Reality Six: There Will Be Choices.

Social Security Reform: Surprise! People do what they want/need to do

The hubris of the government seems to drive them to imagine that they, and only they, have to make decisions for people.  People respond, “You can’t make me.”  It’s true of retirement planning and retirement age.  Unless flexibility is accommodated and encouraged, it will show up in other places that have major social implications.  The flexibility has to extend to both employees and employers.

To illustrate using research discussed in a previous posting, first data from “Life Spans, Health Care Costs and Rethinking Retirement” in the April 2012 AAII JOURNAL.  It reported that the Merrill Lynch survey found that, if respondents knew they would live to be 100, they would redefine traditional retirement. “Nearly four in 10 would continue to work at least part-time in retirement….  It goes on to note that,  “More than 50% of respondents who had yet to retire planned on either cycling between work and leisure or working in a job they enjoy more (part- or full-time). Just 14% of respondents over the age 50 said they would retire once they hit a certain age.”

The findings of the Merrill Lynch survey on plans are consistent with the MetLife data reported byBankRate.  That data reported on what people are actually doing.  It found that among those 65 and over, 55% hadn’t retired and an additional 14% who “retire” were working part time or seasonally.  Based on this survey, 69% of respondents are demanding choice regardless of the government’s attempt to ignore their need/desire for options.

As noted in a previous posting, even using the Labor Department’s ridged definition of labor force participation, 31.5 % of Americans aged 65-69 were still in the workforce in 2010.  It isn’t hard to explain the differences between the Labor Department data and the MetLife survey, and the differences highlight the difficulty the government has when people make choices. 

Three factors go a long way to explain the differences.  First, the Labor Department probably doesn’t count a lot of the people as “in the labor force” if they are “retired” but chose to work part time or seasonally.    Second, as is discussed every time unemployment rates are quoted, discouraged workers (those out of work but who have chosen to stop actively looking for a job) aren’t counted as in the labor force.  Third, the surveys tend to focus on people who are planning to retire.  They want retirement to be a choice.  It’s likely that people who plan retirement (as opposed to those who “just do it”) are more likely to work longer.  There’s also a fourth possibility.  The government may be pushing some older workers into a life of crime working “off the books.”  The fourth possibility seems minor, but it certainly happens.

The exact extent people are choosing flexibility is less important than the fact that more than half of older Americans are indicating that the government’s obsession with choosing a retirement age is a disservice.  The older Americans’ behavior reveals a determination to make their own choice. 

The surveys reveal an additional piece of information: why people make the choices they do.  For that the Bankrate report on the MetLife survey is revealing.  The chart below is quoted in its entirety.
The report states: “The chart below explains people's reasons for the decision they made to retire early or late. It doesn't reflect the biggest reason people cited for retiring no matter when they did it -- 36 percent said they'd reached retirement age, and they wanted to quit. Another 18 percent said they hung up their work boots for health reasons. Only 6 percent said they'd lost their jobs and couldn't find another. Fewer than 2 percent are job hunting.”  Again only 36% are letting someone else dictate their retirement age.  The fewer than 2% looking for work confirms the importance of the second explanation for the Labor Departments under-reporting the phenomena.

What jumps out from the chart is the involuntary nature of retiring ahead of plan.  Health and job loss make up 53% of those who left work earlier than planned.  By contrast, staying employed was voluntary: for job satisfaction or economic benefit.  The wording is interesting: “need.”  Substitute the word “want” and it gives a different picture. One can legitimately wonder whether the word choice reflects the writer’s assumption.  Many people of all ages need/want to work because the need/want the salary or benefits because they need/want to save more.

It is unfortunate that the “other” categories are as large as they are, but, none the less, the chart tells a story.  Adjusting the retirement age in Social Security and imposing tax penalties on those who chose to work don’t address the need for flexibility. 

People will make choices.  Social Security needs to embrace the fact that people want to make their own choices.  Rather than try to force life-changing choices, the government needs to enable people to choose and encourage choices that benefit older Americans and society in general.

