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beyond blue
Toward a Post-Blue Retirement Model

We highlighted yesterday how strained our current retirement system is; others are thinking along the same lines. Dean Baker, co-founder of the Center for Economic and Policy Research, a liberal think tank, has an interesting op-ed in the Los Angeles Times about the challenges many Americans are facing in saving adequately for retirement, and the measures some state governments are taking to devise new retirement models:

Although Social Security is a tremendously important program, and provides a solid base that retirees can depend upon, its $16,000 average annual benefit doesn’t go very far. […]

In response to this situation, Illinois is developing a state-run retirement program that will make it easier and cheaper for workers to save. Many other states, including California, are studying this option.

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  • qet

    Contrarian view: a state desperate, and I mean desperate, for cash decides to garnish 2% – 3% (prediction: after more study by “experts,” it will end up closer to 5%) of its people’s wages and place them into a “publicly managed fund,” where under the sound and prudent supervision of the government, these “savings” would accumulate and be there for the worker 35 years later when he retired.

    Seriously? This program already exists. It’s called taxes. Its other name is Social Security–that, too, is a “publicly managed fund”. Er. . . .or not. No, the state would never “borrow” from that big pile of pension cash just sitting there like a big juicy low-hanging fruit, like the evil corporations used to do which is what gave us ERISA. State agents would never divert those funds to present vote-buying donor-satisfying appropriations, leaving the mess for their successors 30 – 50 years later to deal with. No, trust us: this time it will be different. We swear!

    • Jim__L

      Yes, the law would have to be structured so that there was absolutely no way for the state government to get their hands on the cash, to make the plans individual and portable if the owner moves elsewhere in the country, etc etc etc.

      Otherwise it really is just theft waiting to happen.

      • Ofer Imanuel

        My assumption was that “like a 401(K)” is correct. That means at the very least individual and portable.

        • markterribile

          Heck, it should BE a 401K.
          Do you realize that if you invest the IRA limit of $5,500 per year in investments which average 7% per annum (less than the hstorical return for the total stock market), starting at age 20, you will have nearly $1,500,000 at age 65? Given what the goverment is likely to do with inflation, that might not be enough, but it shows the power of compounding and regular investment. Make it $12,000 and you get very nearly $3,200,000–and that should be within the reach of a 401K.

    • Fat_Man

      Dude: Word.

      An accident (err, crime) waiting to happen.

    • Andrew Allison

      Couldn’t agree more with your basic thrust, but Social Security invests only in Treasury instruments. Low return, but backed by the full faith, etc. State and local governments are far from prudent. I’ve suggested before the ERISA should be applied to public pension funds.

      • John Morris

        Translation. Social Security payroll taxes are spent sustaining current welfare state and military needs and IOUs are placed in a ‘lockbox.’ It all ends up exactly the same, sooner or later the Social Security Trust Fund needs the money back and the government doesn’t have and won’t anytime in the forseeable future so they ‘sell’ another ‘Treasury instrument’ to another big government fund and extract the cash from it or the Fed just creates cash from unicorn poop and buys a Treasury Bond.

        Problem is no big fund the size of Social Security can possibly save money. Where do they put all that money? If they actually invest it you have a sovereign wealth fund and political corruption of epic scale, just sit on the cash and the withdrawal of that much cash would crash the financial system and playing accounting games, just spending it and having the government owe itself is a nasty lie. Personal accounts. And even then if we suddenly started doing it changing the national savings rate so drastically would have interesting implications. Can you say speculative bubble? On this scale any change has to be gradual.

        • Andrew Allison

          “Few budgetary concepts generate as much unintended confusion and deliberate misinformation as the Social Security trust funds.” http://www.cbpp.org/research/social-security/understanding-the-social-security-trust-funds

          • John Morris

            Spin again. Next time try a source that isn’t part of the Progressive NGO complex. In short, they are economically illiterate when they aren’t outright lying. Try rereading the second paragraph in my post.

          • Andrew Allison

            You second paragraph is wonderfully illustrative of the quotation. Not only does the Social Security Administration (which invests exclusively in government securities) save, and achieve better returns than many public and private pension funds, but the only “corruption” possible is the borrowing of Trust funds by the government, which involve none fees or commissions which rob other pension funds. Social Security has a demographic (aging population) problem, pure and simple.

