Friday, October 2, 2015

Don't Tread On Me! Why the retirement crisis isn't going away

Don't Tread On Me!
Why the Retirement Crisis Isn't Going Away

A recent article published by The Atlantic left me steaming mad!

Here's why:

Most people would surely agree that Americans are not saving enough for retirement. The article I mentioned (linked at the bottom of this post, to avoid featuring it prominently and giving it even more clicks) laments the low rate of retirement savings by Americans, the fact that education in the form of "home economics" was sexist and didn't work anyway, and that some people just don't have the right personality type to save.

That article, however, expounds on the "real reason" that people aren't saving enough: retirement savings accounts aren't accessible enough, and the costs of daily life get in the way of even the well-intentioned.

Never fear, though, the intrepid author has it all figured out! From that article:
"The various proposals for such an account assume a similar structure: The government would let workers contribute to it directly from their paychecks, and it would be managed for them by an independent, government-appointed committee..."
Note: this is referring to an automatic savings account that can't be accessed until retirement; essentially, a government-mandated forced-savings account
  • Wow, ya mean the government would let me contribute to a retirement plan? Right out of my own paycheck?! Well, golly gee, how magnanimous!...
  • And, y'know, I can't figure out how to save money on my own. No sirree, I can't be given such a back-breaking responsibility! Thank my lucky stars that the government will appoint 'experts' to handle the arduous task of automatically depositing money into a retirement account!
  • In fact, the government is the best organization around at finding experts and positioning them to succeed, without having to worry about labyrinthine laws and frustrating bureaucratic red tape! After all, Congress always passes budgets on time, the national debt is diminishing thanks to the responsibility and vision of our leaders, and Social Security is going to be in wonderful shape for the foreseeable future!

The Advantage:

Such proposals do have a grain of sense. After all, an 'opt-out' strategy can greatly increase enrollment in certain programs, like being an organ donor, as Duke professor and author Dan Ariely explains.

Since some decisions are very difficult to make, we just go with the default, as Ariely points out. In an opt-out approach, the default is to participate in the program, and you have to take some action (like ticking a box) to opt out of the program.

Such a setup can yield benefits for all the people who don't mess with the default. That would be a way to implement a savings program that would gain widespread participation, thus getting people to save for retirement automatically--and, since the money would come straight out of their paychecks, people wouldn't even miss that money in the first place!

The Problems:

Here's my problem: the author is looking to a central authority (apparently, the federal government) to implement a retirement savings program. This approach absolves individuals of any personal responsibility to take charge of their savings and manage it appropriately.

By automatically enrolling everyone into the same program, this approach also assumes that the central authority actually knows what's best--completely ignoring the fact that different people in different situations have different needs!

Even worse, this approach implies that we need the government to do this for us, because we are too dumb to do it for ourselves! Heaven forbid that I'm ever, as the Atlantic article puts it, "burdened with investment decisions" about my own money!

That author continues, "it [the proposed savings program] would be managed for them by an independent, government-appointed committee..." I don't know about you, but the last thing I want to do is hand over my money for someone else (a government agency or commission, no less!) to decide how to invest! And I hope you'll forgive me for being skeptical of whether this plan would actually have my best interests at heart...

There are a number of reasons why a person would not want to participate in such a program. Perhaps you want to maximize your tax-free contributions to another plan, like the 401(k), 403(b), or IRA that you chose and that reflects your personal situation, risk tolerance, or other preferences.

Perhaps you don't make much money and your entire paycheck goes to pay the rent/grocery bills/student loans/clothes for your fast-growing child/other necessities. Retirement isn't a concern for people who can barely afford to pay their bills right now.

Or perhaps you just don't trust the government to make good decisions for you. Considering the national debt of $18 trillion--and growing--as well as the mismanaged pyramid scheme that is Social Security, you'd be completely justified in your lack of trust.

But, according to plans like the one advocated by the article in The Atlantic, the same government that can't pass a budget on time or keep Social Security solvent is supposed to encourage wise financial decisions and long-term thinking through yet another government-managed program! Hypocrisy, anyone?

Complicating matters is that any sort of government-sponsored retirement savings program is likely to be overly conservative. Picture this: the program director/committee chair for this program creates a balanced portfolio, including some stocks, bonds, and real estate. Then, as happens every few years, the stock market dips, and/or the demand for real estate decreases. People would lose a significant amount of money--including people who are near retirement!

Imagine the outcry! What program director/committee member would want to face a national barrage of criticism for losing the very money that the government is forcing people to save!

Due to such risks, the 'investment' would probably be in long-term U.S. Treasury bonds--a safe but low-yield option. Not only would you almost certainly get a better return with a private-sector portfolio, but there's also the potential for criticism of the program's goals: i.e. "All my money is going into U.S. bonds! Is this really for my benefit, or is it just another way for the government to take more money out of my paycheck to benefit itself?"

