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Today's Commentary: 06.03.04
The Last, Best Hope for Retirement, Part One
Today's Commentary: 06.07.04
The Last, Best Hope for Retirement, Part Two
Protection of your accumulated principal is not, as we discussed in Part One, an easy task. The long term effects of inflation and the inevitable effect of taxes will shrink your nest egg even as you become more dependent on it - especially if you live for much longer than you may have previously anticipated.
One of those external assaults is coming courtesy of our sitting president. In his 2005 budget, he is offering the American people two very expensive ways to ensure that you will not have enough. As harsh as that sounds, there are numerous reasons why his well-intentioned and misguided attempts at fixing retirement will fail unless he includes Social Security reform in the package.
Current IRA plans have too many restrictions to fit into the great Bush giveaway. His proposal would be to create two tax free (after a certain age) accounts that would allow contributions of up to $5,000 without any income limitations. The money in his Retirement Savings and Lifetime Savings Accounts would also be available for major purchases such as a home or a college education. While on the surface this sounds like a good financial idea, these accounts are designed with the upper middle class and wealthy in mind.
Unlike the lower and middle class wage earner, the higher wage income earner usually, but not always, enters into retirement with some sort of nest egg that may include pension income as well as investment income. This puts them at an advantage while adding pressure to the benefits program.
Robert C. Pozen, visiting professor at Harvard Law School suggests that reform in Social Security should resemble one of the original suggestions made by FDR when the program was adopted. The means test was adopted by New York when Roosevelt was governor. the idea is simple. By determining need, the benefits could be distributed more evenly. This reduced benefit for those who do not necessarily need it will meet, as it has in the past, with objections. The screams come courtesy of "those that have" while wondering aloud why they should support an entitlement of the program for "those who do not".
Incentives such as tax breaks may work to encourage savings but bigger changes are needed to change the program.
If Mr. Pozen had his way, the program would switch from a wage indexed method of accounting that, in his opinion creates an unusually large benefit based on career earnings to one that is focused on prices. Wages have grown in this country at a pace that exceeds the price index by 1%. Over the course of a workers lifetime, this discrepancy between wages and prices would give the worker 25% to 40% more in retirement benefits that they would have received under a benefit system set against the price index.
Workers look for an adequate living benefit based on something called "a replacement ratio". That figure is absolutely necessary to the low wage earner whose income at retirement would fall around 60%. With three quarters of all Americans targeting retirement at 62, the pay as you go program currently in place will not last. This borrowed time approach could continue without much in the way of reform until 2018. When that date hits, the program will no longer have money that the federal government can fraudulently borrow for other purposes. It will them be a program supported by less workers for more retirees.
Three things can be used to change the current state of affairs without costing the government too much to alter the course of the impending disaster. The first involves a gradual, income adjusted change in the wage index and price index. Upper income workers would find their benefits changed to a price index based benefit in combination with tax relief incentives to save more for themselves. This would reduce the overall benefit for this group by fifty percent but would allow them to create wealth in outside investments without increased tax consequences. Wage indexed calculations would remain in place for the remainder of the workers ensuring them something for a retirement that may not be available at the desired age of 62. Lower income workers tend to be employed in occupations that are not easily survivable into old age. A further move to an later age in awarding full benefits is breaking the back of the average worker.
The second would forbid the government, by law, from borrowing from the Social Security Trust Fund and require that they begin to pay back what they owe now rather than later. This would not, I'm afraid, be allowed through the reduction of other social benefit programs currently in place and in many cases, underfunded.
The third and final suggestion involves the permanency of the Bush tax cuts. These tax cuts are misplaced and ill-conceived. Making the upper wage earner benefits permanent will come at the expense of the President's "compassionate agenda".
Using the boldest of political fraud, the president raided the surplus in the Trust Fund to pay for his tax cuts, many of which did not trickle down to the population in equal amounts. If you hear the average amounts each American received as part of these cuts ($1448) and you didn't receive that amount, it is because those averages were skewed to the affluent.
The surplus that the President told us was ours, was indeed ours. It was our retirement money that had been dutifully paid when the economy was good. It would have helped pay for Social Security and Medicare, two programs whose future now looks even more dire in the face of growing deficits. Those deficits, one columnists suggested, were paid for using our credit cards.
The end result of those cuts will be felt long after Mr. Bush leaves office. It will not be fixed by making them permanent.
Which leaves us with the last, best hope for retirement, our health. Keeping ourselves in good "working" order has now become even more important. We will need to remain employed far longer that any of us had anticipated, even if we do so on a part-time basis.
I recently read in a union rag that critized members thinking. The 401(k) plan offered to their union members by the employer - unmatched of course - was not as good as the pension they offered as part of the contract, the article said. But like all pensions, it failed to mention the reduction of contributions many pensions are faced with, in this particular case with this particular union, the loss amounted to almost 67% less than previous years. This makes any pre-tax savings the employee can garner worth while - necessary. In many cases, finding the right pre-tax percentage that does not effect the employees take-home pay is worth doing.
Reigning in your plans for future debt burdens so that you are relieved of them by age sixty should be a part of every workers plan. If you have recently refinanced your mortgage for thirty more years, and in doing so, extending your debt to reach well beyond your working years, don't be surprised if inflation begins to make that look like a poorly thought out decision.
The last, best hope for retirement lies in three things: lower expectations, higher savings, and the belief that the quality of life you lead now is the only the only way you will be able to continue to work in those golden years.
The Blue Money Report
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