The Pitfalls of Social Security and Pension Funds Globally (w/ Dean McClelland)

MAX WIETHE: You figured out that annuities
weren’t going to solve it. Obviously, a lot of certain countries, we
have the Social Security system here in the US, I know you’re from Ireland, countries
all over the world have their own forms of pension to protect people after they retire,
but it’s pretty obvious here that Social Security is not going to be a viable solution, most
likely by the time I reach retirement age. As well, if you just talked to anybody about
the sorts of checks they’re getting from Social Security, it’s not enough to live on, so that
you have to supplement it somehow. We know that what’s available from the government
is not enough and what’s available on the private market currently is sub-optimal to
be polite. How did you come to this conclusion that tontines
were a viable alternative? DEAN MCCLELLAND: Well, just if I can comment
on the Social Security pensions situation first, there was a Citi Group report out I
think it’s about two years ago now, they calculated that the richest 20 OECD countries in the
world have a combined pension deficit of 78 trillion, which is bigger than global GDP. They forecast that this is going to rise to
400 trillion by 2050. Basically, it’s rising faster than GDP. If you’ve got a problem that big, that’s completely
out of control. It’s not getting solved anytime soon. Anybody I talked to in Europe, that’s around
more like your age, I say how do you feel about the pension system you have to pay in
at the moment? They’re like, we’ll never see it. We’ll never see it. We’ll never see a penny. It’s like a tax that just completely ripped
it off. If you think about the US, obviously, that’s
where we are at the moment, of the 50 states, I think 49 of them are so underfunded that
there’s a good chance to run out of money really between the next seven and 15 years,
which is unbelievable. Again, it’s an unsolvable problem. There’s one state, which is Wisconsin, which
is fully funded. The reason you can trust in getting your pension
from Wisconsin is that it’s run exactly like a tontine. MAX WIETHE: What is some of the differences
between the way that it’s run in Wisconsin? You say it’s run like a tontine, but why don’t
we get into the nitty gritty? What does that mean to be run like a tontine? DEAN MCCLELLAND: If you think about from a
pensions perspective, in the good old days, you have defined benefit pension. Your uncle worked all his life for GE, let’s
say, once the greatest company in the world, some would say. He contributes every month and he knows when
he reaches retirement, he’s going to receive a pension for the rest of his life. Unfortunately, all those calculations that
were made by GE, originally, were wide of the mark. They didn’t put enough money aside to be able
to make up for that and now, I think you’ve read all the articles, ultimately, GE’s pension
fund is probably going to take it down over the next, well, certainly less than a decade. That’s like almost 600,000 families that were
expecting this payment for the rest of their life, it’s now just going to disappear. What the world has done is they’ve shifted
away from defined benefit pensions because they realized that just they’re unaffordable
for governments or for big corporations. They’ve moved to something called defined
contribution pensions. Basically, a defined contribution pension
is that you save all of your life and then when you get to retirement, you can then start
drawing it out. It’s great that they get you saving so you’ve
accumulated some capital but then you got the problem of working out how much can I
spend every month, so that I don’t run out of money. MAX WIETHE: There was an example in our conversations,
before this interview, brought up of one country in particular that has some pretty horrifying
statistics about a similar plan, where you have to pay in, but you reach that age and
it’s totally available to you which is how the defined contribution plans usually work. In Malaysia where it was 90% of all savers
have run through their entire retirement savings within 18 months of reaching retirement age,
so there still has to be– we as human beings are still, at least with our current education
system and the way the world works, we’re not equipped to actually save for ourselves
in this way and in some ways, there is a little bit of hand holding that needs to be done. That’s where I think your plan meshes some
of the, in the defined contribution aspects, which is that there isn’t a set payout for
everybody at the end, but knowing full well that you still can’t give everybody the keys
to the kingdom when they reach retirement age. You defined ambition plan, can we talk a little
bit about that? DEAN MCCLELLAND: First of all, if you look
at Wisconsin and Netherlands and Denmark, and so Netherlands and Denmark are the only
A rated pensions in the world, by there’s an annual report that comes out every year. The reason they’re so highly rated is that
they have the ability to adjust the amount that they’re paying. If there’s been a market crash scenario, as
it was in 2008, and as is likely to happen in the not too distant future, then the pension
fund has the ability to adjust the payments that they’ve been making going forward. Demand is not fixed. It’s like a safety mechanism that allows them
just to balance the books. That’s it. It’s that simple. Just allowing that feature enables the fund
to maintain its solvency all the way along. When you’re saving into the Danish state pension,
they’ll tell you what they expect you to receive, but it’s an ambition, it’s not a guarantee,
because they have that adjustment mechanism that’s going to ensure that they’re able to
keep the promises that they’re making. MAX WIETHE: They’re able to keep their promise. It seems like a very straightforward methodology,
what’s preventing the rest of the world from following this model? DEAN MCCLELLAND: Nothing. They’re doing it. Canada has just introduced legislation last
year making I think they call it Group Life Pools or something like that. I can’t remember the name, off the top of
my head, but they’ve offered tax concessions for people when they come together to pool
their money. The Royal Mail pension fund which I think
is about $15 billion reformed, converted to a scheme like this last year, there was a
lot of objections from the insurance industry, understandably, but they were able to convert
their whole fund, and there was a 90% approval rating. Now, the UK Government has come out and said,
look, this is actually a great idea. We need to put in place a framework so that
everybody can start moving to this type of model, because this is the future.

4 thoughts on “The Pitfalls of Social Security and Pension Funds Globally (w/ Dean McClelland)

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  2. We have good pension system in Latvia. Kind of.. it has 3 levels. 2nd and 3rd level is not interesting. 1st level is good! Indestructible! Out 1st level pension system is based on taxes of current generation. So it can only fail if we stop having kids or vote to make 1st level social. Currently 1st level is split proportional to ones life tax payments which means that if ones average life salary was 2x average, then ones pension will be 2x average pension,

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