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We
have a problem.
Laura
D'Andrea Tyson reported in Business Week, (Economic Viewpoint,
Retirement Savings: A Boost for the Needy, pp 30, June 6, 2005),
that the median value of IRA and 401(K) savings plans for
households headed by a person between the ages of 55 and 59 is
an impecunious $10,000.
Only about half of American workers participate in 401(k) or
other employer sponsored retirement plans. Furthermore, fewer
than 10% of eligible workers contribute the allowable maximum to
their 401K plans, and almost half cash out of their plans when
they change jobs.
And
what happens, may we ask, when these people retire? What are
they going to use for money? And more to the point, …. why are
Americans ignoring Private Accounts?
- Is
it human nature to avoid planning for the future?
- Does
our culture overemphasize current consumption?
- Are
we struggling under the burden of overwhelming household
debt?
- Or
is it because Congress keeps telling us that Private
Accounts are BAD?
The
awful answer. All of the above.
Depressing
as it may be, those of us who ignore the wealth accumulation of
Private Accounts face a painful financial famine when we retire.
AARP
reported in its June 2005 Bulletin that some 60 percent of
Americans 75 and older and almost 40 percent of those ages 62 to
74 receive more than half of their income from Social Security.
One third of those 65 to 74 and almost 50 percent of those 75 or
older have incomes of $18,000 or less (individuals) and $23,000
or less (couples).
Could
you survive on this income?
Approximately
40 percent of the boomer generation is ill-prepared to finance
its retirement. Unless something changes, these people will have
to depend on Social Security and public welfare for their
survival.
Is
that what we want?
Another
question. If every qualified financial advisor emphasizes the
importance of accumulating personal wealth in a Private Account,
if the accumulation of personal wealth is the only way to
guarantee an independent and comfortable retirement, then why
are multiple members of Congress making nasty, negative and
venomous attacks on Private Accounts?
- They
hate George Bush. Their loathing of his reelection justifies
every action and every statement, no matter how
obstructionist, dishonest, or misleading it may be.
- They
panicked. Congress needs the revenue from Social Security to
finance the Federal Government. With Private Accounts in
place, they have less money to spend.
- Or
perhaps their objective is to create a welfare class of
elderly constituents. Like it or not, that is precisely what
Congress is doing.
For
the record, I am not a fan of the President's ill-considered
Private Accounts proposal. But instead of coming up with a
suitable alternative, Congress has deliberately chosen to
mislead the people of America. The liberals have attacked
Private Accounts. The Republicans have failed to respond. It
doesn't seem to matter who gets hurt in the process. Retirees.
Workers. Families. In Washington's playhouse of theatrical
performance, the accumulation, preservation and exercise of
political power is far more important than reason, compromise
and public service.
Should
we care?
The
Pension Benefit Guaranty Corporation (PBGC), a federal
pension-insurance provider, has reported to Congress that over
1,000 pension plans are under-funded. Last year, over 127,000
beneficiaries in 192 pension plans suddenly found that their
plans had been terminated due to under-funding. Total
under-funding has grown by an estimated 800 percent since 2000
to over $450 billion. And we can expect pension plan defaults to
increase because these plans were largely fashioned in an era
when America's companies were relatively isolated from foreign
labor costs. Pension plans were affordable. In today's global
economy, it's tougher to fund them. So how many of the 34
million people covered by defined benefit pension plans will
eventually get their money? Some of their money? Any money?
More
bad news. State Governments, in the aggregate, will not be able
to fund their retirement plans. Eventually, a recession will
reduce available tax revenues. Retirement plan assets will
decline in value. Individual States which used Retirement
Obligation Bonds to fund their public employee pensions will
find themselves deeper in debt. According to Business Week (June
13, 2005, pp 71) more than 14 million public servants and 6
million public service retirees are due $2.37 trillion by more
than 2,000 different states, cities, and agencies. Of this, more
than $700 billion is under-funded. To these amounts one must add
huge under-funded State and local government health care
obligations.
