This is part of a week-long series about Social Security. If you want to read the whole series, links are provided at the bottom of this post.
One of the “selling points” of privatizing Social Security was the idea that “You manage your own money.” I put “selling point” in quotes because I don’t understand how this could be any such thing.
Check the business trade news (not investing news as presented in most papers) and you’ll find annual stories telling you how poorly prepared current workers are to retire. If your company offers a 401(k) plan, you’ll get similar information from your employer, urging you to save more and not be among the poorly prepared.
So, how many people (in the U.S.) who are reading this are saving enough? How many even know what “enough” is supposed to be? Hint: If between you and your employer you are not contributing 15% of your pay to fund your retirement, many investment consultants say you’re not saving enough.
Are you doing that? I am, but I’m in a position to make that decision relatively comfortably. Even so, I didn’t do that for all too many years of my working career. I didn’t feel like I could afford it. I didn’t have the knowledge needed to set up an IRA when I worked for a tiny company that didn’t sponsor a 401(k). Whatever the reasons, I made financial decisions that were bad for me in the long term.
That’s what we all do, by the way, unless we are raised in a culture where the good decisions aren’t decisions, just the way things are done. People whose parents have retirement accounts mostly elect to contribute, they mostly contribute enough to get a full company match. They still only sometimes contribute as much as is recommended, though, and they still often cash out their savings instead of rolling them over when they switch jobs. A pile of money when you need it is a very strong temptation.
It is because of these factors that laws around retirement savings have been changing recently. They’ve been encouraging or requiring automatic enrollment of new employees into savings plans, so that not contributing requires an extra step. That still doesn’t have everyone contributing, however.
Then there’s the question of how to invest those savings. How much do you know about investment risk, investment return, long-term versus short-term investment strategies? Can you tolerate enough risk to generate enough return? How well can you predict which companies will grow and which ones will go belly-up? Would you ever have considered investing in MySpace?
Don’t feel bad about your answers to those questions. It turns out that professional investment managers don’t do as well as we might like, either. That probably shouldn’t surprise you after a decade that saw both the tech and housing bubbles burst, but it’s still a bit terrifying. These are the same people who create the funds into which our savings go.
And if that doesn’t make you uncomfortable enough, do you have any idea how to make your savings last through retirement? How about if you live well past age 90, as my grandfather did? He was very nearly out of money when he died, despite having lived with the world’s most frugal woman until just a few years before his death. (My grandfather, by the way, had a tiny pension to supplement his savings. You likely won’t have that.)
Even if you think you have a strategy, how will that be affected if another one of those investment bubbles bursts just as you retire? That happened to a fair number of boomers a few years ago. They’ve been drawing down savings at a rate they didn’t plan for because the money they take now can’t rebound when the economy does.
Annuities are a good thing, of course. They shift risk to someone else. That also means two things, however. The first is that you’re relying on the long-term financial stability of (generally) an insurance firm. These days, that’s an insurance firm that is allowed to invest in risky ventures. That also means that you are paying some extra to have someone take that risk off your shoulders.
Do you know enough to balance rates and company stability when you’re shopping for an annuity? Do you know enough to ask for an annuity that builds in cost-of-living adjustments so the amount of money you get each month continues to buy the same goods and services throughout the length of your retirement?
As you can see, private saving and investment for retirement requires quite a bit of expertise. Contrast that with Social Security. A fixed amount is contributed by you through your taxes. You can’t make bad choices about it because you have no choices. The same fixed amount is contributed by your employer.
You can’t remove the funds before you retire. The amount you receive is fixed based on your income during your career. It can’t run out before you die, and it is indexed to reflect the cost of living, so it buys you as much in the last month you receive it as the first.
So, do you still think managing your own money is such a good deal?
The full series: