Nice legacy for actuaries--failure of EVERY pension system

[Andy Lang]

As Fed Cuts Rates, Retirees Are Forced to Pinch Pennies
With Interest Income Down, Senior Citizens In a Florida Complex Face Tough Choices

By KELLY GREENE
Staff Reporter of THE WALL STREET JOURNAL

CLEARWATER, Fla. -- For Ruth Putnam, an 86-year-old widow in a small retirement community here, the consequences of the Federal Reserve's continuing interest-rate cuts are painfully clear: She's selling her English Rose china collection, piece by piece.

Mrs. Putnam relies on interest income to make ends meet -- and her investments are earning only a fraction of what they did when she retired 24 years ago. So she's selling her treasures to make up some of the difference. "I don't know what else I could do," she says.

Across the country, retirees and older adults are struggling with the dark side of falling interest rates. The Federal Reserve has made 13 cuts in the past 2½ years, chipping its benchmark rate to 1% from 6.5%. While cheap money has helped fuel a housing boom and may yet spur capital spending, the low rates are ravaging interest income from older Americans' investment vehicles of choice -- certificates of deposit, bonds and money-market accounts.

Low interest rates have always been a threat to retirees relying on interest income. But the relentless decline of the past two years, with no uptick in sight, is taking a particularly hard toll on elderly CD and money-market investors. These are the people who tried to do everything conservatively with their money. For the most part, they didn't chase Internet stocks, and they didn't load up on debt. They sacrificed to pay off the mortgage while building nest eggs to leave their kids.

"They've had their plans in place for 40 years, and now, through no fault of their own, they've had the rug pulled out from under them," says Robert Allsbrook, an economist with AmSouth Bancorp, of Birmingham, Ala., who spends much of his time visiting customers in retiree havens such as Clearwater.

After the federal-funds rate was cut by a quarter-point to 1% on June 25, Mr. Allsbrook's phone rang steadily with calls from older investors, many berating him for "letting" the Federal Reserve squeeze their income.

Many residents of this sprawling suburban town, bordered on the east and west by coastal bays, are feeling the pressure these days. According to the 2000 census, Clearwater has the largest proportion of senior citizens -- 21.5% -- in U.S. cities with at least 100,000 people.

Mrs. Putnam's retirement community, founded 37 years ago, is called On Top of the World. Here, 10,000 residents, many of them transplants from the Northeast and Midwest, live in condominiums in three-story buildings with whimsical names such as "South Seas" or "Royal Chateau." A grand arch marks the entrance to the development; behind it lies a grassy mall featuring a giant globe and a column-filled sculpture garden. Activities include golf, bingo and shuffleboard, as well as classes in yoga and art.



The people who live here make up retirement's middle class. Median annual income for people 65 and older in the community's ZIP code is estimated at $29,696 this year, just $209 more than the national number for that age group, according to demographic-research firm Environmental Systems Research Institute Inc., of Redlands, Calif. Most residents cover day-to-day bills through a combination of Social Security checks and interest generated from their plain-vanilla investments. The luckiest have pensions , though the development's many widows sometimes receive a mere sliver of their late husbands' former benefits.

So, with interest rates at a four-decade low, one big piece of income is drying up. The average rate for a one-year CD purchased last week was 1.59%, nearly four points off the average rate in 2000, according to Bankrate.com. The return on some money-market funds approaches zero after subtracting for overhead.

The cuts aren't leaving the residents destitute or starving, but they have been forced to start cutting back once again after a lifetime of scrimping and saving. They can't visit family as often, eat out or go to shows. Department stores now are out of the question for many; some have decided that membership at a new Costco discount retailer down the street is too much of a splurge.

Pat Wheeler, a Clearwater financial planner, got an earful while manning an advice hotline two months ago for a local TV station. The retirees he talked to typically had several hundred thousand dollars in CDs that had been paying 7% interest a few years ago and were now down to 2%, he says. "If you have $200,000, that's $14,000 a year in interest that's gone down to $4,000. It's quite a cut in pay."

