When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them
When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them
A crisis is looming for baby boomers and anyone else who hopes to retire in the coming years. In When I’m Sixty-Four, Teresa Ghilarducci, the nation’s leading authority on the economics of retirement, explains how to confront this crisis head-on, revealing the causes behind the increasingly precarious economics of old age in America and proposing a bold plan to guarantee retirement security for every working citizen.Retirement is one of the hallmarks of a prosperous, civilized market economy. Yet in America today Social Security is on the ropes. Government and employers are dismantling pension security, forcing older people to work longer. The federal government spends billions in exemptions for 401(k)s and other voluntary retirement accounts, yet retirement savings for most workers is falling. Ghilarducci takes an unflinching look at the eroding economic structure of retirement in America–and what she finds is alarming. She exposes the failures of pension regulators and the false hop
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Review by Dale C. Maley for When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them
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A little background on myself before I start the review: I have read over 200 books on investing, so I count myself lucky if I learn 1 new thing for each new book I read. I’m an engineer, so in my opinion, my pay falls in the middle-class segment of the US. I have been a big fan of index fund investing since 1990.
Near the beginning of this book, the author argues the typical 70-80% replacement ratio of income at retirement is too low……she argues it should be 100% for the average worker and more than 100% for low income workers……primarily due to high future medical expenses. Kotlikoff likes to blast the 70-80% replacement rule-of-thumb and says it is way too high for most people because of a conspiracy in the investment community (mutual funds, brokerage firms) to tell people to over-save……..because the higher the level of savings……..the higher the profits for the investment community. If you run the numbers for different cases, you will find the 70-80% rule-of-thumb varies dramatically from maybe 40% up to 100% depending on the specific household.
The author argues that with no pension and no social security, the average worker would need to save 20% of every paycheck and get a return after taxes and fees of 4% to create their own pension. She argues that most people will never save this much unless they are forced by the government to save.
The author speculates that most people don’t buy annuities because either they fear they will die too soon to collect the payouts or they feel they can invest it better than an insurance company.
On page 129, the author constructs an interesting table comparing the risk of defined benefit versus defined contribution pension plans. The author correctly argues that most employees in 401K plans pay excessive fees which dramatically reduce their net worth at retirement. One percent annual fees can easily reduce the ending value of a retirement portfolio by 30 to 40% over a 30 year working career.
The author advocates that 401K’s should be forced to offer an inflation indexed annuity with survivor rights.
The author repeats some often cited statistics……which remind us that we may intend to work until we die, but poor health or company problems force many of us to retire before we want to. The statistics include 36% who retired when they wanted to and 57% who retired before they wanted to. Of the 57%, 70% were forced to retire because of health reasons, 44% because of job related issues, and 9% to care for a family member.
She said that DC plans like 401K’s cause people to retire when the stock market is good and keep working longer when it is bad.
Although this book is chocked full of interesting statistics, probably the most interesting part is her proposal for fixing the American retirement system. Her proposal is:
-keep the Social Security system intact (the worker and the company must continue to contribute a total of 15.3% of pay to the government)
-add a new system and an additional tax of 5%
-the new system is managed by the government similar to the Thrift plan for federal workers
-upon retirement, the money in the new system must be converted to an annuity with inflation indexing and survival benefits. A lump sum payout is not an option.
-if you are covered by a traditional DB pension plan, you can keep it and you are not forced to join the new system
-401K plans remain but the pre-tax contribution feature is abolished
-each worker gets an inflation adjusted $600 tax break to make up for the new 5% tax and the lost 401K tax savings
-workers can contribute additional after-tax dollars to the new plan
She contends that Social Security plus her new system would increase the replacement rate for lower income workers from 56% to 86% and high income workers from 34% to 64%.
Wilfred Pareto, the Italian economist, found that in several European countries in the late 1800’s and 1900’s…..roughly 20% of the population had 80% of the wealth. This observation led to this phenomena being called Pareto’s Law or the 80:20 Rule. You will find the same 80:20 phenomena still applies to the US today. If you were one of the 80% back in the late 1800’s, then you relied upon your family and the church for support in your older years. Of course your life expectancy around 1900 was only about 50. Pareto’s law seems to indicate that only about 20% of the humans save and invest while 80% do not. Based upon Pareto’s Law, I would agree with the author that 100% of the population would not save 15% to 20% of their income if there were no Social Security or pension plans.
The current Social Security system is a pay as you go system, with worker’s contributions coming into the Government, but then being immediately being sent to retired workers. It is also a relatively progressive system, with wealth being transferred from higher income workers to lower paid workers.
I ran a little scenario when a freshly graduated engineer started work back in 1979 at $18,500 a year (the average starting pay back then). I figured out how much the engineer and his company contributed to Social Security each (the contribution rate has been raised from 8.1% back in 1979 to 15.3% in 2008)…….then invested this amount at the stock market’s 10% historical return. By age 66, the engineer’s contributions would have grown into $4,356,000 and using the traditional 4% safe withdrawal rate……..could pay him a pension of $174,000. The Social Security system will only pay this engineer a pension of around $27,000. This illustrates the poor deal that Social Security is for higher paid workers who have the discipline to save and invest a portion of their income in low cost index funds.
