January 27, 2007


A Contrarian View: Save Less, Retire With Enough (DAMON DARLIN, 1/27/07, NY Times)

Could it be possible that you are saving too much for your retirement?

Such an idea would fly in the face of almost every exhortation to a nation of spendthrifts that saving more is an imperative. After all, even as people are living longer, corporate pension plans and Social Security can no longer be relied on to ease most Americans through their retirement years. Fidelity, the nation's largest provider of workplace retirement savings plans, says the average 401(k) account balance is only $62,000.

Beyond that, the national savings rate -- the difference between after-tax income and expenditures -- is actually negative, government statistics show.

Nevertheless, a small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less than they are being told to by the financial services industry -- and spending more -- while they are younger. The negative savings rate, they say, is wildly distorted.

According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.

The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.

While the conventional wisdom is always wrong, it is never more wrong than about Americans and their savings. The idea that a country with $54 trillion in household net worth has a negative savings rate is especially delicious because so obviously wrong and so often repeated by the elites.

Posted by Orrin Judd at January 27, 2007 8:05 AM

Exactly what kind of saving aka not spending do they require so we can satisfy their statistical model? Should we be tossing loose change in tin cans and putting a couple of bucks a week in passbook savings accounts like our parents did?

What they really don't like is that we're managing our own finances instead if becoming willing dependents of big brother and the nanny state.

Posted by: erp at January 27, 2007 9:48 AM

Mrs. Erp, I'm pretty sure we've just left their statistical model behind. I'll bet that the people talking about the savings rate have never done the numbers. An old, out of date formula is used, because "that's what we've always used".

Posted by: Robert Mitchell Jr. at January 27, 2007 10:57 AM

It isn't the savings, it's the defined benefit Pensions....

The number pf people, particularly in the public sector, that feel they have a God-given right to unsustainable pensions and post retirement health care will be what breaks the back of our financial system.

It will be the proverbial irresistible force (political clout of the tax-eating class) meeting an immovable object. (not enough "savings" or tax dollars to meet their voracious greed).

Posted by: Bruno at January 27, 2007 2:21 PM

Population is rising so fast to such levels we could sustain that system forever. We won't for ideological reasons.

Posted by: oj at January 27, 2007 3:18 PM

OJ - while I don't fully agree with your statement regarding SS, when it comes to pensions and retiree medical benefits for public unions, a lot of municipalities and states are going to be in deep trouble as the workforce of the 70s, 80s, and 90s retires. Areas losing population, like the Northeast, are particularly vulnerable, but even cities like San Diego and Sacramento are already grappling with potentially revolt-inducing tax increases to pay for the benefits.

As I understand it, the unions believe they have the courts on their side (especially in CA), because there have been rulings that the benefits (and future increases) are legally binding parts of the union contracts, therefore tax hikes to pay for higher costs are (virtually) automatic.

This is why George Pataki was able to ruin New York in just about 6 or 7 years, because he bought off the public unions with generous state contracts. Now Eliot Spitzer will be suing Wall Street to finance New York state.

Posted by: jim hamlen at January 27, 2007 6:34 PM

They just won't pay them.

Posted by: oj at January 27, 2007 6:45 PM

I am a State employee with a defined benefit pension. Our legislature is going to debate switching to a defined contribution system this session. The State employees union sent out an e-mail rallying everyone to fight the measure. I'm thinking of writing my representatives to tell them to go ahead and make the switch. I would much rather have that money going into my 401-K so I can walk away from state employ anytime I want.

Posted by: Jason Johnson at January 28, 2007 8:54 PM