Call it Manichaeism or 180ism, binary thinking is the source of many an intractable problem. I noted this in a really great book on Social Security, Medicare, and Government Pensions (also the title) that I read for my continuing education requirements. Attorney Joseph Matthews did an outstanding job with a very dry subject. He correctly opined on the shortcomings of our retirement system and how raising taxes would keep the current system solvent. However, we have more than the two choices of cutting benefits or raising taxes. Matthews’ preferred method would result in an inferior retirement system, one that fails almost half of our population, at a very high cost.
Obviously, as a financial planner I have a profound interest in retirement planning and the systems available to our clients. Viewed globally, the top half of American society are aristocrats when it comes to the quality of retirement choices available. Virtually all of our clients fall into this category. As a whole though, America fares poorly in comparison to the developed and even parts of the developing world. How bad? Oyin Adedoyin of The Wall Street Journal explains that the recently updated Mercer CFA Institute Global Pension Index ranks America as “22nd out of 47 countries.” *
Good pension systems combine defined-benefit (DB) plans with defined-contribution (DC) plans. Social Security is a DB plan. The retiree receives a monthly benefit and does not own the principal. A 401(k), among other plans, is a DC or savings plan. We own the money that we and/or our employers contribute. We can spend it in retirement or bequeath it to our heirs. Despite some improvements in Secure Act 1.0 and 2.0, the burden of establishing plans falls to the employers and the costs are absurdly high. For example, a self-employed person with no employees should not have to buy an expensive trust to establish a Single(k) plan. Most basic plans could be easily standardized and consist of a few pages. At Treasure Coast Financial Planning, the cost of administering our 401(k) has increased considerably since the rules have been rewritten. DC savings plans should be universal, and they should be cheap.
If every working person had a retirement savings plan, we would instantly go from a nation of haves and have nots to one of everybody who works has something. The burden of Social Security on the federal government’s budget would be reduced and America would shoot up the ladder in the rankings.
That will not happen with binary thinking that fails to weigh the vast number of options for fixing our retirement system and our budget deficit. Sadly, we require all of our candidates to swear not to “touch Social Security.” This translates to a pledge not to “fix” Social Security. Virtually all good systems are a combination of public and private. Medicare is public and private.
Social Security in its present form is both expensive and unjust, particularly since the Great Recession. Nearly across the board, our leaders have abdicated their responsibilities to the Federal Reserve (Fed). The Fed manages the economy and the growth necessary to keep tax receipts flowing by inflating asset prices. The lack of a retirement savings plan for about half of workers increases wealth inequality while running up the federal deficit. Housing, a traditional means of widespread asset ownership, is increasingly unaffordable.
My experience as a financial planner is that two working people who have access to a 401(k) or similar plan, and who diligently fund it, retire well-to-do. This is especially true for those who are prudent spenders and do not change houses and cars too often. If you or a family member have retirement plans available that you are not taking full advantage of, now is the time to review your plan and join the retirement aristocrats.
* Adedoyin, O. The U.S. Gets a C+ in Retirement - WSJ, Accessed on 12.01.2023.