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Journalist Megan McArdle published an article in January 2017 titled The 401(k) Problem We Refuse to Solve. Link: https://www.bloomberg.com/view/articles/2017-01-03/the-401-k-problem-we-refuse-to-solve If the link happens to be broken, you can find it after this article.
Takeaway ideas from McArdle’s text:
- The major problem with all three pillars of a retirement system is the underfunding.
- She proposes a flat 10-15% so-called surcharge on the workers’ wage income, and divert the money into the ”system” for future use.
What is this so-called ”surcharge”? If go by the dictionary a surcharge is to be considered additional sum added to the usual cost or amount paid (www.tfd.com). McArdle’s proposal is nothing less than a flat mandatory savings rate imposed on top of the usual tax obligations.
Generally speaking a retirement system is comprised of there main pillars:
- Pillar 1 are the state-funded streams such as Social Security and Medicare
- Pillar 2 are employer-sponsored plans such as 401ks
- Pillar 3 are private personal savings that are used for retirement
McArdle’s proposal is fundamentally NOT feasible for the following reasons:
- Low income earners have little disposable income left to be saved. Imposing a savings surchage forces them closer to poverty. According to economist Robert Reich:
”Beginning in the late 1970s, the real median household income stagnated. The vast American middle class employed several techniques to maintain its purchasing power notwithstanding. The first was for mothers to move into paid work; the second, for everyone to work longer hours; the third, to use rising home values to extract money through home equity loans or refinancing. By late 2007, debt reached 135 percent of disposable income.” (Robert Reich, Saving Capitalism) With little or negative income left, a vast majority of workers have no ability to save 10-15%, regardless if it’s imposed or not.
- The proposal superficially addresses only the symptom for the underfunding of the three pillars. It only tries to answer the question: how do we put more money into the pillars? The real question that needs to be answered is: WHY are the pillars underfunded? Why is the system leaking? With all the new wealth that has been created, why is the retirement system so severely underfunded? The author has the wrong question in mind.
- The proposal is an attempt to control the disposable income of the population, to control spending behavior, to control consumption behavior. All these limit the economic freedom of workers. Surely, it is vital to have savings for retirement, and to manage consumerism, but the right method is not to force people to save, especially people who cannot afford it.
- The proposal does not make any connection between savings and capital. There cannot be any net savings when a worker has no net capital that generates positive returns. If average household debt is significantly higher than average income, 10-15% savings may not be enough to cover the compounded interest on debts. Disposable income has to allow not only for an increase of the household net capital, but also has to account for the standard of living. A 10-15% mandatory savings rate may actually decrease the standard of living.
- The author proposes a failed philosophy of savings, that is you have to save no matter what. This philosophy was proven wrong by the past 25 years that have shown decreased household incomes, decreased social mobility, increased income and wealth inequality. People cannot save when they have mounting amounts of debts, little to zero disposable income. A more viable philosophy of savings would be to increase wages, increase labor security, decrease income inequality, allow people to have more disposable income, allow them to save voluntarily and control consumption by regulating production rather than regulating savings.
Demographic and economic trends that are contributing to the underfunding of the retirement system
The surge of neoliberal Reaganomics that followed the fall of the Bretton Woods agreement (on August 15, 1971) has started an age in American economy where income and wealth inequality have reached historical peaks. Within this context, the demographic and economic trends that are contributing to the underfunding of the retirement system are, but are not limited to:
- Baby boomers approaching retirement.
They comprise of 75+ million Americans, approx. 23% of US population. This is the largest segment of the population. Richard Heinberg writes in The End of Growth:
“Few baby boomers have substantial savings; many had hoped to fund their golden years with house equity — and to realize that, they must sell. This will add more houses to an already glutted market, driving prices down even further.”
When boomers will exit labor market, they will put even greater pressure on the contribution mechanisms of the pillars, driving the underfunding to lower layers. Boomers will also drive down consumption, and may have a sizeable impact on the GDP.
- Massive increase of productivity coupled with the concentration of the new wealth at the top 1%, and 0.01%.
Below there is a chart that follows the increases of productivity compared to increased in wages from 1948 onward.
