The U.S. retirement income system, Pt. 3
By Dick Duff
In the first two articles in this series, I advocate a U.S. retirement income system that doesn't exist. But, it could. We must get back to basics with clients and help them build incomes for retirement. We need solid macro thinking, too. This column might jumpstart things in a small way. My goal is to stimulate thinking and get your creative and critical juices flowing.
In the big picture, the news is all bad. Capital can't last 30 or 40 years in retirement. Boomers will outlive their money -- or what's left of it. Employers have cancelled traditional pensions and the PBGC isn't a safety net, either. Meanwhile, 401(k)s shift risks to workers, if costs, charges and Ponzi schemes don't take their toll first. Social Security is in trouble, with fewer workers to assume the slack. Parents will be forced to move in with children whose inheritance will already have been spent. Taxes and inflation are on the rise. If you've ever seen debt, that's a mere beginning. Oil prices and health care costs are climbing, the stock market is shaky, you can't rely on real estate and even safe money doesn't make sense, because interest earnings are so low.
Whew! We need some help before it's too late.
Here's my view: We need a leaner and meaner government- and employer-sponsored retirement income system. While keeping oversight, the Social Security Administration should gradually shift control of social security to the financial services industry. It must make meaningful changes immediately. Perhaps we can awake one fine morning and find that a magic wand has cut through all the politics and left us with a U.S. retirement income system (the income system). It embraces the following:
The income system, as it ought to be:
1. Congress agrees to change Social Security, namely an extended normal retirement date (NRD), full creditor protected payments, and a capped inflation rider.
2. Additionally, there is ongoing debate on:
- Whether NRD will be age 68, 69, 70 or 72
- An inflation cap of merely 1 percent or 2 percent annually
- Tax-free or taxable benefits
- An optional non-forfeitable income certificate for new retirees redeemable at "qualified" insurance companies
- Certificate options -- survivorship, payments, long term care, indexed payments, and early retirement income
- The definition of a qualified insurer
- Whether banks and the securities industry can issue income certificates
- Government oversight for the certificates
Example: Let's say the income system's goal is a 50 percent pension (up to $50,000) on a worker's final pay (up to $100,000). Harry earns exactly $100,000. If Social Security assures $25,000 (about $2,100 monthly), Harry's employers will provide another $2,100 monthly from their DB plans. Of course, Harry's employers can provide additional DBs or something more from a DC plan.
4. All employer DB benefits are non-forfeitable and fully portable. All terminating workers receive accrued benefit certificates redeemable for income from qualified insurers (and possibly banks and securities firms). Retirement income education
1. Education on retirement income is the norm. Schools and colleges give mainstream courses on financial planning emphasizing income in retirement. The information embraces:
- Quick math; the Rules of 72, 112 and 144; compound interest; present and future values and amortization; annuitizing and annualizing (beginning of year (BOY) and end of year (EOY); and life expectancies
- Numerical differences between fixed period and life contingent payouts
- The effect of long term care features and survivorship on one's retirement income plan
- The definition of risk, and whether one should first build a safe and secure base for retirement
- How taxes impact the accumulation and liquidation of money over long periods of time. Tax deductible, tax-deferred, tax-free and taxable are defined, compared and contrasted.
1. Participation in an employer worker's pension is mandatory. Costs and contributions are shared. Benefits are non-forfeitable and fully portable. This does not mean full vesting, where funds can be borrowed or cashed-out; instead, what's earned up to termination of employment is issued as "accrued benefit" certificates redeemable at retirement age for lifelong incomes. These deferred-immediate annuities add "chunks of anticipated income" on one's financial statement. They move everyone toward pensions to the ultimate goal; say, 50 percent of final pay ($50,000 on $100,000).
2. After core pensions are assured, employers have incentives to add a simplified defined contribution program to their DB pensions. Similarly, DC accumulations are non-forfeitable and fully portable.
3. Finally, workers have incentives to fund private retirement plans similar to traditional and Roth IRAs. There are limited cash-outs and provisions for RMDs. Basically, retirement accumulations are available under lifetime payout arrangements. There is no advantage to "stretch" payouts. A wide choice of investments is available. The bottom line: The Income System (Social Security and DB pensions) form a base. Then DC's and worker IRAs can add extra capital for enhanced income.
Qualified insurance agents and financial industry employees earn fees for advising on Social Security alternatives and DB/DC/IRA possibilities. Fees are paid by the Social Security Administration, qualified insurers, and (if applicable) banks and securities firms. There is always the possibility of extra income and commissions from enhanced client relationships.
How's that for a start? As advisors, we have a responsibility to offer our suggestions to make things better. Presently, there is a hodge-podge of retirement plans, complex rules and regulations. As workers and retirees hurdle through these minefields, a leaner and meaner income system could mean a better retirement in the coming years. And, that's certainly better than running out of money someday and depending on welfare and family.
Certainly, you can disagree with what I've come up with. In fact, you might chuck it and recommend another program. The important thing is that we begin a dialogue and do something.
In next month's column, I'll outline all the possibilities that can save Social Security. In the meantime, go online and study some of the chatter about what others are saying on retirement income. There's a lot to learn.
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