Few American business leaders are as connected to the concepts of saving and long-term investing as John C. Bogle, founder of the Vanguard Group.
Bogle's principles were to provide key assets for anyone seeking a comfortable retirement — the reward for a lifetime of striving and planning. But for many Americans these days, a well-financed retirement is a quaint goal unlikely to be gained.
Here is what Bogle, who turned 84 this month, said about the future of retirement in the United States:
Is retirement as we know it today a relic of 20th century American economic might and something that will not exist in the future, given faltering family incomes, disappearing traditional pension plans and other wrenching changes in the economy?
I think you are correct, but it is not without cure. If we do nothing, America's retirement system is facing a train wreck.
What are the problems?
There are three pillars of the retirement system. One is Social Security. Two is the defined-benefit plan, and three is the defined-contribution plan. They are all in terrible shape. Social Security, I could fix it in five minutes.
What would you do?
I'd change the cost-of-living adjustment — not to cheat the retired people, but to get a formula that was right. It would result in savings.
That in itself would probably cure it. But I'd add a couple of things. I would raise the maximum taxable earnings for Social Security. I'd raise it to maybe $140,000, $150,000. (This year, the maximum is $113,700.)
Just those couple of little adjustments are easy to conceptualize, easy to prove the economics of, and impossible to get through our Social Security system.
Why is that?
We have a fundamental conflict in the way Social Security is done. That is, it's essentially younger people paying for the retirement of older people.
The younger people are going to be unhappy with this because they have to pay more. The older people are going to be unhappy because they calculated benefits under the old, and I think incorrect, system, and they will be getting less.
What about the fact that for a large percentage of retirees, Social Security makes up the vast majority of their income?
Oh, sure. When you think of somebody who's going through life earning $25,000 a year, and you say, "Save more," how do you save more?
It's probably impossible for anybody like that to accumulate money, and you end up in very rough terms with about half of our society finding it hopelessly impossible to save anything above their current needs. These are not excessive needs. They are not showboat needs. They are real needs: food and clothing and shelter. That's something Social Security was designed to cure.
Traditional, defined-benefit pensions, like the plans companies used to always provide for their employees, are as much a wreck as Social Security, aren't they?
The problem with those plans is, unbelievably, they still assume they will earn 8 percent annually in the future. They are not going to earn 8 percent in the future.
Isn't the issue that if corporations used a more realistic rate of return, they would have to put more money in the plans, and they don't want to?
You have it exactly. There would be a charge against earnings, which is totally unacceptable.
What would you do to fix defined-benefit plans?
That's not really fixable, because the corporations, in league with their accountants, can assume anything they want.
So the defined-benefit pillar is … ?
It's broken. This is a bad system. It's a disabled system. To make matters worse, corporations are dropping these things everywhere.
What about defined-contribution plans, the most common being 401(k) plans?
That was designed as a thrift plan, and it doesn't work as a retirement plan.
If you want to borrow money from it, you can borrow money from it. Think of how much you'd have for your Social Security payments if you could borrow against them. A lot of these poor people we were talking about — not poor necessarily in dollars, but people who are not as privileged as we are — would do that.
What about people who can't afford to put much into their 401(k)?
They are just going to have to live on Social Security. Or as they did before Social Security, depend on their families.
Can the federal government do much about the nation's dismal retirement outlook?
We have limited resources in this great nation. We sometimes behave as if we don't. We have limited revenues, but apparently unlimited willingness to undertake expenditures.
It's just our unwillingness to face fiscal reality, in our corporations, in ourselves, and certainly in our government. It's going to be painful to get out of this, but it can be done.