Source: Economic Policy Institute analysis of unpublished total economy productivity data from Bureau of Labor Statistics (BLS) Labor Productivity and Costs program, BLS Current Employment Statistics, and Bureau of Economic Analysis National Income and Product Accounts. This chart originally appeared at go.epi.org/2013-productivity-wages. Quoted in Robert Reich, Saving Capitalism.
Lo and behold, when Reaganomics kicks in after Bretton Woods is buried, productivity goes through the roof and wages modestly go up. The enormous gap translates in staggering amounts of new wealth created by the economy that did not “trickle-down” to the general population. The wealth created billionaires and moved overseas in fiscal paradises, but did not go to retirement pillars or wealth for the many. This institutionalized Great American Theft of the 20th century have left people with largely no retirement security.
- The financialization of the American economy.
The 1970s were the beginning of a frenzy in the financial industry to create complex products through securitization. Since the dollar became fiat money, enormous amounts of currency and financial products were created to stimulate nominal growth. Deregulation from 1970s through 2000s and sheer greed from the Wall Street banks and their acolytes have created trillions of dollars in ABS (asset-backed securities) that were not actually backed by any real assets, which lead to the crash of 2008. Billions of dollars of 401k accounts have vanished, leaving millions without their life-time savings.
The US is the only advanced economy that does not guarantee some version of universal health care. In the 21th century, health care in the US continues to be viewed as a business that must followed the precepts of the market economy. This deeply flawed philosophy is costing the lives of millions of Americans and keeps millions more at poverty levels. The main reason for personal bankruptcy in the US are health care costs. Not only that health care is not considered a natural fundamental human right, but even Obamacare fell short of creating a universal health care system, that according to many economists is cheaper, is more financially sustainable, is more socially sustainable, prevents corporate abuses from HMOs, Big Pharma and lobbyists. The high health care costs have a direct impact on the retirement pillars, since they eat away heavily from savings that are supposed to sustain the retirement years.
As with health care, education in the US is mostly considered a business. Education is no longer viewed as the foundation for raising the minds of future generations. Both public and private schools have the mandate to be financially viable, not to create knowledge. Students start life after graduation heavily indebted, and their disposable income is shrunk by the student debt, leaving them little opportunities to save for retirement.
- Enormous amounts of public, private and personal debt.
US Household Debt. Financial obligations ratio and total outstanding nominal debt of US households. A household’s financial obligations ratio (FOR) is the ratio of its financial obligations (mortgage, consumer debt, automobile lease payments, rental payments on tenant-occupied property, homeowner’s insurance, and property tax payments) to its disposable income. Just before the financial crisis, households were spending almost 19 percent of their disposable income on servicing their debt. Total outstanding household debt also peaked in 2008 just before the financial crisis at almost $14 trillion. To put this amount in perspective, the entire US economy was worth $14.3 trillion that same year. Source: The Federal Reserve, quoted in Richard Heinberg The End of Growth.
“The expansion of expenditures like 401(k) retirement plans and mortgage interest deductibility has led to a decrease in effective rates at the top as more and more wealthy families take advantage of various tax breaks. According to an analysis by the Congressional Budget Office, more than half of the $900 billion paid in individual income tax expenditures and 80 percent of the tax deductions in 2013 accrued to households in the top 20 percent, with 17 percent accruing to the top 1 percent, while those in the middle income quintile received just 13 percent and those in the lowest 20 percent of income received just 8 percent. At the same time, transfer payments, the direct and in-kind payments that the government makes to individuals, receded. According to the CBO, in 1979, households in the bottom quintile received more than 50 percent of transfer payments. In 2007, similar households received about 35 percent of transfers. (Joseph Stiglitz, Rewriting the Rules of the American Economy)
And more from Richard Heinberg, The End of Growth:
“These figures and many more other sources show how debt has eroded the functionality of the US economy. While credit and debt are natural tools of a market economy, the staggering amounts that have accumulated have diminished the PPP of the general population. Millennials can no longer hope, like their parents, to start in life from a zero-proposition (no debt), can no longer hope to buy a house, to form a family, under the same encouraging auspices.”
