Is America’s Retirement System Broken?

SimonBill Simon, Managing Director, Retirement Plan Services

In an article earlier this week, Mr. John Bogle, founder of the Vanguard Group, decreed that America’s current retirement system is broken. As far as a fix, he offers only two suggestions. The first is to increase the current level of taxable income subject to Social Security taxes to $140,000-$150,000. The second is a reduction in the automatic cost of living adjustments that are used to calculate benefits.

While both would generate significant increases and savings to Social Security, they do not address the larger issues with our retirement system. As Bogle notes, the three pillars of retirement are Social Security, Defined Benefit plans and Defined Contribution plans—and they are in bad shape. In order for defined contributions plans to work better, we need to continue to automate as much of the functionality as possible, incentivize larger contributions, and make sure that an appropriate investment option is selected based on the participants age and realistic expectations about goals and markets.

5.15.13_Simon_BogleArticleHere is some food for thought. What if you could earn an additional tax credit by deferring at least 10% of salary or not having a loan against your 401(k)? What if an employer gave one additional vacation day per year if a company-wide goal of participation and contribution was reached? Ultimately, the system can work, but we need to continue to innovate and provide fresh ideas.

Click here to read more on John Bogle’s comments.

The Optimism for an Economy with a 7.8% Unemployment Rate

Dan WilliamsDan Williams, CFP, Brinker Capital

Currently, the U.S. unemployment rate stands at 7.8%, an improvement from the 8.5% a year ago and the 10% from the recent peak in October 2009. Still, compared to the consistent sub 6% rates we were used to seeing from the mid-1990s to mid-2000s, it is hard to feel good about this current state of employment and what this means for the health of the economy. There are those that argue that the “real” unemployment number is even worse (due to discouraged works exiting the equation and poor measurement methodology etc.). While it’s hard to show optimism for our economy, that is what I aim to do here.

A meaningful place to start is to define what an economy is. By its simplest definition an economy is a measure of the value of the goods and services the people of an area produce. Increase your number of people, increase the amount each person can produce, or produce more valuable stuff and the economy should grow. As you trade and cross-invest between economies, you can make further optimizations. In the short run, economies go through cycles and go by the whims of politicians, the media, central banks and consumer confidence. Still at its core, the economy is just a measure of what the people of a country are able to produce.

More Efficient Per EmployeeThe clear point here is that unemployment represents a failure to produce all we could. However, even with that fact, looking at GDP (expressed in 2005 dollars) we stood at $13.3 trillion at the end of 2011 (the highest year end number ever) and have seen continued growth such that 2012 will be even higher. So we have managed to become more efficient with what each employed person produces. This is the equivalent of a factory using fewer workers but producing more. If the real unemployment rate is actually higher than the 7.8% stated, that means we did it with even fewer workers. This seems like a good thing, right?

What makes the unemployment statistic different from a company having unused equipment is, of course, that people are not computers who can have their software updated over a lunch hour to be instantly redeployed to a new task. The fact is that many of those who are presently unemployed are trained for jobs that are no longer available. Also, people suffer when they are not able to work. There is no spin I can put on that other than to say things will get better given the time to retrain and redeploy. However, is this true?

A challenge to the idea of time healing this employment wound is the fear that technology efficiencies will replace more jobs such that even if the real GDP grows, maybe not all of us will get to be a part of it. Professor Andrew McAfee in a June 2012 TED Talk “Are droids taking our jobs?” echoes this sentiment when he references that in his expected lifetime, he believes we will see a “transition to an economy that is very productive but just does not need that many human workers.” He even notes that in the future an algorithm will be able to do writing tasks so a computer could author this blog. Basically, he sees no current job that we do as safe as these technologies accelerate.

This, however, does not mean that McAfee is pessimistic about our future employment. He is in fact quite optimist. He believes that these new technologies of efficiency represent the opportunity “to make a mockery of all that came before us”. (A phrase originally used by historian Ian Morris when he was speaking of the industrial revolution). What the industrial revolution did to magnify the productivity of our muscles, he feels the technology revolution is going to do to the productivity of our minds. To say differently, he expects we should expect an acceleration in our ability to innovate as technology improves.

A more skeptical reader would be right to ask that if innovation is accelerating, why are we still in the aftermath of the great recession? Thankfully Mr. McAfee is not alone in this technology optimism and has an economist among his group with an explanation. Joe Davis, Vanguard’s chief economist, in a December 2012 speech titled “Better days are in store” notes that the growth of industrial revolutions do not proceed in straight lines. The steam revolution of the late 1770s led to an economic overconfidence and collapse that occurred in the 1830s. The telephone revolution beginning in 1876 led to an economic overconfidence and collapse that occurred in the late 1920s with the Great Depression. In both cases Dr. Davis argues these tough times caused businesses to go through the required creative destruction to survive and took these technologies to a major inflection point of further growth. Today, we are in that inflection point of the microprocessor revolution that began in the 1970s. If history is any guide, this is the economic hiccup that will cause us to get to new technology heights.

Unused Human CapitalSo where does this leave us? Over the past five years, the U.S. has learned to do more with less, has additional unused human capital to deploy, and the efficiencies afforded to us by technology are likely to accelerate. While the near term may be messy, there is an undeniable potential for us to be so much greater and “make a mockery of all that came before us”. While the details of this future and what an economic blog of 2063 will read like are unknown, there does seem to be rational reasons for great optimism. With that let me say, Happy New Year!