Saturday, October 15, 2011

A Better Retirement

A modest proposal- cancel all retirement plans.

The US retirement system is a mess. It is grossly unfair, in that employers can choose whether to offer retirement benefits or not, with employees not able to say much about it. Whole fields of employment may have defined pensions or their miserable cousin, the 401K, or nothing, with little rhyme or reason. Workers unwittingly enter fields that either do or don't offer retirement benefits, for all sorts of unrelated reasons of interest and talent, and wind up forty years later either made in the shade, or dumpster diving. We need a better way.

Employers also are mistreated by the current system. Some misers offer the stingiest 401K (no, or token matching), while others offer generous defined benefits. The latter can be destroyed by their pension obligations if they undergo contraction in the ever-changing business landscape, rendering them disasterously uncompetitive against younger companies without large pools of retirees. Among 401K plans, the degree of matching is highly variable, presumably a gauge of labor power in that company or industry, with results that only come out in the wash when the worker is later hung out on the line.

This hidden part of pay packages should, like health insurance under the Obama reforms, be made more uniform, and also be brought into the light by a few fundamental reforms.

First would be to cancel all non-Social Security retirement plans offered in the US, whether by private or public entities. Retirement is not a job for the workplace. Instead, Social Security should be doubled, to provide a uniform and stable base to the retirement of every working American. Despite all the scare stories, there is plenty of scope to beef up Social Security, by raising the cap of income levels that are taxed, and increasing the tax rate.

Second would be to eliminate the employer role in 401K plans. If a company wants to pay employees more, it should put that in the top line of salary, while the employee takes responsibility for the saving, the investments, and the tax deduction. All employees should be treated equally, not given more or less money based on whether they wish to save. Employees would still be able, however, to get their desired savings automatically deducted from their paychecks. The switch would by law put the money previously hidden in retirement benefits into the employee's top-line pay.

For instance, an empoyee might decide to save 10% of income automatically from her paycheck, and have it sent to a specified investment account. Her company would pay her the extra 10% that it previously paid in matching 401K contributions. The employee would take over the tax benefits, being allowed up to $20,000 of annual income to be counted as pre-tax toward this 401K/IRA. The government would offer all workers a social-security-grade account to invest these savings, (as inflation-protected bonds), in case they don't want to gamble it at the Wall street casino, and might also insure special bank savings/CD accounts if desired.

All this would go a long way towards decoupling retirement from the corporations and other institutions we work for. They don't want to worry about our retirement- they have better things to do. They have also been willing to underfund and raid these retirement accounts. Retirement is just too important (and far too long-term) to leave to employers.

The paternalistic model of employment needs to be put out of its misery, instead of penalizing those employers with moral scruples. Companies deserve a level playing field where they compete on their productivity, and attract workers based on transparent offers of compensation. Such reforms will also promote workplace mobility, lowering the need for workers to wait out bad employment situations for their promised retirement. The various fiascos of early retirement programs (allowing retirement at 55, even 50) would no longer be an issue, since no one would get defined benefits that could be arbitrarily granted and started at early times.

Lastly, this proposal would also resolve the public pension crisis, which is truly dire. As investment returns head downwards in our Japan-decade, the extravagant promises made to public employees by various well-meaning but undisciplined public entities have become unsustainable, hollowing out municipal and state public services. This albatross of needs to be cut from our necks by clawing back promises that were so rashly, and sometimes corruptly, made. These costs should be transparent on the top line of salary, not in the sticker shock of hidden crises bequethed to future generations. Public employers need to get out of the retirement business as soon as possible, and into a fair, transparent, transportable, worker-centered system.

In the US case, adjustment will require a break with a credit-fuelled economy, which is the only way American capitalism has of dealing with the vast inequalities of wealth and income that it has created by outsourcing most of its manufacturing to low-wage countries. There is little sign, however, of the US being willing to rethink its version of capitalism.


  1. "Second would be to eliminate the employer role in 401K plans. If a company wants to pay employees more, it should put that in the top line of salary, while the employee takes responsibility for the saving, the investments, and the tax deduction. All employees should be treated equally, not given more or less money based on whether they wish to save. Employees would still be able, however, to get their desired savings automatically deducted from their paychecks. The switch would by law put the money previously hidden in retirement benefits into the employee's top-line pay."

    You have identified several problems, but your solution has a fatal flaw, evident in similar ideas already tried in the UK and shown to fail.

    The main flaw is that very few employess will not save for their retirement.

    In the UK, we still allow employees to save for retirement, but we recognise that few will. Several measures have been tried to encourage this, for there is a reluctance for compulsion (i.e. a tax) but that, ultimately is what will have to happen. Or else there will be a generation going to work and enjoying their earnings and dealing with the massive shame of letting the older generations fester and die in horrendous third-world state-run concentration camps. Though they won't be called that of course.

    In the UK we do recognise the need for a blanket state pension, to which everyone is entitled, though it will be a challenge to pay for it.

