Stephen Sexauer. GIC. 8 March 2018
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A Pension is... • Three things: – Savings – Returns on the savings (investments) – A regular and reliable paycheck, for life
• That’s it • What’s hard is making it last a lifetime —no matter how long you live! Stephen Sexauer. GIC. 8 March 2018
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Pensions: Why so valuable? • Longevity pooling – The group (pool) saves for the average lifespan (85) – The individual (you) save for the maximum (105) – No longevity pooling, you need 50% more savings
• Professional management, working for you – Actuaries, accountants, investors, payroll department
• Scale economies and lower costs – Wholesale purchases of services – Example: 40,000 members and 5 investors = 8,000:1 Stephen Sexauer. GIC. 8 March 2018
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87 years ago…DC Comics…
A Lifetime is a Longtime... Stephen Sexauer. GIC. 8 March 2018
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Why Pensions Fail • Anchoring on miracles • No access to longevity pooling • Incentives – Not saving enough (relying on other people’s money) – Counterparty risk not recognized by the employee – Ignoring future productivity gains (public sector) Stephen Sexauer. GIC. 8 March 2018
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Anchoring on Miracles
source: Sexauer and Siegel, Journal of Retirement, Spring 2017
Stephen Sexauer. GIC. 8 March 2018
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Longevity Pooling • You can’t outlive your money • You can’t leave a bequest • You need experts to administer the program – Institutions are more efficient – If done right, your job is to get up each day—the check arrives on its own Stephen Sexauer. GIC. 8 March 2018
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Incentives Matter • All of economics can be collapsed into four words: People respond to incentives. • Get the incentives right; The pension works. Get the incentives wrong; The pension fails. • You need experts to administer the program – Institutions are more efficient – Institutions include employers/employee associations, governments, and insurance companies – Your job is to get up each day—the check arrives on its own if it’s a well-run pension plan Stephen Sexauer. GIC. 8 March 2018
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Don’t Kill the Golden Goose
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• Pensions are valuable: to the employee, the employer, and society • Incentives matter; Get them right. • Pensions are a serious business – They are just wages delayed – They shouldn’t depend on financial alchemy – A well-run pension plan can and will work, for all
1. Waring and Siegel, Financial Analyst Journal, January/February 2007
Stephen Sexauer. GIC. 8 March 2018
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