The Retirement Wealth Inequality Machine

Yves here. I have mixed feelings about this video. On the one hand, Professor Ghilarducci does an impressive job of laying out the severity of the retirement crisis. But the flip side is she pushes the fallacy of having a public-private retirement savings program as a mass solution. We already have an economy which has a financial sector that is so oversized that it is dampening growth. One of the big activity and I hate to use the word, talent drains is the amount of time and energy devoted to the secondary trading of securities, which does absolutely nothing to support growth. It’s asset-shuffling which does not send terribly good signals as to the pricing of capital assets (and in any event, research has repeatedly found that business managers generally assign overly high return targets for projects, leading to chronic underinvestment, particularly in projects with back-ended payoffs).

To put this another way, one person’s financial asset is another person’s financial liability. And as Micheal Hudson has repeatedly pointed out, expecting debt, and by extension, other financial assets to earn above inflation returns simply leads to period busts.

The best way to provide for retirement is to look to MMT-based solutions. The currency issuer can create new spending with the constraint being generating too much inflation. Having the national government play a bigger role in retirement funding also aligns incentives better, since the powers that be would have incentives to find ways to make sure that employers didn’t discriminate against older workers who wanted to continue working (notice Ghilarducci’s discussion of how far the US lags other countries in some important respects), as well as pursuing more bona fide pro growth policies (which can and should include a lot more aggressive action on the environment) as opposed to groaf and looting programs.

Originally published at the Institute for New Economic Thinking website

Most older workers have increasingly fewer retirement options, forcing the elderly to continue to work under arduous conditions to earn income. At the same time, employers are less likely to hire elderly workers. The retirement wealth inequality machine has churned out the specter of isolation, malnutrition, and poverty for retirement age workers.

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41 comments

  1. Sluggeaux

    More asset-shuffling through public-private partnerships will not solve the moral catastrophe of short-termerism and greed that prevents enterprises from investing in the human timeframe of a lifespan, that might support a proper social safety net. A sane government which had the interests of all citizens at heart would impose a confiscatory tax system on asset shufflers and short term greed. This is the opposite of the policies of our political class, who prefer voter suppression to the sort of democracy that would find the impoverishment of our elders intolerable.

    Reply
    1. Enquiring Mind

      Voters should say, en masse, “When I hear the phrase Public-Private Partnership, I reach for my gun.”

      Reply
    2. Crazy Horse

      “A sane government which had the interests of all citizens at heart” In the One Exceptional Country? Not in my lifetime or that of my children.

      Its all very fine to talk about how wonderful your favorite band-aid would be if only the Repugnant or Democon team would support it, but in the real world there is only one semi-valid retirement strategy.

      Emigrate to a country that is sufficiently un-exceptional to not have to support an Empire and which is poor enough to allow you to live on whatever savings or pension you have accumulated.

      Reply
  2. Tomonthebeach

    This larger role of government proposal overlooks the fact that is just creates more piggy banks for workers to raid to buy new cars, finance big ticket purchases, etc.

    This human irrationality is common with today’s IRAs. Congress has shown willingness to expand access to retirement savings in order for workers to raid their pots of gold. We have just seen this with legislation relaxing withdrawal in the federal TSP. Thus, how such programs are set up and administered is likely to merely expand financial asset management fees while collecting taxes and penalties to boost the treasury – with little improvement in retirement outcomes.

    Reply
    1. diptherio

      the fact that is just creates more piggy banks for workers to raid

      Bad workers! Wanting to have nice things! Don’t they know only their corporate task-masters get to raid banks (piggy or otherwise)?

      As always, greedy workers are the problem. Brilliant analysis [/sarc]

      Reply
  3. Moneta

    The first thing that government could do is guarantee an acceptable pension to all those who live past 80. Then we would not all have to save as if we will live to 95, bloating financial markets for nothing.

    And it should be funded from current earnings, not through financial markets.

    Reply
    1. Dead Dog

      80? Most of us don’t get that far, Moneta…

      Try 55? That’s what it used to be for Australian women….

      Now, it’s 70

      Reply
      1. Moneta

        We just hit the peak of 5 workers per retiree. This number will be going to 2.5 over the next couple of decades.

        I think you don’t realize how low the standard of living has to drop to fund an age 55 retirement.

        2/3 of boomers have less than something like 100k saved up so this means they will be asking the young to fund their retirement because I don’t see the 1%ers doing it, without some huge transformation which would take a decade or two… sidelining boomers anyway.

        This situation should have been planned for 30-40 years ago but it wasn’t because the general meme at the time was that the markets would save the boomers.

        When a squirrel plans for winter, it stores nuts, meaning it does not eat them all.

