BUT IT'S CHEAPER, RIGHT?

Posted in Rants on May 6th, 2013 by Ed

Children born since the year ~1995 will need to have the concept of a pension explained to them. It will be about as relevant to their lives as the carburetor, the telephone switchboard operator, and the Victrola. And we will have to explain that after St. Ronnie descended from heaven and a lot of people in expensive suits spent ten years doing blow, corporate America came up with this great idea: rather than having a defined benefit, why not have defined contribution retirement plans? It would cost employers far less, sure, but it would benefit the working stiff, too! Why be saddled to a defined benefit when you can invest your money in Mutual Funds (remember when those were all the rage? Gosh, I Love the 90s!tm) and watch it grow, like, 10-15% per year! Hell, maybe 20%.

The internet came along at just the right time to make this seem plausible. Look! Websites! E-Trade! You can be your own stockbroker! Sure, nobody really understands any of this shit, but…Mutual Funds! A trained monkey could pick those, and our Investment Professionals take care of the rest. You just get a drink with an umbrella in it, sit back, and watch your money grow.

Now that this new era of capitalism is mature – if any aspect of such a scheme can be so labeled – it turns out that the estimates of future gains may have been slightly exaggerated. Maybe we all were a tad optimistic. So maybe it has been more like 5% annualized, if you're lucky. And then there's the Investment Professionals. Boy, we should maybe have screened them a little more carefully, or supervised them a little, or maybe not incentivised gambling with your money for short-term gains. And then there was that whole real estate thing, which no one could have foreseen. Everyone knows that real estate is a good investment! OK, OK. Lessons learned.

Here in academia, we're one of many professions currently bemoaning the sluggish job market and pointing to Aging Boomers Who Won't Retire as part of the problem. Having almost completely abandoned the defined benefit in favor of defined contribution plans 20 years ago, apparently it never dawned on our social betters that people won't necessarily retire when we (collectively) might like them to if we give them a retirement plan with a value that changes, quite literally, by the second. Oddly enough, they seem to be hanging on "just another year or two" hoping that The Market will increase the value of their savings – savings that are, even among responsible savers, often pretty meager.

"I guess they should have saved more!" we say with wagging chins and scornful glances. Well, thanks to another invention of the 1980s – constant downward pressure on wages, temp-ification of the profession, and so on – even people who saved rather aggressively might have amassed comparatively little over their working lives, given the cost of living as they cross age 65. It turns out that if a worker's retirement savings is a percentage of their earnings and you pay them jack shit, they reach their late 60s and can't necessarily afford to retire. Contrary to the propaganda, most people in higher education are not making a ton of money. And then people in the profession wonder, gee, why won't all these old people just retire? Well, saving 20% per year on a salary that topped out at $68,000 after forty years isn't going to be very reassuring to a 65 year old. What if I live another 20 years, they think. Better work just a few more…

Everyone in this country tells you that things like communism only work In Theory, and they are right. What they neglect to mention is that most of the things about the system we have in place – and actively endorse at all levels of society – only work In Theory too. Sure, 401(k)s sounded great, if the market gave 10% annualized returns and if one's income increased steadily over the life course. That's two Ifs too many, and the end result has been a predictable trainwreck: too many elderly people end up having to retire on Social Security and little else, or they simply work until they drop waiting for their 401(k) of magic beans to grow another 10 or 20 percent.

With no disrespect to the older readers, watching a 77 year old perform most jobs is not an inspiring sight. Someone pushing 80 has no business being in a classroom, for example. Yet here they are, still teaching, still doing any other profession in which a mandatory retirement age can't be (or isn't) enforced. For years (not coincidentally, the years I was desperately searching for a job) I wondered what was wrong with these people. Why won't they retire? Are they selfish? Senile? Delusional? Over time I learned, though, what three decades of stagnant salaries, increasingly expensive health benefits, and the "slight" under-performance of the ol' Employee Retirement Plan can do to one's definition of the right time to retire. Meanwhile, the real under- and unemployment rate for people in their twenties is, what, 50%?

But hey, it saved our employers money. So it's a win, according to the gospel of American economic wisdom (St. Friedman version).