You’ve heard it before: Corporations are no longer loyal to their employees or vice versa. Medical insurance is disappearing. Corporate pensions are dinosaurs. Future Social Security benefits will probably be lower, if they exist at all. Such statements may be hyperbole, but they correctly identify major trends. What they don’t do is tell us what we need to do to adapt and thrive. When the histories are written, we’ll look back and see that the golden age of benefits lasted about 40 years and ended sometime in the mid-80s. During that period, the workweek was shortened, vacations and holidays grew, corporate pension plans dominated our futures and health benefits expanded year after year. Even as corporate largesse expanded, government benefits ballooned. Social Security schedules were improved. Early retirement became possible. And lifetime government medical insurance was created and expanded. Nor did the cornucopia end there. Fueled by government-backed home mortgages, home ownership became possible for millions of American families. The expansion of home ownership began what may have been the largest redistribution of wealth in the history of the world. In the late 1970s and early 1980s, I regularly received letters from readers who were trying to plan their retirement. They had no 401(k) plans and their savings were limited. A few had profit-sharing plans. But many had some combination of the following: A company pension that rewarded 30 years of service with a lifetime income that replaced about 40 percent of their final salary. A profit-sharing plan that created, for some, a small fortune. Social Security benefits that replaced another 35 to 40 percent of their salary for themselves and additional benefits for their non-working spouse. The total came to more than 50 percent of their final salary. Combined with the corporate pension, the total replacement rate for their earned income was nearly 100 percent. There was also a home that was paid for and that had probably tripled in value since purchase. In some instances, the home value had multiplied 10 times. More important, the home could be sold as part of a move from the Northeast or Midwest to the Sunbelt states where housing, taxes, insurance, food and utility expenses were lower. The rules for doing well were simple: Stay as long as possible with one employer, buy as much house as possible and hang on. That world has all but disappeared. The number of corporate pension plans peaked in 1985 at 112,200 and hit 42,300 in 1998. At that rate of decline, they will be all but gone in a decade. Of those still in operation, many are being modified in ways that reduce future benefits. While scheduled Social Security benefits will replace the same portion of income as in the past, workers now have to pay more into the system. Worse, benefits were made taxable for some recipients in 1983, becoming de facto means-tested. Some analysts worry that benefits will have to be scaled down as much as 25 percent when the baby boomers retire. Finally, home ownership is no longer a lead pipe cinch. On the inflated East and West coasts, prices are beyond the reach of most workers. Throughout the country, shifts in regional fortune have created bonanzas for some, disasters for others. To create still more uncertainty, the cornucopia of government health care for the elderly now faces demands and pressures never imagined. Today, a woman approaching 60 who is healthy, has no history of heart disease or cancer in her family and has a healthy lifestyle, can expect to live to be nearly 100 years old, vastly increasing her need for income to pay both living expenses and health care bills. Only a century ago, we feared that our children would die in childhood, almost before memories. Today, we fear outliving our memory and even our identity. The rules for living have changed. Question: I am really puzzled by the confusing factors surrounding investing for income, particularly current interest rates, Treasury yields, bond fund performance, bank CD rates, inflation, etc. An inverted Treasury yield curve has historically come before a recession. Do you believe that is the situation at hand, or is this just another historical pattern being invalidated by the “new investment era”? R.M., Dallas Answer: The Treasury yield curve the curve made by connecting the yields on Treasury obligations from three months to 30 years isn’t the indicator that it used to be. One reason is that the Treasury has been buying back long-term issues. This has forced yields on long Treasuries lower. Another reason is the prospect of a long period of government surpluses that could result in enormous reductions in the amount of Treasury debt outstanding. Beyond the Treasury arena, yields are much higher. Recently, for instance, the yield to maturity on GNMA issues with an average life around 10 years was about 7.4 percent, a 160-basis-point premium over comparable maturity Treasury issues. Similarly, long-term tax-free municipal bonds have been providing yields that were 90 percent of comparable taxable Treasury yields. There is also a large premium to Treasury yields on guaranteed investment contracts (GICs) from insurance companies. Recently, the T. Rowe Price GIC Index showed yields of 6.6 percent for one-year contracts and 7.18 percent for five-year contracts. As a consequence, the Treasury yield curve probably isn’t a good tool for economic forecasting. What’s the alternative? That’s what everyone wants to know. Q: Although I was familiar with exchange traded funds (ETFs) previously, your recent description in a column caused me to think there are many similarities between ETFs and closed-end funds. If so, do you have any thoughts on why ETFs have been successful during their relatively short lives compared to closed-end funds? What is particularly interesting here is that most of the closed-end funds sell at a discount and still don’t seem too popular with investors. Or are the ETFs less popular than I think? K.W., Dallas A: If you check the most active issues on the Amex on any given day, most of them will be ETFs, usually led by the Nasdaq 100 unit. They are very popular because they can be traded through the day, margined, shorted and should operate with very low costs. I suspect that one of the reasons ETFs are so popular is that index funds have “opened the door” to the idea of unmanaged portfolios. In addition, the very mechanism of their creation means they should never sell at a premium or discount to the underlying asset value. Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265, or faxed to (214) 977-8776, or by e-mail to [email protected]. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.