Mrs. Putnam says she has had to scrimp "to the point that a lot of my friends think I'm cheap." Twenty-four years ago, she and her husband relocated from New Hampshire, where he managed a country estate and she worked as a hairdresser. They kept most of their money in CDs, then paying 18% interest. They had some exposure to stocks through a mutual fund, which they picked because the fund company was also called Putnam. The investment had grown to $40,000 two years ago, she says, but since then has plummeted by half.

Meanwhile, interest rates started their steady drop. Rates for one-year CDs at the AmSouth branch a few blocks away from her home fell to a mere 0.8% on June 27 from 5.9% in early 2001. On her bank's advice, Mrs. Putnam started converting her CDs several years ago to fixed annuities paying 4.5% interest. That provides a monthly income of $157 -- less than her former CD income, but more than she would be making with CDs at the moment, she says. The cut is making it tougher to cover her $3,000 annual premium for supplemental Medicare insurance. She also could use hearing aids, but they are so expensive -- at least several hundred dollars apiece -- that "it's out of the question."

To continue trips to see her sons in California and Norway, she's selling off collectibles that she and her husband gathered over the years, including watches, rings and porcelain she no longer uses. Mrs. Putnam has continued to eat lunch out every day, which she considers her main social outlet. But she has downgraded from sit-down restaurants overlooking nearby Clearwater Beach, where she would spend $5 "without thinking about it," to Wendy's and Burger King, where she orders something from the 99-cent menu, along with coffee, for $1.59 or $1.63.

Betty Houghton, who lives a mile away, feels she has to stay put in CDs and a money-market account. Seven years ago, she accepted an invitation to a dinner sponsored by an investment adviser and wound up sinking nearly $120,000 -- almost three-quarters of her and her husband's life savings -- into variable annuities that since have lost a third of their value. "I made such a big mistake giving them such a big check," she says.

Now Mrs. Houghton, 76, goes to great lengths to protect the principal in two CDs valued at $20,000 and $7,000, each paying less than 2% at the moment, and a $14,000 money-market account that earns a paltry 0.2%. "It's a terrible time," she says. "We get practically nothing from the money market, but I don't want to do anything risky anymore."

When she volunteers at her church's clothes closet for people in need, part of the church's storefront mission, she sometimes asks for permission to take clothes for herself. Mrs. Houghton has quit going to the beauty parlor and wears a wig instead. Her husband's doctor has started giving them extra free samples of medications: Zocor for high cholesterol and Aricept for her husband's Alzheimer's disease.

She and her husband each receive a small pension . Mrs. Houghton gets $147 a month from her work as a nurse, and her husband gets $69 a month for his 20 years at Singer Co. It would have been more, she says, but Singer's retirement benefits were curtailed after the company became mired in debt and the fund was taken over by the federal Pension Benefit Guaranty Corp.

All together, the couple's Social Security, pension and $60 or so a month in interest income add up to just over $2,000. Off the top, $216 goes toward the premium for a life-insurance policy Mr. Houghton has had since age 59 and Mrs. Houghton is afraid to drop. Another $438 is earmarked for the couple's Medicare HMO, which provides coverage beyond the program's basic plan. Then there's $300 for monthly condominium maintenance fees, $100 toward property taxes and $350 to help their 57-year-old son, who is disabled.

"There are no frills," Mrs. Houghton says. "No going out to dinner, no movies, no new clothes. It's just a way of existing, really." She has considered going back to work, but would need to get her certification renewed to do her most recent job as a diabetes educator. And regular nursing "at my age would kill me." She's trying not to dip into her interest-bearing accounts, but sometimes, when a CD matures, "I have to take out a few thousand dollars. We're having the same basic bills with less income."

And Mrs. Houghton worries about what would happen to her husband, whom she cares for at home, if she dies before he does. "He's failing," she says. "We don't have any life insurance on me, and there's no way we could afford it now."

