With the demand for gold and silver increasing heavily since the beginning of the global financial crisis, Slovenians now own more gold than the Slovenian central bank, Banka Slovenije, according to precious metal dealer Elementum.
Elementum quotes data from the World Gold Council which show that Banka Slovenije has about 3.2 tonnes of gold in its reserves. It also quotes Umicore, a leading world refiner of precious metals, which says that Slovenian investors had surpassed that amount in the last 18 months. Last year the majority of investors in gold opted for buying an ounce of gold (31.1 grams), which represented more than 40% of all gold bars sold and about 7% of the total value of gold purchased in 2008. The second most attractive option was buying a 250-gram bar, which represented about 20% of all sold bars, their value accounting for almost 30% of the total sales of gold last year. According to Umicore, investment in precious metals in Europe increased considerably in the second half of 2008, with the highest demend for of 1,000-gram and 500-gram bars.
This blog is dedicated to inform foreign workers who want to come to Slovenia to live and work.
20 Feb 2009
The Winter of Our Discontent
Ardent skiers might rejoice in it, but the snowy and unexpectedly cold winter has laid bare some of the inconsistencies in Slovenia’s energy policy. Things were brought to a head when the Russian energy giant Gazprom cut off the supplies of gas to the country at the beginning of January, citing an unresolved pricing dispute with Ukraine. Although the gas is flowing freely at the moment, the episode should give a jolt to Slovenian policy makers negotiating with Russian energy tsars.
The thought that a dispute over the price of gas between two faraway countries such as Russia and Ukraine should worry the average Slovene might have seemed far-fetched a decade ago when Russian influence in the ex-Soviet region was still relatively uncontested. However, as a number of the so-called colour revolutions have established market democracies and brought western-sponsored leaders to power on its borders, Russia has obviously decided that it is time for the former satellites to put their money where their mouth is, i.e. to start paying market prices for the gas they buy from Gazprom, Russia’s state-owned energy giant.
At the beginning of January, when Ukraine, a transit country for 80 percent of Russian gas exports to the European Union, started diverting some gas destined for European consumers to its own gas distribution system, nobody was surprised. That had happened in 2006 and again in 2007, with authoritarian Russia demanding too high a price for its gas in order to punish the country for its pro-Western leanings; Ukrainians are doing the only thing they can to keep their homes warm, fumed the commentators. This year, however, Russians called their neighbour’s bluff and cut off the gas to Eastern and Central Europe, putting a couple of countries in a tight spot. Righteous indignation gave way to fear.
Southern comfort
Although natural gas accounts for only around 14 percent of Slovenia’s energy needs, industry depends on it for a little more than a third of its final energy consumption. When Geoplin, the operator of the gas transmission network and the country’s biggest gas importer, announced that Gazprom had stopped supplying gas to Slovenia, industrial facilities were first to suffer reductions. There was no talk of cutting off the supply of gas to private households, but the gas reserves could have lasted only a few weeks. The lesson was clear: Slovenia depends on Russian natural gas; energy security should therefore be the top priority of the country’s energy officials.
Coincidentally, Alexei Miller, Gazprom’s boss, was in Slovenia just at the time when nervous government officials were assuring the public that the country had enough gas reserves to keep their homes warm and dry. Miller came to discuss the possibility of Gazprom’s planned South Stream pipeline crossing Slovenia on its way from Russia to Italy. The pipeline will start on the Russian shores of the Black Sea, cross underwater, then continue through Bulgaria, Serbia and Hungary and will reach Italy either through Austria or Slovenia, perhaps both.
By agreeing to establish a joint company with Gazprom to build the Slovenian section of the pipeline, Slovenia would arguably settle the gas issue once and for all. South Stream will bypass Ukraine, so abstruse pricing disputes far to the east would no longer be a concern of the Slovenes. Furthermore, the security of supply would be greatly enhanced by the country being one of the transit countries for gas destined for western European markets.
Fault lines within
It thus came as a surprise when Matej Lahovnik, the minister of the economy, appeared to be less than enthusiastic about the prospect of quickly concluding talks with Gazprom. He said that it had to be certain that Slovenia’s strategic interests are safeguarded and that the project would have to be checked for conformity with EU law before it could proceed. Miller did not succeed in persuading the new government to continue the negotiations from where the previous government had left them.
One may conjecture that this is just a clever negotiating tactic on the Slovenian side. Miller is known for his hard bargaining style, evidenced by the favourable terms obtained for Gazprom in joint ventures with national companies in two other transit countries, Bulgaria and Hungary. Perhaps Lahovnik wants to obtain better terms for Slovenian companies than the standard 50-50 joint venture and is holding out for a better offer from Gazprom. But since none of the negotiating parties wanted to comment on the talks, there is no clarity on this issue.
What is clear, however, is that Lahovnik’s way of negotiating with Gazprom provoked Slovenian president Danilo Türk to warn publicly that the country cannot afford to drag its feet on the issue of South Stream for much longer. “This pipeline will enhance Slovenia’s energy security,” read the statement issued by the office of the president.
