Unstacking the deck

The Thinker by Rodin

I’ve decided life is much easier if you are rich.

This is hardly surprising. While my wife and I don’t consider ourselves rich, at age 60 plus we are out of debt. No mortgage. No car payments. Now, precisely when I don’t need credit, I’ve discovered my credit score is 832 out of 850. I know this only because we applied for a 2% cash back credit card, and the credit union thought I needed to know the good news.

Yes, if you want to pay less, get at least relatively rich. Also, it helps to be retired. You have time to shop for the discounts, and you can time things like vacations (something of an oxymoron if you’re retired) for ideal times. For example, if you want a cheap Caribbean cruise, book it for early December. When you are retired, there’s no reason not to.

It’s the poor and those who work for a living that pay handsomely for the privilege. Of course, that was me for much of my life too, until recently. There was that mortgage, to start. It’s a great deal for the mortgage companies. For thirty years you pay for the privilege of being deeply in debt. If you get too far behind on your mortgage due to circumstances you probably can’t control, like losing your job, the bank will be happy to repossess your house. Maybe you’ll get some equity back after they sell it, but you sure won’t have a house bought and paid for. At best, you get to start the whole cycle again.

So it goes with much of life’s necessities: car loans, home improvements and college education for the kids. Neglecting fixing infrastructure to save money only does the opposite in the long run. Live within your means, our betters tell us. Only it’s not at all easy to do that, particularly today, as living is so expensive and wage increases are so niggardly.

The system is stacked against the vast majority of us. Worse, “our betters” tell us it’s all our fault when we fail. We fail mostly because they set impossible goals. It’s some defect in ourselves when we do, and it’s never the fact that the rich have used the system to bar the gates for most of us from making it to their level. Not that most of these rich ever knew poverty. So many, like Donald Trump, live on inherited wealth. Trump never went hungry, or homeless, or had to live in a cheap apartment. Yet these are the people who feel they have the right to tell us what we are doing wrong. In fact, they create the conditions to keep us mostly forever on the outside.

Candidates like Bernie Sanders and Elizabeth Warren at least have acknowledged the obvious: the system is rigged against the vast majority of us. To the extent that I am rich is probably due to 20% being white and male, 20% the sort of doggedness my betters wanted out of me, and 60% being a former government employee who moved steadily through the ranks over 32 years. Because I stayed in it, I can take advantage of a system available these days only available to a vanishing few: a nice pension.

My daughter recently joined the civil service. She’s being trained to be a 911 operator for Prince William County in Virginia. She was shocked to discover when she was hired that she too could earn a pension, like dear old dad. My pension looked a bit problematic when I joined the civil service. Hers is probably more problematic, and ultimately depends on a future Virginia state government. Assuming she decides to hang around in this field that long, maybe she will climb that rung of financial security like dear old dad. But that will only be because there is a rung there for her to reach for. For most of us, that rung was pulled decades ago.

Ending pensions though was one of the biggest and earliest ways they pulled the rug from under us. You just have to do the math on 401Ks and IRAs to see how it just doesn’t work. If you can manage to save $5,000 a year for 35 years at 6% return and with a 2% inflation rate, your nest egg is about $560,000. Taking out inflation, that’s $237,000 in today’s dollars. To make that stretch over 25 years with a 4% rate of return and 2% inflation, you could take out $1255 a month. If you outlive your money, you will be reduced to social security income alone, assuming that system is solvent. “Our betters” are trying very hard to ensure it won’t be.

In most places, $1255 a month in today’s dollars won’t even pay the rent. Hopefully you will have paid of your mortgage before you retire, but how many of us can count on steady income and no major financial calamities? With a pension though, assuming it’s fully funded, it’s income for life. Any 401K or IRA supplements a pension. That’s exactly how we’re doing it.

And with such a steady income in retirement, that’s how we keep making our modest pile grow. You book vacations in off seasons. You pay cash for stuff and often get a discount. You buy in bulk. Like me, maybe, you find a 2% cash-back, no-fee credit card and try to put all expenses on it. Or you take out a CD at get 2.25% return on it, like we also did recently. It’s all nice, unearned money, free for the taking if you are savvy and have a nice pile of cash you don’t need to touch.

