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to avert retirement bust

Consider forced savings
to avert retirement bust

A retirement income crisis rambles toward us. Each leg of the three-legged stool upon which retirement income has historically rested–Social Security, pension plans and personal savings–is crumbling, mostly for those under age 50 (the baby boomers, the generation Xers and whoever comes next). The crisis can be headed off only by a substantial, long-term accumulation of assets. Yet, the folks in Washington are so short-term-oriented they react only to the current year’s budget problem or the perceived voting habits of the current Social Security set. As a group, the boomers’ parents are doing nicely in retirement, thank you. But their good fortune is due largely to historical factors that will not be repeated anytime soon, such as the high ratio of current workers to retirees, a Depression-induced savings mind-set, long-term job stability, and strong union and employer pension programs.
In combination, these factors helped our elders accumulate the prodigious amount of assets required to retire. In this context, consider a couple of rules of thumb that retirement planners use: first, the average person will need at least 75 percent of his or her preretirement income during retirement; second, it will take roughly $20 in assets to produce $1 a year in real retirement income (nominal earnings may exceed this 5 percent return, but if inflation is, say, 3 percent, one must make 8 percent to pull out 5 percent this year and keep one’s income up with inflation next year).
Go ahead, apply these figures to your current income and see the result. For every $10,000 in retirement income, you will need $200,000 in assets–a cool $1 million if you plan to live on $50,000 a year. Up until now, the average person could count on the value of Social Security and an employer’s pension plan to provide around half of retirement income with savings providing the difference. Now look at what’s happening:
–Social Security benefits necessarily will be reduced by the time the boomers and post-boomers need them, despite assurances to the contrary. There simply will be too few workers to support the rapid increase in the number of elders.
–Employer and union plans will be worth less. Congress has been ratcheting down the benefits permitted under these plans for the past 10 years or so, and deficit-reduction schemes (aimed at reducing tax deductions related to retirement benefit plans) threaten future cutbacks.
–Work-force changes threaten accumulations. The boomers’ parents have pensions based on 30 to 40 or more years of service with one employer or industry. Today, few people can expect such longevity with one employer. Job changes often cause a loss of benefits or prompt employees to spend benefits that are cashed out.
–Savings are way down. One can moralize that this is easily solvable just by changing our attitudes about spending and saving. The fact is that we seem to know we should be saving more but are incapable of doing it.
What to do? Social Security and employer pensions simply are not going to provide as much in the future as they have in the past. It also seems unlikely that individuals can or will save enough voluntarily, whether through personal savings or IRAs. Let’s face it, retirement generally is too far out in the future to worry about when there are basic needs to meet, children’s education expenses or almost any other immediate expenses. The approaching crisis is getting noticed in Washington. Sens. Sam Nunn and Pete Domenici recently proposed using a dramatic tax incentive to encourage savings–a flat tax of 40 percent on all personal income after deducting net savings.
Since we find saving so difficult, how about considering another wild idea: forced forced savings–a mandatory payroll deduction of, say, 8 percent or 9 percent of everyone’s pay to be deposited in an individual account held and invested solely for the benefit of the individual? Benefits would be paid at retirement. If the individual died before all the funds are expended, they would go to the individual’s beneficiary.
The advantages of such a program are: It would be universal (unlike employer plans and voluntary savings); automatic deductions generally are not missed because we act on the basis of take-home pay; the program should be more acceptable than, say, Social Security because each person will be guaranteed a return of an identifiable savings pool; it would be portable (i.e., not be forfeited or spent as a result of a job change); and it would create a new pool of national savings for investment purposes.
There would be disadvantages. As with any personal savings plan, there would be no tax deduction for the contributions because Congress doesn’t need to give a tax incentive for a mandatory deduction (e.g., Social Security) and can’t afford one anyway. In addition, it is difficult to trust Congress not to lust after the huge funds that would accumulate, such as by requiring their investment in U.S. Treasuries. There would be some administrative complexity in keeping track of the accounts, including the investment returns, but if the federal government and large employers can keep track of Social Security earnings and the large numbers of 401(K)-type accounts, they can surely keep track of these accounts. Also, there would be political problems, e.g., some will say we can make a good deal better by having employers make the contributions. This could happen, but it would be a terrible mistake because employees would pay for the employer’s cost indirectly anyway.
Looked at in isolation this is a lousy idea–paternalistic, inconsistent with individual freedom of choice and subject to governmental tampering. On the other hand, examined in isolation, democracy is a lousy system of government. But it starts to shine just a bit when compared to all the alternative systems of government that have been tried over the years. The alternatives to forced personal savings seem to be forced employment until a ripe old age, or forced living arrangements with kids or relatives, or forced poverty because of retirement income shortfalls. Of all the forced maybes, forced savings may look all right.
(Justin P. Doyle is a partner with Nixon, Hargrave, Devans & Doyle. His colleague, Robert W. Wild, assisted with this article.)

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