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Don't trust us with Social Security accounts
A study shows that far too many people mishandle their 401(k) plans. They'd most likely do the same with private Social Security accounts.
By Jim Jubak
Every time I write about Social Security, I get an e-mail box full from readers who just plain don't like the philosophy behind the government-run retirement insurance program.
They don't like the idea that the government takes their money and, after "investing" it for them, decides how big a check they'll receive every month after they've reached some bureaucratically determined retirement age. It's paternalistic, since it assumes that the government invests our money better than we would. And it's coercive, since the government doesn't give most of us a choice about whether we're going to participate in the system.
All of which is true. The program is bureaucratic. Often arbitrary. Definitely paternalistic. And certainly coercive.
But a recent study from Hewitt Associates, the global human-resources management and consulting company, argues that paternalism and coercion is exactly what most Americans need, at least when it comes to saving for retirement. It also says that the average 401(k) retirement savings plan could use a bit less freedom and a tad more paternalism and coercion.
I know that goes against the philosophical and political grain for many of us. But frankly, the Hewitt Associates study says that many of us aren't exactly in need of more financial freedom and aren't ready to take on more financial responsibility.
Put that in your pipe and smoke it when the discussion turns to how to reform Social Security.
The sad results
Here's what Hewitt Associates found in a study of nearly 200,000 workers who participate in 401(k) retirement plans:- 45% of workers take a cash distribution from their 401(k) plans when they leave or change jobs. In other words, they take money out of their 401(k) retirement plan and spend it.
- 66% of workers aged 20 to 29 take a cash distribution. In other words, the very workers who have the most to gain from compounding over time take money out of their retirement plans and spend it.
- 42% of workers aged 40 to 49 take a cash distribution. In other words, workers in their prime retirement savings years take money out of their 401(k) and spend it.
- 73% of workers with balances under $10,000 take a cash distribution. In other words, workers with very little put aside for retirement, either because they've just started to contribute to a 401(k) or because they don't make much money, are saying, "To heck with a $10,000 nest egg and a lifetime of saving," and just spending their balance.
Now granted, the data I've seen from the Hewitt study doesn't distinguish between the worker who takes everything out of his or her 401(k) and spends every last dollar and the worker who spends just 10% before reinvesting it. But the picture still isn't very comforting.
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A failure to help ourselves
When it comes to figuring out how a rapidly aging society can avoid a retirement crisis, I keep hearing the words of Walt Kelly's Pogo: "We have met the enemy and he is us."
I'm surprised that the numbers in the Hewitt study are so depressingly high. But I'm not surprised at the trend. I know I'm generalizing radically, but my own e-mail indicates that when it comes to investing for retirement or anything else, we're not especially patient, and we don't use the investor's most reliable tool -- the power of compounding over time -- especially well.
I regularly get e-mails that run like this: I'm 25 and I've saved $10,000. Can you give me the names of three $5 stocks that'll double in the next year or two?
In the eight-plus years that I've been writing Jubak's Journal, I've never once received an e-mail anything like this: I'm 35 and I have a portfolio of $50,000, but it's mostly in risky, highly volatile stocks. Can you give me the names of three stocks that I can use to reduce the risk in my portfolio, even if it means I'll get a lower average annual return?
The Hewitt study puts the returns scored by Social Security in a different light. Sure, many investors could beat the 6.25% yield the Social Security Trust Fund is getting on the funds that it has invested in Treasury securities. And I'm sure that many of my wealthier readers, who are paying the highest Social Security taxes but getting a relatively smaller future payout on taxes paid, could certainly get a better return on their Social Security tax dollars if they managed the money themselves. But the evidence remains that almost half of us, 45% to be exact, would spend our 401(k) money if given the chance, rather than roll it over to another retirement plan or keep it where it is. (The Hewitt study found that 45% of workers took the cash, 23% rolled it into another qualified retirement plan and 32% left it in their employer's 401(k) plan.)
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