Industry Voices

Barry’s Pickings Online: Needed: Critical Retirement Savings Infrastructure

Michael Barry, president of the Plan Advisory Services Group, discusses his idea for a solution to the “missing participant” plan leakage problem.

By PS | August 01, 2017
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PS-Portrait-Article-Barry-JCiardiello.jpgArt by Joseph CiardielloIn a pay-as-you-go (PAYGO) retirement system, the generation working pays for the prior generation. This “works”—both financially and in terms of “perceived fairness”—when the succeeding generation is at least as large as the prior one. The fairness argument—if it’s not clear—is that the prior generation has paid the (at this point, in the U.S., substantial) cost of raising and educating the succeeding generation. It works especially well when the succeeding generation is larger and, critically, more productive (and therefor earns higher incomes) than the prior one. That was the situation in developed world (including the U.S.) until sometime late in the last century.

This system stops working when, as is the current situation, the prior generation is larger than the succeeding one—that is, the prior generation has not fully reproduced itself—and (again critically) the wages of the succeeding generation do not (at the macro level) increase. In those conditions, the system is financially stressed and no longer perceived as fair.

We in the U.S. (unlike, e.g., some European countries) have done a pretty good job in adapting to this change. The rational response, in these conditions, is to ask (require?) that each generation fund its own retirement. And that is more or less what we have done—through the encouragement of a robust, employee-funded retirement savings system (most obviously, 401(k) plans).

The infrastructure required for a PAYGO system is pretty simple. All that is involved are transfer payments, from one generation to another—money is taken from a working individual and paid to a retired individual. A funded system presents a much bigger challenge, because in it money must be transferred across time. Wages someone earns today must somehow be moved into the future so that she can live off of them when she retires. They must be invested.

That requires an entirely new infrastructure. For instance, it requires new investment products, like mutual funds and (more recently) collective trusts and separate accounts—so that individuals with relatively small (relative, say, to Warren Buffett) accounts can invest their money (that is, move it into the future) efficiently. Investment management is the glamorous part of this infrastructure project, and lots of very talented and well-paid people are working on it.

But this change—this new need to be able to move money across time—has made necessary another, less glamorous, infrastructure project: keeping track of all these investments. Part of the problem here is that the value produced—e.g., that the individual knows how much money he has and where it is—to a large extent isn’t dependent on the size of the account. So that (with obvious qualifications) the cost of keeping track of, say, $1 million invested in a mutual fund isn’t much different than the cost of keeping track of $1,000.

To use an analogy: the cost of maintaining a road is pretty much the same (per car) for a Ford or a Bentley.

NEXT: Gaps in the infrastructure