How Financial Associations Are Failing Us All #3 - Promoting Government in College and Retirement Investing, Not Market Solutions
I'm not writing this for the scare factor, though clickbait seems to be a popular strategy for press and financial associations over publishing actual ideas today that advance financial security (the FPA is very proud of itself for "slamming" the tax plan just to have a press release on the topic, though their full time advocacy staff hasn't offered a single advocacy thought yet that I've seen to advance financial security).
I just want to be able to have published this prediction when I look back and say that I warned other professionals about how financial associations are letting their members and the public down.
To illustrate how your retirement investments will be taken over by the government to do for you, consider the history of college investment accounts…
The way the system worked without socialism…
1) People saved for college. Costs were manageable on a minor amount of savings or by a minor amount of work.
Enter the state…
2) The state manufactured social programs (pre-paid college programs) to get their hands on your savings. Since these initially are meant to replace regular savings accounts, all they had to promise the first savers to adapt socialism was a minor interest payment just above what the bank paid.
Anyone that uses the bank and doesn’t using the social program pays a tax for those that do, and so, for a time these programs take over the market.
However, the programs had the consequence of guaranteeing a pipeline of future demand for college that didn’t previously exist. A monopoly-like situation arises for the end product, which is to say that college is guaranteed to be a lower quality and higher cost. Like a monopoly-provider the end ‘college’ product decreased in quality (requiring more years for the same end result of the education) and increased cost.
The bureaucracies and revenue created to run these plans ensured they would continue to grow, so the promises continue, despite not being as attractive.
3) Savers realize these plans can not keep up with the future costs, and look for alternatives. Leaders advance market solutions like Education Savings Accounts to avoid the state system. Goods and services are created to help people save. These strategies are based on competition in the market, and so the products and services increase in quality and decrease in price.
4) The state creates competing investment accounts (529 plans) to remove the new market threat, just like they did with the banks. The same story plays itself out, the inferior state investment plans can not compete with the quality of the market solutions, and to ‘win’ they confer greater and greater benefits to their accounts while not providing the same benefits to the market accounts. These 529 plans accounts force savers into mindless and risky investment schemes that give the impression that all one needs to do is hand their money over to the state and they’ll be alright.
5) The state legislatively decides free market competition is not necessary and forces free market ESAs to close and sends the money into the state sponsored programs.
6) An event such as out of control college cost increases, stock market crash, or massive decrease in demand for college will make the monopoly complete as the state will be required to admit their program doesn’t work.
The removal of market options and the total monopoly of the state savings programs will open the door to lead the push away from ‘risky’ investments to complete socialism, college will be ‘free’ (at a multiple of the cost) and if you want to save for a ‘real’ education that is worthwhile you do so outside of the system. Why should those who do the prudent thing and save have benefits? (Note: This already is built into the system, if you save for college you do not get tax credits that non-savers do).
Without any competition, these 529 plans will decrease in quality and become worth less than the old method of just saving to the bank. As much as I tried to avoid recommending them in the past, I won’t be advising investors save to 529 plans in the future. While the quality won’t fall off a cliff, the odds of a state-run system with no competition providing a quality product are zero. Think about that if you have 10+ years that your money will be locked in a 529 plan.
At the end of the socialism cycle the original saver always pays for a good in taxes (though the cost has increased by a multiple because of the government interference) and if you want the good, you pay for it again out of pocket.
It’s important to note here that the above is happening during a time when the so-called ‘free market’ party runs the government. I’ve written about the proposals for what those who don’t believe in markets want for your IRAs in the past.
Without a party pushing to simply keep market competition in college investing accounts... why would we expect there will be anyone pushing for it with your retirement savings?
Following the above, and where we’re at in scheme when it comes to retirement accounts, I estimate we may be ~10 years or one 2008 crash away from losing our retirement accounts to a state-run scheme. A few years ago I would have thought it was longer, but State-run IRAs have started us down the path of programs existing that – despite being terrible investments – will offer benefits that will force people to use the state program. Otherwise, you’ll have to save on your own, and you’ll pay a tax for those benefits that others are receiving. The argument that these plans are terrible – Oregon Saves charges 1% for a few index funds – doesn’t matter. They will slowly increase the benefits to those who use them and remove market competition.