- The 2008 recession, the housing bubble, the depreciation of personal assets
“With the crash in the US real estate market starting in 2007, household net worth also crashed (falling by a total of $17.5 trillion or 25.5 percent from 2007 to 2009 — equivalent to the loss of one year of GDP); and as unemployment rose from 4.6 percent in 2007 to almost ten percent (as officially measured) in 2010, average household income declined.“ (Richard Heinberg, The End of Growth.)
There is little hope for retirement planning for many who lost their homes, savings and employment mobility after the 2008 crisis. People are working longer hours for lower wages, pay equity for women has not been accomplished, paid sick and family leave is not mandated by law and is not universal. All these have increased the pressure on retirement planning.
Potential adult support ratio
McArdle writes: “The more workers there are relative to retirees, the smaller the fraction of their income each worker has to give up to support each retiree, and the easier it will be to get them to do so”. This is called the potential adult support ratio.
Would an increasing or decreasing trend in this ratio provide better support for a retirement system? Why?
To answer these questions we need to consider the following:
- “Personal retirement plans are sold as a means of empowering the individual investor to get in on the game, but in practice they more frequently exploit a person’s ignorance and lack of negotiating power. For a middle-class worker’s 401(k) to perform well enough to retire on, he must not only invest like a pro but also never get seriously ill, never get divorced, and never get laid off. In other words, it doesn’t work in real life.” (Douglas Rushkoff, Throwing Rocks at the Google Bus – How Growth Became the Enemy of Prosperity) People do not have the knowledge to manage their retirement investments.
- the demographic trends – population growth may soon reach a plateau of unsustainable level for the resources of the planet
Of course, raising the ratio indicates that a total population has greater number of potential workers to support the nonworking population. In theory this looks all nice. The big problem, however, is that climate change, raising cost of resources, financial instability, risk of global conflicts, put under severe scrutiny the very concept of the adult support ratio. Yes, we need a sustainable replacement fertility rate, or the human species goes extinct. On the other hand, we have reached the limits of neoliberal growth, we need a completely new mindset of economic thinking, that also considers the emergences of AI and robotics. For example: there are 3 million truckers in the US. That’s a sizeable % of the workforce. Specialists estimate that in 10-20 years trucks will be self-driven. There will not be 3 millions new jobs to replace those lost, and 3 million new young workers will not solve the problem, they will create even more problems.
Economic growth and productivity
Thomas Piketty writes in Capital in the 21st Century:
“According to official forecasts, progress toward the demographic transition at the global level should now accelerate, leading to eventual stabilization of the planet’s population. According to a UN forecast, the demographic growth rate should fall to 0.4 percent by the 2030s and settle around 0.1 percent in the 2070s. If this forecast is correct, the world will return to the very low-growth regime of the years before 1700. The global demographic growth rate would then have followed a gigantic bell curve in the period 1700–2100, with a spectacular peak of close to 2 percent in the period 1950–1990.” See figure below.
Positive population growth is necessary for:
- The survival of the species
- The potential exploration of the cosmos
- Giving meaning to evolution by natural selection
Population growth alone won’t improve retirement outcomes:
- We have reached the limits of economic growth in the neoliberal model
- We are approaching a zero-marginal cost society (see Jeremy Rifkin’s The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism)
- The emergence of AI and automation will drastically reduce the amount of available jobs
- More people will put more pressure on the planet’s limited resources
Education for economic growth and productivity?
Education starts in preschool. New generations must learn that the neoliberal model is over. They must be taught to prepare for an after-growth society, when values will emerge not from consumption and production, but from the creating knowledge and maintaining an efficient balance with the environment. The concept of growth must be replaced with the concept of prosperity. Productivity will gradually be externalized to automation and Artificial Intelligence. The new economic models must consider a shift from the obsolete neoliberal model and shift to an economy of prosperity with zero-marginal cost, with virtually unlimited productivity.
Moreover, for baby boomers, Generation X, Y (millenials) and even Z (born 1995-2012), financialized retirement is still a harsh reality. Financial education must be promoted widely, cheaply and with persistence. Education ought to show the path to prosperity by finding the right balance between consumption, savings and leisure. Finding the right spot is the key to saving capitalism and moving on to a new society.
Savings, investments, and productivity
McArdle writes: “Unfortunately, productivity isn’t growing rapidly, and we didn’t have a lot of kids. That leaves plowing a great deal of money into savings and investment, in the hopes that productivity will start to grow again.”
