If 401ks don’t serve many customers, we need higher Social Security benefits
Brad DeLong adds his voice to the people addressing the retirement woes of many:
Edward Filene’s idea from the 1920s of having companies run employer-sponsored defined-benefit plans has, by and large, come a-crashing down. Companies turn out not to be long-lived enough to run pensions with a high enough probability. And when they are there is always the possibility of a Mitt Romney coming in and making his fortune by figuring out how to expropriate the pension via legal and financial process. Since pension recipients are stakeholders without either legal control rights or economic holdup powers, their stake will always be prey to the princes of Wall Street.
That suggests that what we really need is a bigger Social Security system–unless, of course, we can provide incentives and vehicles for people to do their retirement saving on their own. But 401(k)s have turned out to be as big a long-run disaster as employer-sponsored defined-benefit pensions when one assesses their efficiency as pension vehicles.
And so let me turn the mike over to James Kwak:
The Problem with 401(k) Plans: Ian Ayres has made a lot of people upset, at least judging by the Wall Street Journal article about him (and co-author Quinn Curtis) and indignant responses like this one from various interested parties. What Ayres and Curtis did was point out the losses that investors in 401(k) plans incur because of high fees charged at the plan level and high fees charged by individual mutual funds in those plans. The people who should be upset are the employees who are forced to invest…. Ayres and Curtis estimate the total losses caused by limited investment menus (small), fees (large), and poor investment choices (large)…. What really annoyed people in the 401(k)) industry (that is, the mutual fund companies that administer the plans and the consultants who advise companies on plans) was Ayres and Curtis’s charge that many plans are violating their fiduciary duties to plan participants by forcing them to pay these fees….
Well, Social Security is insurance against the failure of these other “plans.”
I personally think it would be wise to expand SS to pay for a more generous retirement, but there are two problems.
The first is that SS works, in part, because it is mandatory. People in general hate mandatory, even if by the time they are sixty they suddenly see the wisdom of it, or are at least glad they have it, even if they can’t remember hating it.
The second is, how are you going to pay for it? SS already “taxes” about 12% of a workers earnings, and will need to go to about 16% just to keep up with predicted increases in life expectancy (coupled with a lower rate of growth in wages). This is not actually much of a burden, but it is extremely hard to explain that to people who still think money should come down from the sky… either wall street or “the government.”
Raising the tax on the rich (who do not currently “pay for” Social Security (the program; they pay for their own benefits) would destroy the basic nature of Social Security: that is it is NOT WELFARE.
So, once again personally, I think the best answer is to keep SS where it is… insurance against grinding poverty in old age… and a nice boost to other retirement savings. But let the people find other ways to seek wealth or a retirement that preserves the way in which they are accustomed to live.
For what else it is worth, the State of Oregon (at least, I believe other states do the same) managed a retirement plan for its workers which seemed to work very well, before the insane greed machine started cutting pensions to avoid having the taxpayers pay the retirements they promised employes as part of the pay they would get for a lifetime of working for the taxpayers at otherwise lower wages. If every worker in the state were part of the same retirement plan, it would be more resistant to the politics of greed, and having the plan managed by the state should… and did… provide both better investments and lower costs than those programs managed by private companies.
If the entire world puts their “savings” into US Treasury notes why not American workers? U.S. Treasury Retirement Notes, In God We Trust!
Such notes could have a better than average market rate of earned interest and that interest could automatically be reinvested. I’d guess that an individual could retire after 35 years with about 2/3s of his average salary over his working life if the notes paid about 4.5% per annum and rolled over.
Such a system could be administered by SSA or a similar agency. Employers could be required to pay in a specific amount towards each worker’s retirement fund. No disability aspect need be added as that is already covered by SS. Same for death benefits, dependent care, spouses, etc. It would be an addition to SS and be the personal savings plan of each worker. Seems like the solution is simple enpough. Of course the only complication is that it cuts out of the process the investment banking industry. They really like IRAs and 401K plans, but there would be no need for such plans and the fees that they generate for the bankers.
Jack
how much would the workers be contributing. and where would the 4.5% interest come from?
Jack, since the SS trust fund IS invested in US Treasury bonds. I favor raising FICA tax and increasing benefits. Makes more sense than an add on fund. And better than individual savings on which interest is negligible. Nancy O
well, actually, the Trust Fund is not that important. When the current enhanced Trust Fund returns to the normal “one year’s reserve” the interest on it won’t make a whole lot of difference.
What does make a difference is pay as you go. And that needs only one thing, and one other thing that would help, but is not needed. The one thing it needs is enough people paying a high enough “tax” (it’s an insurance premium that you get back with interest) to cover the benefits of those who paid the premium in their turn.
What would help is if the rise in workers wages provided enough effective “interest” (because the workers paying in are paying in more money, from larger paychecks, than the people did who are now collecting benefits) to provide a reasonable “return on investment.”
However that return on investment should NOT be compared to what you can get by putting your money at risk (SS has no risk, except for dishonest politicians, which we are supposed to be smart enough to control) and which does not include insurance… including insurance against never having had enough money to invest in the first place.
I really hate to see everyone trying to reinvent something that works fine. If they actually understood how it works, and why, there might be some excuse for it. But as it is, it is just every man for himself blathering because he has heard something, most likely not true, certainly not “the whole truth,” that makes him think his own particular brilliance can come up with an answer in 37 milliseconds.
And just so Nancy doesn’t think I am picking on her: I favor raising the FICA tax enough to pay the same replacement rate, over a longer lifespan, to future retirees. That would be about 80 cents per week per year in today’s terms, over about twenty years, after which the rate would stabilize, with workers getting benefits about twice as high as todays, after paying a slightly higher tax rate on an income also twice as large as todays. NOT an extra burden, merely the prudent choice of spending part of your increased standard of living on a better retirement.
If everyone wants to raise the tax even higher to pay even higher benefits, so be it. It might be a good idea. But it stops being a good idea the second you call for having someone else pay for it. That would make it welfare, and that is exactly what Roosevelt made sure SS would not be, “so no damn politician can take it away from them” …the workers who paid for it themselves.
As for an add on fund… i did pretty well with a state retirement plan in addition to my Social Security. money invested in the markets and managed by the state. I hardly noticed the extra deductions from my pay (after the first childish reaction that something was being taken away from me), and I can’t see why every worker in a state… not only the public employees… should be part of the plan. That would certainly help protect it from the lying politicians who are always trying to cut public employee pensions on the theory that “the taxpayer” is paying for them.
“….and I can’t see why every worker in a state… not only the public employees… should be part of the plan. That would certainly help protect it from the lying politicians who are always trying to cut public employee pensions on the theory that “the taxpayer” is paying for them.”
That’s pretty much what I’m suggesting though I chose a fail safe investment, US Treasuries, which could have the same manipulated interest factor as do the Trust Fund securities. Yes, make it very much like public employment retirement plans, but require worker and employer real contributions and government agency over sight. The Treasuries and the over sight cut out the “management fees” that often shrink the return on current IRAs and 401Ks as well as the vagaries of the stock market. Included in those vagaries are both eco cycle storm and drung as well as manipulations by big bank manipulations.
Coberly–I ain’t mad, and I ain’t tired. But, I’m actually trying to agree with you per the NW Plan. Certainly in current terms, it’s clear that 401k’s don’t do what they’re supposed to do and Jack’s idea is a definite improvement over the existing system. Nancy