In a syndicated column in The Tulsa World before Christmas, Caroline Poplin argued that Social Security should not be “on the table” for consideration in reducing government expenditures. In my rebuttal discussion in the previous post I explained what I believe are the central reasons why it should be “on the table”. The heart of her argument seemed to be that we can afford the current level of Social Security because it benefits most middle class Americans. I would hope that all government expenditures were beneficial to someone. My experience in budget cutting in many different situations – corporations, non-profit organizations, or family situations – is that it is never easy or painless. But if revenues do not cover expenses then it must be done, and everything should be “on the table”.
That said, I thought that the last two or three paragraphs of Caroline Poplin’s opinion piece needed some additional discussion. In that part she addressed the idea that retirement security has historically been thought to rest on a three-legged stool. She said, correctly I believe, that the three legs are Social Security, private pensions, and personal savings. She implied that the leg that is now missing (or at least, is wobbly) is the private pension leg because of the conversion by many – if not most – employers from defined benefit plans to defined contribution plans. My argument, based on published national economic data is that the missing leg is personal savings. The published data indicate that the individual savings rate has gone from something close to 10% of income in the 1960s to almost zero in the last 20 – 30 years. At the same time, personal debt – even excluding home mortgages has gone up significantly.
Since the 2007, individuals (and corporations) have de-leveraged. In fact, everybody it seems, except the Federal Government has reduced debt. On Christmas Eve, the Wall Street Journal ran an article reported that the 3rd quarter, 2012 Federal Reserve data, shows U.S. households spending of after tax income on debt, is at the lowest level since 1983. Why individual savings rates went down and debt went up is a subject much debated by economists. I think it might have had something to do with private pensions, but perhaps in the opposite way that Caroline Poplin describes. This opinion is based on personal experience with a major international corporation. Although not all private plans are alike, I have reason to belive that my experience is typical of many large company plans.
When I started work in the 1960s, my company had a defined benefits pension plan. Contrary to what Caroline Poplin implied, participation was voluntary and it also required an employee contribution. I could be vested in 10 years of participation. If I was vested and changed jobs, I would be frozen at whatever level of retirement benefits I had at that point. If I died before starting retirement – even if I was still employed, my heirs got nothing. Having benefits for life was an option, but not the only option. I could take a fixed number of years and gotten a higher annual income. I could also have the option of joint survivorship so my wife would have something if I died first. In addition to the retirement program, my company also had a voluntary savings program which allowed contributions of up to 6% of one’s salary and the company would match that at fifty cents on the dollar. Not a bad deal.
By 1980, the company had ended the requirement for employee contributions to the retirement plan and shortened the vesting period to five years. But the remainder of the plan was basically unchanged. In the 1980s my company merged with another company in what amounted to a “leveraged buy-out”. But then the industry economics turned down, revenue dropped, and things began getting tight. So when they then announced that our defined benefit plan would be discontinued and replaced by a defined contribution plan, most of us feared the worst. Our new company did not have a reputation for being particularly “employee friendly”, and they were strapped for cash. If it had been put to a vote, it no doubt would have lost. We were given the option of keeping our vested position in the original plan or “rolling over” its current value to the new plan.
My vested interest in the old plan after about 15 or 16 years service would be frozen in so that at retirement, I would get the formula amount at retirement based on my current service time and current average salary. That was the same as would have gotten had I left the company. While that seemed reasonable, it wasn’t going to be much money at retirement 20 or more years later. The current value that would be converted to the new plan seemed even smaller. People who were close to retirement were generally not converting. Although I had gotten retirement plan statements every year I had been in the old plan, because of the nature of the plan I had not much idea what they were really worth on a current basis. But faced with the decision on whether to convert or not, I decided to spend the time necessary to understand the methodology and the way the calculations were being done. With my background in financial planning, I was able to understand and duplicate the calculations that resulted in my present value roll over amount. And for probably the first time I understood what the old plan was worth. For me it was a “wake up call”. I realized that the private pension and social security were not going to provide the type of retirement that I wanted without personal savings. The conversion did not make that so. It had been so all along. The conversion made me realize what I had and how much more I needed. It changed my expectations.
The new defined contribution plan had several advantages and one disadvantage. The advantages were that it had more portability. I “owned” it. If I left the company, unlike the old plan it would continue to grow because I got the earnings on the investment. The new one was also capable of being inherited, so if I died before I retired, my wife or other heirs owned the assets. The old one would disappear in that event. The new plan was still totally funded by the corporation. And I calculated that, with average investment earnings, the corporate contributions were sufficient to provide the same income at retirement as the old one. The options concerning how to take the money at retirement included the same annuity income options as before with the addition of being able to make partial or total withdrawal on demand. The downside was that I took on the risk of future earnings and inflation rates. If they matched historical averages, I was OK. If they were better, I was better, but if they were worse, I would be worse off. I had more personal responsibility. My conclusion when it was all said and done, was that I wished I had been in the new plan from the beginning.
Caroline Poplin, in her article said she did not think that people had the ability for personal savings. Based on the data, they obviously haven’t been saving. But I think the problem is more one of expectations than ability. Our guide in St Petersburg in September said that the change in the Russian economy to a free market economy was liked by the young. But was difficult for the old, “because they had counted on the government to take care of them and now did not have the time to save what they needed”. I believe that many Americans have had the expectation of being taken care of by their company and/or the government and have not seen the need to save. The best thing that happened to me in the pension plan conversion was that I got a wake up call. I understood that I needed more personal savings to have the retirement that I wanted. That had been true under the old plan, I just had not figured it out. As it was, I had the time to make the adjustments I needed to make before facing retirement. The head of AARP in Oklahoma said in an article in this weeks paper that half of retired Americans depend on Social Security for half their income. Maybe Americans need a wake-up call because that doesn’t sound like a balanced three-legged stool. But it’s too late for existing retirees. I think Caroline Poplin was right that Social Security was never intended to provide all of our retirement income by itself. But that message has obviously not reached everyone. The good news here is that no one that I know of has proposed changing it for those currently in or near retirement.
The rule of life that applies here is: There is no free lunch and the longer we put off paying the more it will cost us. The traditional value that applies is: I need to be responsible for myself. It would appear that a lot of people think the government should take care of them. But they should remember that, as many of our forefathers have pointed out; we live in a country where there is “government of the people, by the people…” We are the government. To paraphrase the old comic strip character, Pogo, “We have met the enemy and he is us.”