          • markterribile

            Social Security is hidden taxation, and not just on the people paying into it. The money is spent by the government now, ridiculously low interest rates are paid, and the taxpayer will be obligated to make up the difference later.
            Tax money is spent, and does not produce–thus it shrinks the economy. Exceptions like needed highways are rare, though important, and do not justify the boondoggle spending. Money invested in stocks and bonds do grow the economy (Chile is showing the way on this).
            The government can only pay what it can tax. When it cannot tax anymore, it must either restrict payment or pour money into the economy in excess of what the economy needs for transactions, thus inflating the currency and stealing from savers while reducing the value of the government’s payouts. At that point, EVERYBODY is poorer.
            Long-term investment in stocks and bonds need not be excessively risky. Broad-based mutual funds reduce the danger from failure of specific companies; prudent asset allocation reduces the danger that the value of the investment will drop just when you need to cash it out (since the asset classes rarely move in the same direction).
            Prudent allocation is within the reach of any investor: The major mutual fund complexes will be happy to provide you with a fund whose asset allocation varies as you approach your specific retirement year.
            Finally, can you think of a better way to keep the government honest regarding the economy than for EVERY voter to have a stake in the fate of the investment markets (and the productive companies which rely on them)? This puts a glacier-sized icy lump in the bowels of any “Government Can Be A Force For Good” busybody progressive–and I’m very much in favor of that.

          • Andrew Allison

            More of the same; read the article referenced in the link. You are correct that prudent private saving and investment could theoretically replace Social Security, but a quick look at the national savings rate and the typical returns earned by pension plans both public and private will demonstrate the gulf between theory and practice. Personally, I’d happily support an opt-out from Social Security if, and only if, there were ironclad guarantee that those opting out would not receive taxpayer-funded benefits when they failed to save or made bad investments.

    • Pete

      A person has got to be crazy (or totally ill-informed) to trust the government, especially state governments in nearly dysfunctional states like IL and CA..

  • Anthony

    “The vast majority of Americans who expect to retire in the next decade can count on little income other than their social security. This is true not only for low-income workers, who have struggled most of their lives, but also for millions of middle-income workers.”

    Sobering, very sobering. And the Los Angles Times article ought to bring reflection upon reading. Though article focuses on age group 45 to 54, the issue practically affects Millennials and Generation X members(so called).

    In particular, “Demography and Aging” underscores idea of post in addition to implied concern to be mindful of the far future. In that regard, the issue may be of less practical importance to TAI’s general readership than to both Millennials and Generation x. In the same way, their respective views on economic organization of pension/retiree benefits thirty (30) to forty (40) years out would be insightful – as a public policy concern (since no one appears to dispute a new fiscal framework is needed).

    Equally important, the retirement issue may best be solved under the concept of subsidiarity (the idea that policy problems should be addressed understanding that America is an enormous and diverse country with considerable local variation – California, Illinois, for example.

    Finally in consideration of pension policy, “we cannot, of course, peer into the distant future, but we can still train ourselves and orient our political system to be mindful of the far future, a time horizon, for example, of at least two generations ahead.”

    • Boritz

      “understanding that America is an enormous and diverse country with considerable local variation ”

      The Left does not accept this and argues perpetually that “The United States is the only industrialized nation that [doesn’t have free this, free that, or free something else]” as if we are just an upsized Holland or Denmark and should behave accordingly.

      • Anthony

        As you know, I am not representing what you classify as a “left” point of view. And, I will not hastily conclude quoted statement is generally unacceptable as you infer. But, Boritz, if you have not already, read TAI’s David Blankenhorn’s essay on Polarization as we grapple towards some accord.

  • Boritz

    Workers would have a modest amount (around 2% to 3%) deducted from each paycheck, although they could opt out if they chose.

    Of course cash-strapped Illinois would have no temptation to withdraw the money once it begin to accumulate for the state’s current expenses and turn this into a Ponzi scheme whereby current income would go to current expenses and future liabilities would be backed by nothing but an IOU.

  • Andrew Allison

    This is doomed to failure for two reasons: first, government-managed pension funds have a perfect track record of enriching only their managers; second, the opt-out will likely be taken advantage of. The abysmal savings rate, even with the incentives already in place, suggests that the mass of US citizens have been conditioned to think that “the State” will take care of them in retirement and they don’t need to save. This is, of course, a myth. There will be copious tears before bedtime.

    • Boritz

      “the opt-out will likely be taken advantage of”

      Even more likely it will not be in the final plan.

    • Pete

      That most op-out is my thought, too.

      • Andrew Allison

        The huge problem facing this country is the widespread lack of personal responsibility for one’s own welfare.

