Tuesday, June 5, 2012

Reality One: Face It, Not Planning Is Easier.

Social Security Reform: Planning is a pain

Those who don’t plan for the future get the future they planned. However, they avoid the perils of planning. 

By not planning for retirement, people avoid the hassle of thinking ahead.  They get the hollow satisfaction of “spending ‘til they’re broke.”  They avoid the frustration of inevitably discovering weaknesses in their plan and having to adjust.  Planning for lengthy, twenty-first century retirement isn’t easy.

By contrast, the Social Security Administration updated their projections this May.  The update anticipates that the existing plan will support current benefits for fewer years than previously thought.  They, fortunately, don’t avoid the need to plan.  But, as will be discussed in the next few postings, they avoid addressing the important realities that determine whether Social Security is a realistic program or just a square peg we can fit into a round hole for a few more election cycles. 

Social Security is a part of retirement planning.  Now that upsets many liberals who want to use it as a method of redistribution.  It also constraints libertarians who want to get government out of the retirement-planning business.  Not surprisingly, neither extreme gets much support since everyone who has done any retirement planning starts by estimating what roll “their” Social Security payments will play.  So, how people plan for retirement is an important reality Social Security reformers need to consider.

What are elected officials doing instead of addressing the reality of the pleasure many people derive from unplanned behavior?  They too are avoiding serious planning.  While Romney is willing to propose some tinkering around the edge (e.g., inflation adjustment, retirement age, etc.), Obama’s clear message is he’ll attack anyone who dares to interrupt the joy of not planning. 

Social Security reform should take into account the benefits of not planning.  That may seem like an impossible task, but it’s not.  If it were impossible, the appropriate response would be to give up on the concept of social insurance. 

The retirement plan we seem to be pursuing is to ignore reality.  Instead we continue to pursue a fiction that will eventually end in failure.  Telling people they need to plan would be a good first step.  Yet, if positive incentives like tax deferrals on retirement plans can’t overcome the joy of not having to plan, advice isn’t going to do it.  It would, however, reflect, perhaps encourage, some responsible behavior on the part of politicians.  It would get in the way of those planning to run on the “don’t bother to plan, we’ll make others support you” rhetoric. Class warfare rhetoric is so much more appealing than even the most obvious truth.  Giving up the rhetoric is a small price to pay if it results in a realistic view of the problem. 

So, face it: not planning is easier, but it doesn’t work.  There is no reason it has to be that way. Just acknowledging the reality is an important first step.  There is ample research documenting that planning an activity can often be more fun than the activity itself.  Vacations are a well-researched and an often-cited example.  All that is required is the realization that without a plan the activity won’t occur.  Since Social Security isn’t and never was an adequate retirement plan, stop promising what can’t be deliver.

Social Security should have disclaimers just like other retirement products.  It should start with an acknowledgement that it doesn’t provide for retirement.  It’s a social insurance program not an individual retirement plan.  Social Security, including old age and survivors’ benefits and disability insurance, are good social policy.  However, to be viable as a retirement plan, Social Security would have to provide for the production of the goods and services consumed during retirement.  Currently, it pools risks but doesn’t generate the output retirees and the disabled consume.  Pooling risk, although useful, doesn’t satisfy society’s desire to support the old and disabled.  It’s a risk reduction plan, and an effective one, but it’s not a retirement plan.

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