The answer is probably a more generous and better funded Social Security, except that fund keeps getting raided for other purposes.
This is one of the reasons I suggest people buy a house rather than renting. The financials may not always make sense, but it forces savings in a way that many people would not otherwise do.
How many people do you think would manually pay a large chunk of their paycheck into a savings account every months before deciding whether they can afford an extra order of curly fries?
Rent eats first and having a mortgage lets you actually save some of that (once you get past the substantial interest heavy starting year).
> The 401k was an experiment, and that experiment has largely failed.
Retirement accounts are not the problem. It’s a general lack of financial education. People can barely calculate simple interest. Compound interest is even less natural. Calculating the present value of a fixed payment annuity in 25 years? We’re a slim minority that can do that from scratch.
Some of the best savers are the ones that do not even understand the financial constructs, but take the savings rates and methods as gospel. Faithfully putting away percentages of their salaries that are orders of magnitude higher than the rest.
> The answer is probably a more generous and better funded Social Security, except that fund keeps getting raided for other purposes.
Social security is claimed to be “money you paid into”. But that cannot be true if the net amount grossly exceeds what you paid in. That system simply would not work without another revenue source.
People have to pay massively more into it over their entire working lives.
And if someone wants a pension the financial product exists. Except nobody wants to actually pay for it because an inflation adjusted guaranteed annuity for life is incredibly expensive! So the present value of it divided out would be more than people are willing to actually pay.
People are irrational. I have a loved one who told me they can’t afford car insurance, but subscriptions to Spotify, Netflix, Duolingo, and uses DoorDash, etc.
I think people are wired to think that small purchases are ok but that long term things are “not possible.” Of course there’s also a sense of people wanting to have some joy in their life now and choosing to gamble away future prosperity.
Yes, that's the Avocado Toast problem. You point out that maybe, just maybe, they don't need all of these optional luxury expenses if they can't afford to do "normal adulting". The response is always a cornucopia of excuses and fatalism: "Saving $5 is not going to make me financially stable!" and "There's no way I'll ever retire--I might as well live a little today!" and "I can't just eat rice and beans every day!" and "Why shouldn't someone have just one little luxury to make them feel happy?" and "The cost of my flagship smartphone is trivial, just 1% of my student debt!"
It's not the actual Toast that's the problem, it's the attitude that excuses the toast.
- Karl Marx
The reality is saving $5 here or there will not make a difference. You need to be saving 60 bucks a day for 10 years just for a deposit. Or over a hundred for a more palatable 5 year saving.
The average wage in Australia is around $1400 per week, tax is around 20% and average rent is around $300 per person. So that leaves you with $120 for everything else.
Yes, it's the attitude that is the problem..
The 401k experiment is not failing because people don't understand how interest and capital gains work. It's failing because people are not funding their 401Ks and the ones who do, don't sufficiently or consistently fund them. I know so many people my age (mid 40s) who don't even save at all. Like zero. They are playing a dangerous game of chicken where they believe the USA ultimately won't let the elderly die en masse in the street, and they think they'll be rescued. They think I'm the sucker for saving the max every year and then saving more.
This isn't a lack of financial education, it's deliberate. People can save but they won't because they don't think they're going to meet the consequences. Or they don't save enough because they don't think they need to. I also know people who say things like "I plan to die the day after I stop working, so I might as well spend everything now."
And that doesn't even consider the large number of people living paycheck to paycheck who literally can't save. It's going to be a shit show in 20-30 years.
If you reframe SS/OASDI as "someday starving because unable to work insurance", many different facets of its rules and financing fall into logical place.
As is, I feel like I'm watching people paying premiums for "house burns down" insurance and then being angry about "their money" not being "all paid back" when their house never has any problems. ("That's not how it works, that's not how any of this works.")
Not really.
By that definition a 401k is also an insurance policy. So is a checking account.
To the recipient, SS resembles an investment account more than an insurance policy.
So here, I'll give you some from the other side.
First, the "Old-Age, Survivors, and Disability Insurance" really is literally Insurance because it's literally in the damn name and I don't know how much clearer I can make that.
Second, you can tell it's insurance because larger payouts are conditional based on bad things happening to you. That is not true for an investment account, therefore they are different.