Thirty
seven percent of these public servants belong to a union and
their defined benefit plans are an obligation of the payee by
law. So if State and local governments default on their
obligations, we can bet these public entities and their employee
unions will go to Washington for a solution. A bail-out.
But
unfortunately this is where America will run smack into the wall
of economic reality.
Consider
this scenario. It's 2018. By adjusting Social Security revenues
and benefits in 2005, America's unfunded Social Security debt is
less than $1 trillion (probable). Pension Plan defaults have
added $ 3 trillion to the nation's tax burden (possible).
Congress has bankrolled the Public Service employee retirement
shortfall by adding $1.4 trillion in debt (likely). Boomer
generation retirees have demanded increased health care coverage
and housing subsidies, adding another $ 825 billion to the
Federal debt (highly likely). Congress has finally figured out
that America really does have an energy crisis. Add another $1.5
trillion for heating subsidies and frantic attempts to find a
solution. And finally, the bill for homeland security is now out
of control. Add another $750 billion.
Total
Federal Debt exceeds $15.5 trillion. Because of a world-wide
recession, Congress is unable to borrow enough money to fund its
proposed budget.
Congress
will pontificate about the deficit. But neither conservative nor
liberal will have a workable solution to the budget crisis.
Congress will be hit with Public Sector, Social Security,
Retiree Subsistence, Health Care, energy and security funding
disasters at a time when tax revenues are decreasing,
unemployment welfare costs are increasing, and the deficit
spending binge of the last 18 years has reduced America's
borrowing power. By 2018, oil depletion has savaged the world's
economy. The political structure of almost every nation is under
immense pressure. America is no exception. The Production Crisis
scenario described in my book "Oil, Jihad and Destiny"
projects inflation climbing through 7.14%, a growing
unemployment rate that has reached 6.4% and a GDP that has
headed below 2.86%.
Sound
implausible? There are those who believe this scenario is much
too optimistic.
But
one thing is certain, when oil depletion guts America's economy,
the public sector will not have enough tax money to fund its
current welfare promises. They will have to be trimmed back.
Private Accounts are thus an absolutely critical component of
retirement planning. When you retire, you are going to need
every penny of personal wealth you can accumulate.
Or
would you prefer to be hungry and cold?
Most
of us already have one or more Private Accounts.
When
we open a checking or savings account, we have created a Private
Account. It's our money. It belongs to us. When we purchase an
Annuity, we have established a Private Account. IRA and 401 K
plans are Private Accounts. A vested interest in a union pension
plan is a Private Account. Making regular contributions to a
mutual fund is a fine way to establish a Private Account. Our
money is being held, in trust, by a corporation. In most cases
we have, in effect, loaned our money to the corporate sponsor
who will, in turn, invest it in a financial instrument. We
receive interest payments and perhaps an occasional capital
gain. Our personal wealth grows.
We
have wide choice of investments. They range from the relative
safety of Bank deposits to highly speculative growth stock
funds. Generally speaking, a modest increase in risk will yield
a greater return on our investment. We have to remember,
however, retirement accounts are long term investments – a
fact that multiple members of Congress have chosen to ignore.
Average returns have almost always been positive through periods
of market exuberance and recession. For example: as of 3/31/05,
and despite the market crash of 2000, an investment in MidCap
SPDRs delivered a five year average annual NAV return 6.55%.
If
we create a diversified portfolio of stocks, our investments
would include small, medium and large companies. We could also
diversify between growth versus value investments, companies
that pay a dividend versus those that do not, high versus low
risk ventures, and so on. Diversification is a way to spread our
risk over an array of investments. We are playing the averages.
Although some investments may not do well, in the aggregate the
losers will be more than offset by the winners. Our wealth
increases.