  • Fat_Man

    Backs broke, bending, digging holes to plant the seeds
    The owners ate the cane, and the workers ate the weeds
    Put wood in the stove and water in the cup
    You worked so hard that you died standing up

    Maria Muldaur “The Work Song”

  • FriendlyGoat

    I’m glad TAI uses words like “necessary” and “promising” with respect to anything being hatched in Blue States, and I’m also glad that TAI suggests that Red States should similarly take up the over-riding issue. Even if the real “concern” might be political—-like that of G.W. Bush and the GOP doing Medicare Part D themselves to keep from losing the seniors’ votes—-a phrase like “would behoove Right-of-Center policymakers” acknowledges that conservatism had better be somewhat “compassionate” or risk having working people wake up and abandon them.

    The keys to whether these ideas are good or bad lie in two areas. The first is a matter of whether the plans are allowed to be a ripoff of excessive fees from workers to corporations for administration over years or decades. The second is whether the plans are allowed to shift all the market risk of the investments onto the workers where the plans end up being slow-moving prey in the market for the lions of the “more sophisticated” traders of the world. We all have to realize that A LOT of money is being traded out of “the market” by high-frequency trading and other dodge-in-and-out methods. Looking at something which might run decades into the future, we do NOT need any misunderstood schemes which have the effect of supplying the predator of “the market” with the withholding of little people.

    • Anthony

      “Where the plans end up being slow-moving prey in the market for lions of the more sophisticated traders of the world.” Good point FG.

      • FriendlyGoat

        Thanks. And Merr y Christmas to you.

        • Anthony

          The same Merry Christmas to you and those you love.

  • Jacksonian_Libertarian

    The Government Monopoly like all Monopolies, suffers from the same disease, the lack of the “Feedback of Competition”. It is the “Feedback of Competition” that provides both the Information and Motivation which forces continuous improvements in Quality, Service, and Price in free markets. The leftists and Big Government activists on the Right, would have everyone believe that the lazy, overpaid, Bureaucrats in the Government Monopoly are experts and better at everything than the citizenry, when the “Truth” is the exact opposite. Those working for a Monopoly like the Government, don’t have the Information (what are our competitors doing, and how can we beat them?) to make improvements, nor do they have the Motivation. In fact, the Motivation for Government Workers is to avoid risk of any kind, avoid being blamed for anything, when you have to some work make sure many other Bureaucrats have signed off on it to spread the blame, because if everyone is responsible then in a Monopoly, no one is responsible. There is a phrase commonly used in Government circles “Good enough for Government Work”, this illustrates just how important the Quality, and Service of their work is to the “Public Servants”. As far as productivity goes and therefore “Price”, the incentives are all for “Less Work”, because if a department doesn’t finish its work for the year. I can demand more money next year, to add on more employees, which means less work for the already underworked and unproductive Government Employees, and their Supervisors are now supervising “More” employees and can demand higher pay, there might even be promotions and raises for many because of “Not Working”.

    So if you have been asking “What happened to the American Dream?”. The simple answer is that the “Burden” of the Government Monopoly stole it away incrementally over that last 140 years or so. Before that America grew at a rate of 7%-10% per year which is what an economy can expect according to the Rahn Curve, when the burden of the Government Monopoly is about 15% of GDP (enough to maintain the essentials which only a government can do, Defense, Foreign Relations, Justice, but letting the private sector which is exposed to the all important “Feedback of Competition” do everything else.). This is because “Compounding Growth” is the “Most Powerful Force in the Universe”. And this “Most Powerful Force in the Universe” took America which was nothing in 1600 to being 50% of the world’s GDP only 350 years later at the end of WWII. This was when America supplanted Great Britain as mankind’s bleeding edge culture and world hegemon. It was several decades before this that the Big Government Monopoly began its crushing of the private economy by bypassing the US Constitution and assuming authorities that the Constitution never gave it, and in fact forbid the Federal Government from assuming.

    This means that if we ever want the American Dream Back, we must return to a strict adherence to the word and letter of the US Constitution. If this was done the Social Security program would have to be turned over to the States, as the program is an unconstitutional Ponzi Scheme. And with the 50 states “The Laboratories of Democracy” each doing their own thing, ways would be found fix the American Retirement system, along with the rest of the Unconstitutional Federal Government Programs. This is because the 50 States compete with each other, and so have a limited amount of the all important “Feedback of Competition”, even though it isn’t local, it would still help significantly. More importantly the unburdening of the economy would make paying for everything much easier as the “Most Powerful Force in the Universe” started working again.

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