To totally understate the problem, we aren't saving enough as a society to provide for the benefits of future retirees. That will change as indeed it must. The question, however, is not who will pay ---- we the people will pay, as always --- but rather who will do the investing for us? Accordingly, one critical question will be the extent to which we choose to rely upon the government (aka our fellow taxpayers) or ourselves to make those investment decisions.
I wonder how David Navari would answer that question. In the article 401(k) Suppresses Saving for Retirement, Mr. Navari, 45, is described as having maxed out his contributions in previous companies before going to work for a new company in 2008. That makes the story of Mr. Navari one worth repeating. Arriving at his new company, instead of contributing heavily to the 401k as he had done at earlier companies, he instead enrolled at the company's default rate automatic percentage of 3%.
As is the case with two thirds of employers today, the company auto-enrolled employees with a contribution level of only 3% for its 401k plan. While employees are free to change the level of contribution, strong evidence is mounting that they don't do so. This relatively new "auto" opt out in place of the opt in feature was passed by congress a few years ago to encourage greater participation in 401k plans, the idea being that people will not always opt in, so having an automatic feature will increase the number of employees who save for their own retirement needs. The new opt out law has worked to increase employee participation, but too many employees now simply stay with the 3% default contribution level. Overall an undesirable and unintended consequence.
But the much larger question presented by people like David Navari is who will take care of our retirement needs if we don't save enough? Our fellow citizens, that's who. {Nevertheless, the answer that most people would give, I fear, is social security. Either that or they just choose not to think about it at all. Or are afraid to think about it, so they ignore it except for hand wringing.}
We now are spending more in social security benefits than we are receiving from payroll taxes. And we're doing this even though employees and employers pay social security related taxes at a combined ~12% of employee pay. Despite this, the social security system is approximately $18 trillion underfunded, assuming it will meet its promises with respect to promised future benefits. So in the end we the people will pay, one way or the other. {Although the current level of payroll taxes may have been sufficient for some time longer, had they been invested properly, or at all, by the government, they simply weren't. The money was spent, and there's no money in the till. Zero. Zilch. Nada.}
To reiterate, that leaves us with a straightforward choice. Will we trust the bureaucrats with our money or will we instead trust ourselves?
As a firm believer in the MOM school of financial management and investing, I vote for MOM (my own money). My guess is that the "paternalistic" bureaucrats will vote for spending OPM (other people's money). But what about Mr. Navari and countless others like him? How will he vote? Well, we need to enhance his knowledge and help educate him about the reality of the situation. As we do, he'll vote for the MOM way, too, because in the end, he'll pay one way or the other, as will we all.
While this entire subject of pensions, social security, 401k plans and the like will take some considerable time to cover appropriately, it's definitely time to begin the discussion. It's an enormous issue affecting all of us and has not been addressed in a serious way by we the people as individuals, politicians, educational institutions, companies, investment advisers or government agencies. Or apparently anybody else, for that matter.
Our fellow citizens and taxpayers are all too often making uninformed choices about 401k plans and other aspects of our financial affairs without having the necessary education or knowledge to make informed decisions. As more people come to know the reality of what's going on and what they can do about it, they'll choose wisely.
In fact, here's an acronym about what needs to happen if we are to make our choices in an informed manner: PEGIT. PEGIT means planning, educating, giving, investing and taxing. If we can help each other become better at individual planning through improved education by freely giving what we know about relevant investing and taxing matters, that would be a wonderful end result and more than we could realistically expect to accomplish. But why be realistic about our goals, objectives and dreams? Instead let's just try to do it. So let's begin with some background about all this stuff.
During recent decades, a tremendous and largely unnoticed change has occurred with respect to retirement funding and the responsibility therefor. Unfortunately, we the people haven't been prepared to satisfactorily and with knowledge discharge our new and additional responsibilities. In the "good old days" individuals didn't need to know much about investing, and now we do.
Thirty years ago ago, defined benefit plans with fixed pensions at retirement were the rule for private sector employees. An employee didn't need to know anything about investing, pension funding, or other related matters. Retirement planning was really simple in that the company promised to pay a prescribed monthly benefit based on an individual's years of service with the company and, in many cases, based on the average annual compensation earned. In other words, the individual went to work for a company, stayed employed at the company, retired from the company and, upon reaching retirement, collected the monthly pension money from the company. And received a social security check for the rest of his life, too.
In the 1970s and 1980s, out of necessity that mentality began to change. Defined contribution plans became commonplace and offered to those employees who voluntarily participated in the 401k plans supplemental benefits which were in addition to the "guaranteed" basic pension benefits. An attractive feature of the 401k plans was that each employee had a personal account representing the cumulative value of his investment in the supplemental plan.
As global competition for market share became heated and companies had more and more difficulty staying competitive, 401k plans began to replace the more expensive and open ended costly pension plans. That's what changed everything. As a result, we now need to become quite knowledgeable about investing for our own financial retirement security. Unfortunately, the alarm bells didn't sound, at least with respect to retirement planning and investing responsibilities, and the necessary employee education didn't happen. And that's a shame.
And equally troubling, with respect to government promises and the social security system, not that long ago the word demographics was probably unfamiliar to most of us. We probably thought somebody was mispronouncing geography when the word demography was used. But what demographics and the baby boom generation would mean for our social security system was simply this: Fifty years ago approximately eight active workers were paying social security taxes into the system for each social security recipient receiving benefits. An 8/1 worker to recipient ratio. That's now three for one and within a few short decades will be two for one. From 8/1 to 3/1 to 2/1, and all that means for current and future taxpayers and social security recipients as well. A generational conflict in the making.
But this very serious and long time coming issue of an aging society and what it means still doesn't get much attention from the politicians. And it genuinely represents a huge threat to our future well-being as a nation. Social security financing is out of control and as presently constituted can't possibly meet the needs of future generations. Eight of us used to work and pay benefits to one of us, now it's three paying for two and will soon be two for one. That's not only not sustainable, but it's unfair to David Navari's child and eventually will be to his child's children as well. I wonder if David even realizes what's happening.
Let's summarize. It's widely understood that most people aren't saving enough to satisfy their financial needs upon retirement. Since many employees have 401k plans, and many of these 401k plans have matching contribution features, it's appropriate to question why these plans are often either not used at all or are being underutilized by employees.
It's also widely acknowledged that social security has become the biggest source of retirement funds for most people. Of course, those retiree benefits are being financed by current workers and their employers through payroll deductions.
The demographics are unavoidable. We're getting older as a nation, and that's something the politicians can't change or we can't vote against, no matter who's in office.
And it's widely agreed that the social security promises may be empty ones without some serious overhaul of the system to ensure its continuing solvency for future generations. Stated another way, we know that social security is "insecure" as presently constituted, but the politicians still won't touch it. They're afraid of the reaction of we the people. To which I say that if we are treated as adults, we'll act like adults. They could try telling the truth.
So who's to blame for all this? Of course, we the people need to take our fair share of the blame. But through self help and collaborative efforts like PEGIT, we can make things right. At the very least, we as individuals can choose to to do the right things for ourselves and our families. And in the end, I'm betting on PEGIT working for people like David Navari, too.
Thanks. Bob.
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