    Measures to date include:
    - a promise that it will be a decent and universal minimum, rather than shameful poverty. The reality remains to be seen.
    - lots of encouragement to top it up with a private, individually owned, pension (stakeholder pension). Though this is likely, on past performance of managed pensions, to be a very poor investment and I expect will later be seen as a waste of money, however well intentioned those designing it were.
    - reducing the cost by raising retirement ages. So far, in the UK women are seeing it raised from 60, and men from 65, to a unified age of 67. But this is likely to rise further, so those not close to retirement might well see themselves unfunded until even later than this.
    - making it easier for people to continue working later, even than the state pension age: for example, by removing the compulsory retirement ages. Until a couple of weeks ago, employers could enforce retirement at 60 & 65 for men and women. Now, they can't do it on the basis of age, but only if the employee is no longer fit to carry out their job (with certain exceptions such as police).

    Its a mess, but the solutions are not easy, and have to take account of the real world as well as the psychology of individuals.

    Faced with so much pressure on one's income, paying into a pension plan or paying one's rent, or even going on a holiday from the awfulness of work. How many can really afford to risk putting money into a pension plan, when time and again, those savings have proved worthless, ravaged by inflation, or stock collapse, or scandal. Let's face it, the capitalist system is loaded against the mass population in favour of the rich, and the corporate, so the only way to protect and support the mass of people is through proper taxing of capitalism, and proper distribution of basic universal benefits by the state.

    America thought it could do this its own way for too long and now that the lie has been shown up, you need to change. But you can't expect the mass of people to suddenly take control of their long term financial affairs, when most have struggled to grasp the basics of saving for a holiday, or stretching the paycheck from a weekly payment to a monthly payment.

    Mark (in London)

  2. Thanks, Mark- That is brilliant. I knew there was a weakness in the employee's motivation to save. But the solution for inequality is equality. All pensions should be set up the same way, whether as mandatory savings plans, or as optional ones. Giving automatic savings to the rich, and giving nothing to those with weaker labor power or lower pay/poorer jobs isn't the answer.

    Raising the base of Social Security (which is a compulsory tax) is an important element in my plan, providing a universal basic retirement which will suffice for most people. Right now, Social Security is a bit too low for people to survive on, by itself. This would constitute the decent and universal minimum that you say is missing in the UK. To make this more progressive and save a bit of money, the payouts could be taxed, instead of their current untaxed status.

    The status of police is a particular issue. I find it scandalous that police should be routinely retired in the US at age 55 with full pensions. Yes, they may not be able to run after criminals anymore. But there are plenty of other jobs for them to do, like detecting, dispatching, community relations ... the list is quite long. They and other government employees do not deserve priviledged status in that regard, which is why doing away with defined pensions would be such a positive step. I also support doing away with mandatory retirement ages generally, though of course that leads to some uncomfortable decisions in many individual cases. However, police over here are quite happy to claim disabilities of many kinds in order to retire earlier and gain fatter pensions, so delicate sensitivities may not be the primary issue!

  3. Eliminating the paternalistic employer relationship for retirement plans and replacing it with a paternalistic government relationship for retirement plans doesn't make a whole lot of sense. Especially if we already have huge unfunded liabilities for our existing entitlement programs. Providing automatic government "matches" to those who choose to save and only providing those benefits on a means-tested basis is more logical, less expensive and provides an incentive to participate. Doubling a defined benefit payment to a growing group of retirees - regardless of whether they have saved for that retirement - is unfair to those savers who have sacrificed current needs for future needs.

  4. No matter what, I'd definitely argue that the entire thing needs to be made federal, that is to say, nationally equivalent. People in fields like mine spend a lot of their "prime" retirement-saving years bouncing from one two-year post to the next - it's the nature of the field - and so end up with disjointed retirement accounts in banks across the country, all of which fall under slightly different rules. I have two completely (and eternally) separate accounts with the same company! The unnecessary complication is irritating at best.

    Of course, I'd be one to advocate (assuming we were going to completely overhaul the system) a program that would allow you to choose whether you want to aim for a "full retirement" at the end of your career, or else a "partial retirement," where instead of working 40 years and then stopping completely, you work 5 years and then take one off, then five more years and another off year, or something like that. I don't want to work my whole life waiting to be able to do things I'd enjoy doing (taking long vacations, etc), nor do I want to quit working arbitrarily at 65 (or whatever). I'd opt to take the money up-front and use it to create a completely different work-life balance; the sum over an entire life would be the same, but it wouldn't come as two discrete steps.

  5. That is a very interesting point, nk. I was not thinking sufficiently about those who want to take time out of the workforce. Social security is cleverly engineered to partially account for this, allowing less than 45 years in the yoke to count up to full benefits, and providing benefits to spouses. This is another reason to emphasize and expand Social security, rather than cutting it.

    It is also one more reason to drop private defined benefit plans- allowing workers flexibility to not only switch jobs, but also to take breaks when they like/need, and later resume retirement saving. Whether the retirement account money should be usable for vacations and the like.. that is a psychological question of what kind of savings discipline people typically need. As the first commenter points out, we do tend to need some structural support to save for retirement.

  6. The flexibility issue can be solved if people are allowed to take out retirement funds early without penalty, or are allowed to split their contributions between a "retirement" account and a "short-term break" account. I'd like to think that people who would opt for this kind of system (a more flexible, less binary kind of work-life) are those who are potentially better about having the discipline necessary to utilize such a system...