Sunday, February 10, 2013

The retirement bailout

Duncan Black, aka Atrios,  makes the case in USA Today for yet another bailout -- this time for those who have failed to save sufficiently for retirement:
We need an across the board increase in Social Security retirement benefits of 20% or more. We need it to happen right now, even if that means raising taxes on high incomes or removing the salary cap in Social Security taxes. 
Over the past few decades, employees fortunate enough to have employer-based retirement benefits have been shifted from defined benefit plans to defined contribution plans. We are now seeing the results of that grand experiment, and they are frightening. Recent and near-retirees, the first major cohort of the 401(k) era, do not have nearly enough in retirement savings to even come close to maintaining their current lifestyles. 
Frankly, that's an optimistic way of putting it. Let me be alarmist for a moment, because the fact is the numbers are truly alarming. We should be worried that large numbers of people nearing retirement will be unable to keep their homes or continue to pay their rent. 
According to the Center for Retirement Research at Boston College, the median household retirement account balance in 2010 for workers between the ages of 55-64 was just $120,000. For people expecting to retire at around age 65, and to live for another 15 years or more, this will provide for only a trivial supplement to Social Security benefits. 

And that's for people who actually have a retirement account of some kind. A third of households do not. For these people, their sole retirement income, aside from potential aid from friends and family, comes from Social Security, for which the current average monthly benefit is $1,230.
The logic presented is simply hideous: people have failed to save sufficiently for a retirement which will allow them to maintain their current lifestyles (a life event for which they have had literally decades to prepare), social security is inadequate to the task and therefore the confiscation of money from others in the form of taxes should be increased to pay for a 20+ percent hike in payouts. 

Let us begin by appreciating how truly pathetic $120,000 in savings is for a household on the verge of retirement. If a household composed of two boomers born in 1950 did not save a single dollar for retirement until age 30 and then began saving a mere $150 per month ($1,800 per year, or 6 percent of salary for household income of $30,000) they would have $125,000 by age 60 assuming a 5 percent return on investment (Yes, $30,000 would have been a decent household income in 1980, but by 2004 it would have been $14,000 below the median, so inflation wouldn't seem to be a big consideration here).

But a 5 percent return is basically a worst case scenario. Remember, a boomer born in 1950 who didn't save a dime until turning 30 in 1980 was perfectly positioned to take advantage of the greatest bull market in history lasting from 1982-1999. Indeed, from 1980 until 2010 the S&P had annualized returns of 11.36 percent. Consider this: someone who averaged $30,000 in salary from age 30-60 and contributed a mere 3 percent to their 401(k) per month (401(k)s were enacted into law in 1978)  -- $75 -- would still have had over $170,000 in retirement savings even assuming their employer provided them with zero match and a 10 percent annual return (thus underperforming the market by 1.36 percentage points). For someone who contributed $100 per month and obtained the S&P average they would have realized over $300,000 with five years still remaining until retirement age!

In other words, for a household from the baby boomer cohort to have only $120,000 or less in all but extreme cases reflects a conscious decision not to save for retirement. If they didn't or don't see the need to save for their own retirement, why should the rest of us? After all, retirement and advanced age are hardly a secret or unforeseen event. Do they bear no responsibility for their own fiscal situation? 

Perhaps, however, this attitude is too harsh on those who have failed to save. Again, let's place ourselves in the shoes of someone born in 1950. In 1972, when such a person was 22 years old, Congress voted to increase social security benefits by 20 percent and link payouts to inflation. If government has promised to provide a steady income stream to those in retirement, and has already boosted the level of payouts once, how much incentive is there for one to diligently save? Why be an ant when grasshoppers have all the fun?

Also note that, in addition to these increased benefits, Congress boosted social security taxes from 4.6 percent in 1972 (and remember that through tax incidence it is widely believed the matching social security tax paid by the employer is actually borne by the employee -- see footnote #8 here for further confirmation of that -- for an effective tax rate of 9.2 percent) to 6.2 percent (effectively 12.4 percent) by 1990. Given the combination of higher taxes and higher payouts, why should someone be surprised that so many people have failed to adequately save? 

Think this silly or outrageous logic? Consider what would happen should Black's proposal to increase Social Security payments be adopted along with the higher taxes to pay for it. Would people continue their savings habits exactly as before? Or would they see that savings is a fool's errand given the government's history of increasing payouts for those who fail to save adequately? Is that really so difficult to imagine? Neither this moral hazard nor the negative economic impact of higher taxes used to pay for it is addressed or even acknowledged by Black, which surely he must be aware of given his doctorate in economics. All that seemingly matters is that people have failed to adequately save enough money to preserve their lifestyle in retirement, and therefore it should be given to them.

Black's attitude is nicely summarized in the piece's penultimate paragraph:
If the consensus is that we need policies in place to ensure that the vast majority of people have at least a comfortable retirement, then we need to adjust our current failing policies. Expecting people to save sufficiently for their retirement, even if those savings are subsidized by our tax code, is unrealistic.
It's a beautiful representation of the mindset among so many of those on the political left: people are entitled to something, they are too dumb or otherwise incapable of achieving it on their own and therefore the rest of society owes it to them. It's equal parts economic ignorance (failure to account for the impact of higher taxes and moral hazard), pessimism/borderline misanthropy (lack of belief in humans to manage their own affairs) and arrogance/condescension (believing one has the foresight and wisdom to micromanage the affairs of society, in this case by confiscating money from some and giving it to others).

This is the mentality which holds sway among so many of our elected officials.

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