I am usually an advocate for free markets and less government. One of the few things our government does do well is to manage the retirement savings of our federal civilian workers via the Thrift plan. This plan offers basic investment options with rock bottom low annual expense ratios.
I agree with the author in that the current 401K plan design is a disaster. One could argue the current 401K plan design is the ultimate Law of Unintended Consequences example. A benefits consultant trying to figure out how to increase the amount of deferred compensation for executives…….ends up creating the 401K system that basically is wiping out our traditional defined benefit pension plan system. Who in their right mind would design a retirement plan where the workers have no choice about who their 401K provider is and have no choice in the annual expense ratios they must pay?
From my research, the current Social Security system was partially created because Francis Townsend looked out one day in the 1930’s and saw several elderly women scrounging for food in garbage cans. He publicized this scene and lobbied for a fixed monthly payment for our elderly citizens. This political pressure eventually helped to cause Roosevelt to sign the Social Security law.
I’m concerned that in a few years, many Baby Boomers will find themselves in the same condition as Townsend’s elderly women. This may lead to a knee-jerk reaction by our politicians…who then create a plan much worse than the author’s proposed plan. I might be able to live with the most of the author’s proposed plan, if the workers who contribute the most also receive the most. I would like to see Social Security phased out over a 30 year period and replaced with a system somewhat like the author proposed.
Over-all, this book was very readable…..and if you like statistical data…..you will like the book. At least the author came up with a specific proposal to fix our retirement system, even if many people don’t like the plan. It will be interesting to see if political pressure causes changes in our retirement system once significant numbers of the Baby Boomers reach retirement.
In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.
Other good books on investing which may help you become a member of the 20% of the population that has the wealth are shown below:
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads’ Guide to Investing
Review by Charles L. DeFanti Jr. for When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them
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Book basher lives up to his or her name. I checked book basher’s
complaints out. In fact, this book is written by a world-renowned
authority in retirement policy. One of her recent publications is in
what is unquestionably a major journal — “Journal of Pension Economics and Finance.” She is currently Professor of Economics and the Schwartz Chair in Economic Policy Analysis at the New School for Social Resarch. Just yesterday, Dec. 14, the New York Times magazine cited her plan for Guaranteed Retirement Account (GRA) as one of the best ideas in 2008. “Book basher”– by the way why would someone raise themselves up with the identity of a destroyer?” — made the classic mistake in evaluating the stock market’s future by looking backward and choosing a thirty year period to make a judgment about stock market returns. Book basher forgets that what we know happened wasn’t apparent before it happened. All professionals know that what was a sure thing looking backwards was a risky venture looking forward. The 30-year window is of absolutely no relevance for someone who works forty years and is left with no choice when approaching retirement age. There is no product on the market, nor can there ever be, that will pay a risk free rate of 3% PLUS inflation. Only the richest and most stable government on earth can guarantee that rate — it is linked to the growth rate of the US economy — over all lifetimes.
I agree, 70% of final income for retirement is not adequate for most
people. Ghilarducci says directly in her book that personal
responsibility is still required. All middle class people, and those who
have more income will have to save more than the 5% the GRA requires. The GRA plus Social Security is designed to give a middle class worker a 70% replacement rate. Face it, if we all want to retire on what we earn we will have to save about 10% of our income every month. At least this book tells it like it is and it has a lot of information about how we got this way.
Review by W. L. SALVATORE for When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them
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All the facts you need to make up your own mind about pensions.
Comprehensively argued, analytically brilliant; if you are interested in or involved in restoring, defending, and extending pension justice, you would be making a mistake by not reading this book.
Review by PolicyGeek for When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them
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Ghilarducci’s book is great because it covers so much ground and makes a complex subject uderstandable. One of the points of the book is that it describes how rotten 401(k) plans are and how much taxpayers are spending on them. The end result is that the very highest income people get huge tax breaks and half of the workforce gets nothing. It also has a good history about how we got in this mess and why baby boomers are going to do worse than their parents and grandparents in maintaining a decent standard of living in retirement. It was also fun to read; there are short sections called “data to digest” so you don’t get bogged down in numbers and stories about companies and their pension systems. A must read to understand the big debate on Social Security and how we can save the system for our own retirement.
Review by Rolf Dobelli for When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them
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For many Americans, the dream of a safe, secure retirement has become a cruel joke. Elderly people without pensions find themselves trying to squeeze by on Social Security as they work part time for minimum wage serving hamburgers or greeting customers at discount stores. Some have money saved, but the overall U.S. savings rate is way down. For most workers, reliable pensions are becoming a thing of the past, just as costs are rising. Pension expert Teresa Ghilarducci explains that Social Security is under threat, even though many retirees have no other source of income. What is to be done? At this point, Ghilarducci stops analyzing and starts recommending. Americans need a bold, new government program offering “Guaranteed Retirement Accounts” (GRAs). She asserts that – given a burst of radical change – this idea can provide safe, secure incomes for U.S. elders. getAbstract finds that even though some readers might dispute her political conclusions and the fine points of her alternative plan, Ghilarducci cares passionately about retirement policy and provokes a meaningful conversation for those who hope for a dignified retirement.