Reality Five: Kids Aren’t the Only Ones Who Say “You Can’t Make Me.”

Social Security Reform: Santa Clause Isn’t the Only Childhood Belief We Retain.

It seems positive incentives like an immediate boost to income and tax deferrals are not enough to induce widespread planning.  Nor is the prospect of having to give up some consumption in the future, even if the consumption one has to give up is health care.  Not planning is just too easy.

It’s worth noting that Brown’s article on YAHOO stated:  “EBRI, a Washington-based nonprofit that studies benefit plans for U.S. workers, says confidence about being able to reach a comfortable retirement has reached the lowest level in more than 20 years….”  It seems people recognize they aren’t planning for retirement. 

It concludes: “That pessimism may be a healthy sign, since it means that Americans are losing a false sense of confidence and learning the virtues of savings and thrift.”  That’s one possibility.  Another, probably more realistic, interpretation is they are acknowledging that they know what they have to do and are saying “you can’t make me.”  They don’t think they will plan and follow through.  Instead they just plan not to plan.

They don’t plan to provide for retirement and, in that sense, plan not to retire.  One can call it a default plan or a non-plan.  In short, they are saying: “Plan for retirement?  You can’t make me.  Retire.  You can’t make me.”  Social Security reform needs to acknowledge that the problem isn’t that the retirement age is wrong.  The problem is that there isn’t an age when people will magically all retire.  If reformers aren’t hearing it, someone needs to force them to acknowledge that people are saying, “you can’t make me.” 

Reality Four: No One Else Can Do It for You, So Don’t Count on Santa.

Social Security Reform: It is your problem.

To the frustration of the 99%ers, the darn 1% are a moving target.  An article entitled “The Truth About Wealth” by Robert Frank (WALL STREET JOURNAL, 12/17/11) provides some data relevant to income and wealth.  It illustrates a point this blog has made in connection with a number of issues: One can’t treat distributions from different time periods as if they represent the same information.  

“The 99%ers: Part 2” mentioned that fact as it relates to income distributions.  For example, it stated:  “although often described as a permanent plutocracy, the Forbes 400, the richest of the rich, is actually quite unstable.”  It concluded with the obvious statement: “…like the poor, the rich will always be with us; they just won’t be the same people.”  Someone is always at the top of the distribution. However, the relevant question is: "How big is the top?"

“The 99%ers: Part 3,” “The99%ers: Part 4” and “The 99%ers: Part 5” illustrated some of the problems interpreting even a single year’s data.  It gets even more questionable when multiple years are involved.  There are so many shortcomings of most of the conclusions people try to support using comparisons of static distributions that only those highlighted by the article will be addressed.  But, there are quite a few of them.  They are extremely relevant to Social Security funding.  They illustrate why the current administration’s efforts to pretend taxing the rich is a solution is dumb (if they believe it).  It is destructive and counterproductive.

The instability doesn’t end with the Forbes 400.  For example, the article notes that a Federal Reserve study found that a third of the people in the top 1% in 2007, as measured by wealth, were no longer in the top 1% in 2009.  It discusses an interesting concept: “… the latest wave of data points to an indisputable trend—we have entered the age of ‘High-Beta Wealth.’  (On Wall Street, "beta" measures volatility relative to the overall market; a beta of 1.0 signals alignment with the market. Technology and gambling stocks can have betas of 1.5 or more, since they tend to overshoot the market in cyclical ups and downs. Utilities, by contrast, both rise less and fall less than the overall market and usually have betas below 1.0.) … the top 1% have income swings that now are more than twice as high as those of the rest of the population.”

The volatility of the incomes of the wealthy has probably increased.  The article notes that “A study by Jonathan A. Parker and Annette Vissing-Jorgensen of Northwestern University found that the beta of the top 1% nearly quadrupled between 1982 and 2007 to 2.39. The top 0.01% had a beta of 3.96…”

To see why all this is important, remember that comparing distribution says nothing about levels.  Whenever politicians start talking about distributions, one should suspect they are doing it to avoid the actual numbers behind the distribution.  Usually they’re hiding behind a deceptive use of percentages in order to conceal the fact that the actual numbers don’t support their position.  Sure there’s always a richest 400, and sure there’s always a 1% (or 4% or 5% by the math- challenged administration’s definition of 1%).  That says nothing about the amount of money, and in this posting, it’s all about money to fund Social Security. 

“The Truth About Wealth” points out an inconvenient truth people like to ignore: “Despite heated rhetoric emanating from politicians and pundits, the top 1% is hardly a fixed group that enjoys consistent income gains. To the contrary, the wealthiest have become the most crash-prone group in our economy.”

“The total income of the top 1%—or those earning more than $343,000 in 2009—fell by more than 30% from 2007, according to the most recent Internal Revenue Service data. By contrast, the average income of the bottom 90% fell less than 3% during the same period.”

An obvious implication is that whatever is being funded by targeting the rich does NOT have a reliable income stream.  Expenses like food for an individual and entitlements for a society are very predictable and viewed as essential.  They deserve reliable income streams.  If one wants stable funding, relying on a large percentage from just a part of the distribution is foolish. It’s doomed to failure and periodic crises.  The equivalent investment mistake is not diversifying (e.g., owning a lot of just one stock).  A logical response would be to avoid overly relying on taxes on the rich to fund nondiscretionary spending. 

The narrowly-focused approach of relying on one small group for funding gets more risky when the group’s fortunes are unstable.   It is even worse since the income of the rich is probably inversely correlated with the need: the social safety net becomes more important and requires more funds during hard times.  That is exactly when the fortunes of the rich are hard hit.  To illustrate, using a different social safety net program, the Medicare administrator has already pointed out that the surtax on high incomes is a failed approach to funding. 

It’s fiction for Americans to believe anyone else can plan retirement for them and folly to think there is someone else who will fund it.  Reforming Social Security shouldn’t narrow the funding source in a foolish search for Santa.  If anything, reform should widen it to the extent consistent with reality.  It isn’t an equity issue: it good financial planning not to use unstable income sources to finance continuous and growing needs.

Reality Three: It Isn’t Going Away.

Social Security Reform: Social Security may die, but retirement won’t

Boomers aren’t unique.  It would be nice to think the retirement planning problem is just an irresponsible generation.  In fact, another article “WhyBoomers Need Bigger Nest Eggs Than Their Parents” starts out looking like it will just rehash that issue.  Certainly the title would lead one to believe the focus is on boomers.

But it broadens the focus: “From 1983 through 2007, the period during which the surveys (Fed’s Survey of Consumer Finance) were conducted, the ratio of wealth to income has remained virtually unchanged at any given age.”  Note the phase “at any given age.”  They aren’t just talking about boomers. 

The broader focus is also explicit in the next statement: “At first glance, this regularity seems comforting, suggesting that the boomers and the cohorts that follow are as well prepared for retirement as their parents. But that conclusion is wrong.”  Again note the phrase “and the cohorts that follow.” 

The article first uses the conventional measure of the extent one is prepared for retirement: “The easiest way to answer that question is to look at the ratio of wealth to income from the Survey of Consumer Finances (SCF), the Federal Reserve’s comprehensive survey of household wealth in the United States. The notion is that the wealth-to-income ratio is a good proxy for the extent to which people can replace their pre-retirement earnings in retirement.”

Then the article goes on to list reasons why current and future retirees need to have more savings than previous generations.  What the article fails to note is that some of the reasons why current retirees need to have saved more (e.g., decline in pensions and increased life expectancies) are going to stress “…the cohorts that follow” more than boomers.  In short, for retirement planning, the wealth-to-income ratio has to be updated.  It has to be supplemented with as follows: “AND the number of years over which it has to be replaced.”

