RebelCapitalist: Financial Information for the Rest of Us

The Stool is Broken

Apr 13, 2010 | By: Mr_Blue | Tags: 401k, retirement savings, ira

The three legged stool representing Americans’ retirement savings is broken. Social security, personal savings and pensions are represented by legs on a stool. The financial crisis has exposed the weakness of this system. Two legs in particular are broken.

Social Security

Despite what you hear in the corporate owned and Wall Street favored media Social Security is not the problem legged. There is a lot of talk in media about insolvency of Social Security. It is all scary tactics on the part of Wall Street and benefactors in the media. Wall Street would love to get its hands on that Social Security surplus. Social Security is NOT broken.

Personal Savings

This leg is broken. We have an abysmal saving rate - 3.1% of disposable income. This is hardly enough to help with retirement. A repair to this leg would require a drastic behavioral change on we use debt (it’s evil) and how we consume. It is not impossible to change but right now this leg is broken.

Pensions

This leg is also broken. Pensions are a thing of the past. What we have now are defined contribution plans such as 401k’s or Individual Retirement Accounts. There are several major problems with defined contribution plans:

1) These were sold as a way to have workers or people control their money. In theory, a good concept but the problem was that we were never educated about how to invest our money. People were stuck: either go it alone and make mistakes (which we could not afford to do) or take advice from someone who may not have client’s best interest in mind.

2) The structure of these plans - particularly 401ks are not the same. For instance, my father, who recently retired, asked me several years ago (before crash) to review his investment allocations for his 401k. To my surprise and chagrin his only options were stock mutual funds. How can someone protect their “nest egg” with investing in only stock funds and he was near retirement and should have been in much more conservative investments. I did the best I could with the options my father was given. Sadly, how many other types of 401k plans are out there like this one?

This leg is very important and will require policy maker’s attention very soon. As of December 2008, retirement accounts lost $2.8 trillion, 32 percent of their value. This is devastating for those close to retirement and is not quickly made up for younger adults. The repair of this leg may require some sort of public/private partnership.

Sorry to be bearer of bad news but the sooner we recognize the problem the sooner we may be able to fix it.

Good luck.