The big game
Inadvertently, perhaps, the president may not have exposed only different views within the Slovenian politics on the negotiating tactics to be employed in talks with Gazprom, but also differences within the government itself. Well-informed sources say that Vlado Dimovski, whom Prime Minister Borut Pahor proposed preside over the government’s strategic energy council, is a staunch supporter of South Stream. But after Zares, Pahor’s junior coalition partner, demanded that Lahovnik chair the council in his ministerial office, Pahor backed down.
Dimovski was not present at talks with Miller. Observers say this may be a sign that Lahovnik has warmed up to the Nabucco option, an EU-sponsored pipeline that is supposed to bring gas from Central Asia to Western Europe via Turkey, circumventing Russia but following more or less the same route as South Stream after hitting the Balkans.
Slovenia could connect to the Nabucco pipeline that is planned to cross Hungary on its way to the Baumgarten gas hub in Austria, supplying several EU countries. Energy experts state that this would reduce the country’s dependency on Russia’s gas, while proceeding with the South Stream option would certainly increase it. To tap the huge LNG terminals on the Croatian island of Krk that are due to come on line after a few years would also be a step in the direction of an ideally diversified gas supply.
The energy business, however, deals with hard money rather than ideals. While you may not have noticed it, next winter is literally around the corner, global warming notwithstanding.
The thought that a dispute over the price of gas between two faraway countries such as Russia and Ukraine should worry the average Slovene might have seemed far-fetched a decade ago when Russian influence in the ex-Soviet region was still relatively uncontested. However, as a number of the so-called colour revolutions have established market democracies and brought western-sponsored leaders to power on its borders, Russia has obviously decided that it is time for the former satellites to put their money where their mouth is, i.e. to start paying market prices for the gas they buy from Gazprom, Russia’s state-owned energy giant.
At the beginning of January, when Ukraine, a transit country for 80 percent of Russian gas exports to the European Union, started diverting some gas destined for European consumers to its own gas distribution system, nobody was surprised. That had happened in 2006 and again in 2007, with authoritarian Russia demanding too high a price for its gas in order to punish the country for its pro-Western leanings; Ukrainians are doing the only thing they can to keep their homes warm, fumed the commentators. This year, however, Russians called their neighbour’s bluff and cut off the gas to Eastern and Central Europe, putting a couple of countries in a tight spot. Righteous indignation gave way to fear.
Southern comfort
Although natural gas accounts for only around 14 percent of Slovenia’s energy needs, industry depends on it for a little more than a third of its final energy consumption. When Geoplin, the operator of the gas transmission network and the country’s biggest gas importer, announced that Gazprom had stopped supplying gas to Slovenia, industrial facilities were first to suffer reductions. There was no talk of cutting off the supply of gas to private households, but the gas reserves could have lasted only a few weeks. The lesson was clear: Slovenia depends on Russian natural gas; energy security should therefore be the top priority of the country’s energy officials.
Coincidentally, Alexei Miller, Gazprom’s boss, was in Slovenia just at the time when nervous government officials were assuring the public that the country had enough gas reserves to keep their homes warm and dry. Miller came to discuss the possibility of Gazprom’s planned South Stream pipeline crossing Slovenia on its way from Russia to Italy. The pipeline will start on the Russian shores of the Black Sea, cross underwater, then continue through Bulgaria, Serbia and Hungary and will reach Italy either through Austria or Slovenia, perhaps both.
By agreeing to establish a joint company with Gazprom to build the Slovenian section of the pipeline, Slovenia would arguably settle the gas issue once and for all. South Stream will bypass Ukraine, so abstruse pricing disputes far to the east would no longer be a concern of the Slovenes. Furthermore, the security of supply would be greatly enhanced by the country being one of the transit countries for gas destined for western European markets.
Fault lines within
It thus came as a surprise when Matej Lahovnik, the minister of the economy, appeared to be less than enthusiastic about the prospect of quickly concluding talks with Gazprom. He said that it had to be certain that Slovenia’s strategic interests are safeguarded and that the project would have to be checked for conformity with EU law before it could proceed. Miller did not succeed in persuading the new government to continue the negotiations from where the previous government had left them.
One may conjecture that this is just a clever negotiating tactic on the Slovenian side. Miller is known for his hard bargaining style, evidenced by the favourable terms obtained for Gazprom in joint ventures with national companies in two other transit countries, Bulgaria and Hungary. Perhaps Lahovnik wants to obtain better terms for Slovenian companies than the standard 50-50 joint venture and is holding out for a better offer from Gazprom. But since none of the negotiating parties wanted to comment on the talks, there is no clarity on this issue.
What is clear, however, is that Lahovnik’s way of negotiating with Gazprom provoked Slovenian president Danilo Türk to warn publicly that the country cannot afford to drag its feet on the issue of South Stream for much longer. “This pipeline will enhance Slovenia’s energy security,” read the statement issued by the office of the president.
The big game
Inadvertently, perhaps, the president may not have exposed only different views within the Slovenian politics on the negotiating tactics to be employed in talks with Gazprom, but also differences within the government itself. Well-informed sources say that Vlado Dimovski, whom Prime Minister Borut Pahor proposed preside over the government’s strategic energy council, is a staunch supporter of South Stream. But after Zares, Pahor’s junior coalition partner, demanded that Lahovnik chair the council in his ministerial office, Pahor backed down.