        In our economic system we’ve been eating all our nuts plus using millions of years of energy to eat even more than we needed. Our obesity epidemic is one blatant symptom. Even most of those with big investment portfolios have overindulged… just think of how many joules of energy they have spent in their lifetimes yet they are still expecting their investments to represent claims on future resources.

        I guess it can work out if our planet can support it and the US can force its way on the world for another few decades but I have trouble believing that a country with more than 30% of its population over 60 can cling to its reserve currency status while net importing.

        I believe we can fund a 55+ retirement if most retirees accept to rent a room in their kids’ house… but the kids have to somehow get out of the basement of their parents’ still mortgaged house and take possession of the main floor. That’s the conundrum.

        Reply
    2. washunate

      Yeah, that’s the question. Is retirement a universal human right or a privilege? This whole notion of focusing on the plight of the elderly as a group is bizarre. In the US context, older generations are significantly wealthier than younger generations.

      If we are really talking about people living with dignity, then such a policy should apply to people of all ages, not just older Americans.

      Reply
  4. Moneta

    Health care and retirement plans should not be through the employer because it promotes discrimination. These should be portable.

    Reply
  5. funemployed

    How bout a UBI for the elderly and disabled, and free healthcare for everyone? Seems like the simplest solution to me.

    Aside from the fact that it seems like the obviously right thing to do, as an oldish millennial, I’d prefer to have them out of the forced-labor market anyway.

    Reply
    1. funemployed

      I’ve also long thought that providing care for the elderly, disabled, and children could go a long way toward filling the roles of a job guarantee for us relatively young and able-bodied.

      Reply
      1. Left in Wisconsin

        On the one hand, the job part of the job guarantee already exists almost everywhere in the U.S. The problem is the job stinks – low pay and often very hard work.

        On the other hand, it is foolish, and inhuman, to think of these jobs as overflow job guarantee jobs in an MMT JG. We need an economy, and society, that values caring over (mostly idiotic) for-profit paid work.

        Reply
    2. cocomaan

      How bout a UBI for the elderly and disabled,

      Maybe we can put “social” in the name, because it’s the social safety net. And since it’s a source of financial security, we should also put “security” in the name.

      Wait! Wait, I got it!

      Reply
      1. Moneta

        But isn’t it based on earnings? Which for tens of millions were based on 10$ an hour which is not a livable wage… thanks to CEO wage inflation going from 30x lowest wage to over 300x?

        Reply
      2. katiebird

        Actually laughing outloud!!! OMG.

        Except that I have. Friend who is struggling on $759/mo Social Security …. who can live on that?

        Reply
      3. funemployed

        Love it. That was my thought too. Just convert social security to a UBI. Maybe even one not tied to a regressive payroll tax.

        Reply
        1. cocomaan

          Just to respond to all of you, the Townsend Plan from back in the 1930’s when Social Security was being devised, pledged to give out $200/month to people of age: https://www.ssa.gov/history/briefhistory3.html According to an inflation calculator I used, that’s $3400/month per person.

          They actually paid out more like $50/month. Which is more like $900 in our money today.

          Ida May Fuller was the first person ever paid out: https://en.wikipedia.org/wiki/Ida_May_Fuller interesting story.

          Reply
        2. jrs

          Social Security is fine, it just needs to be increased, and the age lowered (to at least what it used to be). Calling it a UBI, although it is one, will just lead to people trying to tie it to costs of living which varies widely across the country, it just needs to be increased a lot to be on par with what much of the rest of the world offers.

          Reply
    3. washunate

      And how about expanding this odd and surely un-American idea of providing security and care to people of all ages? Ridiculous, right?

      Reply
    4. JTFaraday

      “How bout a UBI for the elderly and disabled, and free healthcare for everyone? Seems like the simplest solution to me.

      Aside from the fact that it seems like the obviously right thing to do, as an oldish millennial, I’d prefer to have them out of the forced-labor market anyway.”

      I agree with everything you say. In a country as wealthy as this one, so ridiculous that this isn’t just common sense conservatism.

      Reply
  6. rjs

    coincidentially, i just read
    ” In 2016, California residents 62 and older took out more payday loans than any other age group, according to industry data compiled in a new report from the Department of Business Oversight. Seniors entered into nearly 2.7 million payday transactions, 18.4% more than the age group with the second-highest total (32 to 41 years old). It marked the first time that the DBO report on payday lending, published annually, showed seniors as the top payday lending recipients. The total transactions by the oldest Californians in 2016 represented a 60.3% increase from the number reported for that age group in 2013. The fees can bring annual percentage rates that top 400%. In 2016, the average APR was 372%, according to the DBO report. Customers typically take out multiple loans in a year, ending up in what critics call a “debt trap.” .. The average payday loan borrower 62 years or older took out almost seven payday loans last year, compared with the average of 6.4 loans for all customers”

    https://www.americanbanker.com/opinion/no-one-should-have-to-rely-on-payday-loans-in-retirement?utm_campaign=regulation%20reform-jul%2012%202017&utm_medium=email&utm_source=newsletter&eid=969759b033715b3e2ccac996e9e27347&bxid=57449de4e9328b2d608b4d55

    Reply
  7. Jim A.