Joseph Nemeth, an 80-year-old retired electrician who lives a mile east of On Top of the World, says he lost $3,000 in interest income over the past year through his individual retirement account, which he keeps in fixed-income investments. That's money he has counted on in the past to pay his taxes and insurance bills. Now he's digging into principal to pay those bills and cutting back on bimonthly trips to see his eight living children, 13 grandchildren and two great-grandchildren. "When you start pulling money out of savings, you don't buy things you want," he says.

Despite the low rates and specter of chipping away at savings, few retirees so far seem tempted to diversify their investments. When people ask Mr. Allsbrook, the bank economist, for advice, he tells them, "'One alternative would be to buy stocks that pay higher dividends than the interest you're getting on CDs. Have you thought about that?' But they hear the word 'stocks,' and you can see them tense up."

Before Mary Ellen Owen's husband died several years ago, he moved much of their savings into Treasury, municipal, airport and corporate bonds paying 8% to 9% interest. The 83-year-old widow, who lives just south of Clearwater in Belleair Bluffs, remembers him telling her that their money would be safe and secure. She could live off the income, without having to worry about investment strategy.

For some retirees, bonds they bought years ago when interest rates were higher have proved a solid investment. The bonds have appreciated in value as interest rates have fallen, and they've continued to pay their higher returns.

But many bonds, particularly tax-free municipal bonds favored by retirees, can be called, which means the issuer can redeem them before they mature. Issuers frequently call bonds early if interest rates drop, which allows them to issue new bonds at a lower rate. Bond holders sometimes get a small premium on their principal, such as 3%, when bonds are called early, but it hardly makes up for the lost interest income.

With the current rate cuts, the bonds "are getting called right and left," Mrs. Owen says.

In an attempt to stabilize her income, the widow is diversifying a bit into blue-chip stocks that pay dividends. Still, she's nervous about a future with less money, so she's doing without things she's enjoyed since moving here 33 years ago from Richmond, Va. This spring, she scrapped a summer trip to Europe. She has started substituting lunches for dinners at Belleair Country Club, cutting the cost of going out to eat virtually in half.

The daughter of a minister, she has continued giving to First United Methodist Church of Clearwater, where her son Rick Owen serves as treasurer. But she worries about the many retirees who have not. The church has seen a 25% drop in pledges this year, much of that among retirees who say they don't know how much they're going to have to live on, Rick Owen says. "You would like to have cash reserves of two months. We don't have that this year."

The situation is the same at Mrs. Owen's club. Two weeks ago, as she hesitated to spend $37 on a dinner and mystery-theater act, the hostess told her that a lot of members are cutting back on the special events. One of Mrs. Owen's friends recently told her that she's considering dropping her membership altogether.

"I'm not going hungry, but I am uneasy," says Mrs. Owen. "I don't feel that it would be wise to take money, at a point when my income is dropping, and spend it on any pleasures."

Write to Kelly Greene at kelly.greene@wsj.com

Updated July 7, 2003

[Sandman]

Andy, as long as we're blaming all of the world's economic problems on actuaries, you should probably pick up the latest Economist. It includes a quote from a fund manager blaming actuaries for the equity-heavy asset allocations chosen by fund managers in the last few years. Because of course, all the fund managers wanted to shift to more conservative asset allocations in early 2000 (being masters of market timing) but those mean ol' actuaries said no.

[WWSituation]

Sandman, if there is no old lady having to sacrifice her poor trip to Norway this year, there will be no sympathy for those fund managers!

Frankly, the image of them pawning their China made me laugh. I see a new reality TV show coming..

[Andy Lang]

The problem with most actuaries is that they are lousy when it comes to investing. They jumped in late to the game and contributed to the dotcom and other market crashes.

Many actuaries also work for large management consulting firms, where I hasten to add, the CEO excess began back in the 80s with their Executive Comp practices and were the prime movers in this whole giant mess.

