Steve Klingaman

Steve Klingaman
Minneapolis, Minnesota,
January 01
Steve Klingaman is a nonprofit development consultant and nonfiction writer specializing in personal finance and public policy. His music reviews can be found at

AUGUST 2, 2012 8:36AM

Mitt’s IRA Reminds Us Ours is Toast

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Retirement dreams bite the dust:  it’s all Greek to us.


Mitt Romney’s likely abuse of the tax code to build a $100 million IRA has been drawing growing interest on the part of experts who want to figure out exactly how he did it.  Without more information from the candidate that is impossible, so they are left to their own theories.  I advanced the dominant theory based on reportage that appeared in the Wall Street Journal in my blog last week.  That Mitt skirts the rules to amass a fortune is bad enough.  Worse is how it reminds us just how broke we are as a nation when it comes to retirement.

            Teresa Ghilarducci, professor of economics in at the New School for Social Research, writes in a New York Times Op-Ed piece, “Our Ridiculous Approach to Retirement,” “Almost half of middle-class workers, 49 percent, will be poor or near poor in retirement, living on a food budget of about $5 a day.”  The reason she posits, is that 75 percent of workers nearing retirement age have less that $30,000 in their retirement accounts.  She chalks it up to psychology, suggesting that we are more like the grasshopper than the ant, or the chipmunk, or whatever it was, because we just can’t focus on the future in the face of urgent competing needs in an era of overstretched (or no) paychecks.

            How did we get here?  A big part of the answer is that defined contribution retirement plans like IRAs, SEP-IRAs, 401Ks, and 403Bs were never intended to be the be-all, end-all of our retirement plans.  There were designed to augment defined benefit, i.e. pension, plans.  That’s why defined contribution plans have those strange caps on the annual contributions allowed.  That was so super-savers wouldn’t “abuse” the system by out-saving the rest of us by some unreasonable degree.  Apparently Mitt didn’t get that memo.

            The looming crisis this policy gaffe of gargantuan proportions has created is rarely addressed head-on by even liberal policy experts.  It’s as if we have become so cowed by the free marketers that the while we are capable of discussing a few jobs coming back from China, we act as if pensions are extinct, dead as the Golden-Headed Langur.  And for those public sector workers who still have them, we are actively working to make those pensions extinct, too.

            Free marketers who would release business from any responsibility to provide for their workers’ well-being after retirement apparently didn’t get the memo that showed that a significant level of consumer spending over the last 20 years was made by seniors.  And that spending dynamic will dry up under professor Ghilarducci’s prediction, instead becoming a permanent drag on the economy in two ways:  lack of proactive spending and increased societal expenditures to care for impoverished seniors.

            If—and contrary to popular belief, it still is an if, if not for long—Social Security is seriously curtailed in the future, we will face need of epic proportions.  And of course the best way to prevent a doom loop from occurring is to catch it early before it takes the swan dive.  In the current political climate, however, we are paralyzed by ideological gridlock, same as we are for most of the dire outlooks we face with global warming and health care costs, though the latter issue is related in the way in which Medicare factors in to the equation.

            Most American workers who are staring down an imminent retirement age with insufficient resources seem to respond with a sense of resignation and even depression.  I argued a last year in an Open Salon piece, "Face It. 401Ks are a Failure," that the system cannot be repaired. Professor Ghilarducci provides a psychological explanation for the failure.


            What we need to do is—get ready you haters—is institute the equivalent of an individual mandate, using the tax code as both carrot and stick, to get workers to save at some minimum threshold.  If they chose not to, they suffer an incremental tax penalty via their payroll taxes that augments their Social Security contribution.  The idea is that you have to pay the piper at some point, the only question is when, and how, and whether you will do it in a tax-advantaged manner.  Employers, for their parts, need to be rewarded for generous defined contribution plan matches above 6 percent of salary, and penalized for miserly matches, again by employer-share payroll tax rates that bolster Social Security payments.

            In addition, businesses that curtail or cease their employer matches to retirement plans in recessions should be required to fund those matches via make-up provisions over a five-year window or face further payroll tax penalties, hopefully in ways that directly benefit their employees.  If that means cutting work hours back to 35 hours a week instead of 40 during a recession, so be it.  Complain all you want, but the reality is this:  the looming retirement impoverishment is as real as global warming.

            Astute critics of the present administration will note, not doubt, that President Obama championed a payroll tax cut to stimulate the economy.  That, I agree, was not helpful. But the reason he did so was because the Republicans would not consider any tax relief plan that did not grant relief to millionaires and billionaires as well as the middle and under-classes.  That the conservative position that these “job creators” must be left with their disposable income in order to create jobs has been discredited by recent events—four years of non-job creation—goes without saying.  But still, we will have to make up the funds that were not deposited into the Social Security trust fund somehow, someday.

Bring Back Pensions: Starter-Pensions, Mini-Pensions “Penny-Pensions,” Something!

            Beyond encouragements to bolster defined contribution plans, we need to offer incentives to bring back pensions, even if they will look very different in the future than they have in the past.  Pooled pension funds purchased by businesses through some sort of pension exchange, should be offered to counterbalance tendencies businesses have to underfund and overpromise.  Defined benefit plans may need to evolve so that only minimum levels of pension payout are guaranteed and higher levels depend on the market performance of the fund.

