your life savings sadly depleted. Also, since you probably have some skill other than being a professional financial planner, you may make stupid decisions, and/or get bullyragged into one by a dishonest broker.