Dimovski was not present at talks with Miller. Observers say this may be a sign that Lahovnik has warmed up to the Nabucco option, an EU-sponsored pipeline that is supposed to bring gas from Central Asia to Western Europe via Turkey, circumventing Russia but following more or less the same route as South Stream after hitting the Balkans.
Slovenia could connect to the Nabucco pipeline that is planned to cross Hungary on its way to the Baumgarten gas hub in Austria, supplying several EU countries. Energy experts state that this would reduce the country’s dependency on Russia’s gas, while proceeding with the South Stream option would certainly increase it. To tap the huge LNG terminals on the Croatian island of Krk that are due to come on line after a few years would also be a step in the direction of an ideally diversified gas supply.
The energy business, however, deals with hard money rather than ideals. While you may not have noticed it, next winter is literally around the corner, global warming notwithstanding.
Slovenia Bidding for EU Energy Agency Seat
Slovenia is vying to host the seat of the EU's new energy agency. Slovenian officials presented the candidacy for the seat of the Agency for the Cooperation of Energy Regulators at the session of EU energy ministers.
The Czech EU presidency urged other EU member states to put forward any possible candidacies for the ACER seat by mid-March. Apart from Slovenia a candidacy has so far been presented by Slovakia, in December 2008, while Hungary and Romania have announced their bids. Slovenia's bid was presented by Andreja Jerina, the state secretary at the Government Office for Development and European Affairs. Jerina said that Slovenia would be a very good host owing to its natural and economic circumstances, transport links and the fact it is a member of both the Schengen area and the euro zone. Its odds of winning the seat depend on how many candidacies will be fielded. "But Slovenia has very good reasons to justify its candidacy," Jerina said. Vying for the seat of this agency does not, however, mean that Slovenia is giving up any other candidacies, Jerina said, referring to the bid to host the supervisory authority of the Galileo sat-nav system. "Both our candidacies are strong and there is no exclusion involved," she said. The energy agency will be established after the endorsement of the third energy package for the liberalisation of gas and electricity market, which is expected to be passed this year.
The Czech EU presidency urged other EU member states to put forward any possible candidacies for the ACER seat by mid-March. Apart from Slovenia a candidacy has so far been presented by Slovakia, in December 2008, while Hungary and Romania have announced their bids. Slovenia's bid was presented by Andreja Jerina, the state secretary at the Government Office for Development and European Affairs. Jerina said that Slovenia would be a very good host owing to its natural and economic circumstances, transport links and the fact it is a member of both the Schengen area and the euro zone. Its odds of winning the seat depend on how many candidacies will be fielded. "But Slovenia has very good reasons to justify its candidacy," Jerina said. Vying for the seat of this agency does not, however, mean that Slovenia is giving up any other candidacies, Jerina said, referring to the bid to host the supervisory authority of the Galileo sat-nav system. "Both our candidacies are strong and there is no exclusion involved," she said. The energy agency will be established after the endorsement of the third energy package for the liberalisation of gas and electricity market, which is expected to be passed this year.
16 Feb 2009
Ljubljana Housing Market Slows Down in 2008
The growth of advertised prices of flats in Ljubljana fell to 3.4 percent in 2008, as the prices fell in the third and fourth quarters by 0.7 percent and 2.3 percent respectively, according to the real estate website www.slonep.net.
The main reasons are the reduced ability of potential buyers because of the high prices, the vast offer of new flats and worse borrowing terms.
Buyers started delaying the purchase when they saw the prices are going down, which in turn meant further decrease in demand.
Prices around Ljubljana rose by 10 percent and were also falling in the second half of the year.
The average growth of listed house prices in Slovenia varied between 4.9 percent at the coast and 34.8 percent in the Koroško region. The price of houses went up by an average of 10.1 percent in Ljubljana and 13.7 percent on its outskirts.
The price of building land increased in most of the regions - by 90.7 percent in Koroško, by 78.4 percent in Dolenjsko, 65.4 percent in Posavje, 34.8 percent in Ljubljana and 32.2 percent on its outskirts - while falling in the northern part of Primorsko and in Pomurje.
Offices in Ljubljana were 3.8 percent more expensive and finished the year at 1,733 euros per sq. metre, while the prices of commercial facilities fell by 3.3 percent and the price of bars and restaurants rose by 1.4 percent.
Apartment rents in Ljubljana also rose considerably, as they finished the year 11.8 percent higher with an 8 percent growth in the second half of the year alone.
The advertised rents grew the most for two-bedroom flats (18 percent), rooms (14 percent) and four-bedroom flats (13.5 percent). The growth was slowest for flats with more than four bedrooms (0.5 percent) and flatlets (1.5 percent).
The main reasons are the reduced ability of potential buyers because of the high prices, the vast offer of new flats and worse borrowing terms.
Buyers started delaying the purchase when they saw the prices are going down, which in turn meant further decrease in demand.
Prices around Ljubljana rose by 10 percent and were also falling in the second half of the year.
The average growth of listed house prices in Slovenia varied between 4.9 percent at the coast and 34.8 percent in the Koroško region. The price of houses went up by an average of 10.1 percent in Ljubljana and 13.7 percent on its outskirts.
