Retirement in the age of Creative Destruction

Those of you familiar with The Phoenix Principle are familiar with our statistical review demonstrating the high failure rates of companies.  Company longevity is far shorter than most of us realize.  One significant impact of this phenomenon affects all of our company retirement accounts.

America largely depends upon private retirement.  Social Security is considered substistence funding, and we are expected to make up the difference with either private funds or a retirement plan.  For our parents, who expected near lifetime employment, these private retirement plans were their safety net.  They depended on "the company" to fund their retirement and health care.

But let's consider someone today who wants to retire at 65.  They need to work, and pay into, a corporate retirement plan for at least 10 years, so they have to start at age 55.  And they would expect to live until 80 (the current average).  So, they want that company retirement plan to be around for at least 25 years.  Yet, when we look at performance of the S&P 500 we know that only about 1 in 3 companies (yes, only 1/3) of the S&P 500 can expect to survive for 25 years.  So where does that leave your retirement plan? 

It's even worse if you start your retirement planning at 45.  Now you need your employer to stick around for you for 35 years.  The odds of that are no better than about 1 in 4 (25%).  So, where comes the funding for the retirement plan?

Now look at the problem from a large employer's viewpoint.  US Steel and GM are just 2 recent examples (out of several dozen) where the company has said they can't afford to maintain the retirement program.  Not surprising.  Their lock in to their old Success Formula has pushed them way out into the swamp.  So what happens to those retirees?  Or those near retiring that had planned on that pension?  They have gone along for 10, 20, 30 or more years believing in the Myth of the Flats, thinking that their employer would always be there for their retirement.  But that myth is about to implode on them with painful consequences.

In an age of Creative Destruction, corporate retirement programs are little more than a wish.  If the companies don't succeed long enough to support the programs they are of little use to retirees.

Perhaps this should be part of the current debate regarding the future role, and funding, of Social Security.  For sure  it should be part of your plans for retirement.