Cartoon of the day

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401(k) world

Friends often ask me when I plan to retire. My response is, in 6 years—or perhaps 16 years.

That’s because I and hundreds of millions of my fellow citizens now live in what Thomas Friedman refers to as a “401(k) world.”

For Friedman, it’s a world of individual promise:

We now live in a 401(k) world — a world of defined contributions, not defined benefits — where everyone needs to pass the bar exam and no one can escape the most e-mailed list. . .

If you are self-motivated, wow, this world is tailored for you. The boundaries are all gone. . .Your specific contribution will define your specific benefits much more.

But for the rest of us, the 401(k) world—a world of defined contributions retirement programs, instead of defined benefits—is just a giant scam in which employers have managed to shift all the risk of saving for retirement onto their employees and the financial industry captures a new set of fees. Sure, employers (some of them at least) have to distribute some of their gross profits to their employees’ retirement accounts, and the employees have to come up with another portion out of their wages and salaries. But the risk is all with the employees, since their actual retirement savings depends on what happens in equity and bond markets. Once their initial contributions have been made, employers no longer have to worry about coming up with the funds to keep pensions fully vested. All the risk falls on the employees—and the gains accrue to the lucrative area of managing both employer-mandated and 401(k) retirement accounts.

Matt Yglesias has some sense of what’s going on:

the problem with living in a 401(k) world is that Planet 401(k) is a pretty sucky planet. Here’s the essential shape of 401(k) as a backbone of the retirement system:

— Poor people get absolutely nothing.

— Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect

— For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words, it’s inverse to need.

— A small minority of middle-class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee, broadly diversified fund as their savings vehicle.

— Most middle-class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.

— A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle-class mass market based on their ability to swindle people.

Felix Salmon has an even clearer view of what’s going on:

a 401(k) plan is an icon of futility and the way in which the owners of capital extract rents from the owners of labor. . .the 401(k) is a way for both your government and your employer to disown you, and to leave your life savings to be raided by the financial-services industry and its plethora of hidden and invidious fees.

All of which means, in a 401(k) world, employers and banks are making out like bandits, while the rest of us are forced to have the freedom to rely on whatever we can save for retirement, plus the vagaries of financial markets.

In Friedman’s world, we get what we deserve. In my world, I’ll be able to retire in 6—or 16—years.

Chart of the day

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The vast majority of American workers are forced to have the freedom to rely on Social Security payments to finance their retirement, because the other two legs of the stool—defined-benefits pensions and home prices—have collapsed.

Therefore, Michael Lind, Joshua Freedman, and Steven Hill argue, the United States should be expanding, not cutting, the Social Security program.

Cartoon of the day

Special mention

Cartoon of the day

Special mention

Chart of the day

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According to the Center for Retirement Research (pdf),

as of 2010, more than half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 – which is above the current average retirement age – and annuitize all of their financial assets, including the receipts from a reverse mortgage on their homes.

Chart of the day

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Bruce Bartlett is right: if someone takes early Social Security benefits (say, at 62), the amount of money they receive is less than if they’d waited. And, as Shelly X. Liang has shown, the lower benefits would put them below the poverty line.

Why, then, do people choose to retire early?

All Bartlett can come up with is ignorance:

Thus there is a huge financial price to be paid for drawing Social Security benefits early and an enormous payoff for delaying the decision to claim benefits. Unfortunately, I think many workers have a “use it or lose it” attitude, incorrectly thinking their benefits will be bumped up when they reach the full retirement age or ignorant that their benefits rise when receipt of them is delayed.

An alternative explanation is, they need the benefits at the age of 62—either because they can’t continue working or they’ve been bumped from their jobs or their earnings from the jobs they’ve managed to find are simply too low to live on.

And so they file for Social Security benefits and, as a result of the early retirement penalty, face the prospect of a lower income for the rest of their lives.

The crying game

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According to the the annual Wells Fargo Retirement Survey, retirement has become a guessing game.

Actually, it’s more like a crying game—since over half of pre-retired Americans (53 percent) say they are not confident they will have saved enough for the life they want in retirement.

And they’re right: according to Sadaf Knight, in 2009, 40 percent of retirees had saved less than $10,000 for retirement (the first bar in the chart above), and over half of them had saved less than $25,000 (the first and second bars combined).

That’s not at all surprising, since, according to a recent survey by CreditDonkey.com, 41 percent of respondents reported having less than $500 in savings.

For many Americans, imagining retirement with a decent income is not a guessing game. It’s a crying game.

And it will soon become the hunger games if plans are enacted to cut Social Security.

Cartoon of the day

Special mention

United States of financial insecurity

Paul Klee, “Tightrope Walker” (1923)

The United States is becoming a nation of increasing financial insecurity.

According to a new survey by the Consumer Federation of America (pdf), more Americans find themselves living paycheck to paycheck, forced to reevaluate their expectations for retirement, and falling further behind in terms of their retirement savings.

Clearly, in the midst of the Second Great Depression, more and more Americans are being forced to walk a financial tightrope.