The price of building land increased in most of the regions - by 90.7 percent in Koroško, by 78.4 percent in Dolenjsko, 65.4 percent in Posavje, 34.8 percent in Ljubljana and 32.2 percent on its outskirts - while falling in the northern part of Primorsko and in Pomurje.
Offices in Ljubljana were 3.8 percent more expensive and finished the year at 1,733 euros per sq. metre, while the prices of commercial facilities fell by 3.3 percent and the price of bars and restaurants rose by 1.4 percent.
Apartment rents in Ljubljana also rose considerably, as they finished the year 11.8 percent higher with an 8 percent growth in the second half of the year alone.
The advertised rents grew the most for two-bedroom flats (18 percent), rooms (14 percent) and four-bedroom flats (13.5 percent). The growth was slowest for flats with more than four bedrooms (0.5 percent) and flatlets (1.5 percent).
Gorenje Most Popular Among Foreigners
Gorenje, the Velenje-based home appliance manufacturer, is the leading Slovenian company in terms of foreign shareholding. The latest available data from the NLB bank show 17.59% of Gorenje shares are owned by foreigners.
Etol, the flavourings and essential oils manufacturer, follows with 15.33% foreign ownership and Mercator, Slovenia's biggest grocer, ranks third with 12.28%, followed by drug company Krka with 8.11% foreign shareholding. Compared to the year before, the share of foreign shareholders in Gorenje increased by 7.5 percentage points. Available information shows its biggest foreign shareholder is Home Products Europe (7.63%), followed by Raiffeisen Central Bank Austria (3.7%), EECF (2.92%) and Unicredit Bank Austria (0.77%). EECF and Erste Group, have increased their shares the most this year, while Raiffeisen Central Bank Austria and Hypo Alpe Adria Bank are the foreign owners that have sold the most of their shares. The share of foreign shareholders in Krka has changed little for the past year, the biggest being New World Fund (2.6%), Unicredit Bank Austria (0.97%), American Funds Insurance Series (0.52%), Raiffeisen Central Bank (0.26%) and Pictet&CIE Banquiers (0.26%). Pictet&CIE Banquiers, New World Fund, BGI Frontier Markets Fund (under Barclay's Bank) and the Swedish East Capital Balkan Fund have increased their shares the most, while the biggest foreign sellers of Krka were Unicredit Bank Austria, AXA World Funds, Dexia Equities and GP Morgan Funds. The share of foreign owners in Mercator dropped somewhat at the annual level. One of the biggest is Serbian holding Rodic, which acquired a 4.6% stake in the Slovenian retailer when it sold its retail division to Mercator in 2006. Nearly 48% of Mercator is now being offered for sale by Infond Holding and beverage group Pivovarna Lasko. Some information has it documents for the purchase of Mercator have been taken out by between 10 and 15 bidders, while only the Serbian Delta Holding has confirmed it has submitted a non-binding offer. A while ago, the Austrian Raishop Holding expressed interest in acquiring Infond Holding's 23% stake in the Slovenian grocer, but the deal failed. The Competition Protection Office initially declined to sanction the sale, but then the buyer backed out after the onset of the financial crisis. Following the four companies in terms of the share of foreign shareholders are Pivovarna Lasko (7.42%), NKMB bank (5.75%), reinsurer Sava Re (5.48%), insurer Zavarovalnica Triglav (4.61%), food and pasta maker Zito (3.85%) and telco Telekom Slovenije (3.42%).
Etol, the flavourings and essential oils manufacturer, follows with 15.33% foreign ownership and Mercator, Slovenia's biggest grocer, ranks third with 12.28%, followed by drug company Krka with 8.11% foreign shareholding. Compared to the year before, the share of foreign shareholders in Gorenje increased by 7.5 percentage points. Available information shows its biggest foreign shareholder is Home Products Europe (7.63%), followed by Raiffeisen Central Bank Austria (3.7%), EECF (2.92%) and Unicredit Bank Austria (0.77%). EECF and Erste Group, have increased their shares the most this year, while Raiffeisen Central Bank Austria and Hypo Alpe Adria Bank are the foreign owners that have sold the most of their shares. The share of foreign shareholders in Krka has changed little for the past year, the biggest being New World Fund (2.6%), Unicredit Bank Austria (0.97%), American Funds Insurance Series (0.52%), Raiffeisen Central Bank (0.26%) and Pictet&CIE Banquiers (0.26%). Pictet&CIE Banquiers, New World Fund, BGI Frontier Markets Fund (under Barclay's Bank) and the Swedish East Capital Balkan Fund have increased their shares the most, while the biggest foreign sellers of Krka were Unicredit Bank Austria, AXA World Funds, Dexia Equities and GP Morgan Funds. The share of foreign owners in Mercator dropped somewhat at the annual level. One of the biggest is Serbian holding Rodic, which acquired a 4.6% stake in the Slovenian retailer when it sold its retail division to Mercator in 2006. Nearly 48% of Mercator is now being offered for sale by Infond Holding and beverage group Pivovarna Lasko. Some information has it documents for the purchase of Mercator have been taken out by between 10 and 15 bidders, while only the Serbian Delta Holding has confirmed it has submitted a non-binding offer. A while ago, the Austrian Raishop Holding expressed interest in acquiring Infond Holding's 23% stake in the Slovenian grocer, but the deal failed. The Competition Protection Office initially declined to sanction the sale, but then the buyer backed out after the onset of the financial crisis. Following the four companies in terms of the share of foreign shareholders are Pivovarna Lasko (7.42%), NKMB bank (5.75%), reinsurer Sava Re (5.48%), insurer Zavarovalnica Triglav (4.61%), food and pasta maker Zito (3.85%) and telco Telekom Slovenije (3.42%).
