Nest Eggs Cushioned From Market’s Drop
Amid the brutal stock market plunge of the last 2 1/2 years, there is at least one bright spot: the nation’s pension and retirement plans.
Although pension plans of major corporations and government agencies--along with 401(k) retirement plans of individual employees--have taken losses in the market meltdown, they in aggregate have not fallen anywhere near as much as the stock market as a whole, largely because of the plans’ conservative investment approaches.
As the Standard & Poor’s 500 stock index and the Dow Jones industrial average declined more than 20% in the last year, corporate and state pension plans and individual retirement plans lost only 5% to 10%--largely because they have diversified investments among bonds, stocks and real estate, according to surveys of thousands of pension funds by consulting firms and research institutes.
That means the retirement savings of millions of workers have not been as hard hit as the market plunge would indicate. That could help explain why consumer spending and the economy have held up much better than the market.
“There is no retirement crisis because of the stock market decline,” said Dallas Salisbury, president of the Employee Benefit Research Institute, a Washington-based organization financed by employers, unions and government agencies that monitors thousands of pension funds.
To be sure, low overall savings rates and other problems pose a long-term threat to Americans’ retirement incomes.
Nor are Salisbury and other experts minimizing the losses of employees who had 401(k) accounts and other retirement funds invested in the stocks of Enron Corp., WorldCom Inc. and Global Crossing Ltd.--all now in bankruptcy proceedings--and other troubled companies. Some of those workers have lost most or all of their retirement savings.
But for the overall work force, the market’s plunge has not caused serious damage to prospects for retirement income, experts said. For most workers, problems with their ability to retire stem less from the stock market plunge than from the fact that they have not saved enough, experts said.
Lesser Effect of Markets
Stock markets simply don’t have the effect on consumer attitudes that many believe they do, said Robert J. Shiller, Yale University economics professor and coauthor of a paper on so-called wealth effects.
Housing prices--which have continued to rise while the stock market has plunged--have a strong effect on consumer feelings of wealth, Shiller and his colleagues found, but stock prices do not.
So this “drop in the stock market wouldn’t have much effect on consumers’ spending,” said Shiller, who gained public prominence in 2000 with his book “Irrational Exuberance,” which said investor enthusiasm had driven stock prices to unsustainable levels.
Investment managers for pension funds and even individuals investing for their own retirement apparently were not carried away by irrational exuberance, pension experts said.
Managers for pension funds are governed by rules of prudent judgment to spread investments among fixed-income securities such as Treasury and corporate bonds, along with real estate and stocks. Typically, such funds hold 40% of their assets in non-stock investments and shift money out of stocks as rising prices make that portion of the portfolio top-heavy.
Many individuals likewise have kept investments diversified among Treasury bonds and bills and bank certificates of deposit, as well as stocks. And the 401(k) plans most companies offer to employees include relatively conservative mutual funds, not all-technology-stock funds and other high-risk varieties that have suffered severe losses.
In addition, pension funds typically invest with a long-term horizon. At the California Public Employees’ Retirement System, the nation’s largest public pension plan, investments are made on a 10-year perspective in accordance with strict ratios for allocating assets among bonds, stocks and real estate.
CalPERS is shifting more of its funds into stocks as part of a normal process to take profits and move money out of investments that have performed well (bonds) into those that have lagged (stocks). During the height of the stock boom, it shifted money from stocks into bonds.
These days “we are buying equities,” said Mark Anson, CalPERS’ chief investment officer. “We are selling our gains in fixed-income securities and buying $200 million to $300 million in equities with every 50 point drop in the S&P; 500,” Anson said. That index has fallen almost 400 points in the last year.
CalPERS’ mammoth investment portfolio has lost only about 5% in the last year, going from $156 billion to about $149 billion at present, because gains in bonds and real estate reduced the overall losses.
Similarly, General Motors Corp.’s pension plan--the nation’s largest corporate plan, with about $65 billion in assets fell 5.7% in 2001 from a year earlier and 3% more in the first half of 2002, far less than the stock market.
That and similar minimal losses among other pension plans is good news for the 42 million American workers in private industry and state and local governments who are dependent on those guaranteed pension plans--called defined benefit plans--for most of their retirement income. Those with such guaranteed pensions are in the minority, as so-called defined contribution plans--including 401(k)s and individual retirement accounts--have grown to dominance.
But the results shown by 401(k)s and other defined contribution plans, which cover 58 million U.S. workers, are comparable to those of the corporate plans. Defined contribution plans lost 10.9% of their value, or $248 billion, in 2000 and 2001, bringing their total assets to $2.2 trillion, according to a study by Cerulli Associates, a Boston-based pension advisory firm. By contrast, the S&P; 500 was down 20% in those same two years.
The performance was decidedly better than the stock market as a whole because individuals had kept a good portion of their money in non-stock investments.
And such accounts have become even more conservative this year, experts said, because individuals have been transferring funds from stocks to money market funds, Treasuries and other less risky investments.
A Need for Concern
However, there still are many reasons for concern about prospects for retirement income of U.S. workers, beginning with the fact that savings are low. In the aggregate, personal savings among Americans is only 1.6% of disposable income, the Federal Reserve has determined.
The Fed’s Survey of Consumer Finances shows that half of U.S. households have no savings to speak of.
With Social Security expected to provide only a fraction of the income needed for a comfortable retirement, the low level of individual savings is the most serious threat to future living standards of retired Americans, experts said.
A new study projects that retired families face expenditures that will exceed their available income by $10,000 over the period of their retirement. The study, done in Kansas by the Milbank Memorial Fund and the Employee Benefit Research Institute, is the first of a planned series of studies on all states.
There also are concerns about the long-term solvency of the nation’s pension insurance agency, the Pension Benefit Guaranty Corp., which is funded by industry but administered by the federal government.
The PBGC’s reserve against pension claims is at $5 billion, but the agency faces claims amounting to $9 billon because of underfunded pension plans in bankrupt steel companies and troubled firms in the airline and retail industries, Steven Kandarian, the PBGC’s executive director, told Congress last month.
In addition, the PBGC said, many pension funds of major corporations have become underfunded in the wake of losses in stock portfolios, meaning that the companies must put more money into their defined benefit pension plans to make good on the future payments promised to worker beneficiaries. The additional money that corporations must put in will reduce profits, which in turn could lower their stock prices.
General Motors, for example, put $2 billion into its pension fund in April and plans to put in $7 billion more to bring the fund to full-funded status, a spokesman said.
