Social Security: We Suck at Money


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.

Hands holding money.

“Money” by 401(K) 2012. Some rights reserved.

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?

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The full series:

Comments

  1. danielconceicao says

    I like what you want to do here. A defense of a public social security system is always welcome. But please consider a few things. Conventional thinking about saving is that one can increase her own saving by cutting back on her expenditures. For the individual, this may be true since her income can be viewed as independent from her expenditures. Given income, saving will surely rise if one reduce her expenditures. This view is obviously fallacious when it comes to the saving of the entire community (it is the good old fallacy of composition that Keynes tried to teach economists about). Since there cannot be saving without income, and there cannot be income without expenditures, then there cannot be saving without expenditures. Obviously, the income of the entire community is not independent on its expenditures. By cutting back on its expenditures, the community is also reducing its income, thus reducing its potential saving. In fact, given how we define incomes and expenditures(for example, the fact that consumption spending constitutes dissaving and investment spending does not), we can easily show that saving over any given period is determined by total investment spending, the government deficit and the current account surplus. Thus, if we want to boost the saving of the community as a whole during times when private investment is falling (not enough opportunities to produce profitably) and foreigners are cutting back on imports, rather than hoping for the private sector to cut costs (which are also incomes) and rather than advocating for a more fiscally responsible government, perhaps we should be looking for ways to INCREASE the public deficit in ways that are not wasteful (such as waging wars). If you want to fix social security, make it a part of the federal budget and stop worrying (not that you do worry) about the appearance of the federal government’s balance sheet (the deficit is not a problem; unemployment or inflation are). Worry about the economic consequences of the government’s fiscal decisions instead (inflation and unemployment). And no, government payments are not financed by tax receipts and borrowing of the government, so there is no reason for us to be worried that a monetarily sovereign government (unlike that of Greece, for example) will become financially unable to make needed payments at some point.

  2. Tracey says

    I am not an investment banker. I am making the best choices I can with my 401k money, and yet I’m not seeing any progress. As a Gen X’er, I don’t expect to get any Social Security, either–the Boomers will have sucked that pot dry long before I’m eligible.

  3. movablebooklady says

    I spent my working life (I’m now 69) at jobs that didn’t provide any kind of savings program other than Social Security, and I never made more than $20K in any one year. I now receive less than $900 a month and live on it only. Talk about reducing expenditures. But it is a cushion and when I can find work to supplement it, I can live fairly well (by my standards). However, I think basing the formula on one’s income perpetuates a lower living standard. Why isn’t there a floor for payouts, such as the “federal poverty level”? And the COLA isn’t always automatic: for 2012 we got a 3% raise, but we hadn’t had one for the previous three years because of some arcane way of figuring out the adjustment. Also, a ceiling would be nice, so that people who have income over, say, $500K, are required to divert their SS into charity. I know it’s not “fair” because they did pay into the system, but they don’t now need it and could do some good with it. I also think the Congress should be required to participate in SS.

  4. jesse says

    The other big boondoggle about individual savings is that it assumes no investment cost.

    That is, people don’t invest your money for free. Unless you invest a pretty large amount — my back-of-the-envelope says about $10,000 minimum — the returns get eaten up in the fees your money manager charges.

    Heck, even without the problem of saving enough to make it worth it, yur investment return (to have real savings) has to be above the rate of inflation AND the rate you are getting charged.

    So, if your financial advisor hits you up for 1 percent (that’d be cheap) and inflation is say, 2 percent. You need to make 3+ percent on your money just to beat inflation.

    This extends to after retirement, too. If there is any inflation at all your money disappears even faster than you actually spend it unless the return beats the inflation rate — something that might not happen at all.

    Ideally you would have enough to live off the interest, I guess, but that means you need to save on the order of $3 million in the current environment. God luck with that.

  5. trinioler says

    Tracey, read Stephanie’s previous post on social security and how it works. You’re wrong about SS running out.

  6. simonsays says

    There is also a category of people who simply don’t earn enough to get by, let alone save for retirement, much less make good or bad choices with their non-existent retirement savings.

  7. lochaber says

    moveablebooklady> I may be wrong on this, but I was under the impression that people only paid Social Security taxes on the first ~100k (very rough number) of income. – and at that, only certain types of income.
    (the rest isn’t directed at you, I just got started on the subject…)

    In some ways, this makes social security regressive, since the more income you make (over that cutoff, whatever it is), the smaller the percentage of your paycheck that goes to it. I strongly believe that, like income tax, there should be no ceiling to this.

    And, I have little to no sympathy for those people that complain that it’s unfair for them to rake in millions (or even billions) per year, and be expected to live on the same retirement as someone making ~30K/year. These people can afford to set up their own retirement funds and pay someone to manage them. Someone making ~30K/year, paying off student dept, an apartment, and trying to raise a kid, is lucky to just get by.

    I can’t remember where, it may have been on PZ’s board, that someone had stated that they believed that benefits should be equal across the board, whether you are a CEO or a floor sweeper, and only the pay scale should differ. I quickly grew to like this, and think it should extend to things like unemployment and social security as well.

    If someone is rich, they have the means to set up systems where they are not reliant on Social Security for retirement, and if they desire a retirement as high-end as their lifestyle, it’s up to them to plan for the difference twixt what is guaranteed (social security), and what they like. At the same time, because some has had a hard life, should not mean that they face eviction, homelessness, bankruptcy and other similar problems just because they got a crap deal in life.

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