More money going into savings and investments will NOT spur productivity. Let’s qualify and put this into context. Jeremy Rifkin, The Zero Marginal Cost Society:
“Until very recently, economists were content to measure productivity by two factors: machine capital and labor performance. But when Robert Solow—who won the Nobel Prize in economics in 1987 for his growth theory—tracked the Industrial Age, he found that machine capital and labor performance only accounted for approximately 14 percent of all of the economic growth, raising the question of what was responsible for the other 86 percent. This mystery led economist Moses Abramovitz, former president of the American Economic Association, to admit what other economists were afraid to acknowledge—that the other 86 percent is a “measure of our ignorance.” Over the past 25 years, a number of analysts, including physicist Reiner Kümmel of the University of Würzburg, Germany, and economist Robert Ayres at INSEAD business school in Fontainebleau, France, have gone back and retraced the economic growth of the industrial period using a three-factor analysis of machine capital, labor performance, and thermodynamic efficiency of energy use. They found that it is “the increasing thermodynamic efficiency with which energy and raw materials are converted into useful work” that accounts for most of the rest of the gains in productivity and growth in industrial economies. In other words, “energy” is the missing factor.”
The neoclassical/neoliberal model has taught that productivity means roughly to produce the same amount of goods with less capital (including labor) or to produce more goods while capital remains constant. Rifkin and many other economists have pointed out that we are on the verge of exponential increases in non-labour productivity through the emergence of new smart technologies. We are soon going to reach the limit of the human productivity. While automation, software, and artificial intelligence will take over.
In this context, what does it mean to save more and invest more? What would we do with the savings when we will be unemployed and replace by an algorithm that does the work of 100 people? What would it mean to invest in technologies? Where does this money come from, if profits will go down because there will be nobody left to buy those products, because people will not afford to spend anything? These questions are only rhetorical vehicles to properly narrow down the heart of the matter. While the current neoliberal status quo continues, trudging its feet in debt and unemployment, savings will only serve as a temporary fix. Investments will push productivity further with unemployment side-effects. While it is true that some new technologies will create jobs, these new jobs will not offset the jobs displaced. We live in a world where tech companies worth tens of billions are create in garages and end up employing hundreds, perhaps a few thousands workers. These are the new realities. We need to completely redefine productivity.
What can government do to spur productivity?
Government must make sure innovation continues unimpeded, while making sure the social costs of innovation are well accounted for. Innovation has no social benefit if it displaces millions of jobs and lets millions of people scrambling for new opportunities after they have been laid off. Who can learn computer programming in their mid 50s, after having worked for 20 years in a car manufacturing company? It’s unrealistic. Not everyone can jump professions so easily just because market economy’s dictum is “adapt or die”.
Concrete policies that might spur productivity as we currently understand it, but are not limited to the following:
- Limit the maximum working week at 40 hours or less, with target to drop to 30 hours
- Overtime must be paid at least 1.5x and must have a maximum cap (say 50-60 hours/week)
- Ban employer’s interference in the off-duty personal time of the employee (France has passed laws to ban employers to email employees after-hours)
- Establish pay equity for women, African-Americans, Latinos and all social categories
- Establish paid maternity leave, paid sick leave (in some European countries maternity leave is at least 12 paid months. 12 months! In Romania is 24 months!)
- Establish federal paid vacation time of at least 3 weeks per year (this is the EU average, in some countries it’s 5 weeks)
- Close loopholes of non-traditional employment (gig economy): contracts, part-time, internships, in such a way that these workers are not excluded from all the rules above.
- Ban unpaid internships
- Increase minimum wage to at least $15/hour if not more to match the increases in productivity since the 1970s.
What can employers do to spur productivity?
