Mike’s Financial Pocket: America’s Retirement Woes


Imagine for a moment that you are working for a company and that, as part of your compensation package, the company promises to fund a retirement for you. In order to accomplish this, the company needs to set aside a certain amount of money over a given time period (monthly, quarterly, yearly, etc.), ensure that it’s protected, and that it will grow at a reasonable rate. This way, when you do retire your company will be able to make payments to you so you can live comfortably in retirement.

I basically described (in an oversimplified way) a pension plan. That’s generally how it works. The problem with pensions, as we have seen in recent years, is that it was very easy for companies to make big promises to workers. However, when workers began to live longer pensions began to become more and more underfunded. S&P 500 companies are facing a near-$700 billion pension shortfall, which likely will continue to grow without serious contributions by these companies or reduction in benefits for future retirees.

Public pensions have an even larger shortfall with a projected deficit of $1.19 trillion.

But, at least we have Social Security, right?

@rdengr123 Soc Sec exists for when private investments fail. Talk to Enron’s and Madoff’s investors. @SHannitysHair @ThePantau

— Wisconsin Strong (@WisconsinStrong) August 14, 2013

Yes, seriously. People believe that. No wonder America is in deep trouble.

A little background first.

Social Security was signed into law by FDR and touted as a program to protect widows and orphans from starving during the Great Depression and subsequent economic crises. Seriously. Unfortunately, today it is a primary source of retirement “income” for many retirees.

This chart shows the problem with Social Security.


In 1945, nearly 42 workers supported each retiree’s benefits. In 2010, that number has dropped to below three workers per retiree. This is simply not sustainable.

In fact the Social Security disability fund, which covers workers who are not able to work (as opposed to retirees), will be depleted by 2016. The last time I checked, that’s less than three years away. The Social Security Trustees report suggests that there would be an immediate 20% cut in benefits to disabled workers, assuming all things equal, in 2016. By 2023, the Social Security OASI fund will pay out more than it takes in. In other words, the Ponzi Scheme will come home to roost.

Yes, Social Security is a Ponzi Scheme.

What is a Ponzi scheme?

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

That’s the definition of a Ponzi Scheme from the SEC Website. Oh, the irony!

Social Security takes in money from future retirees and uses it to pay current retirees, with the promise of making the same payments to those future retirees for life. The problem, as illustrated above, is that fewer and fewer workers are supporting each retiree. Less money per current retiree means even less money for future retirees. The Trustees have admitted that Social Security is in trouble, yet our “leaders” on both sides of the aisle refuse to acknowledge the problem. Why?

Social Security is euphemistically referred to as the “third rail of American politics” — meaning if you touch it, you’re dead. Anyone who discusses reforming Social Security, introducing optional private accounts, etc. sets himself or herself up for a political ad claiming that he or she wants retirees to die in a fire or something.

Because the federal government can borrow at extremely low interest rates, thanks to Helicopter Ben Bernanke, they can fund the shortfall in Social Security — for now. What happens when interest rates pop?

There is no “lock box” for the Social Security monies collected. It is deposited in Congress’ coffers and spent like income tax revenue. As this somewhat dated but still relevant Cato article points out, workers don’t even have ownership rights to their Social Security funds. If the government wanted to end Social Security tomorrow (or had to end it because of its insolvency) it could — with no recourse. The Supreme Court has already ruled on this in Flemming v. Nestor, holding that an individual does not have a right to the proceeds of Social Security because he does not actually own an account like one may own a bank account or a 401(k) account. Unfortunately, the GOP failed to push through a private Social Security account option after Bush’s re-election in 2004.

One does not have any right to his Social Security “account.” Pensions are underfunded. What are we supposed to do?

We should — nay, we must — save for ourselves.

The “progressive” who tweeted at me seems to think that Social Security will be here forever and that the government is there to protect us from the next Enron. Somebody wake him up from the fairy tale — Social Security is in deep trouble. Moreover, the government usually only gets involved long after the harm has been done by fraudsters. For example, whistle blower Harry Markopolos approached the SEC for a decade about Madoff’s fraud, but the agency did nothing. Only after the market tanked in 2008 and his fund faced billions in redemptions (customers asking for Madoff to sell their positions and give them their money back) did Madoff get caught.

What do Bernie Madoff’s victims have in common with people who think Social Security (or pensions) will “always be there for them?”

I can think of two things, which are strongly correlated to the third:

(1) Misplaced trust

(2) Lack of due diligence

(3) Laziness

It’s deceptively comforting to just assume that someone else will “take care of us” in retirement. We hand over money to financial folks who are “so much smarter than us” and have the time to dedicate to looking out for our best interests. In reality, many are just salespeople who make commissions off of mutual funds sold to us and don’t care either way if the investment goes up or down. They have no fiduciary responsibility to you. Of course, they’re not supposed to “Madoff” you and run off with your money. But the fact that they make money off of the higher fee products strikes me as a conflict of interest.

Look, I understand. We are busy people. It’s a tough market out there and it’s easier to hire an “expert” to look after investments or just save some money in a 401(k) and not really pay any attention to it. It’s ironic that some spend more time researching smartphone purchases than studying our investment choices.

We hand over inordinate sums of money to the government (income tax, Social Security tax) and to financial “advisers” (mutual funds, 401(k)s). Shouldn’t we do some diligence and make sure that both Social Security and our retirement savings are taken care of?

Finally, simple laziness prevents us from learning about investing in companies and creating our own retirement accounts that will help us achieve a comfortable retirement. I wrote about how it is possible for someone on a middle class salary to save millions of dollars, given enough time and historical rate of return. Laziness gets in the way of this goal. Isn’t it easier to just hand over money in a 401(k) or to someone else to look after it for you? Sure, it’s easier — but is it safer?

Who better than to be responsible for your own retirement than yourself? Get out there, learn about savings and investment, and protect your hard-earned money.

As always, free markets are better markets.

* * *

This week, earnings season continues. We also will have lots of Treasury auctions (of course, we need the money!) and a speech by possible future Fed Chief Janet Yellen.

We also can look forward to the Chicago Fed National Activity Index, existing and new home sales, Bloomberg Consumer Comfort Index, PMI Manufacturing Index Flash, and the Kansas City Fed Manufacturing Index.

Jobless claims will be coming out on Thursday as well. Lots of macro data for the dog days of summer.

Have a great week!