USA: It's time to fix the 401(k)
Alicia Munnell is a Harvard-trained economist. She served as an assistant secretary of the Treasury and is regarded as one of America's foremost experts on 401(k)s. You'd think she'd be terrific at managing her own retirement, but even she has to fess up to some mistakes. "When my son got married, I took some money out of my plan to help," says Munnell, who heads Boston College's Center for Retirement Research (CRR). "And I ended up paying a 10% penalty and taxes."
In the jargon of the retirement business, that's called leakage. It's a common problem: About 60% of job switchers with a 401(k) plan cash it out.
That's just one of the many pitfalls. Lots of people start saving too late, save too little or make missteps with their portfolio. And all of us are vulnerable to risks that we can't control. Your employer might not offer a plan or might choose one with second-rate investments. Or you may hit a market storm at precisely the wrong moment: the year you stop working.
That last problem is especially obvious now. Over the past 12 months, a 64-year-old investor in an age-tailored "target date" mutual fund has lost 26%. Savers with high balances can recover from that. But many lost more, and the typical near-retiree with a 401(k) has less than $50,000 stashed away in it. That will spend down quickly, and once the money's gone, it doesn't matter if the market roars back.
A recent CRR study shows that a bear market retiree could easily end up with just half the income from a 401(k) as someone retiring during a bull market. "Any system that delivers such wild swings in retirement income is just not working," says Munnell.
She isn't the only one who's worried. A growing number of policy experts who study 401(k)s think they fall short. So why not rethink America's retirement system from the ground up? No, it won't be easy: We're in an economic crisis, and lobbyists for the financial services industry will fight like tigers for the status quo. But that doesn't make the task any less urgent. Some 78 million baby boomers are hurtling toward retirement. Their poverty, if it comes to that, will be a burden to their children and lead to calls for taxpayers to support them.
What would a better system look like? It would be universal and strike a more conservative balance of risk and return. Most of all, it would be designed for savers, not employers or money managers. Here are five principles for reform.
1. We need a plan for everyone
Our current retirement system hasn't broken - it was never really a working system to begin with. No law-makers designed the 401(k) to displace the traditional pension, although that's what ultimately happened. It is named for a tax loophole that pension consultants gradually built a plan around. Under the rules, the earnings you put into a 401(k) aren't taxed, and the account grows tax deferred until you cash out at retirement. It's not a cheap program: The tax advantage for 401(k) contributions will cost the Treasury $51 billion in 2009. Add in the break for IRAs, which are largely funded by 401(k) rollovers, and it's $63 billion.
If you are a typical reader of this magazine, that tax break has been extremely valuable for you. Whether it actually encourages you to save more is another matter. Since 401(k)s became more popular, some studies have shown, higher-income people seem to have shifted their assets from taxable to nontaxable accounts rather than saving more.
Lower- and middle-income households, on the other hand, don't benefit as much from the program. They are less likely to be covered by any plan or by one that offers a generous company match. Since they pay lower tax rates, they get less out of the tax deferral. In all, about 70% of the tax benefits for 401(k) savings goes to the top 20% of earners. "Given the way 401(k)s are structured, they are virtually designed to provide inadequate retirement income for the average worker," says University of California Berkeley political scientist Jacob Hacker. So how can the system pull more people in?
Enlisting employers
One obvious approach is to ensure that more people have access to a savings plan through their jobs. This one could be an easy bipartisan compromise. Retirement experts at the conservative Heritage Foundation and the liberal Brookings Institution have together proposed an "automatic IRA." Businesses with no retirement plan would have to put a portion of workers' paychecks into an IRA unless the employee opted out.
Pension experts Pamela Perun and Eugene Steuerle have proposed a simplified retirement plan similar to one in the U.K. Employers would be required to offer a retirement plan with a match of up to 3% of salary. As part of the bargain, the plan would lift some of the burdensome administrative rules of today's 401(k).
Getting a boost from Uncle Sam
A more ambitious approach would be a government savings match similar to what you get from your employer. If this sounds like a subsidy, it is - but then, so is the current tax break. The difference is that this one would take the form of a refundable credit. Unlike tax deferrals, such a credit can benefit even people in low brackets. Gene Sperling, a former Clinton administration official, has proposed a "universal 401(k)" in which low-income workers can get as much as a two-to-one match. Higher-income families may get a 30% match.
Economist Teresa Ghilarducci of the New School for Social Research goes further. To ensure that everyone saves from the start of their career to the end, she proposes a mandatory national savings account on top of Social Security. You'd kick in 2.5% a year and your employer another 2.5%. In one version, the tax credit would be a flat $600 a year for everybody.
