What a year it’s been! If someone had told me in January that by the end of 2008 in the United States:
- the major stock market indices would have dropped over 40 percent,
- Wachovia, Merrill Lynch, Bear Stearns and Lehman Brothers would all be gone,
- AIG would have to be bailed out by the federal government,
- the female governor of Alaska would be a vice presidential candidate,
- we would have our first African-American president,
- we would be close to losing our domestic automakers,
- oil would be selling for under $40 a barrel,
- the yield on short term Treasuries would be close to zero,
- discount rates would be in excess of 8 percent,
- a New York hedge fund manager would stand accused of running an $50 billion “Ponzi scheme, ”
- we would be in the midst of a global recession,
- and the list goes on and on and on…
… I would have thought they were crazy! Yet all this and more dominated the headlines in 2008—the words “historical and unprecedented” are in the news almost daily. Without question, this has been a year of milestones we won’t soon forget.
The financial and insurance industries often use the phrase “moral hazard.” Wikipedia defines this as “the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.” In this era of bailouts and rescues, this phrase has taken on a new and personal meaning for all of us. If you’ve been brave enough to check your 401(k) or RRSP balance lately, you may want to ask “Where’s my bailout?” I was in Toronto in September and saw an article in The Globe and Mail entitled “Bail out the kids? Think twice,” relating stories of parents who were considering providing their own mini-bailouts to kids who have made bad decisions, including not only the obvious financial ones but also non-financial ones like getting bad grades. As the parent of a 26-year old with cash flow issues, I can certainly relate to the difficulties of navigating such situations!
Once the bailout process begins, where does it stop? I don’t think it was difficult to predict the mortgage meltdown when people were buying houses that they obviously couldn’t afford without the help of aggressive loan tactics such as interest only loans or adjustable rate mortgages, and with buyers and lenders both counting on the expectation that real estate prices would continue to increase indefinitely. Likewise the credit crunch comes as no surprise when we consumers are running up huge debt balances and paying exorbitant amounts of interest. What a lot of people didn’t realize was the depth and breadth of the problem, which is now having global implications.
Will the retirement system be the next victim? As many of you know, the U.S. pension community has been in Washington, D.C. lobbying for relief from the new funding rules, some of which has already been granted. We all know that the American Social Security and Medicare systems have some serious challenges ahead of them with the baby boom retirements that are beginning to occur. And, the limitations of defined contribution plans are more apparent than ever.
What Is The Pension Section Council Doing and How Can You Help?
The PSC launched the Retirement 20/20 initiative in late 2005 to explore what could be done to address the decline in the number of defined benefit plans and concerns about the long-term viability of the defined contribution plans that often replace DB plans. It has become increasingly apparent that neither traditional defined benefit plans nor defined contribution plans on their own can meet the economic and demographic needs of employees, employers, society or the financial markets in the 21st Century in North America. The purpose of Retirement 20/20 is to help to build a new retirement system from the ground up, without constraints related to the realities of current U.S. and Canadian program designs or their regulatory structures. The group of volunteers involved with Retirement 20/20 is very impressive. It includes academics, public policy professionals, economists, market representatives, as well as actuaries. For example, we had participation from the chief actuaries of both the U.S. and Canadian social insurance systems at our most recent conference.
Our third Retirement 20/20 conference took place in Washington, D.C. this past November (see Andy Peterson’s article). The feedback we received from the conference indicated that now is the time to be moving forward with concrete solutions. One of the important tools to assist us is the Measurement Framework which we introduced at the conference (see also my article in the May 2008 Pension Section News— http://newsletters.soa.org/soap/issues/2008-06-02/2.html). The Framework consists of a color-coded rating system. We’re using it to compare and contrast various existing retirement plans as well as any new models that are developed based on the underlying principles identified as part of Retirement 20/20 initiative and conferences. The Framework also incorporates the effect of moral hazard in its evaluation.
With our eyes firmly focused on moving forward, we’re working on several ideas to accelerate the Retirement 20/20 project during 2009 and 2010. This is where you come in. We need your help (see Marcus Robertson’s article)! This is an exciting project in a challenging environment. With new governmental leadership in the United States (and possibly in Canada by the time you read this!), there may be a window of opportunity to get our message out and to motivate real change. We invite you to come be a part of this effort! Let’s help make this a positive “historical and unprecedented” time in the retirement world!
Cindy Levering, ASA, EA, is chair of the Pension Section Council for 2009. She is a senior vice president with Aon Consulting, based in Baltimore, Maryland. She can be reached at email@example.com.
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