An article entitled “Life Spans, Health Care Costs and Rethinking Retirement” in the April 2012 AAII JOURNAL notes some relevant survey results.  The respondents were asked how they would “change how they approach money management if they knew they would live to be 100.”  The respondents weren’t non-planners.  It was a Merrill Lynch survey of 1,000 individuals with investable assets of $250,000 or more.  “Respondents said they would continue working at least part-time and/or re-evaluate their saving and investment strategies if they knew they would become centenarians.”  Fully three quarters would change how they planned for retirement.  The fact is living to be 100 is going to be more common among the post boomer generations. 

Unfortunately, boomers aren’t the only ones that enjoy the freedom of avoiding responsibility for planning.  Remember “The 99%ers: Part 7” cited some articles (e.g., “US wealth gap between young and old is widest ever”) that indicated some encouraging information: boomers have saved more than younger people. Reality three:  It isn’t going away reflects the fact that freedom from the responsibility for planning appeals to many: young and old alike. 

The reforms needed in order to accommodate the size and longevity of the baby boomers are going to be essential in the future.  It is absurd to ignore the fact that medical science is going to continue to find treatments that increase longevity.   The shortcomings will be worse for post boomers because they will live even longer. 

Reality Two: Many, Probably Most, Baby Boomers Already Blew It.

Social Security Reform: Time has run out

The “it” in the heading is “traditional retirement” where income comes from the proverbial three legged stool of retirement planning: 1) Social Security, 2) a retirement program (pension, IRA, 401(k), 403(b), etc.), and 3) savings (home equity, investments, etc.). 

Among social scientist there’s a lot of chatter about whether baby boomers will redefine retirement by opting for alternatives to traditional retirement.  In the media it often surfaces as a positive trend called the “second acts,” meaning a second career built on volunteerism, hobbies, or neglected interests.   It surfaces as a negative in articles like “Aging and Broke, More Lean on Family” about boomers who become a “burden” on family.  Other articles focus on budget problems that surface when the burden is shifted to strangers (a.k.a. the public).  The truth is that retirement HAS to be redefined.  By not planning for retirement, baby boomers are just forcing the issue, but ultimately it is life expectancies that are creating the change.

For boomers the dye has already been cast. The posting entitled “Now We Know Who the Rich Are” mentioned the foolishness of trying to find someone who can compensate for this failure to face reality. 

Collectively, all the options used to support retirement come up short.  They can help some people, but no amount of redistributing benefits can overcome the deficiency.  Boomers’ total contributions to and earnings in pensions, social security, savings, IRAs, 401(k)s, etc. aren’t enough to support their retirement (i.e., traditional retirement).   There are too many of them, and they are living too long.

The posting, “The 99%ers: Part 5,” illustrated the folly of ignoring employer pensions and health insurance benefits.  But, one doesn’t have to be an expert to know that pensions are largely a thing of the past.  Most of us experienced it firsthand.  The defined benefit pension was the first retirement approach that failed under the stress of greater life expectancies.  Baby boomers may be the last generation where pensions spare some portion of retirees from the consequences of the appeal of not planning.  But, as a generation, pensions are far from a solution for boomers.

“The 99%ers: Part 7” cited some articles (e.g., “US Wealth Gap Between Young and Old Is Widest Ever”) that indicate some encouraging information.  Interestingly, some of the articles about the phenomena greeted the news that some people actually save over time as if it were a class issue.  By contrast, “Oldest Baby Boomers Face Jobs Bust” by  E.S. Browning  (WALL STREET JOURNAL, 12/19/11) presents a starker picture by focusing on a specific demographic, the same age group addressed in “Retirement CrisisCloses In on Baby Boomers” by Tom Brown (Yahoo Finance, Reuters).  

Here’s the picture the Browning article paints; “The median household headed by someone aged 55 to 64 has $87,200 in retirement accounts and other financial assets, according to Strategic Business Insights' MacroMonitor database.”

“Financial planners often advise that retirement resources be large enough to provide 85% of a person's working income. Median households headed by a person aged 60 to 62 with a 401(k) account have saved less than one-quarter of what is needed in that account to live as well in retirement, according to Fed data analyzed for The Wall Street Journal by the Center for Retirement Research at Boston College.”

