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.

The Fading American Middle Class

The Thinker by Rodin

The Washington Post has been running a series of articles on the fading American middle class. These articles are enlightening. However they are not all surprising. The reality is the American middle class is an endangered species. America is quickly dividing into a society of haves and have nots. This trend probably does not bode well for the United States. If it continues it may actually hasten the sort of liberalism anathema to many so enamored with our current corporate-ocracy.

Is “corporate-ocracy” too strong a word? I don’t think so. I would argue strongly that a government by and for the corporation has supplanted our republican government. There are exceptions. But the safeguards put in place during more liberal times that restrained corporations so they act in the public’s interest have frayed to the point where they are becoming hard to see. If anyone doubts that special interests are firmly in control of our government they need only watch the recent 60 Minutes interview with outgoing South Carolina Senator Fritz Hollings. He laid it all out: money buys influence and as a result the public interest gets short shrift.

“Communications, defense, you got them all – farms, agriculture people and everything else like that … They get their piece of the pie. That’s our problem. Today, you can’t find the real interests of the country.”

It would be tempting to blame the decline of the middle class entirely on American corporations. And certainly they share a lot of the blame. For the last thirty years corporate America has worked hard to marginalize labor unions. They are now at the point where they hardly exist anymore. Even when they exist unions are increasingly impotent. Corporations have options now they didn’t have before, such as the ability to quickly outsource jobs to countries where pesky labor laws don’t exist. And Congress has aided and abetted this process. It has made it easier for a company with pension plans to change them so that workers receive less in the way of pensions. The better companies throw newer workers into 401-K plans instead of defined benefit plans. Some of them convert all their workers to 401-K plans. Others have used legal shenanigans to raid pension funds to prop up their share prices. And if the corporate pension fund goes bankrupt, it’s not a problem for shareholders. The costs are foisted on the taxpayer, that is the Pension Benefit Guarantee Corporation. Increasingly, if companies offer health insurance benefits at all then workers are asked to pay larger shares of premiums and higher deductibles.

The result is that marginal cost of living raises are more than eaten up by increased costs for health insurance. This cascades into a decline of the standard of living for middle class people. Increasingly these costs have the effect of dumping people out of the middle class. A labor force that is increasingly disposable exacerbates the situation. Careers long thought secure are now often easily outsourced. Workers that used to be able to get benefits are often now employed as temporary employees or as contractors, if their work is not outsourced to some foreign country.

It is hard for many of us, particularly younger workers, to grasp the magnitude of the change that has occurred over the last 30-40 years. Consider this: in the 1960s a single breadwinner could support the middle class lifestyle for a family. For example a bus driver could afford to buy his own house and car, keep the wife at home and send the kids to college. He usually didn’t need a second job. What’s the situation today? To live a middle class lifestyle a family requires at least two wage earners. The bus driver is likely living in an apartment somewhere, and is probably working another job. His wife is pulling a couple jobs too. It’s increasingly unlikely his family has health insurance. They are precariously holding on to their middle class existence. One lost job or one huge medical bill and their lifestyle is blown away.

The Washington Post talks about the $17 an hour job as typical middle class wages. I laughed when I saw this number. Exactly who can afford a middle class existence on $17 an hour? It can’t be done in my neighborhood, that’s for sure, unless the spouse is also earning $17 an hour. And those kind of wages likely mean they are living in an apartment, or perhaps a modest town home, not some single family house with a two car garage.

And what sorts of jobs are paying this kind of money? I can think of some. Clerks perhaps, mechanics and plumbers. Many of these jobs are also the most vulnerable to outsourcing. What does one do when they lose that $17 an hour job that has been outsourced or made obsolete? It’s possible but unlikely that they will find another job at this wage rate. Instead, as the Post documents, they are working two jobs somewhere to maintain the same income level. But if they had benefits before it’s unlikely they have much in the way of benefits now.

Working two jobs instead of one they live an increasingly precarious and exhausting life. The smartest ones may have anticipated their obsolescence and went back to school. But as many computer programmers found out in the last few years there is no guarantee that the money invested in a new career will ever pay off. In our modern world the uncertainty of maintaining any job is much higher.

And so the middle class slowly disappears. Manufacturing moves overseas. Machines handle more farm jobs. Computer repair people find they aren’t needed because machines can be replaced for less money than it takes to fix them. The winners are those who are born into money or can simultaneously be savvy, intelligent, multitask and have connections. To sustain the middle class lifestyle it is no longer sufficient to have a trade. You must continually reinvent yourself. You must be a shrewd businessman. You must do your market research. You must find a particular niche. You must network ruthlessly. In short this new Darwinism requires a combination of skills never needed before. Not all can cope with the complexity and demands of such changes. So they fall through the cracks. They spend their days as cashiers at Wal-Marts and their nights at a second job, and their weekends at a third job.

And who is benefiting? Perhaps by shopping at Wal-Mart in their few off hours they are saving a few bucks. Clearly stockholders are benefiting. Their share prices are increasing. But where is this wealth really coming from? In effect we have decided that in America that we will transfer wealth by screwing the hard working earnest American laborer tighter and tighter. The money will largely go to those who had wealth to begin with, making them increasingly wealthy. And that’s how the middle class disappears, slowly, until one day it is gone entirely. By that time it will seem natural and we’ll all smile and say we are happy because we believe in the Republican Party, and the Republicans are good.

How long can this go on? I would hope not much longer, or the character of the country that I grew up in will be changed irretrievably. I often feel like our future will look a lot like Brazil’s. It seems that the stranglehold by the corporation on our democracy is virtually complete. But perhaps the corporation has pressed its advantage too far. Perhaps like Howard Beale the American worker will no longer play the patsy and demand a government of, by and for the people again.

But this seems naive. Apparently we are a nation of sheep. We’ve bought into the whole corporate bullshit and we’ve wrapped it around God and the American flag. We can’t tell them apart anymore. Why are the people who are getting screwed the worst pushing for their own obsolescence and poverty?

There is a solution to this madness. It’s called electing people who represent your interests, and not the special interests. It remains to be seen if Karl Rove can keep sufficient numbers of Americans ignorant of what we are in effect doing to ourselves.