A lot of people are having a miserable retirement. A lot of others are heading for a miserable retirement. They haven’t or are not saving enough. They spent too much and underestimated, or ignored, the long-term costs of inflation and how it hurts the standard of living. This made things that were once affordable unaffordable for many people as assets run down a faster pace than expected.
This is part of the front-page story of the Wall Street Journal of June 23, 2018 entitled “Time Bomb Looms for Aging America.” It is a frightening story that GregoryBresiger.com has been writing about since we began almost five years ago.
Right on Most Things But…
Although the WSJ drew some wrong conclusions about how millions of Americans got into this retirement savings fix and the article didn’t really offer any long-term solutions, nevertheless the editors and reporters are to be commended. They used their awesome power as the nation’s leading business publication to make Americans aware of this serious issue.
The Problem Explained.
“Older Americans,” the article begins, “are facing a tougher outlook than the generation before them. Their income has stagnated and more are at risk on the verge of retirement.”
The article had a chart showing that the percentage of those ages 50-59 with insufficient retirement assets. They are at risk of seeing their lifestyle worsen in their last years. Their assets aren’t keeping up with their increasing costs. This number has risen dramatically over the past 15 years. The dismal figure has gone from some 35 percent to 45 percent as millions more are not saving and investing enough for retirement. The story included several personal histories of elderly people whose years in retirement are now anything but golden.
Indeed, GregoryBresiger.com has been documenting this problem for years. Millions of Americans, along with people in most other advanced welfare state democracies in the West, consume too much and save too little. These problems, we have argued are cultural—the emphasis on spend now and forget about tomorrow—political—tax policies approved by both parties that often discourage thrift—and economic—nations with low savings rates don’t grow as fast as those that encourage savings. The latter is why the highest growth rates in the world are usually in Asia, not the United States or Europe.
Here’s Where the WSJ Is Wrong
But while much of the analysis was excellent, toward the end of the story the WSJ drew the wrong conclusion and missed the point of why millions of Americans are in, or are approaching, retirement hell.
“For many Americans facing a less secure retirement than their parents, the biggest reason is the shift from pensions to 401(k) type plans.”
The WSJ Goes Astray
This is just wrong. The woes of insufficient retirement savings, the problems of inadequate savings and investments at any age, are more profound than simply blaming the most popular retirement saving vehicle of our time. It is also a culture problem. We have had a tax code that discourages thrift along with a government that sets a poor example for citizens. Governments, both left and right, have been spending like crazy; running huge deficits, then passing on incredible debts to generations unborn.
Many individuals have caught the crazy spending bug. We live in a consumer society in which production is discouraged, even frowned upon in popular media as miserly. A live for today and the hell with tomorrow model is championed. The idea of letting people save more, letting them take home more of their pay, has been often dismissed by political elites.
The recent income tax rate cut was a good start but just a start. Capital gains and dividends tax rates are still far too high and payroll taxes are at crushing rates for young workers who want to start saving (I remember how difficult it was for me to get started in my 20s. I would look at those FICA tax rates, of how much they were eating up of my paycheck, and gasp).
Bigger tax cuts are needed along with spending reductions to justify lower taxes. But that is difficult to do when you have so many pols playing the jealousy card; telling voters to be angry at people who have succeeded through hard work and sacrifice.
Enable, Don’t Disable
The politically popular idea of income equality is crazy. You don’t pull down the successful person to make society better. Instead you teach the less successful person how to improve himself or herself without relying on the promises of governments that come and go. How do you help the people at the bottom; people who want a better life?
You educate them in how they can help themselves so they don’t rely on handouts and the phony promises of many career politicians, seeming always ready to expand welfare state payments just before elections. One of the powerful tools for creating wealth is a defined contribution/401k program. And here the WSJ is right, but only partly so.
Many people don’t understand how important it is to take advantage of 401(k) programs, or any saving program, by contributing on a regular basis over a long period of time. They don’t understand that the benefits of compounding only accrue to the long-term investor. It is the marathon investor who wins the savings race, not the guy who only wants to run the 60-yard dash.
For example, I have known workers who had very good 401(k) programs at work; programs in which the employer matched up to six percent. That meant the employee’s six percent contribution to a plan became 12 percent. And yet some employees didn’t contribute a cent to the plan. That is not the fault of the 401(k) savings vehicle; that is the result of a lack of investor education or, in some cases, a lack of investment discipline.
Lots of Piggy Banks
Every person who hopes to achieve financial independence, every man and woman who hopes to some day escape from the rat race and the horrors of riding New York City subways 10 times a week or driving crowded highways that drive people to strong drink or worse, needs a savings and investing plan. A decent 401(k) plan—and not all of them are good but many are—is one way of doing it. And if you don’t have one at work, set up your own IRA and fund it each year.
And even if you have a 401(k) at work and are contributing to it, still set up your own IRA if you can. The more savings and investing pools you have working for you, the better.
But all this, as with any goal of substance, requires discipline. It requires the same qualities that our grandfathers and grandmothers had. They often worked for big stable companies and got pensions, but that day is long gone. It also requires something many Americans don’t have today—spending sanity. This means not acting like their governments. Modern governments today in democracies are often under the sway of Keynesian ideas that debt has no downside; that it will keep the business cycle humming (Those who think that is a good thing are invited to revisit the stagflation of the 1970s as well as the crashes of 1987, 2001 and 2008).
The sane person who will not end up depicted in horror stories in the WSJ is not running up huge superfluous debts. He or she is never a revolver. This is someone who carries credit card debts from month to month and pays outrageous interest rates on top of their charges.
How to avoid these problems? Wait for pensions to make a comeback? It will be a long wait.
But it won’t be a long wait for the next segment of GregoryBresiger.com in which I will discuss something the WSJ didn’t discuss: What needs to be done to avoid these retirement savings problems that are making millions of Americans miserable. How to ensure that the WSJ isn’t profiling you the next time it writes about the retirement savings time bomb.