I was reading an article the other day (which didn’t prompt a post at the time) that discussed the idea of retirement insurance. The basic idea of the article is that the 401K concept is fundamentally flawed for the people who are now being positioned to base their retirement on it exclusively. I was a bit surprised to realize that the original purpose of the 401K was a blatant gimme to rich people (why am I surprised at being surprised?) and only because it was written in such a way (likely by some bleeding heart progressive, damn their souls to eternal hell) that it had to apply to everyone at a given company that people started to consider it as a perk to attract the higher-end employees (such as people in my industry (I be a programmer, doanchano)). Once companies realized that they could foist off their pensions onto 401Ks and save money, pensions went the way of the Passenger Pigeon (note that today Wikipedia has decided to protest the asinine Stop Online Piracy Act (SOPA) by blacking out their site. I applaud the intent, but it does make it frustrating when I have come to rely on the site for research (yes, I know the info isn’t reliable, but overall it is very helpful as a place to start)). (Regarding pension funding, that is another thing that sticks in my craw: how could any rational government official (i.e., one working for the _people_ rather than the special interests) think it is OK for companies to carry pension funds as assets on their balance sheets and be able to borrow (steal) from it (but then again, that is _exactly_ what our great government did/does with social security, so I guess it is just fair).) Anyway, trying to raise above my digressions, the original idea of the 401K was just another perk for rich people that somehow got bastardized into the only tool for retirement for a huge segment of our nation’s population. The primary problem with the 401K is since it applies to an individual only, if that individual happens to retire just as the market takes a huge nose dive (2008 anyone?), their ability to afford their retirement decreases precipitously. When figuring in the reality that a lot of people near retirement age are forced into retiring during economic downturns, the author indicated that some 40% of people retiring were subject to significant lost income potential due to the dip in the markets.
The author mentioned something about retirement insurance as a way to pool the resources of many people, thus to be able to build a broadly diversified portfolio (and have it managed by professionals) that can weather the inevitable economic downturns without forcing a retiree into a lifetime of (relative) privation. After reading the article and considering it a while I thought the idea had a lot of merit _IF_ it were implemented properly. I discussed the idea with my wife (she says she enjoys my blather on diverse topics, it helps our 2 hour one-way weekly trips to our Virginia house go by a little faster) last weekend and mentioned that if I wasn’t already committed to various projects (my weekends are totally absorbed by greenhouse/pool construction (and when that is done, I will be shifting to aquaponics research) and now my weeks are dedicated (those hours not attributed to working for a living, of course) to learning to build my own heat pumps as well as trying to build a proton-boron table-top fusion device (I am nothing if not eclectic)) I would probably pursue this as a business. I think that if the organization were to operate like a credit union (meaning it was operated with the intent to return any profit to the customer/owners) AND strong steps were taken to limit executive compensation (I know for an absolute fact that there are 10’s of thousands of perfectly qualified MBA pukes that would be ecstatic to work for $250K or even a wee bit less) then the management of the money would be to optimize the long-term value to the shareholders/owners/customers/account holders rather than the short-term benefit of traders (who only make money if they churn) or fly-by executives who are only interested in their platinum parachute and maximizing the value of their short-term stock options. Most critically, the management of the money would not be based on any sort of percentage (really, does it take more time and effort to trade 1 million shares than it does to trade 1,000 shared? maybe it did in the old days before computerized trading, but that was then and this is now) so the costs to manage the money would decrease as a percentage of the portfolio.
Additionally, it could help tame some of the excesses of our broken capitalism through share holder activism. As would be inevitable at some point, the organization would start to have controlling interests in companies (you can’t manage 100’s of billions of dollars without that eventually happening) and by packing the board (who would then shift the focus of the executives) with people who actually give a damn about the long-term health of the company under question (as opposed to raping it for immediate gain as is the standard for today) these companies would shift to being optimized for long-term sustainable growth. Sort of what our country was based on before the corporate raiders learned about the concept of socialized risk, privatized reward.
I would have to run the numbers, but it seems to me that this could also help with unemployment. Clearly it would come at the expense of the long-term value of the portfolio, but when you are starving now who gives a damn about how well you might be able to live in retirement. I suspect (but would have to experiment with a spreadsheet to have confidence) that the organization could provide some assistance to people who have lost their jobs without totally compromising their ability to have an income during retirement (I know from personal experience that the money that comes from the current unemployment is woefully inadequate and no one actually interested in employment would game the system to get that pittance). Since the basic idea is still an individual account, it would help to discourage people from gaming the system as there are no more dollars available in the account than were put in to begin with and so anyone taking money out when unemployed is just pulling money out of their own retirement pocket (the idea of the group management of the money is to diversify to ensure a minimum rate of return).