As
an exercise, I selected three Fidelity mutual funds as a way to
mirror a possible diversification strategy: Fidelity Low Priced
Stock, FLPSX; Mid-Cap Stock, FMCSX; and Fidelity Large Cap
Stock, FLCSX. If we look at the average annual returns for these
three funds over the last five years, then we are looking at the
worst five years the stock market has experienced since the
1980s. Many funds, including these, lost 25 to 45% of their
value during this period, and this loss would seem to support
the liberal contention that Americans should not have private
accounts because they could lose their money. But that belief
ignores the fact that retirement investments are held over a
long period of time. During the investment cycle for any given
private account, the market value of any fund will fluctuate. A
comparative evaluation needs to look at the performance of these
funds over a 5 and 10 year period. For example, as of 5/31/05,
Fidelity's Low Priced Stock fund had a positive return of 18.6
percent and the company's Mid Cap fund had a five year average
annual return of 1.6 percent. Over this same period, the Large
Cap Stock fund turned in the worst performance with a negative
return of -5.8 percent. However, if we had diversified our
private accounts among these three funds, our average annual
return over the last five years would have been a positive 4.8
percent. This – despite the market disaster of 2000, 2001 and
2002. Furthermore, as of 5/31/05, the average annual 10 year
return of all three funds sums to approximately 12.4 percent.
We
could pick multiple combinations of funds as illustrations of
diversification and then calculate their collective average
annual returns. The point, however, is that with diversification
and the selection of lower risk investment funds, one can
achieve a nice return on private account investments.
Furthermore, if retirement plans are restricted by law to
certain qualified fund profiles, then a Private Account investor
could enjoy even greater security by accepting a moderately
lower average annual return.
So
what happens if we have another stock market bust between now
and 2010? Will a series of market fluctuations make private
accounts impractical? Will the economic impact of oil depletion
and the world's ominous energy crisis send private retirement
accounts into the financial dumpster?
If
Congress acts decisively, we can avoid much of the economic
challenge that lies ahead.
First.
Congress needs to affirm that Social Security, Pension Plan and
Private Account funds belong to us, the beneficiaries. It's our
money. Or to put it another way, stop looking at our retirement
funds as merely another source of tax revenue.
Second.
Congress must acknowledge pay-as-you-go funding is an obsolete
concept that is certain to fail in the economic environment that
we face in the 21st century.
Third.
Congress should take itself out of the retirement business.
Sure. Retain oversight, but privatize the entire program -
Social Security, Pension Plans and Private Accounts. The works.
Forth.
Congress must overhaul America's Retirement System. Retain
Social Security as a basic retirement plan administered by a
quasi-public institution. Replace existing Pension Plans with
portable Private Accounts administered by private financial
institutions. Morph and simplify IRAs, Roth IRAs and Keogh plans
into a new family financial vehicle for people who want to
accumulate an estate.
Social
Security provides an inflation adjusted minimum level of
financial security. Participation is mandatory and payouts are
funded by tax revenues. Private Accounts give employees an
opportunity to grow their personal wealth according to their
annual income. The more you make, the faster your "nest
egg" grows. Participation is mandatory. Although there is a
minimum contribution level, additional employer and employee
contributions are permitted. The family estate retirement plan
is voluntary.
We
must, of course, establish a reliable and secure investment
vehicle for Private Accounts. One possible alternative is
discussed in my collection of articles " Truth, Reality and
Social Security" (you can find them at www.tceconomist.blogspot.com).
In these articles there is a Private Retirement Account proposal
that uses federal and state revenue bonds as an investment
vehicle. Our savings would be invested in projects that generate
revenue. The return, less insurance costs, should mirror
Fidelity's Spartan Muni Income fund, FHIGX. As of 5/31/05, this
fund had a five year average annual return of 7.74%, and a 10
year average annual return of 6.24%.
A
key point. Well placed Private Account investments are backed by
hard assets - bricks and mortar, inventory and equipment. It's a
going business with a balance sheet, cash flow, and annual
revenues from sales, fees or taxes. By contrast, Social Security
is an inferior investment. The "Trust Fund" is nothing
more than a collection of IOUs whose intrinsic value will
decline as America's debt increases and its economy tanks.
So
that's our problem. Our future hangs in the balance.
Someone
should tell Congress. Private Accounts equal personal wealth.
And we need to start saving. NOW.
Ronald
R. Cooke
The Cultural Economist
©
2005 Ronald R. Cooke
The
Cultural Economist
Author, "Oil, Jihad
& Destiny" and "Detensive Nation"
Editorial Archive
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