As we understand productivity, see my definition above, employers could take the following actions, but not limited to these:
- Comply with all government initiatives indicated above
- Institute family assistance programs, such as daycare near places of employment
- Invest time in the training of employees in new technologies
- Invest in the wellbeing and mental health of the employees
- Seriously consider feedback from the employees in regards to the workplace environment, corporate culture, power relations at work
- Conduct informal interviews (outsourced and confidential) to better understand workplace satisfaction, what motivates employees
- Establish transparent work relations around the internal definition of productivity
- Measure productivity not in financial terms, but in terms of employee satisfaction and in terms or general prosperity of the employees and of the customers served
- Prepare for the post-growth society, and the economics of prosperity
Transforming the Retirement Security
Economic cycles are getting shorter and shorter. The US economy is drowning in unprecedented amounts of both public and private debt, while at the same time, major corporations have stashed trillions in overseas tax shelters. The planet is slowly but surely running out of resources. The population is growing close to unsustainable ecological levels. Income and wealth inequality is at historical highest and growing. The GINI index of the US is also growing. The gains in productivity since in the 1970s have not been met with parallel gains in income. The new wealth has gone almost in its entirety to the top 1% and 0.01%. This Great American Theft also has a few more key points:
- The day the market crashed in 2008, Wall Street took $18 Billion (!) in bonuses
(The Retirement Gamble – documentary written by Marcela Gaviria and Martin Smith – aired on April 23, 2013 on Frontline, PBS: http://www.pbs.org/wgbh/frontline/film/retirement-gamble/ )
- Over a lifetime, 401k fees can cost a median-income two-earner family nearly $155,000 and consume nearly one-third of their investment returns. (Robert Hiltonsmith, Source: http://www.demos.org/publication/retirement-savings-drain-hidden-excessive-costs-401ks
- Expensive active managed mutual funds have failed to outperform index funds, while the majority of 401k were invested in AMMs. The fund managers got their fees regardless of performance, while the investors (the public) lost big chunks of their retirement savings
- 80% of financial advisors are NOT fiduciaries, meaning they look after themselves not after their investors
Professor Guy Standing describes the situation in The Precariat – The New Dangerous Class:
By 2009, only a fifth of US employees had company-based pensions. The main reason was that American firms were trying to cut costs to adjust to the globalization crisis. In 2009, US employers still offering health insurance were paying on average US$6,700 per employee a year, twice as much as in 2001. One response has been to offer core employees ‘high-deductible health care plans’, where they must pay the first tranche of medical costs up to a specified amount. Ford dropped its ‘no deductible’ plan in 2008, requiring employees and family members to pay the first US$400 before insurance compensation started and to pay 20 per cent of most medical bills. This was dismantling part of their income. […]
Ford claimed it switched to self-managed retirement accounts to give workers portability, claiming that younger workers ‘don’t think of a career with one company any more’. In reality, the firm was cutting labour costs and transferring the risks and costs to workers. Their lives were being made more precarious.”
And countless many more examples.
The new social class that has emerged in the US and globally, is the precariat. It consists of the structurally unemployed, victims of the 2008 crisis, low-paid workers in precarious jobs, minimum wage workers, gig workers, indebted millenials, disabled adults, educated adults with incompatible skills for the labor market, overworked workers, undocumented immigrants, underprivileged classes (mostly African-Americans and Latinos).
To transform the US retirement system to meet all these challenges requires an enormous political will, an historical engagement of the population in grassroots movements, to transfer the fundamentals of the economy.
- The three pillars must be redesigned to meet the requirements of a post-growth economy.
- Direct transfers must increase: expand Social Security, expand Medicaid.
- Establish universal health care
- Establish free public education
- Regulate de financialization of the economy: ban derivatives that do not create economic value that is environmentally sustainable, establish a program of inter-institutional and international debt relief program, mandate the FED to focus on full-employment rather then inflation
- Increase the taxes on the 1% and 0.01%
- Increase corporate capital taxes
- Increase general capital tax and reduce income tax for low-income earners
- Reduce the work week hours to 30 hours maximum while maintaining the wage levels
- Establish a UNIVERSAL BASIC INCOME. I will spend some more time on this point, since I believe is the fundamental policy that may truly change the US retirement system for the better.
In a study for the Roosevelt Institute, David E. Thigpen notes:
Between 2006 and 2010, the number of part-timers rose from 4 million to 9 million, and today stands at 6 million. That’s 6 million people who want a full-time job but cannot find one.