    It is simply the case that with an ageing populace, we will in total be spending more on Cumadin, nursing home beds and depends than we used to. Pensions, public or private don’t buy warehouses of this stuff to use later. A larger amount of our current GDP will be spent on this than on health club memberships and daycare than if our population wasn’t ageing. Those who are currently working will have a greater percentage of the wealth that the create devoted to purchases of these goods and services than used to be the case when there were fewer elderly. Some of this may be paid for with higher payroll taxes, some with higher income taxes (because bonds in the SS trust fund) and some because the value of equities goes down as pensions become net sellers rather than purchasers of assets. The more people are looking for a magic and relatively painless solution, the further we are from actually figuring out how to do this.

    Reply
    1. Moneta

      The thing is that many with underfunded guaranteed pensions will be getting good pensions while those with no guaranteed pensions will be getting peanuts.

      Not to mention those with pensions based on 10$ per hour while others were making much more. Those who made more feel entitled to their money by they refuse to see how social, fiscal and monetary policies contributed to the wealth disparity. Many of the winners were not better but just at the place at the right time.

      There has to be a redistribution within the older population first before we skim the pay checks of the young still working.

      Reply
      1. Middle Class

        So your solution includes taking money from those who saved and invested, and re-distribute it to those who spent everything they earned? As someone in the “saved and invested” category, I find that plan to be a non-starter.

        When I was setting aside 15% of my income for savings and investments, paying extra on my mortgage, and driving older cars, I have friends who (at the same income level as my wife and I) literally spent everything they earned. They had lots of fun, and lots of new stuff that I didn’t.

        Fast forward 30+ years, and now – in my late 50’s – I’m planning my retirement (before my 60th birthday). My friends? None of them are even thinking of retiring, and one couple has said they will need to work into their 70’s.

        We made different choices, and ended up in different places – but that doesn’t obligate me to hand them what I have.

        Reply
        1. Yves Smith Post author

          What a bunch of total nonsense.

          If you’ve been able to work on a consistent basis at decent enough paying jobs that you could save, it is substantially due to luck: being born into a stable middle to upper middle class family, being white and male, being born at a time when there was enough growth in the economy that you could land good jobs early in your career, which is critical for your lifetime earnings trajectory. Oh, and not having you or a spouse or a child get a costly medical ailment that drained your savings. And not winding up in a job where you were being ethically compromised and stood up against it, resulting in career and earnings damage.

          Did you miss that college grads had a worse time that high school grads and even dropouts in landing jobs in 2008-2010? And getting no or crap jobs then set them back permanently? And this includes graduates in the supposedly more “serious” STEM fields, where contrary to DC urban legend, there aren’t a lot of entry level jobs. You do well if you find employment, but save in a few niches like petroleum engineering, the unemployment rate is actually worse for STEM college grads overall than liberal arts grads.

          Reply
          1. Sluggeaux

            Yves, I think that Middle Class would acknowledge the “luck of the draw” on pension or not. It’s just that neo-liberalism would only redistribute within the laboring classes, not from the looting .01 percent responsible. The Arnold Family Foundation cronies in Rhode Island are making your argument. Those who lucked into wage-earning with a pension shouldn’t be the first redistribution.

            Reply
            1. flora

              If almost all the increase in productivity and income over the past 30 years had not gone to the top 1%, where it is essentially exempt from SS taxes, there wouldn’t be a problem.
              If the Middle and Working Classes still earned the same share of national income they earned before Reaganomics there wouldn’t be a problem. Lots of people with good incomes; those incomes almost all subject to SS deductions.

              Reply
              1. Sluggeaux

                The cap on Social Security tax is an inverted welfare benefit. One of many Reaganite cons adopted by the Clintonites/Obots.

                Reply
          2. Heraclitus

            Your response to Middle Class puzzled me. It is undoubtedly true that there is luck involved in his success. However, he was comparing himself to peers that seemingly had most of the same luck but made different life choices. I think one can recognize his luck and his thrift and appreciate them both.

            Reply
        2. Moneta

          It’s not my solution. It’s how the cookie will probably crumble. I’m in my late 40s and I’m in the category who saved but I also realize that I was in the lucky group with extra income and chances are I’m going to pay for that luck.

          I am planning my future around those odds.

          Reply
      2. AnnieB

        “There has to be a redistribution within the older population first before we skim the pay checks of the young still working.”

