Retirement Income

As the recent Great Recession unfolded, the retirement plans, and savings, of many Americans seemed like they were collapsing. For decades companies have shifted from "Pensions" to 401(k). Everyone contributes, employee and employer, and the income of the investment is supposed to make it grow. That hasn't worked so well lately. Employers have stopped contributing and employees are often under stress to keep saving. Indeed, those that lose their jobs certainly stop. The disastrous fall in returns has made many people rethink their plans, at the least.

In an editorial on 8/24/2009 The New York Times said: "The only way to avoid wide variations in outcome would be to develop a savings plan in which the government shares the risk - say, by providing a guarantee that returns would not fall below a certain level. "

Ugh. A "guarantee on returns" should be familiar by now. It is the sort of guarantee that forms the core of a Ponzi scheme. After the high profile frauds reported of late, you would think The New York Times editors might have seen that connection. Still, their hearts are in the right place.

We are the government. If the government guarantees returns, that means that sometimes we will all have to pay more taxes to make up a "guarantee". That will cause trouble and argument later.

The basis of our national retirement policy, from the 1930's, grew to have three components: Social Security that insured that retired people at least will not be destitute. Even if your Social Security check isn't very big, at least you know how much it will be and that it won't be less or go away. Added to that, whatever savings people can manage to set aside. For the working Americans that can be very difficult, particularly in our consumer oriented society where there is so much pressure to buy more things. And finally, traditional Pensions which, like Social Security, were tightly regulated and provided a known income (at least until the company went bankrupt).

When the 401(k) was introduced, companies gravitated to it. The companies still provided a retirement benefit, but with much less obligations down the line. Plus they could suspend contributions if economic conditions were bad. And this works out fine when, and only when, the economy is steadily growing. Now, not so much. On the other hand the 401(k) belongs to an employee, so if the company closes or fails, the employee still has his 401(k). That is a not an insignificant advantage these days and for the future, when it is likely that companies will open and close more rapidly and that employees will change jobs more often. Clearly we need to alter the structure in some fashion.

My suggestion has three components:

1. To keep Social Security as is. 
2. Encourage personal savings (like personal IRA's and other savings). 
3. Introduce carefully considered regulation to Pension/401(k) accounts.

These regulations objectives would be the following: 

• Each person will have a single pension "account" independent of any employer. 
• All employer contributions would be only to those accounts.
• Large employers will have minimum contributions per employee, based on salary.
• Optionally, employers may contribute to employees spouses or children's accounts.
• Employees minimum contribution will be very small but must be something, even for low income people. Minimum/Maximum based on income level to insure that something is contributed but not so much as to impoverish people.
• Funds in the account may not be attached or used or withdrawn by any creditor or claimant for any reason or to settle any debt (criminal proceeds or actions may be exempted). Only funds payed out can be claimed (but should be protected to some degree)
  
• The funds in the accounts will be properly diversified across a range of asset classes. There will be little personal variation for these accounts (unlike others) and penalties for fraud will be severe.
  
• Upon retirement the monthly payout will be calculated based on life expectancy, and overall returns (individually and system wide), perhaps recalculated annually or on some regular period. Payout will assume that the entire amount will be distributed to the retiree before they die.
  
• On the death of the retiree, if there is any remaining balance, a small portion (less than 10%) will be retained to an insurance fund used to insure any fraud or shortfall. The remainder of the balance (90%) will be added the accounts of the retirees beneficiaries and/or heirs.
  
• Finally, in the event that a retiree uses his entire account, the system will continue payments at his final rate until he dies, but there will be no further payment available to beneficiary or heirs.
• Upon disability (if Social Security approves disability) an account owner may begin to receive payment before old age retirement, but may stop payment if he desires. In this case payment would be calculated on basis of expected life span.
• You cannot borrow from or against this account, but such might be permitted for other savings accounts.
• At a certain age, monthly payout is mandatory regardless of work status.
• Allow 401(k) and some IRA savings to be contributed into the plan
• Plan contributions are not taxed at all (not Social Security, Medicare or income tax of any kind) whether by employer or employee. Payouts taxed at time of disbursement as regular income.
• Plan fees sharply restricted and may not be applied to accounts of minors, or to those with balances below a certain level. Fees are to administer the system and to insure accounts (like FDIC).
  

The end result should be that everyone will have a pension (in addition to Social Security). The pensions for people who contributed more will be higher than those who contribute less rewarding hard work, thrift and success. But everyone will have something and it will go with them from job to job.