Keep in mind these quotes are providing data about people who were offered a retirement plan.  What do you think the picture would look like if those who worked for employers that didn’t offer a 401(k) were included?  It would be even worse.

From a policy perspective it shows that, at least as far as baby boomers are concerned, the joys of escaping responsibility for planning were decisive.  They overwhelmed retirement policies based on voluntary actions by individuals (either collectively through employer pension or individually through IRAs and 401(k)s).  Collectively pensions are often underfunded and are a very expensive way to invest.  Individually, (as shown in “Investing PART 5: Oldies: When looking back is most valuable” for IRAs and “Investing PART 6: Perhaps some seasonal music” for 401(k)s) the problem isn’t that the programs couldn’t work.  Combining the two programs could support a decent retirement plan.  However, positives like tax deductibility of most IRAs and 401(k) contributions, deferred taxes on all IRAs and 401(k)s, and potential employer matches just weren’t enough.   The ease of not planning won out over STRONG positive immediate financial returns.

The spreadsheets associated with those postings on investing PART 5 and PART 6 can be used to illustrate that increasing savings now is unlikely to be a total solution for most boomers, although it will help those who have already started.  Maxing out every available benefit would help, but the Browning article highlights another response   “… it also means that people are working longer, because they cannot afford to leave the workforce and lose much needed paychecks and benefits.”

The Brown article highlights the same response: “Older Americans are already clinging to jobs at the highest rate since before Medicare - the federal health insurance plan for the elderly and disabled - was signed into law in 1965.”

“According to Labor Department statistics in an EBRI report, 31.5 percent of Americans aged 65-69 were still in the workforce in 2010, compared to 21 percent in 1990. Of those aged 70-74, 18 percent were still working in 2010, up from 11 percent in 1990. Labor Department (BLS) statistics also show that the workforce of people 65 and older nearly doubled in the last 20 years, rising to 6.7 million in 2010.”

An analysis reported on Bankrate.com found higher portions were still working.  The report states, “MetLife found that 45 percent of 65-year-old boomers are now fully retired….” and “Another 14 percent say they are officially retired but working part time or seasonally.”  Interestingly, the author somehow reached the conclusion that, as the title implies, “Boomers calling it quits by 65,” despite the fact that less than half have fully retired.

The boomers’ response of continuing to work may be the only realistic response to Reality Two: Most baby boomers already blew it.  Social Security reform needs to accommodate, even encourage, longer careers.  At a minimum, it should immediately remove all disincentives and penalties for working while receiving benefits, especially for the most productive members of the labor force.  We need their output to support the consumption that the system supports.

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.

Social Security Reform

Let’s get real

Of our entitlement programs, Social Security should be the easiest to fix.  So the issue is timely.  When one looks closely at this program, one realizes it is based on political/social thinking from the last century.  In fact, the basic structure of the program hasn’t been changed since it was enacted over 75 years ago in 1935.  Not surprisingly, it is very out of date. 

Consequently, the greatest risk we face is not taking a serious look at how the program can be made viable in the twenty-first century.  Rather, we may just do the easy, quick fix instead.  A quick fix is likely because the program is extremely popular and has historically been successful at addressing an important need.  However, its very success argues for serious reform that will preserve its benefits.

The quick fix would be unfortunate.  The program ignores many twenty-first century realities.  It’s worth thinking about how Social Security can respond to those realities.  It is then that the irrelevance and shallowness of the current discussion become apparent.  The realities aren’t even being discussed, and reforms that are suggested by reality are radically different from what is being discussed.

A series of postings on Social Security reform will follow.  Because the issues the suggestions address totally depend on the importance of addressing reality, the postings start pointing out the realities that need to be addressed.  Only then are suggested reforms discussed.

Throughout the series of postings there will be references to data.  The references will be from coverage of research rather than the source research.  The coverage is generally more accessible.  Some of the source data is in proprietary research reports.  Some is in rather boring government documents.  However, the big benefit of using the reports is that they provide any interested readers with examples of how others are viewing the same information and frequently overlooking the important implications of the very data they are reporting.