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Wendy posted “How will Americans retire? [1] which was based on a New York Times editorial by Teresa Ghilarducci. [2]

Teresa’s editorial has four main points:
1) Average American’s are not financially well equipped to maintain their living standard when they retire

2) 401k’s are a failed concept in bringing widespread success to retirement finances

3) Government policies, mostly tax, have strongly influenced the poor direction of financial well being in retirement

4) A new approach is needed

I am very familiar with Teresa’s work. She is a highly polarizing figure. With a broad brush, the “left” loves her and the “right” despises her. I am NOT going to repeat the arguments on both sides. You can read her full proposal here [3] and a strong rebuttal here. [4]

My take on American retirement is very different from both the left and the right. A few brief points.

1) The US government is DEAD SET on having American’s spend beyond their means. Matter of fact the US economy depends on it. We have been living through a period when American spending was reduced and WE HATE IT! If you removed all of the extra Federal Government spending ($1 to $1.5 trillion per year), the US has been in a continuous recession since 2008. Politicians of all parties do NOT like running for re-election during recession, hence they want positive GDP growth at any and all costs.

2) The unspoken corollary is that Washington does NOT want American’s saving for any reason, be it retirement or otherwise. The more saving, the deeper the recession.

3) A significant majority, call it 75% is MORE than happy to spend 100% and save 0%. It must be in the US water supply. Whether your income is $10k, $100k or $1 million, chances are good you spend ~ 100% of it. (Another one of my pending posts is about this very topic.) Instant gratification wins out over deferred gratification.

4) I agree with Teresa and have posted before that the average American has a way too small retirement fund when they retire, on the order of $50k. We all agree with even a 5% withdrawal rate, the $2,500 per year income stream is woefully inadequate.

YODA’s opinion section:

1) The spending/saving habits of American’s cannot and will not be changed in the foreseeable future. Politicians are not going to change policies and American’s are not going to embrace deferred gratification. Don’t waste your time or energy trying to change it.

2) WE WILL NOT LET THESE FOLKS STARVE WHEN THEY RETIRE! They will be the majority in retirement. Let’s stipulate that 25% of American’s retire with no decrease in standard of living. That means that 75% will have a reduced standard of living. That is a strong majority. Who will the politicians cater to?

3) “Rich” American’s that deferred gratification will end up subsidizing the broke American’s in retirement. It might be though increased taxation of 401k/IRA/pension benefits. It might be through additional means testing of social security. It does not make any difference what you call it, it is the Willie Sutton effect. Where else can they get the money from?

BOTTOM LINE IMO is that our nominal case plan should be that broke retirees will be heavily subsidized and prudent saving METARites will help support them. Plan accordingly. Any plan that has the majority of American’s saving more towards retirement should be considered as a low probability event, say 15% or less.

(On a related note, I spent yesterday working pro bono for the “other 1%”. This 1% is the lowest income, net worth American’s. Visualize living in a house plus land that is appraised at $15k in a major US city. Visualize windows open, no air conditioning in ~100 degree temps. I suspect most of these folks live 100% on social security. I didn't spend time discussing asset allocation with them.)



[1] Wendy post “How Americans will retire?”

[2] Teresa Ghilarducci New York Times editorial “Our Ridiculous Approach to Retirement”

[3] Teresa Ghilarducci white paper “Guaranteed Retirement Account Toward retirement income security”

(BLACK BOX WARNING, this is a highly partisan rebuttal to Teresa’s work)
[4] The Obama Administration’s Secret Plan to Hijack Your 401[k]s and IRA’s
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