Bob Pozen’s keynote address in Boston closing the Monday session of the Retirement Income Symposium was billed as “The Fund Industry: How Your Money Is Managed,” the title of his newly published book. But by the time the chairman emeritus of MFS Investment Management wrapped up, he had galloped through the federal budget deficit, underfunded state pension plans, target-date funds as default 401(k) plan investments, challenges of income distribution in retirement, and the future of retirement itself. Some highlights of his speech, which raised the consciousness, and sometimes ire, of the 200 RIS attendees:
The Budget Deficit
Pozen, now a senior lecturer at Harvard Business School, senior research fellow at the Brookings Institute and former economic advisor to President George W. Bush and then-Governor of Massachusetts Mitt Romney, considers it vital to shrink a federal debt-to-GDP ratio that now exceeds 60%. However, he warned, big spending cuts should be phased in over time in order not to damage the frail economy.
That may not be a problem. We should aim for $5 trillion in reduced spending, he said, but “it’s pathetic how little we’ve agreed to cut”—just $0.9 trillion so far. The deficit supercommittee is supposed to carve out another $1.2 trillion by Nov. 23, but with every special-interest group hollering, “Not me,” Pozen said he doubts whether enough cuts will be found to meet that target.
Underfunded Pension Plans
The distorted accounting used to determine pension plan funded rates is coming to light as states grapple with budget shortfalls, Pozen said. Plans can assume future rates of return without regard to realistic benchmarks. The higher the assumed rate, the less funding is needed. When Pozen reported that the average annual rate of return assumed by state pension plans is 8.5%, an incredulous laugh went up from the audience of financial advisors.
A potential rule requiring pension administrators to use a more realistic rate would, of course, put even more pressure on state budgets. “I’m not asking for full funding right away,” he insisted, “just honesty at the state level.” He suggested that putting new workers into a defined contribution plan would find favor with taxpayers who realize their state’s defined benefit plan is unaffordable.
Asked if states should be required to balance their budget every year, Pozen said there may be times when a state would need to overspend. When he mentioned that nearly every state requires a balanced budget except Vermont, one attendee shouted out “What do you expect from a socialist state!” Pozen recommended a less rigid requirement, such as no more than a 2% to 3% loss over 10 to 20 years.
Target-Date Funds as Default Investment Options