In an ideal world, everyone would save money so they could take care of their own retirement. Some would call this a Jeffersonian ideal. Others might say it is a Republican core belief. But it’s a widely admired idea. It is most admired among by those who feel closer to the ideal world than the world in which the rest of us live.
Forty years ago, when I started writing this column, I thought lots of personal saving was a great idea. I lived closer to the ideal world back then. As my father once predicted, I am now a “sadder, but wiser” man.
Reporting on the real world, I realized that saving was difficult for many. Reader letters convinced me that saving was impossible for some. I also saw that while some people didn’t save because they were willfully clueless, many saved but had their savings wiped out by the nuclear bombs of personal finance: divorce, job loss or major illness. Some got the whole trifecta of personal disaster.
That’s why I defend Social Security. It’s also why I devoted the last two columns to why the proposals for the “reform” of Social Security from Sam Johnson (R: Texas) are so bad for the 94 percent of all American workers who earn less than $118,500 a year. The proposals to “reform” and “modernize” Social Security are particularly horrible for younger American workers. The young will be subjected to paying the same employment tax as their parents. But their benefits will be slashed.
Some would call that “taxation without representation” since many of those workers aren’t old enough to vote.
The current proposal to reform Social Security only rearranges the distribution of benefit cuts workers face when the Social Security Trust fund is depleted in 2034. They do nothing---nada--- to secure the retirement benefits millions of workers will need over the next 75 years. If any exercise deserves to be described as “rearranging deck chairs on the Titanic” it is the proposed reform of Social Security.
Those who want to see independent personal saving replace Social Security should be more careful of what they wish for. The consequences of having Jeffersonian independence might realize an ideal, but they would be devastating to our consumer economy.
How could that be?
Simple. Our economy depends on secure employment, worker spending and abundant consumer debt. That dependence has consequences.
Let’s imagine that there are two groups of workers in America. Some get the memo about reduced future benefits. Others don’t get the memo. They are oblivious to future benefit reductions. Only two consequences are possible. Both are ugly.
The workers who get the memo will save more and buy less. They’ll do this in an economy that is 70 percent driven by consumer spending. The results won’t be pretty. Less spending means reduced employment, lower tax collections and more federal debt. Skeptics should recall that after 9/11 we were urged to go to the mall and spend.
The workers who don’t get the benefit reduction memo will continue to spend. Instead of spending less during their working life and retiring with savings, they will go over a spending cliff when they retire. Without a corporate pension or personal savings, the only asset they’ll have will be their house--- if they are homeowners. They’ll try to sell their houses, but many of their neighbors will be trying to do the same thing.
So home ownership will do less for them, while reducing the value of the most important asset, by far, that middle class Americans own.
Selling houses may sustain some retirees longer. Or not. Eventually we’ll have a lot of people who can’t afford the deposit for a rental. Expect RV parks to boom. Also, expect lots of people to die at surprisingly young ages compared to their parents.
It’s not a pretty picture.
That’s why we need, somehow, to secure those $11.6 trillion in benefits, not rearrange how they are cut. That’s why the real world solution--- not the ideal world solution--- will involve another thing everyone hates: higher taxes. And, like cutting benefits for millions, the real world politicians will be talking about who will pay higher taxes.
They won’t call it that, of course. It will be called tax “reform” and tax “modernization.”
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Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.