            Such funds should be fairly regulated so investment boondoggles by highly compensated incompetents can be avoided.  This goes for businesses and for individuals.  Because never was there a worse class of investors than those who invest in their own IRAs and 401Ks.  The long term track record is abysmal.  It does not have to be.  We just have to think differently; the way John Bogle, founder of Vanguard Investments, thinks about money and investing.  We have to stick to the rules of the road.

            There is an alternative, of course: work ‘til you die.  But someone has to give you that job, and you have to be fit enough to perform it.  Sounds like a problem to me.

            We have a lotto psyche and magical thinking problem in this country.  We are so sucked into our get-rich-someday fantasies that we don’t notice time is running out—and has run out—for millions, who will not cash in on the American dream no matter how you cut the pie. And how are we going to care for those people in their not-so-golden years? What do our “lay-say fare” compatriots like Mitt have to offer on the topic?

            My proposal is three-fold: 1) Get people to save something, 2) Provide sane, regulated investment vehicles, and 3) Introduce a 21st Century pension.  And yes, it may be a semi pension, at least for the next 50 years, but until we can all pack our 401Ks with the looted revenues of companies we have acquired as Mitt almost certainly did, we’re up Mitt’s Creek without a paddle.


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The link for the article I did on IRAs last year is here:
Face It. 401Ks are a Failure.
There is wisdom in this on the surface.
But it also seems to leave out the self-employed.
I may have read it too fast, but how can this extend to the edge of their seat small operator struggling to hold on?
Many of your readers at a site like this fit that description and they do compose a large portion of American workers and business owners.
Your ideas would work fine IF everyone shared equitably in the wealth that they help to create.

As long as most people get barely enough to manage day to day living expenses - or less - they don't HAVE any money to save. And as long as "the few" are sucking up the majority of the wealth created by the many, they won't ever have money that can be saved. It's a miracle that they are even able to put aside what little they do.

Your "solution" reminds me of Rocky-Feller's solution to poverty; "Everyone ought to get up off their duffs, show some gumption, and get out there and inherit a few million dollars as I did."

That'd work........

Alsoknownas, What a delightful question! I count myself among the unemployed, I can relate. So what can be done for the self-employed?

1. More generous tax breaks for the pre-tax money they set aside in an IRA, SEP-IRA, or Roth IRA. This is equitable because they have no employer matching their contribution.

2. Make the caps on contributions higher, especially for IRAs.

3. Provide extra tax incentives for savers to invest in accredited retirement plans, that is, plans that are suited by virtue of diversification to retirement goals, so you don't have sixty-somethings invested 90% in stocks or twenty-somethings with all-bond funds.

4. Introduce tax penalties for self-employed individuals who do not save at least 1% of gross income per year.

5. Self-employed individuals need to build in several extra percentage points into their rates to cover minimal retirement savings.

Sadly, none of these ideas will transform the money lives of the self employed. A big part of this starts with how we, ourselves think about money and how we structure our expenses.

I believe in the boil-the-frog-slowly method of saving: start with saving 1%. After a year or so, up that to 2%. And so on, over time. The problem is that our economic system doesn't incent saving for retirement to a sufficient degree and it perhaps doesn't penalize, at least to the degree that it sends a message, those who can but don't.

SkypixieO, Really? Suggesting that employers be required to offer some form of mini-pension in addition to their 401K contribution matches reminds you of inheriting a million dollars?
I agree with sky that demanding contributions on workers whose incomes have been pushed downward when they didn't remain stagnant is unrealistic, generally speaking.
Recovering the post WW2 New Deal template of incomes, productivity and profits rising in concert would be essential to such a scheme.

Or, a version of the Mitt plan. Workers can knock other workers on the head, legally steal their money, convert it into undervalued stocks and save millions for retirement. Survival of the Mittest.
Now I understand why my paternal grandfather buried cashin a Mason jar in the backyard in the 1930s.
So, when are you running for office?

Thanks for this great post. ~ r
When I get a personality transplant and a $100 million in my war chest!
How handily you forgot the FIRST part of that paragraph; y'know, the part that reads......
"" What we need to do is—get ready you haters—is institute the equivalent of an individual mandate, using the tax code as both carrot and stick, to get workers to save at some minimum threshold. If they chose not to, they suffer an incremental tax penalty via their payroll taxes that augments their Social Security contribution. The idea is that you have to pay the piper at some point, the only question is when, and how, and whether you will do it in a tax-advantaged manner.""
And just what good will any retirement plan do when the whole economy is in the throes of collapsing?
Your proposals are in the right direction Steve. Paul raises a valid point and while there's an answer to that, it's well off the radar. The whole tax system needs a large overhaul. Payroll taxes need to rise to allow for decent retirement pension. Income taxes on middle and low income earners could be reduced, while taxes on higher earners need to rise and in the case of those receiving more than $1 m annually, rise sharply. There ought to be a national sales tax along the lines of Europe's. Exemptions can be made for grocery store food (i.e. non-prepared), children's clothing and the like. And of course there should be a carbon tax. All this should allow for a reduction in the corporate tax rate which would largely offset the rise in payroll taxes. Consumption taxes (including carbon) encourage savings and enable governments to reduce income taxes.