Third, you can tell it's insurance because the benefits are typically not transferable (inheritable) to another thing (person) being insured. That is not true for an investment account, therefore they are different.
> To the recipient, SS resembles an investment account more than an insurance policy.
Being deeply misinformed doesn't make something true.
> If you reframe SS/OASDI as "someday starving because unable to work insurance"
You might want to contact the Social Security Administration with your gripe, because they present SS as a "retirement benefit":
https://www.ssa.gov/retirement https://www.ssa.gov/prepare/plan-retirement
And look at your annual Social Security Statement. Mine says:
Retirement Benefits: You have earned enough credits to qualify for retirement benefits.
These explained benefits are not linked to bad things happening to you.
Earlier you said:
> As is, I feel like I'm watching people paying premiums for "house burns down" insurance and then being angry about "their money" not being "all paid back" when their house never has any problems. ("That's not how it works, that's not how any of this works.")
I disagree, because people expect their SS retirement benefits to pay out even if the house doesn't burn down. Which is why I'm saying I don't think people view it as "insurance" even if it technically is. People just want the income stream (aka "retirement benefit") that they earned (this is the language used by SSA) by contributing over their entire working life.
Sure, had I gone full throttle into a house back then, I could pat myself on the back right now, but at that point my employment wasn’t anywhere near as much of a certainty, and money was sit tight so the wisest thing to do with the information I had was wait a few years.
While I think things may be slightly better now and I need to do my yearly review of how things are, for most people getting stable enough to do anything other than split rent is out of reach. I’m one of the few people I know that could stop working and not be out on the street in 3 months.
I’m fortunate in that at least I have a pension I’ve been putting into over the matched amount all this time.
Money is pieces of paper that determines how a nations resources are divided.
Having more money in a "Social Security fund" is useless. If the social security fund is massive when it comes time to withdraw money from it but there are no resources to divide, then inflation will ensure the fund is worthless. If the fund is tiny but there are lots of resources to divide, the money will go a long way.
Individuals can save money to ensure they get a larger share of the resources in the future. But overall money is a zero sum game -- if one person has a greater share, everybody else has a lesser share.
As a country, to support retirees you invest in the productive capacity of the country -- train nurses, build infrastructure & housing, et cetera.
From an anecdotal point of view, I have never cared for money in the sense that I have not been busy maximizing my money whether it be salary, retirement, etc. not to mention "investments". I could not care to play the game of money/investments, I want to do other things with my time and headspace. However, in our Western society I'm forced to play the money game and to "be on top of it" otherwise later in life I am f*ked.
"Money" seems to be mostly an "interest" of some people and somehow we seem to have pivoted our entire society around that.
The reason most people don't understand this is because retirement has historically been a pipe dream for 99% of the population. You worked until you were no longer able to get up physically (from illness or general deterioration).
Nowadays people don't just want to retire, but retire "comfortably", whatever that means. Presumably living in your paid off suburban home, while travelling and owning multiple cars? It's not sustainable and will revert back to the mean, unfortunately.
The 5-8% per annum, which everyone older expected to live off of, was stolen to prop up the banks which got us into the mess in the first place.
It's not their lack of planning, not their generations fault. They they shouldn't be the ones to pay for the crash of 2008. There should be thousands of former bankers starting their second decade behind bars... but there are NONE.
Then the 70s and 80s happened, people did not realize there would be a paradigm shift in the work force. So here we are, and back then IRAs were limited on what you could save and I think there were no 401k's at all.
I think what we will see is a return to generational housing in America. More out of a necessity, like how divorced couples still lived together during economic strifes across the world.
Is there any evidence or reason to think that people were just more financially literate in the past and somehow regressed? This theory seems to ignore broad societal trends such as increasing wealth inequality, increasing housing costs, increasing health care costs, stagnation of wages, decreasing employment stability and security over time, and the elimination of employer pensions.
The more kids you had, the more of a buck shot approach it was.
The auto enrollment private pension minimum contribution in the UK is 8% (3% from the employer and 5% from the employee)...and its widely known that this is pathetically inadequate. It needs to be doubled.
Nobody is taught about this stuff in British schools either. Most people don't start worrying about funding retirement until they hit 50