“People have income shock, like divorce or loss of a job or a health crisis,” and those crises tend to drain retirement accounts, she said.
But even putting income shocks aside, she said, most human beings lack the skill and emotional wherewithal to be good investors. Linking investing and retirement has turned out to be a recipe for disaster.
If you’re like me, and in this regard you probably are, you don’t know how to manage your money like a Wall Street champ. You do the other thing that only chumps like you and I do. Get rid of all of our disposable income on a house. That’s also for chumps, but the best I can tell, seems to be slightly less chumpish.
That’s the best I can tell, which is not much. The scariest part of that is compared to most humans I’m brilliant at managing money. Or making it, I can’t really tell.
Which is the point. The best I can do. I can’t tell. Probably? Neither can you.
According to more and more people, the defined contribution plan (such as the US 401k) turns out to be a bad idea. Worse than the defined benefit plan, and worse than Social Security. Other people say 401ks rock.
Whose right? I can’t tell, and neither can you.
But what I can tell is that people who talk about moving to a plan where folks are meant to have more control over their own money are either lying to you, or lying to themselves. I’m willing to give them the benefit of the doubt, and say they’re self deluded.
Here’s why. Individual saving accounts for society suck. They will tell you individual retirement accounts don’t suck because They will tell you individual retirement accounts on average have a hire return on investment.
Well, They’re making a very reasonable argument, aren’t they? It’s all about better rate of return isn’t it?
No. The name of the game is not rate of return. The US made a mistake taking calling Social Security “Social Security”. It should be what it’s called in Britain, which is what it is. National Insurance. The name of the game is Risk! And not the version of the game that you used to play with your overly competitive asperger hobbled dorky cousin, but the exciting real world stuff of actuary tables.
For example, some people in the United States live to something like 80. Some of them live a lot less than 80 years, and a few of them live a lot more than 80 years. If we concentrate all of our retirement efforts in to individual accounts, then when one person dies 5 days after retirement, all of the wealth they scrimped and saved is cashiered by their heirs. Not bad for the heirs, if you have an overly developed sense of the importance of private ownership, but not good for society. That includes people who are unlucky enough to have relatives that live until 110. Most likely, those people will have run out of their individual savings ages before they kick it, and would become a burden on their heirs, assuming they didn’t outlive them.
National Insurance mitigates this problem by making the people who die young pay for the people who die old. Now I know that sounds harsh and at many many levels, it is. But it’s also reassuring. We don’t really know when our time comes, and we hope it’s a very long time away.
But if you happen to be unlucky enough to live for a very long time, which under an individual account scenario could make you very unlucky indeed, wouldn’t you feel secure to know that society is going to be their for you? I guess that’s why the Yanks call it “Social Security”.