Friday, August 23, 2013

Paternalism, Protection, and Pandering

When we let go, others take the reins. No, thank you.

At dinner the other week, an old friend told me that "things happen for a reason". While I love my friend dearly, I couldn't disagree more. For me things happen because we make them happen and, sometimes, because we fail to take action. While there's a certain luxury in blaming others for failings, there's greater pleasure in reaching difficult goals. As Jay Bilas puts it: "Having fun is doing hard things well."

Saving for retirement is hard. Throughout life we need to provide for the daily needs of ourselves and our families, prepare for unexpected and occasionally tragic events, and fight off the constant drone of consumerism. More and more employer-provided define-benefit plans have given way to voluntary defined-contribution plans such as the 401(k). Even with defined-contribution plans we don't have full control: our employers' administrators pick the investments available to us, and often those investments come at a higher price (and lower return) than if we were to pick our own investments via an Individual Retirement Account (IRA). Mind you, it's no bargain for employers either: it takes time and money to pick and maintain a 401(k) and there are outside administration fees imposed as well.

If I had my choice I'd ask for IRA annual contribution limits equivalent to 401(k) plans ($5,500 v. $17,500 in 2013, respectively). By setting differential limits Congress has legislated an advantage for investment firms that offer 401(k) plans, increased the cost and lowered the return for savers, and created a reliance on employers. And those employer 401(k) matching contributions? Just turn them into higher salary or wages that employees can invest themselves. Retirement needs to be simpler so it's easier to understand and participate.

Social Security – funded by employee and employer payments via the Federal Insurance Contributions Act (FICA) – was supposed to make retirement income simpler and more reliable. That's a great idea as long as there are more workers than retirees. Sold to us by elected officials as a defined-benefit pension, Social Security offers defined benefits but it's not a fully funded pension: current employee and employer FICA taxes pay for current retiree disbursements; the Trust Fund is just a buffer between inflows and outflows, not an investment for future disbursement. Social Security has been around so long that current employees often believe that they're "paying into the system" where, in effect, they're "paying through the system". I look to Social Security for the "insurance" in FICA provided as a protection against personal financial catastrophe.

Though in a slightly different vein, reliance on employer and government pensions got me thinking about military service members and sports stars. (I know ... just stick with me.) When departing from military life, service members are rushed through the Transition Assistance Program so fast that it's ineffective. Afterwards they're isolated, not ready for reentry into civilian life with predictable and unfortunate results. Members' reliance on a paternalistic military served them well in that environment but is detrimental without known support mechanisms. Sport stars also get isolated, carefully groomed and pampered by pandering agents anxious to guard their meal ticket and by media eager to elevate them to the next level of greatness. Reliance on fame and fortune can create a shell of an individual unable to cope with the pressures of everyday life.

We'd be blessed if all those around us act in our best interest. But that's not reality. Even well-meaning people, groups, and policies create a reliance that – when removed – leave us unprepared.

As I said earlier it's important to have a net that catches us when we stumble and fall. But unless we're empowered to act in our own best interest without advantage given to someone else's interests, we're more likely to believe that "things happen for a reason" rather than through our own strengths and smarts.