Of course, the government can't just throw cash around (recent events notwithstanding). Paying for tax credits would likely mean trimming or eliminating the existing deferrals. Tough sell. No one is talking about touching existing 401(k) balances. But if you are a high earner able to contribute the max to your 401(k), you'd pay more taxes under Ghilarducci's plan. Before you throw out the idea altogether, though, consider this: You weren't always in your current tax bracket. A plan for moderate-income earners could have gotten you saving consistently from the first day of your first job. It could do the same for your kids.
2. Spread some of the risk - but not all of it
In any retirement system, your standard of living will depend to some extent on the state of the economy. Traditional pensions rely on a financially healthy employer. Even Social Security, as a pay-as-you-go system, depends on the productivity of current workers. But 401(k)s stand out for the way that they concentrate nearly all the economic risk on you alone.
With that risk comes a shot at high rewards. If you have an above-average income, it makes sense to have at least some of your retirement money in the market over your career. But many retirement experts think we need a third tier of savings in between Social Security and the 401(k). It would offer a better return than Social Security but less market risk than mutual funds and other investments. Just a portion of the money you now put into 401(k)s would go here.
Working out the details of this third-tier plan won't be simple. One approach would be to offer a straight-up guarantee. In Ghilarducci's plan, the mandatory savings would go into a single government fund invested in stocks and bonds. You would be guaranteed a payment based on a 3% annual return after inflation, possibly more if the market did so well that the managers decided they could safely distribute extra gains. "Historically, that's a very achievable rate of return," says Ghilarducci. Unfortunately, it is also a modest one - over long periods, stocks have generally beaten inflation by six percentage points or more.
Boston College's Munnell thinks the Dutch retirement system might be a better model. In their national pension fund, retirees get a payment based on their salary and years of service, similar to a company pension. But the amount can change in the event of a severe market crash or funding shortfall. "If returns are low, everyone takes a hit," says Munnell. "Retirees might not get the full cost-of-living adjustment, employers may have to put in more, and workers building up benefits will accrue less."
An American solution would be different in the details. Even so, the basic principle could apply: Spread risk among employers, retirees and current workers and you can smooth out the highs and lows to make some retirement income more predictable.
3. Help us make the money last
At the end of your career, a 401(k) will leave you (you hope) with a big pile of money. But stretching those dollars over two or more decades is as big a challenge as accumulating them was.
You face two uncertainties: how markets will perform and how long you will live. Spend too much and you might find yourself a hale and hearty 85-year-old with an empty bank account. One solution is to use at least part of your savings to buy a fixed-rate immediate annuity, which creates a pensionlike income for life. But almost no one does this with their 401(k) balance.
Why? Annuities can be complex - insurance salesmen like them that way - and the expenses are higher for retail investors than for institutions like pension funds. There's also a big psychological barrier: You give up hundreds of thousands of dollars in exchange for a lot of smaller checks. Yet there's evidence that older retirees are happier if they have some annuity income.
A third-tier savings program could provide some guaranteed income. But even without a whole new retirement plan, there are ways to make it easier for retirees to annuitize.
Right now most 401(k)s pay out in a lump sum as a default. It's just less trouble for employers that way. But simply by switching that default to an annuity - or a partial annuity - new retirees would get a signal that this is the smart move. This would also remove some of the hassle and encourage a more competitive annuity market. Experts at Brookings and Heritage recommend automatically converting a portion of a new retiree's 401(k) into a "trial" annuity for just two years. If retirees like getting the regular paychecks, they can convert to a lifetime annuity. "It's a way of letting investors take an annuity for a test drive," says Mark Iwry of Brookings.
4. Choke off high investment fees
Unfair as it sounds, 401(k) plans do not have to fully disclose how much you're being charged. Chances are, it's a lot. "A typical 401(k) plan may be charging participants 1.5% or more annually, when a more reasonable cost would be 0.5% to 1%," says Matthew Hutcheson, an independent pension fiduciary in Portland, Ore. Over 20 years, paying an extra 1% in expenses can reduce your nest egg by about 17%, assuming a 6.5% annual average return.
Low costs would be a key advantage of a public savings plan - in general, the larger the plan, the lower the expenses. In the meantime, though, we could at least set some sensible expense rules for the system we have. Congressman George Miller, head of the House Education and Labor committee, has introduced a bill mandating that plans offer at least one low-cost index fund. That's a great start.
5. How about a "retirement Fed"?
All of these proposals require some public oversight of your retirement investments. But when tax breaks are involved, that's inevitable - your current 401(k) plan is already highly regulated. The task is to make the regulation more effective. To see how the current rules fall short, consider the 2006 Pension Protection Act. It encourages employers to sign people up for 401(k)s automatically and to use target-date retirement funds and other diversified stock-and-bond portfolios as the default investments. Money markets and stable-value funds were mostly ruled out as automatic options.
In other words, the government has already started opining on what is and isn't an appropriate retirement investment. The bill has probably helped steer more savers in the right direction. Even so, the investment guidelines were left quite loose, and different fund companies offered wildly different asset mixes. When the market collapsed last year, investors who happened to be in plans that had nudged them into stock-heavy allocations suffered steep losses.