They are very skilled in undertanding the flaws in ERISA on the other hand and how to exploit them, including I hasten to add, the expoitation of other actuaries--those dummies in the insurance industry who not only do not undertand DB pensions but do not undertand what a pension valuation is and why it is so important.

*That is NOT, however, to say that a large component allocated to stocks is wrong--it isn't at all--when done using basic rules of investing such as rebalancing, for example and always in conjunction with a carefully thought out long term asset allocation strategy based on sound Markowtitz mean-variance optimization.

Note how idiots like Peskin and Gold and Bader--all who have major conflicts of interest BTW--are now pushing exactly the wrong 'solution'--something that would not only cost far more, but create huge and unnecessary volalitity and lead to another different kind of momentum based explosion. I'm referring to the fact that their proposals to work in an ever-changing environment means that bonds must be continually traded--that means guessing the direction of interest rates, something that few can undertake successfully, and carries with it huge risk. The huge transaction costs of this trading is of course ignored by these folks, which is the whole idea and the source of the aforementioned conflicts.

Of course it would never really happen, because long before it could, the DB industry would be dead and buried.

Here is another piece on the perfidious record of the experts who often work in the same management consulting outfits:

I.R.S. Takes Aim at Big Shelters and Hopes Message Filters
Down
By DAVID CAY JOHNSTON
The government is pressing a broad assault on the
flourishing tax shelter business with an array of
high-profile summonses and civil suits aimed at stopping
cheats.

http://www.nytimes.com/2003/07/06/bu.../06TAX.html?th

***

I wonder if they will go back and resurrect those awful tax shelters so common in the oil and gas industries back in the Reagan ands Bush era--where the massive drilling of dry holes in Texas made so much dough for the insiders? They were direct subsidies from ordinary taxpayers to the oil and gas oligarchs and just like modern day pension actuaries, often screwed their own 'investors" in these limited partnerships.

Who was it that opened the floodgates to these kinds of outragious stuff?

You guessed it: GHW Bush, VP. Same guy who did the S&L scandal and began the downfall of the DB pension industry by Laizze Faire Capitalism, Texas-Style!

[mikey]

I see, so your point is that since actuaries are bad at investing, and the old people in the article invested their money badly, they must be actuaries and that we are all going to have to hock out china someday. I'll take good care of mine, so it is worth more. Thanks.

[Wigmeister General]

We live in an alarmist society. A wee bit melodramatic, aren't we?

[Jeremy Gold]

Originally Posted by Andy Lang

Note how idiots like Peskin and Gold and Bader--all who have major conflicts of interest BTW--are now pushing exactly the wrong 'solution'--something that would not only cost far more, but create huge and unnecessary volalitity and lead to another different kind of momentum based explosion.

I expect an apology.

If you ever say anything similar again, I will file a formal complaint with the ABCD.

[Traci]

Andy -- you and I go way back - and as such I've granted you latitude that others have not enjoyed. But you have reached the limit of my patience here.

1) You do owe Jeremy an apology - posted here.

2) If you continue to post in such an obnoxious manner, I will be forced to ban you.

You love to go on an on with little to no substantiation about how much wiser you are than all of the rest of us in the pension industry. But your comments and energies would be better spent if you exercised a little more professionalism and a little less trolling.

More facts -- less insults.

[Spectrum]

I'm curious, If Andy had posted his rant against Jeremy in the political section, along side his rants against Bush, Cheney, etc. would that have been acceptable? At some point when actuaries are trying to shape public policy they become political figures. Pensions and Social Security are intensely political. Andy's activities have definitely crossed the line into the political arena here. His proposed policies have sound logic behind them even if his delivery is unappealing. So here is my political satire for him:

In any event if Andy had followed his own advice and invested mostly in stocks for the last 30 years why is he still so angry? He should have outperformed any bond investor by so much that he can buy happiness. Or was he lead astray in his youth and tricked into buying only fixed income investements?

[Asynchronous]