        Increased taxes on the social security of wealthy people has been proposed, so has increased Medicare premiums for wealthy people. These ideas were part of the “grand bargain” proposed by some Republicans and Democrats, including Hilary Clinton.

        What is considered “wealthy” in these proposals has yet to be determined. I don’t think that the “grand bargain” specified that the increased revenue would be used to help impoverished seniors either. Anyway, how much of a surplus would these increased taxes generate ? Enough to give poor retirees a meaningful cost of living rebate on their tax returns?

        I’m not necessarily against proposals such as these, but
        a better and more certain solution would be to rein in the military/security complex, stop all the wars for oil, and get the government back in the business of working for the citizens of this country. I bet we could find a few extra dollars that way.

        Reply
        1. Moneta

          If you stop investing in the MIC you will send the signal that you are weakening and renouncing being the “protectors” of the planet. This means potentially losing your reserve currency status. That means you would lose your easy money printing and net importing advantages.

          Reply
  8. Mel

    The currency issuer can create new spending with the constraint being generating too much inflation.

    I worry about leaving this statement to stand alone, because The Market is an independent thing, and it’s in The Market that inflation is created or not. Players out there are capable of creating inflation on their own. Abba Lerner’s article on Functional Finance (linked here a month or so ago) tells us that the remedy is taxation. I.e. spending to generate well-being shouldn’t be blamed for inflation. Applying the taxation remedy will take some political backbone.

    Reply
    1. Yves Smith Post author

      No, inflation is created in the real economy due to any of commodites inflation (cost-push inflation), wage-pull inflation (created by too much demand, or in MMT terms, too much net government spending) and more recently and not sufficiently acknowledged, by monopolies and oligopolies (see pricing of cable services and drugs, which have monopolies via patents) . Interest rates are a different matter and are controlled by the central bank. We’ve had risk-free interest rates below the inflation rate for years now thanks to the ministrations of the Fed.

      Central banks have the power to kill the economy (raising interest rates so high that it induces inflation) but not much/any power to stimulate (save goosing asset prices, which only trickles down a bit to the real economy). The cliche is “pushing on a string”.

      Reply
  9. flora

    I’m a great supporter of Social Security. There’s nothing inherently wrong with Social Security. The problem has been the politicians. In the mid-1980s the Reagan admin with Dem support changed CPI price calculations (and have been doing so ever since) in order to make any cost-of-living inflation adjusted increase in SS be less than the true CPI inflation numbers. They also made something like the first $25,000.00 of retiree income (all sources) tax exempt…. but did not index that number to inflation. They were clever in hiding the time erosion aspects of that “grand bargain.” They also raised the retirement age. They used the “saved” monies these changes to pay for tax cuts for the well off.

    I think adding another mandatory paycheck deduction for private savings accounts controlled by others would simply be another pot of money for politicians and Wall St firms to rummage. Fees? Churn? “Special” tax treatment? I appreciate the good intentions of the proposal. However, I’d rather see proposals for stronger protections and honest CPI accounting for existing Social Security.

    adding: the number of workers to retirees is less important than the productivity per worker, which has been going up steadily for the past 40 years. If workers were still earning the share of income from productivity and profits that they earned up until Reagonomics there wouldn’t be a problem. Since Reaganomics, however, almost all the gains in productivity and income have gone to the top 1-2%. Meaning that most of the productivity gains are not reflected in SS taxes. The top 1% pay SS security tax on only a tiny, tiny bit of their income. So less and less national total income is subject to SS tax. Falling SS tax receipts are less a function of fewer-workers-to-retirees than to less nation total earned income subject to SS tax. imo.

    Reply
  10. Chris

    Is no one talking about just abolishing the income cap on social security taxes anymore? I thought I read somewhere that would largely fix any holes in the program and allow retirees to get the COLA that they need to keep up with inflation

    Reply
  11. DumbDave

    “The currency issuer can create new spending with the constraint being generating too much inflation”.

    The problem with this is money. Money >> currency. As we have seen, the market can create its own money independent of the currency issuer, making inflation/deflation difficult for the monetary authority to control, e.g. the Eurodollar market.

    Reply
  12. Ep3

    Does anyone know anyone who has retired and lived solely on their 401k, just like a pension? And this person did not inherit any large chunk of money to assist in providing retirement funding. I want an example of a factory worker, McDonald’s worker, etc where they were part of the working class.
    Why not just expand social security? I understand she advocates in addition to SS we have this mandatory investing thru public/private partnerships. But when you have that, doesn’t the govt have to establish guaranteed rate of return? Because when people invest, there has to be a winner and a loser, always. Otherwise, some people’s investments may not make a return enough to support them financially.

    Reply

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