Source: http://rooseveltinstitute.org/wp-content/uploads/2016/10/UBI Explainer_Designed.pdf
Many studies and economists in the post-2008 era have shown how the gig economy has grown, how job insecurity soared, how wages have stagnated, how wealth has gone to the richest, how labour force participation has decreased. Thigpen:
“Between 2007 and 2011, the percentage of unemployed who went without jobs for six months or longer increased from 18 percent to 44 percent. And general labor force participation (defined as the percentage of eligible workers who are actually working) is the lowest it’s been since 1977.”
What is Universal Basic Income (UBI) and how can it address these problems?
In a nutshell, an UBI, is a monthly no-strings attached, direct cash payment from the government to all adult citizens. From a philosophical point of view, it is free money. As utopic as it sounds, this concept has deep, fundamental consequences that might transform the foundations of society and the entire economy.
Many successful projects have shown the viability of the concept. UBI has been tested on small scales and it worked: Madhya Pradesh (India), Otjivero-Omitara (Namibia), Manitoba (Canada). Ongoing experiments are underway in the Netherlands, Finland, Ontario (Canada). See this documentary: http://www.filmsforaction.org/watch/a-basic-income-for-everybody/ by Jozef Devillé featuring Guy Standing, Phillippe Van Parijs (philosopher, co-founder European Basic Income Network, BE), Enno Schmidt (Co-initiator of the Swiss Citizen’s Initiative on Basic Income, CH), Daniel Hani (Co-initiator of the Swiss Citizen’s Initiative on Basic Income, CH) and others.
These are the guiding principles of an UBI:
- General wealth is created by sharing common resources: material resources, knowledge, infrastructure. Therefore, wealth must be fairly distributed in society, while preserving the principles of free enterprise, market economy, and democracy.
- We are bound as a species to sharing one planetary environment. This serves as a natural source for global principles of solidarity and equality. All citizens of all categories must stand on an equal foundation of safety, happiness, and decent life. Therefore, an UBI would provide an income for all citizens, including the rich.
- An UBI must allow citizens to have true bargaining power on the labor market. They should be able to say “no” to gig precarious jobs.
- Work that does not generate income by the standard of today’s market economy must be recognized as labor and be compensated through an UBI. Such as: caring for one’s parents, caring for one’s disabled children, managing households, participating in community building, educating children to become members of an active society
- The new economy of prosperity must recognize the natural talents that are not compensated by the market economy. Poets, artists, writers, nature lovers, explorers may not necessarily contribute to the market economy but they do contribute to the growth of the spirit of the nation. A nation without a spirit cannot live up to its potential. No nation survives its glorious history when its spirit succumbs to the trivialities of daily transactions.
- The UBI glorifies freedom. In this way the concept appeals to both the left and the right political spectrum. The freedom conceptualized as choosing the life you truly want, and the activities you truly find willing to perform.
- UBI would pay for the fundamentals of living and would not endorse idleness directly. However, idleness is a byproduct stigma of capitalism. Idleness may spawn great ideas. Even idleness on the verge of anti-social anarchy may be transformed towards loss of reputation but with no loss of dignity. UBI would preserve dignity but will not guarantee the preservation of reputation. In this way, the natural variances in character and personality will be truly liberalized and be out in the open square of public consideration. Moreover, the natural disposition of humans is towards activity and not prolonged idleness.
- UBI drastically reduces the enormous bureaucracy of the welfare state. Many direct transfers can be eliminated and replaced by an UBI: unemployment, social security. In the long run, UBI may even replace the first and part of the second pillar of the retirement system.
UBI is not a new concept and is not revolutionary. It is a natural consequence of the status quo of US economy. The retirement system is fragile, the political environment is in turmoil and the population has become tired with the American Dream that resembles more of nightmare than of hope. Fundamental changes are required to change the US retirement system.
The 401(k) Problem We Refuse to Solve
The biggest flaw in the retirement plan is that no one saves enough.
By Megan McArdle
Was the 401(k) a tragic mistake?
When you use one of those online calculators to estimate your expected income in retirement, it can sure seem so. Investment returns have proven variable, and individuals are often prone to making idiotic mistakes (like selling everything when the market crashes, which is literally the worst possible time to do so). And that’s only for people who have a 401(k); many people decline to participate in a plan, even when their employer offers matching grants. And according to the Wall Street Journal, the early boosters are turning sour on the whole idea.
