Public employee pensions have been in the news a lot lately. And it gets me to thinking that we are addressing the challenge of retirement entirely backwards.
We only have to look as far as Detroit to see the results of statism carried out to its tragic mathematical folly. Not only do the neighborhoods look like General Rommel just marched through, the bank accounts also look like they have been victimized by Nazi plunder. Detroit’s public employee pension plan is about $20 billion in the hole.
Several other large American cities are facing similar crises in unfunded pension liabilities, with Chicago leading in debt as tall as its skyscrapers. The state of Illinois, along with all of its city governments, combine for more that $200 billion in unfunded retirement promises to its public employees.
This national mess is purely the outcome of fantasy politics. Liberals vote liberals into office who promise liberals that they will liberally fund their pensions. The sum of all unfunded public employee pension liabilities across the country is now pushing $1 trillion. It’s just not funny anymore.
While less dramatic, Social Security is facing a similar demise. The insolvency date keeps officially moving closer and is now predicted to arrive about 18 years from today.
The United States Treasury withholds money from our paychecks during our working years with the good intent of making payments back to us during our retirement years. But the moment that our withheld dollars arrive in Washington, they are immediately borrowed by an out-of-control Congress to fund the dreams of the president’s father.
Three regrettable problems arise from this irresponsible practice: (1) The phenomenon of compounding interest over time is never realized, (2) individual contributions are dissociated from withdrawals, transforming Social Security from a savings plan into wealth redistribution, and (3) attempts to put the program on sound footing has become high-risk for elected officials, earning it the nickname “the third rail of politics.”
Those of us mere mortals trying to plan for retirement will plug in to such sanctioned programs as 401k, IRA, SEP, or SIMPLE. These plans have two things in common; regularly salting away small contributions, and deferring the taxes on those earnings until they are withdrawn in retirement.
So with all of these options, how are we doing as individuals in setting ourselves up for the golden years? Not so good. With the poor showing in retirement account balances, Forbes predicts “The Greatest Retirement Crisis In American History.”
Even with the maximum contribution limits imposed by the tax code, mathematics virtually guarantees a comfortable retirement with one enormous “if” – That is if the investment is made early enough. A 25-year-old who places 6% of his/her income in a long-term, high-interest-bearing mutual fund will retire very comfortably after a typical forty-year career.
But perspective prevents our realizing that nirvana. The prime concern for young adults is the immediacy of socialization, like trying to afford dating and the car to get there. Once dating is successful, rent, diapers and doctor visits demand priority. Then, it takes everything you’ve got to step into home ownership. Improved income is stretched tightly to upgrade to a reliable car and a worthy home. And failed relationships can crash it all.
Finally in your forties, affording future life after the working years begins to find its place of importance. But at this point, compound interest no longer has the time to build up savings for a scheduled retirement. And politicians, knowing your situation, contrive awkward transfers of wealth in exchange for your vote.
Plenty of people have worked spreadsheet theories on how to address the persistent retirement crisis. Perhaps we should privatize Social Security investing, prevent Congress from tapping those funds, or add a compulsory retirement withholding of 6% on all income. The problem with every predictable, clever idea is that the government remains involved.
After much thought, I have come up with a suggestion. I got it from Proverbs 13:22 which reads, “A good person leaves an inheritance for their children’s children...” If grandparents were to invest $3.00 per day as a gift beginning with the birth of each of their grandchildren, their first 18 years will fund their last 18 years.
At three bucks per day, or $1,095 per year, a total of $19,710 will have been put away by each grandchild’s 18th birthday. A low-interest return during that 18-year savings plan would easily bring the balance beyond $20k. That nest egg, invested into a mutual fund with an average annual return of 10%, compounded over the subsequent fifty-two years will secure each grandchild with over two-and-one-half million dollars when they reach age 70. No union-negotiated pension contract, no withholding of income, no politician’s involvement, and no competition from the expenses of daily life.
If a majority of the citizens were covered in this manner by their grandparents, they could vote to keep the government from raiding their savings. And by their charitable hearts, they could voluntarily care for others. The challenge remaining would be to keep the grandchildren from prematurely interrupting what Albert Einstein reportedly referred to as, “the most powerful force in the Universe (compound interest).”
”We have staked the whole future of American civilization, not upon the power of government, far from it. We have staked the future of all of our political institutions upon the capacity of mankind of self-government; upon the capacity of each and all of us to govern ourselves, to control ourselves, to sustain ourselves…” - James Madison, Fourth President of the United States and Author of the Bill of Rights