Sunday, September 11, 2011

Fix the economy - Step #1b more retirement

OK, so I've asked our older populace to take a hit and accept a later start to SS. What about the younger populace?

Well, I think the first big thing to recognize is that we're looking to live even longer than our parents. (I'm 30) So if 65 is too young for our parents to retire, then it's going to be way too young for us to retire. Fortunately, I know lots of people my age who seem to inherently understand this conundrum.

But understanding doesn't necessarily solve the problem. Lots of people my age are also graduating with record student debts and have spent a decade being priced out of homes. Retirement savings are not just low with 60-somethings, it's low with 20-somethings.

There have already been proposed plans for "mandatory retirement accounts" to be offered by employers and I think this is a step in the right direction. However, I think it's "too little" in a couple of directions.

Mandatory Retirement Accounts - Improvement One

First off, the proposed plan creates forced IRA accounts to be set up by employers. These are not the people you want managing this process. Employers are already over-burdened with major benefits like healthcare, dental, disability, etc. On top of that, the average worker will cycle through multiple employers in their lifetime, especially with my generation. If each employer is setting up a new IRA with their provider of choice, you create a giant paperwork mess.

In fact, it's already a paperwork mess. I still haven't rolled over my 401k from 2 jobs ago and pulled it in with the current one. It's all just a pain, shouldn't I just own the 401k and let the employers plug in to my provider of choice? Why does my employer choose my 401k provider?

So this needs to go the other way.

Each person needs to "own" their 401k and government-mandated transfers should happen directly to those portfolios. If the employee doesn't have an IRA, then those dollars are thrown into a government account in their name/SSN to be invested in government notes.

In the electronic era, this whole process is relatively simple.

Mandatory Retirement Accounts - Improvement Two

The second fix here is really to fix the whole [Roth] IRA / 401k / Defined Benefit mess. Why do we have these all of these confusing options? Why do we have the choice between Roth or non-Roth? Do we really want people guess between "tax now" and "tax later"? Does it make anything better?

I think the US needs to look towards a system like the Canadian RRSP for retirement savings. The RRSP system is simple to set up and simple to envision / manage.

The basic premise is that you have two investment "buckets", one bucket registered for retirements and the other bucket for "regular" investments. Money going in to the retirement bucket goes in un-taxed and gets taxed on the way out. To avoid people from "churning" money, the RRSP bucket has a growing lifetime max based on your income. To avoid tax cheaters, withdrawals have some %  held back.

And yes, we should have the usual "out of work" or "back to school" allowances for withdrawals.

In either case, the tax retirement mess should not require a book to explain. It all be explainable in a 5-minute video. In fact, the government should actually produce this 5-minute video :)

Isn't this all Socialist?

Did I mention I'm from Canada? It depends on your take here. Isn't Social Security socialist?

Yes, my whole proposal is "government meddling".

But there's a clear trade-off here. People are notoriously bad at thinking for the long-term and saving for a rainy day. We currently have a entire generation of voters who don't have anywhere near enough money for retirement, so we have living proof of our capacities here.

The goal of my proposal is to set small measures now to prevent larger problems later. If you don't think this is a good thing, then it's easy to call this socialist. But that same measure could apply to lots of existing programs that help provide stability.

I firmly believe that what the public seeks from government programs is some basic form of stability. This program is the type of program that actively promotes that stability, which is why I think it's important.