We save money in other ways now. We don’t need a car loan and probably won’t ever need to take out a loan again. We pay cash when we buy cars. As we discovered recently, we got a good discount from the dealership for the privilege. As we age, we can get senior rates: for hotels, for some meals, for movie tickets, and yes, for our medical bills. Socialized medicine is available at age 65. It’s called Medicare. It goes a long way to helping you keep whatever nest egg you bring into retirement.

So yeah, we’re fortunate. While corporations were giving you measly cost of living raises, their executives kept raising their salaries and your productivity was sent to shareholders, like, er, me I guess. Thanks! Meanwhile, you keep getting squeezed and more squeezed. Your costs go up but your salary doesn’t. So you scrambled. You work two jobs, maybe three. Your life is a treadmill. “Your betters” keep upping your pace and if you fall off, that’s fine with them. The problem obviously was that you weren’t trying hard enough.

No wonder we are so chronically anxious and depressed. “Your betters” have made you this way through ignorance but more likely by general sadism. When will we, like Howard Beale in Network simply acknowledge we won’t take it anymore?

The deck is stacked against us, but it doesn’t have to be. We have to stand up and demand it. Aside from a wealth tax and upping tax rates substantially for the richest, lets also make real pensions universal. Everyone should be able to enjoy retirement like we are fortunate enough to enjoy. It takes, yes, a welfare state, and our insistence that our productivity enjoys the same rewards “our betters” get.

Give us a real retirement (or the 401K/IRA trap)

The Thinker by Rodin

There are some proposals afloat (from progressives naturally) to increase social security payments. Social security used to be enough to marginally live on with Medicare helping by reducing health care cost spikes. Social security is supposedly indexed for inflation but it’s clear that the index doesn’t measure the true cost of living. If you depend almost entirely on social security, you are either slipping into poverty or are already there. So conceptually Senator Elizabeth Warren’s idea looks like a good one. The money will get quickly spent anyhow, which will boost the economy. Of course either deficits will increase or taxes will need to be raised to pay for it. There’s no consensus to do either, so seniors (those that can) do their best to get by. In many cases they remain partially or fully employed while being “retired”. I see them all the time at the registers of my local Costco.

Social security was never designed to keep you fat and rich in retirement, just set a basic floor above the poverty line. The assumption was that the house and cars were paid off so it would allow you to live modestly where you were at. If you desired a richer standard of living, you drew off any pensions or retirement savings that you might have. Pensions are much better than retirement savings but turned out to be too expensive for many companies to continue to voluntarily fund. The alternative, when they were offered at all, was a 401K or similar retirement savings plan. Better employers match your contribution up to a certain amount. If you didn’t have a 401K plan at work, you still had the option of an Individual Retirement Account (IRA).

IRA’s sound good in principle too, but they require you to be proactive, i.e. regularly put a portion of your income aside. Worse, you shouldn’t touch the money. If you do touch it you must refund your account with interest and pay a penalty. The problem with an IRA was that even if you were methodical about putting money aside you couldn’t put a whole lot of it aside. This year you can put up to $5500 a year into a traditional or Roth IRA.

Assuming a middle class income of $50,000 a year or so, putting $5500 into an IRA amounts to ten percent of your salary, a high hurdle that most cannot make. But let’s say you manage to sock $5000 a year aside and do so for 40 years, something that would be excruciatingly hard for most of us with expenses like rent, car payments and childcare. Let’s say you somehow managed to earn six percent on the investment after fees. This means after forty years you would have $772,000 to help you live a nicer retirement. Is this enough?

You would think that the answer would be yes. Let’s say you expect to have thirty years in retirement, which means you could withdraw $25,700 a year over thirty years before running out of money. The amount you would get from social security would depend on how many years and how much you contributed to it. In 2011, the average social security check was $1180 a month. Without a pension or matching contributions from your employers to your 401K, this means an income of $3321 a month, or $40,000 a year.