These IRAs very easily could have been 401(k)’s with the slightest shift in government. They will be 401(k)’s or accounts that compete and shut down 401(k)’s in the future. When that happens, we’ll be well on our way to losing market-based retirement savings accounts.
Another factor that it’s important to be aware of that is happening in retirement accounts… the “state programs” like Oregon Saves have tens of thousands of unpaid ‘agents’ in their state employers who are forced to sign-up employees to their account.
There are no investment firms that can compete.
Finally, advisors, experts, writers, associations, consumer advocates, and politicians who like to rail about market funds costing 0.10% more than the cheapest funds can't find any energy at all to oppose a state plan that costs 1% more.
Below is how I think about the above outline when it comes to what’s in the future for retirement saving for Millennials and Gen X’ers.
The way the system worked without socialism…
1) People saved for retirement. Costs were manageable on a minor amount of savings (~10%) or by a minor amount of work. The costs were so low that employers paid for them with pensions.
Enter the state …
2) The state manufactured social programs like public and national pension schemes to get their hands on your savings that the pensions had. The monopoly guaranteed a pipeline demanding a full retirement, which decreased quality and increased cost. What used to be manageable for employers to offer, or for individuals to do on ~10% savings, now requires 12.4% for the program plus 10% of your own savings. The bureaucracies and revenue created to run these plans ensured they would continue to grow.
3) Those who believed in the market advanced solutions like 401(k)’s and IRAs got a toe-hold of access to help savers overcome these issues.
4) The state creates competing investment accounts (Oregon Saves, MyRA and future national accounts) to remove the new market threat, just like they did with the pensions. The same story plays itself out, the inferior state investment plans can not compete with the quality of the market solutions, and to ‘win’ they confer greater and greater benefits to their accounts while not providing the same benefits to the market accounts. These state-run retirement accounts force savers into mindless and risky investment schemes that give the impression that all one needs to do is hand their money over to the state and they’ll be alright.
See steps 5 and 6 for college accounts for what happens next if no one stands up for greater freedoms in retirement accounts…
Is the above crazy? I don’t think so. But, maybe I’m a pessimist. Maybe – unlike the theft of ESAs from the private market to the state-run accounts – the state will let savers keep their IRAs. At least, if your money is already in an IRA.
OK, maybe. Then all that will happen is the competing account will offer greater and greater benefits to encourage the IRA holder to hand over their account to the socialized system. Let’s say they offer no state taxes on withdrawals, and instead of taking the accounts retirees gladly hand over their market account.
These proposals are already on the table and have been for years if not decades. Serious money is behind pushing for the takeover of IRAs to “public-private partnerships” with hedge fund providers. Search for Guaranteed Retirement Accounts and how the basis for California’s state-run system are based on them. The accounts are coming, the benefits just need to be adjusted upwards until market choices go away enough to make them not worth continuing (like ESAs).
The first market crash after these accounts have 3-5 years of operating and increasing benefits will be the end game.
If I try very hard to be an optimist I might think the above is a cycle. The market has a solution – saving and bank accounts – and the state attacks it, and the market comes up with another solution, and the state attacks it, etc.
But, I think what’s missing from cyclical thinking is that this is a battle of ideas, and while the side of socialism is playing to win, the market side is content with giving up ground in steps.
Unlike past generations, those in positions of leadership and power today don’t believe in step #3 and so that ground is being given up quickly.
Without professionals and associations who are willing to promote the values of the market system to the party in power, there will be more and more attempts for government-run accounts. We'll end with low-quality, much higher cost, and the recommendation will be to save the mandated 12.4% for your Social pension plus the mandated 10% to your social hedge-fun, plus 20% to your own accounts.