These are tricky issues. We need a visible public forum to thrash them out, and we ought to be drawing on the advice of the nation's top retirement and investing minds.
So why not create a quasi-independent Federal Retirement Security Board? The members of this "Retirement Fed" should represent a range of backgrounds and points of view - academics, small business owners, workers and money managers. The board's first task would be to set better rules of the road for those default plans and work on standards for expenses. But it could also develop proposals for that crucial third-tier savings plan. Getting retirement right is essential to our nation's economic health. Let's give it the attention it deserves.
In the jargon of the retirement business, that's called leakage. It's a common problem: About 60% of job switchers with a 401(k) plan cash it out.
That's just one of the many pitfalls. Lots of people start saving too late, save too little or make missteps with their portfolio. And all of us are vulnerable to risks that we can't control. Your employer might not offer a plan or might choose one with second-rate investments. Or you may hit a market storm at precisely the wrong moment: the year you stop working.
That last problem is especially obvious now. Over the past 12 months, a 64-year-old investor in an age-tailored "target date" mutual fund has lost 26%. Savers with high balances can recover from that. But many lost more, and the typical near-retiree with a 401(k) has less than $50,000 stashed away in it. That will spend down quickly, and once the money's gone, it doesn't matter if the market roars back.
A recent CRR study shows that a bear market retiree could easily end up with just half the income from a 401(k) as someone retiring during a bull market. "Any system that delivers such wild swings in retirement income is just not working," says Munnell.
She isn't the only one who's worried. A growing number of policy experts who study 401(k)s think they fall short. So why not rethink America's retirement system from the ground up? No, it won't be easy: We're in an economic crisis, and lobbyists for the financial services industry will fight like tigers for the status quo. But that doesn't make the task any less urgent. Some 78 million baby boomers are hurtling toward retirement. Their poverty, if it comes to that, will be a burden to their children and lead to calls for taxpayers to support them.
What would a better system look like? It would be universal and strike a more conservative balance of risk and return. Most of all, it would be designed for savers, not employers or money managers. Here are five principles for reform.
1. We need a plan for everyone
Our current retirement system hasn't broken - it was never really a working system to begin with. No law-makers designed the 401(k) to displace the traditional pension, although that's what ultimately happened. It is named for a tax loophole that pension consultants gradually built a plan around. Under the rules, the earnings you put into a 401(k) aren't taxed, and the account grows tax deferred until you cash out at retirement. It's not a cheap program: The tax advantage for 401(k) contributions will cost the Treasury $51 billion in 2009. Add in the break for IRAs, which are largely funded by 401(k) rollovers, and it's $63 billion.
If you are a typical reader of this magazine, that tax break has been extremely valuable for you. Whether it actually encourages you to save more is another matter. Since 401(k)s became more popular, some studies have shown, higher-income people seem to have shifted their assets from taxable to nontaxable accounts rather than saving more.
Lower- and middle-income households, on the other hand, don't benefit as much from the program. They are less likely to be covered by any plan or by one that offers a generous company match. Since they pay lower tax rates, they get less out of the tax deferral. In all, about 70% of the tax benefits for 401(k) savings goes to the top 20% of earners. "Given the way 401(k)s are structured, they are virtually designed to provide inadequate retirement income for the average worker," says University of California Berkeley political scientist Jacob Hacker. So how can the system pull more people in?
Enlisting employers
One obvious approach is to ensure that more people have access to a savings plan through their jobs. This one could be an easy bipartisan compromise. Retirement experts at the conservative Heritage Foundation and the liberal Brookings Institution have together proposed an "automatic IRA." Businesses with no retirement plan would have to put a portion of workers' paychecks into an IRA unless the employee opted out.
Pension experts Pamela Perun and Eugene Steuerle have proposed a simplified retirement plan similar to one in the U.K. Employers would be required to offer a retirement plan with a match of up to 3% of salary. As part of the bargain, the plan would lift some of the burdensome administrative rules of today's 401(k).
Getting a boost from Uncle Sam
A more ambitious approach would be a government savings match similar to what you get from your employer. If this sounds like a subsidy, it is - but then, so is the current tax break. The difference is that this one would take the form of a refundable credit. Unlike tax deferrals, such a credit can benefit even people in low brackets. Gene Sperling, a former Clinton administration official, has proposed a "universal 401(k)" in which low-income workers can get as much as a two-to-one match. Higher-income families may get a 30% match.
Economist Teresa Ghilarducci of the New School for Social Research goes further. To ensure that everyone saves from the start of their career to the end, she proposes a mandatory national savings account on top of Social Security. You'd kick in 2.5% a year and your employer another 2.5%. In one version, the tax credit would be a flat $600 a year for everybody.
Of course, the government can't just throw cash around (recent events notwithstanding). Paying for tax credits would likely mean trimming or eliminating the existing deferrals. Tough sell. No one is talking about touching existing 401(k) balances. But if you are a high earner able to contribute the max to your 401(k), you'd pay more taxes under Ghilarducci's plan. Before you throw out the idea altogether, though, consider this: You weren't always in your current tax bracket. A plan for moderate-income earners could have gotten you saving consistently from the first day of your first job. It could do the same for your kids.
