401ks, Baby Boomers & “Privatizing” Social Security

mousetrap-dumb-money-imageThis is a follow-on to my recent post on Anthony Scaramucci, Trump’s handler-apparent.

The Champions of the 401(k) Lament the Revolution They Started
The dominant vehicle for retirement savings has fallen short of its early backers’ rosy expectations; longer life spans, high fees and stock-market declines

Ms. Ghilarducci wants to ditch the 401(k) altogether. She and Blackstone Group President Tony James are recommending a mandated, government-run savings system that would be administered by the Social Security Administration and managed by investment professionals. While both are Democrats, they believe their solution has bipartisan appeal.

“There are a lot of governors and mayors who are Republicans, and the first wave of the crisis will affect states and cities,” Ms. Ghilarducci says.

She says she has already reached out to President-elect Donald Trump’s advisers to float the plan.

You might think that as a libertarian, I would be for anything with the word “private” in it, but I am actually staunchly opposed to government-mandated spending directed into private coffers. This is the essence of cronyism, is tantamount to fascism and is referred to lovingly by the late Irving Kristol as “the conservative welfare state:”

The basic principle behind a conservative welfare state ought to be a simple one: Wherever possible, people should be allowed to keep their own money—rather than having it transferred (via taxes) to the state—on condition that they put it to certain defined uses.

Unfortunately, the conservative welfare state creates hyperinflation and mispricing in targeted industries and directs individual decisions in a direction they would not go in a free market, which per force reduces that individual’s utility. In addition, the providers of these government-mandated services are often highly-regulated and exploit legislated barriers to entry to keep competitors out of the industry giving them the room to make out-sized profits and deliver inferior returns driven down by artificially high demand and reduced competition.  In my opinion, this approach should be avoided at all costs in all industries, and particularly in retirement planning as it might be doubling down on what was possibly a trap from the beginning to convert middle class pensioners into the dumb money when 401ks replaced defined-benefit plans the country over.

Before the 401k revolution, pension funds made up 44% of the market, if I recall correctly. The little guy with a pension was represented by the smart money and was insulated from much of the risk of the market. Once the government made regulatory changes that made defined-benefit pension plans too costly to maintain in many cases at the same time they introduced 401ks, the little guy’s savings was retirement money was shifted from professionally-managed, guaranteed-return investments to being the “dumb money” in the market. Not only did he not have defined benefits but he bore the brunt of market risk and as an amateur couldn’t even assess it properly for the most part–these are the guys who sell at the bottom and buy at the top, or at least that might have been the intended consequences.

This new plan to send social security down the same path also looks like a trap cooked up by the investment industry to shore up their investor base just as the first Baby Boomers are forced en masse to liquidate their 401ks.

Pulling Retirement Cash, but Not by Choice
Baby boomers’ mandatory withdrawals from 401(k)s, IRAs and other tax-deferred retirement accounts start in full force this year, touching off a massive shift of cash

The largest generation in U.S. history has to start pulling its retirement money this year, kicking off a mandatory movement of cash that could total hundreds of billions in the coming decades.

U.S. law generally requires anyone age 70½ or older to begin annual withdrawals from their tax-sheltered retirement accounts and pay taxes on those distributions.

The oldest of the nation’s 75 million baby boomers cross that threshold for the first time this month, according to a U.S. Census Bureau estimate of when that demographic group began.

The obligatory outflows from 401(k)s and IRAs are expected to ripple through the U.S. economy, stock market and a money-management industry that relies heavily on fees from boomers’ tax-sheltered savings plans and assets.

I have read that Bismarck invented the welfare state in the wake of the Industrial Revolution: People were finally able to take care of themselves and did not need the paternalistic protection of the Kaiser so he taxed them until they did and doled it back to them piecemeal so they would keep coming back.

What’s the solution to underfunded Social Security and too little retirement savings? Let the free market decide. Let companies decide how they want to offer incentives for high-quality loyal employees and let individuals decide how they want to plan for the future. Also, let interest rates be determined by the free market so individuals can earn some risk free return for long-term savings. If you think this free market approach would be worse than we have now, think again. The consequences of poor planning will scare society straight in short order, and even if some people fall through the cracks and have to go on welfare in old age it certainly won’t be worse–as it is we basically force the entire population into that position by taking everyone’s money during their working years and squandering it instead of investing it!

Update (1/20/17): Here’s a relevant quote I read in a recent WSJ article:

Some of the better presidents used the inaugural to make courageous stands. Rutherford B. Hayes proposed a constitutional amendment limiting the chief executive to a single six-year term. John F. Kennedy and Grover Cleveland urged self-reliance. “The lessons of paternalism,” Cleveland said in 1893, “ought to be unlearned and the better lesson taught that while the people should patriotically and cheerfully support their Government, its functions do not include the support of the people.”

 

1 reply

Leave a Reply