Remember this is the best realistic case for a person that self funds their retirement because their employer won’t. It assumes a middle class wage earner, say a skilled mechanic, who is methodical about investing for retirement and can do so consistently. If your house is paid off do you think you can live comfortably on $40,000 a year in retirement? Most likely you are shaking your head. Since this is the best realistic case, your actual yearly retirement income is probably more like $20,000 to $30,000 with social security, absent other sources of income. No wonder I see so many grandmas and grandpas working at Costco. What they needed was a pension, but since their employer didn’t provide one they are making up the difference with a (probably part time) job at Costco. Costco at least provides a living wage, so perhaps they are supplementing their retirement income by $20,000. Maybe with working they have $50,000 in income per year. Is that enough to live on? Maybe, but you are working and not really retired.

My point is that 401Ks and IRAs are not viable retirement solutions for almost all of us, even with social security, although they were sold as real solutions. Moreover, social security income is not keeping up with the true cost of living. Sometimes even with a pension you don’t earn enough. This is the case with my brother in law. He retired some two decades ago on a community college pension where he worked programming the college’s mainframe computers. My sister (his wife) is in her sixties. He’s probably at or around seventy. She’s earning some money as an in-home health care aid, likely at less than $15 an hour. Last I heard he was helping manage a Disney store at Orlando International Airport. They get by, but at best they are partly retired.

We either have to give up the idea of ever really retiring or we need to find a way to fund retirement so that your retirement income is somewhere in the range of 70% to 80% of your pre-retirement income, which financial planners say you need to have something close to the same standard of living you had before retirement. To consider what a high hurdle that is, most financial planners (like ours) say not to withdraw more than 3% from your portfolio a year, at least if you want to maintain its value and have something to pass on or some extra savings to fall back on if you live to 100. This means if you want $60,000 in income per year from your retirement savings, you need to retire with a nest egg of $2,000,000. Yowza!

What we really needs are real pensions again. I know what you are thinking, “Isn’t social security a pension?” Well, yes, sort of, just a subsistence pension and it is funded jointly between the employer and the employee. It’s not a living pension, i.e. the sort of pension your parents or grandparents routinely got. Employers don’t have to provide pensions and most won’t. Moreover, many that did have pensions have reduced benefits or have turned the problem over to the government when the fund became insolvent. The real issue was that the private pension system became unworkable, mostly because Congress let it get that way. This doesn’t mean that a real public pension system couldn’t work instead.

Think of such a system as social security on steroids, or perhaps social security evolved. The problem is how to make such a system solvent. Asking employees to contribute too much more probably does not make much sense although many employees would be happy to contribute their 401K contributions toward a public pension system for a higher pension on retirement. Such a system could be funded through taxing employers more. Corporate taxes after all are a smaller and diminishing portion of total federal income, as corporations get increasingly clever at dodging these taxes. This means companies like General Electric pay virtually no federal income taxes. It shouldn’t be hard to have laws that would require GE to pay enough in taxes to fund a public pension for its employees. It would probably be pocket change to their overall profits.

Just as we have a graduated income tax where higher income taxpayers pay proportionally more of their income than lower income taxpayers, the same thing could work in the corporate (and non-profit) world to fund a public pension for all workers. It’s understood that Dollar General’s profits per employee would be lower than GE’s, so their taxes for funding a public pension system would be lower. The government actuaries would have responsibility for making sure it is doable. If some of GE’s contributions effectively go to prop up the pension of Dollar General employees, that’s perfectly fine as the costs are being socialized across the public at large. This is the way insurance works, after all. Companies will come and go but the government does not. If Dollar General goes belly up, whatever replaces it will pick up its slack.

So this is my solution. If this required funds to be invested in well-managed stocks or bonds, using a life cycle fund approach, I am fine with that, as long as those investing these funds are held to a fiduciary standard. Expecting that people can self-fund their own retirement anymore is unrealistic. I hope my analysis show why this is so. Someone has to pick up that slack.

Taxing the profits of corporations (similar payments would be needed from non-profits) for the purpose of public pensions could allow people to have actual retirements again, like your parents or grandparents had. We just have to choose to act.