Key to retirement success is simple
What are your thoughts on public and private pensions? Which is in worse shape?
Private sector corporations have moved steadily from DB to DC, but I do not expect DB plans to disappear completely (see graph below). While corporations that moved to DC have managed to cut per-worker pension expenses, many corporations still have a mix of plans. That said, if I were a young worker today, I would not count on a DB plan, especially in the private sector. In the public sector, I would expect to contribute more for a smaller payoff than more senior colleagues.
Regarding which is in worse shape between public and private pensions, I would say that public pensions are worse off, but only for some plans. As the Boston College database shows, there are many public pension plans that are properly funded. Still, the overall funding averages show significant underfunding. Private pensions are also underfunded, but with these workers can increase their retirement contributions to catch up with their targeted savings.
Have you seen Iowa Sen. Tom Harkin's proposal for a new hybrid pension plan to help solve the retirement crisis? What do you think of it?
I like it. It's a good and sensible proposal. The "USA Retirements Fund" system that Sen. Harkin describes is already available in other countries, and it should be implemented here. Mind you, it will not solve the problem of undersaving, but it is a step in the right direction.
Recently in the media, big-name money managers, such as Bill Gross and Robert Arnott, have made pessimistic forecasts about the economy and/or stock market. What should Americans take away from this?
As I said before, the bulk of your retirements will eventually come from the principal of your savings, not from making a killing in the markets. As to the future of markets, I am not pessimistic, but I will admit that they are getting harder to forecast with any certainty. No matter what one thinks of the markets, though, the key take-away is to start saving now, save more than you think you will need, and take advantage of the tax-related plans. It's that simple.
We would like to thank Alfonso Canella, senior lecturer in the Brandeis University International Business School in Waltham, Mass., for his insights. Questions for this interview were contributed by Barbara Whelehan, assistant managing editor for Bankrate.com.