2. Spread some of the risk - but not all of it
In any retirement system, your standard of living will depend to some extent on the state of the economy. Traditional pensions rely on a financially healthy employer. Even Social Security, as a pay-as-you-go system, depends on the productivity of current workers. But 401(k)s stand out for the way that they concentrate nearly all the economic risk on you alone.
With that risk comes a shot at high rewards. If you have an above-average income, it makes sense to have at least some of your retirement money in the market over your career. But many retirement experts think we need a third tier of savings in between Social Security and the 401(k). It would offer a better return than Social Security but less market risk than mutual funds and other investments. Just a portion of the money you now put into 401(k)s would go here.
Working out the details of this third-tier plan won't be simple. One approach would be to offer a straight-up guarantee. In Ghilarducci's plan, the mandatory savings would go into a single government fund invested in stocks and bonds. You would be guaranteed a payment based on a 3% annual return after inflation, possibly more if the market did so well that the managers decided they could safely distribute extra gains. "Historically, that's a very achievable rate of return," says Ghilarducci. Unfortunately, it is also a modest one - over long periods, stocks have generally beaten inflation by six percentage points or more.
Boston College's Munnell thinks the Dutch retirement system might be a better model. In their national pension fund, retirees get a payment based on their salary and years of service, similar to a company pension. But the amount can change in the event of a severe market crash or funding shortfall. "If returns are low, everyone takes a hit," says Munnell. "Retirees might not get the full cost-of-living adjustment, employers may have to put in more, and workers building up benefits will accrue less."
An American solution would be different in the details. Even so, the basic principle could apply: Spread risk among employers, retirees and current workers and you can smooth out the highs and lows to make some retirement income more predictable.
3. Help us make the money last
At the end of your career, a 401(k) will leave you (you hope) with a big pile of money. But stretching those dollars over two or more decades is as big a challenge as accumulating them was.
You face two uncertainties: how markets will perform and how long you will live. Spend too much and you might find yourself a hale and hearty 85-year-old with an empty bank account. One solution is to use at least part of your savings to buy a fixed-rate immediate annuity, which creates a pensionlike income for life. But almost no one does this with their 401(k) balance.
Why? Annuities can be complex - insurance salesmen like them that way - and the expenses are higher for retail investors than for institutions like pension funds. There's also a big psychological barrier: You give up hundreds of thousands of dollars in exchange for a lot of smaller checks. Yet there's evidence that older retirees are happier if they have some annuity income.
A third-tier savings program could provide some guaranteed income. But even without a whole new retirement plan, there are ways to make it easier for retirees to annuitize.
Right now most 401(k)s pay out in a lump sum as a default. It's just less trouble for employers that way. But simply by switching that default to an annuity - or a partial annuity - new retirees would get a signal that this is the smart move. This would also remove some of the hassle and encourage a more competitive annuity market. Experts at Brookings and Heritage recommend automatically converting a portion of a new retiree's 401(k) into a "trial" annuity for just two years. If retirees like getting the regular paychecks, they can convert to a lifetime annuity. "It's a way of letting investors take an annuity for a test drive," says Mark Iwry of Brookings.
4. Choke off high investment fees
Unfair as it sounds, 401(k) plans do not have to fully disclose how much you're being charged. Chances are, it's a lot. "A typical 401(k) plan may be charging participants 1.5% or more annually, when a more reasonable cost would be 0.5% to 1%," says Matthew Hutcheson, an independent pension fiduciary in Portland, Ore. Over 20 years, paying an extra 1% in expenses can reduce your nest egg by about 17%, assuming a 6.5% annual average return.
Low costs would be a key advantage of a public savings plan - in general, the larger the plan, the lower the expenses. In the meantime, though, we could at least set some sensible expense rules for the system we have. Congressman George Miller, head of the House Education and Labor committee, has introduced a bill mandating that plans offer at least one low-cost index fund. That's a great start.
5. How about a "retirement Fed"?
All of these proposals require some public oversight of your retirement investments. But when tax breaks are involved, that's inevitable - your current 401(k) plan is already highly regulated. The task is to make the regulation more effective. To see how the current rules fall short, consider the 2006 Pension Protection Act. It encourages employers to sign people up for 401(k)s automatically and to use target-date retirement funds and other diversified stock-and-bond portfolios as the default investments. Money markets and stable-value funds were mostly ruled out as automatic options.
In other words, the government has already started opining on what is and isn't an appropriate retirement investment. The bill has probably helped steer more savers in the right direction. Even so, the investment guidelines were left quite loose, and different fund companies offered wildly different asset mixes. When the market collapsed last year, investors who happened to be in plans that had nudged them into stock-heavy allocations suffered steep losses.
These are tricky issues. We need a visible public forum to thrash them out, and we ought to be drawing on the advice of the nation's top retirement and investing minds.
So why not create a quasi-independent Federal Retirement Security Board? The members of this "Retirement Fed" should represent a range of backgrounds and points of view - academics, small business owners, workers and money managers. The board's first task would be to set better rules of the road for those default plans and work on standards for expenses. But it could also develop proposals for that crucial third-tier savings plan. Getting retirement right is essential to our nation's economic health. Let's give it the attention it deserves.
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