To be fair, there are types of investments that automatically rebalance the investment portfolio to be more conservative--more bonds and low-risk investments; fewer high-risk/high-reward investments like stocks--as you approach retirement. But again, different people have different preferences, different degrees of risk tolerance, and so on. You can't just plop everyone into the same box. But if you account for individual differences, then there goes the author's vision of an automatic retirement plan that removes the "burden" of making investment decisions--because people will still have to decide which of several options is best for them!

Despite the best intentions of economists, politicians, or writers who advocate such plans, the fact is that there's no good answer to the issue of how to get people to save more for retirement. Involving the government is just asking for headaches--or worse!

This book explains many common features of poor decision-making, including overcorrection, failure to understand the dynamic interplay of different parts of a system, and the inability to account for time lag between a decision and its effects. 

Such issues would surely plague a forced-retirement savings plan...and the stakes 
are far too high for errors!

Why The Retirement Issue Will Persist:

This problem isn't going away, nor will it be solved so easily.

Thanks to advances in medicine and health, people live for many, many years after they retire--sometimes as much as 30+ years after retirement! Combined with the health problems (and costly treatments) that are near-inevitable parts of advancing well past retirement age, as well as steady inflation in the cost of living--while retirement benefits do not appreciate--it is difficult to ensure that a given amount of money will last throughout your retirement.

And when you're used to spending your entire income--whether that's $40,000 or $400,000 per year--tightening the belt for retirement is going to be difficult! I find it unlikely that the same people who have to be strong-armed into putting money into a retirement plan will be happy with the small stipend that a plan such as the one proposed in The Atlantic would allow.

After all, as I've written before, there is no level of income that you can't outspend! And if people aren't careful with their money or they don't want to decrease their standard of living in retirement, no retirement savings program is going to help them--whether or not anyone is forcing them to invest.

As long as we're a) trying to live a long life, and b) retire as early as possible to enjoy our "golden years" before death takes us, this conflict will persist. Many people will not start saving for retirement until it's too late. Forcing everyone to start saving early is an incomplete solution, because many people are likely to spend wastefully and engage in the so-called lifestyle creep, buttressed by the erroneous impression that this government-sponsored plan is going to enable them to continue their bad habits after retirement.

Therein lies a major underlying problem: some people establish bad habits, and they want to continue those bad habits--all while feeling entitled to enjoy the same privileges as those who established good habits! You don't get to have your cake and eat it, too.

But some people never have any cake to begin with! For the impoverished, who are already eking out a hand-to-mouth living, does it really make sense to take money out of their paychecks now, in order for them to have a decent living at some time in the distant future?

People like the author of The Atlantic's article want to appeal to an authority--namely, Big Government--to right any and every wrong. They think that if people aren't saving enough for retirement, it's the government's job to intervene, the same way you'd expect a parent to rescue a four-year-old who runs out into the street.

But I'm not a four-year-old. I'm an adult. If I run out into a busy street, who's going to save me? If I rob a bank, will I stay out of jail by blaming "the system" rather than my own actions?

And if I don't save enough money to provide for my own retirement, then who's going to pay for my post-retirement needs (let alone any wants)? If I can't afford to retire, then I guess I'll have to continue working--or else retire anyway, and be broke for the rest of my life! But if I don't plan to retire in the first place, is it really in my best interest for someone to force me to save for retirement?

It is NOT the government's prerogative to decide what to do with my money.

It is NOT the government's responsibility to provide for my retirement.

It is NOT the government's responsibility to determine what is best for me.

It is mine.

The government's job, as defined by the preamble to the U.S. Constitution, is to "...establish Justice, ensure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the blessings of Liberty to ourselves and our Posterity..."

You can certainly debate the meaning of each of these, but you'd be hard-pressed to defend the kind of active interference in the affairs of individuals proposed in The Atlantic's article. The "general welfare," or well-being of the people of the United States, is overly broad and subject to interpretation.

One thing that isn't subject to interpretation: there is no 'right' to retire. Retirement is a luxury. And retirement doesn't necessarily contribute to the general welfare--my own or anyone else's.

I find such appeals to authority elitist and condescending. This attitude is especially infuriating because of the naive trust that the government's retirement savings committee won't mess up...with MY money! According to the plan as described in The Atlantic's article, I wouldn't even have a choice in the matter!

So you think I can't make good decisions in my own best interest--but the government will?

Keep your hands off my retirement plans! I'll sink or swim with my own decisions, not someone else's. And I'll retire if I've earned it, not because some do-good fiscal caretaker hands me some of my own money back!

Nobody could reasonably argue that the current system is perfect. But looking to the government won't fix any of the underlying issues, including poverty or lifestyle creep. If nobody (including the government) has solved those underlying problems yet, why would we ask the government to intervene with a program that further discourages self-sufficiency and foresight?

That mindset is not the solution. It's the problem.

Here's The Atlantic's article in its entirety: