Market Innovations: A Boon to Older Populations
By MICHAEL HODIN,
Posted: March 04, 2011
In Harvard Business Review’s March edition, Dominic Barton’s article “Capitalism for the Long Term” argues that the most “consequential” outcome of the recent recession “is the challenge to capitalism itself.” Barton says that “the crisis and the surge in public antagonism have exacerbated the friction between business and society.” Yet with public budget fights erupting over entitlements, which are themselves a function of the reality of aging populations, most innovative solutions are likely to come from the private sector and through market capitalism.
Barton’s article, while insightful, misses an important point: In the new economy, Americans have many fears regarding financial security during retirement. And the “friction” between business and society may well soften as it becomes more doubtful whether government canprovide long term security.
With public retirement almost guaranteed to fall short, even while the aging population dramatically increases the demand, is there a case to be made for new faith in the private sector to help secure our retirement? The recent news from Aegon confirms that one business is already leading the way, and that market capitalism might just be working: “As a result of the financial crisis in 2009, one company increased the pension contribution it was paying into its pension fund to protect employees’ pensions ... [The goal was] to protect the pension fund from the risk of further reduction in funding [and] ensure growth as times got better.”
So how, with one move, did they keep both parties happy? They created new instruments called swaptions, which offer “a pension fund the option of entering into an interest rate swap.” This protects funds against decreased interest rates, but also gives pensions growth potential when interest rates increase.
Dominic Barton’s article says that many Americans currently feel “understandable anger” for the downturn in jobs, the upturn in the deficit, and a host of other economic and fiscal issues right now, including the heated budget battles in places as farflung as Wisconsin and Greece. Anger or not, though, in an era of aging populations, innovative private sector solutions will be especially welcome.
Michael W. Hodin, Ph.D., is managing director, the High Lantern Group, and an adjunct senior fellow at the Council on Foreign Relations.
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