“The great lie is that the 401(k) was capable of replacing the old system of pensions,” former American Society of Pension Actuaries head Gerald Facciani told the Journal. “It was oversold.”
This is true. On the other hand, so was Social Security oversold. As was that good ol’ defined benefit pension, so beloved of editorial writers, which was available to only a minority of workers when the 401(k) sprang into being. Nor were those pensions necessarily the generous perpetual incomes of popular imagining; autoworkers and public-sector employees got a great deal, but most people were not working for either the government or General Motors. They got smaller pensions — sometimes much smaller, if their companies failed and dumped the pensions onto the government’s pension insurer.
There’s a perpetual pundit debate over the best way to provide for retirement: defined benefit plans (pensions), defined contribution plans (401(k)s, IRAs and the like) or pay-as-you-go social insurance schemes (Social Security). Most retirement experts I’ve talked to prefer a mix of these, a “three-legged stool.” But as I’ve written before, this is a bit like arguing whether the Titanic would have survived the iceberg if only its hull had been painted green. All three types of retirement savings have different costs and benefits. But these costs and benefits are not the primary reason that people in Western countries have to worry about an impoverished old age.
The funny thing is that, for all the people arguing that some dire problem in one of these three retirement systems urgently requires that we switch to another kind at once, the major problem with all three is exactly the same. It’s even a problem that’s easy to state and easy to fix — no need for extensive blue-ribbon commissions or elaborate white papers. Here’s the solution: Pick whichever system you prefer; it really doesn’t matter. Now slap a 10 to 15 percent surcharge on a worker’s wage income, and divert that money into the system for the worker’s future use. Problem basically solved, because in all three cases, the only flaw that actually matters is that they’re badly underfunded.
If you expect to spend 40 years of your life working, and then another 20 or 30 years living off the money you made during that time, then you need to save a large portion of your salary. Imagine yourself storing up food for the last 30 years of your life from the harvests made during the first 40. You might hope that when you’re older, and no longer toiling in the fields, you won’t need to eat so much. Nonetheless, you’d understand that you would need to put aside a considerable portion of your harvest — something close to what you’re eating each day — to ensure that you don’t starve to death in your old age.
Somehow, we imagine that modern society can make the math different for all the other stuff we consume, from cars to televisions to little paper umbrellas to stick in the cocktails at our retirement parties. And to be fair, to some extent, it has. If productivity is growing quickly, then it is easier to maintain our pre-retirement lifestyles with a smaller pool of savings, because that savings will buy more.
Alternatively, we can have a lot of kids. No matter how you manage your retirement system, you are ultimately expecting to depend on the labor of people younger than you. Whether that labor comes to you in the form of a dividend check or a government benefit or a saintly daughter-in-law building you a new annex in the backyard, you are still expecting someone else younger than you to make stuff, then give it to you without expecting more than gratitude in return. The more workers there are relative to retirees, the smaller the fraction of their income each worker has to give up to support each retiree, and the easier it will be to get them to do so.
Unfortunately, productivity isn’t growing rapidly, and we didn’t have a lot of kids. That leaves plowing a great deal of money into savings and investment, in the hopes that productivity will start to grow again. There is no substitute, no neat transformation we can enact to make that fundamental problem go away.
All the pundits and experts and not a few politicians have been telling us the exact same thing for decades: The retirement system doesn’t have enough money in it. Yet somehow, we are no closer to the obvious solution of putting more money in it. Arguably, in fact, we’re further away, because these endless arguments about the form that our savings should take provide us an excuse to put off doing the saving.
So why do we spend so much time complaining about some side problem with one of the systems, instead of the major problem with all three? Because none of the experts know how to get people to actually do this: to save 15 to 20 percent of their income, or sit still for a law that would make them. Nor has any clever technocrat come up with a way to sort of slip this by folks without their really noticing.
The 401(k) was not the miracle cure for our retirement problems that was promised by some of its more zealous advocates. But it wasn’t a mistake, either, or at least not the important one. The important mistake was deciding that we could spend our first 25 years in school, and our last 25 years in retirement, without cutting our consumption in between. And, at least to date, that’s one mistake we don’t seem to be able to learn from.