Home > Uncategorized > What Americans need: An ‘idiot-proof’ retirement system

What Americans need: An ‘idiot-proof’ retirement system

from Dean Baker

Volatility in the stock market over the last couple of weeks has caused enormous unease among investors big and small. Tens of millions of people with much of their retirement money in the market are worried about seeing a sudden plunge in prices. Many of these people will sell their stock to protect themselves from further losses, which demonstrates the basic problem with making retirement income dependent on an unstable, unpredictable exchange.

The story is that people tend to make bad decisions when they manage their money in the stock market. They are likely to sell at a low point after the market has just taken a big tumble, as has happened in the last two weeks. Then they buy back in during a run-up, paying much more than if they’d just held on to their stock. It’s natural to want to “stop the bleeding,” no matter what professionals advise. As a result, people who actively manage their money typically get considerably lower returns than people who just buy and hold their stock. And this is before counting the brokerage fees and other costs associated with trading.

This pattern is important to keep in mind in the context of proposals to privatize Social Security, which may find their way back into political debate, as several Republican presidential candidates seem to think privatization is a good idea. A decade ago, President George W. Bush tried to privatize Social Security, but he abandoned the effort without ever putting a bill before Congress. In Washington, however, no bad idea stays dead for long, so we may have to argue once again over the future of Social Security.

Social Security is supposed to provide core retirement income, money that people who spent a lifetime working can count on with certainty. Just as software engineers design cellphones and computers to be “idiot proof” because they know many of us will do stupid things with these devices, Social Security is there for us no matter what mistakes we make in our financial planning. If we buy high and sell low, it’s a safety net.

In fact, the benefits of Social Security go beyond protecting us from our unforced errors. We know that the stock market has periods of upswings and downturns. If we happen to reach retirement age during a downturn, like the one in 2008–09, we would have much less money to support us in retirement than if we had retired a couple of years earlier or later. By contrast, Social Security benefits are determined by our lifetime earnings. The particular year that we retire will not affect the size of our benefits.

In addition to providing a guaranteed benefit, Social Security also saves workers a huge amount on administrative costs. Bush’s Social Security commission estimated that the administrative costs of the private accounts it was proposing would be roughly 10 times as high as the administrative cost of running the Social Security program. That was optimistic. Existing systems of private accounts, like those in Britain and Chile, have administrative costs that are 20 or 30 times as high as those of our Social Security system.

Such inefficiency might actually help to explain the ongoing interest in privatization. The costs of administering a privatized system are income to financial firms. Social Security currently pays out a bit more than $700 billion a year in retirement and survivors benefits. If this money came from individual accounts, it would correspond to a stock of assets in the neighborhood of $14 trillion. And if the administrative costs for managing these accounts were equal to 1 percent of the value of the accounts, which is roughly the case in countries with privatized Social Security systems, it would imply fees of $140 billion a year. That’s real money.

Panicking over declining stock prices is never a good idea. It’s always best to wait. But that’s cold comfort to anyone planning on retiring today, or next week. That’s why we need a foolproof—and market-proof—retirement system like Social Security.

View article at original source.


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  1. antireifier
    September 1, 2015 at 3:42 pm

    Read The Grip of Death by Michael Rowbotham. It has been a few years since I read it but essentially the idea is that since we create billions of dollars every year through the private investment and banking system to switch some or all of that money creation to government and bring it into the economy through the citizens’ spending and investment.

  2. September 3, 2015 at 3:32 am

    I always appreciate Dean Baker’s common sense and agree about Social Security, but he doesn’t mention the fundamental problem with stock markets today , over 50% dominated by algorithms and high-frequency trading(HFT) . So the platforms are corrupted and the plumbing is broken ! See my reviews of Broken Markets (20012); Dark Pools (2012) and Flash Boys ( 2013) at http://www.seekingalpha.com
    So what we are seeing is a series of “flash crashes” like that in May, 2010, as algorithms kick in and out and HFT traders make money on the ups and downs thriving on volatility. They provide only ” faux” liquidity which disappears when needed and their claim of price discovery is a joke ( see my forthcoming paper ” Reforming Electronic Markets and Trading” , to be released in the UN Inquiry on Design of a Sustainable Financial System at the UN General Assembly ,Sept 25th. Also my editorial ” How Will Wall Street Greet The Pope?” TERRA VIVA , http://www.ips.org

  3. September 3, 2015 at 10:12 am

    Nominal and real time transfer
    Comment on Hazel Henderson on ‘What Americans need: An ‘idiot-proof’ retirement system’

    It is a bit tragic that the RWER blog moves ever closer towards Zerohedge. The one and only message of this popular blog is that all is a fraud, that the markets are rigged and manipulated by the FED, that the algos make their money by creating crashes on a regular basis, and so on. You can have as much of empirical proof and juicy exposure as you like every day.

    All this happens, no doubt, but we should calm down for a moment and ask ourselves whether economics has not degenerated to a criminal investigation, trickster hunt, swindle warning, wolf crying, and exchange of valuable tips about safe havens and tax evasion.

    When the question comes to the retirement system, thug busting is the wrong approach. What is lacking is a sound theoretical underpinning of the effects of saving/dissaving over time.

    The economic problem of retirement system is that the real and nominal side of saving/dissaving is disconnected in time. That is to say that the problem lies on the macro level and not on the casino floor.

    While I agree that stories about evil Flash Boys and other players on the stock market are more entertaining I strongly suggest that economists eventually come up with sound theoretical foundations for the construction of a viable retirement system. This means first of all to rethink the theory of saving/dissaving and the interconnection between saving/dissaving, increasing/shrinking debt, and loss/profit (2013).

    As long as standard economics is idiotic Americans will not get an idiot-proof retirement system.

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper
    Series, 2220651: 1–23. URL http://ssrn.com/abstract=2220651

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