This product could also act as disability insurance as well as if you become disabled you can simply start to draw your ‘retirement’ early. You would, naturally, get a lot less than you would if you worked until retirement age, but at least you would have something you can count on for the rest of your life. Since it is basically your own money (just managed as a huge pool), by taking disability when you are not actually disabled (attempting to game the system), you are just taking money out of your future self’s pocket, thus this approach would discourage false claims.
What about your heirs? Well, that is probably a sticky point where the naysayers will raise the ugly specter of socialism if we don’t talk about it. EITHER you run the risk of running out of money before you die OR you run the risk of not passing any remaining dollars to your heirs if you die before your actuarial death. You can’t have both. I personally advocate that this retirement account pay you until you die (with some account being take for spouses and dependents up to a certain age) and if you happen to die early, then what remains in your account is left for those more fortunate who live longer. This, btw, is exactly like life insurance in many respects (it just pays out while you are alive instead of to your heirs), so it really isn’t any sort of communism or socialism, just plain old capitalism and average lifespans.
This idea is undoubtedly poisonous to the GOP because it is a bad idea for the 1% who currently suck the blood from our 401K accounts and it is critically clear to me (as an ex-GOP supporter) that beyond the moronic capture of the party by the frothing religious nuts the GOP acts only to bend and twist our government to maximize the returns of the 1% at the expense of the 99%. This should get the full throated support from the Tea Party and the GOP in general because it takes the government entirely out of the equation and puts the money into the markets instead of treasuries (which are nothing more than IOUs anyway). Too bad it will be greeted as socialism (communism if Obama were to suggest such a thing, but I know he won’t since he is bought and paid for by Wall Street (no different, btw, than the GOP heir apparent Romney)) by the oligarchy since it basically (if implemented as I have outlined) strips away the percentage way of ‘earning’ money off the fund (not to mention capping compensation and the ugly specter of share holder activism (how DARE those stock holders interfere with our pigging at the trough?!)).
I expect add to this later (have to actually do some work today!) and will probably build some spreadsheets to see what sort of retirement incomes that I feel could be generated. I would love to have comments from you dear reader(s), preferably here on the post so other(s) could build off it. Though I have no personal intent to build such a system, I would like to have a robust outline that perhaps could be used by someone else to start such a system.
(This is Erik BTW) I like the idea, it seems more like a group 401k then an individual account.
Is everyone’s money separate? As in, If I take disability money at age 45, I am just borrowing from my own retirement fund? Or is the fund at large contributing to my need?
How does everyone pay in/ get payed out? If I put in 10k a year and you put int 5k a year, when we retire do I get twice the benefit you do or is it capped/progressive like Social Security?
My idea is that every one’s money is indeed ‘separate’, it is just managed as a whole. It does partake somewhat of the life insurance idea where retirees get a lifetime income stream (based on what they have deposited with compounded interest divided by their expected lifetime, so if they live longer they get more, if they die young they get less). So, if you put in 5K and I put in 10K and we retire at the same age (and have the same demographics, thus same life expectancy) then I would get 2x the check you get.
I wouldn’t cap it at all, so anyone can deposit as much as they like, though the tax treatment would have to be resolved (I favor deposits being pre-tax, all growth is tax deferred, and only upon withdrawal would you pay taxes, or exactly like the 401K is today).
If you take disability, say, at 40 (after having paid in for, say, 20 years), you would basically get the amount of money you have deposited, plus the compounded interest divided by your actuarial lifetime. Thus, to a practical extent, you are getting the same money you put into the fund, just at a reduced rate since you are expected to live a lot longer (indeed, this could be taken a bit further and people could undergo some rather invasive heath investigations and rather than generic actuarial estimates of their life, they might get something based on their health (though that would have to go both ways to be fair, something you might want to avoid if you are a clean living health nut expecting to live to be 110)).
I would advocate that anyone can pay into anyone’s account at any time for any reason. Thus parents could pay into an account for their children (the tax consequences would have to change in this particular case as it should be after tax deposits). For employers (as for the individual themselves) I would suggest the deposits be pre-tax. Since the account is personally owned by you (though the money is virtualized in the fund) it would be totally portable. Perhaps you can only deposit a certain maximum pre-tax (like the 401K), but there be no limit to the after tax contributions (I still would advocate that the fund grow tax deferred, exactly like direct stock ownership would be).
Thanks for your questions and comments!