McCain's Argument Against Social Security Reform
John McCain has yet another proposal to save the financial markets:
John McCain proposed Friday that the elderly be allowed to hang on to the stocks in their retirement funds and not be forced to sell them in a bad market.
The Republican presidential candidate would suspend requirements that people start selling off retirement investments when they turn 70 and a half.
“Spare investors from being forced to sell their stocks just in time when the market is hurting the most,” McCain said to cheers at a western Wisconsin rally.
This story scares me for a very simple reason: Why the presumption, which one would hope is incorrect, that most retired Americns with 401(k) accounts are invested, heavily and perhaps exclusively, in stocks?
A 401(k) (or any other tax-advantaged retirement vehicle) is an account. It is not an “investment” and is certainly not a stock. A requirement (which by itself may or may not be reasonable) that the account be partially liquidated each year starting at age 70 1/2 does not necessarily mean — and in most circumstances ought not mean — “selling stocks.”
All 401(k) programs offer a selection of investments, of varying risk and volatility. Any responsible program would have at least one money market fund — cash — and would not force participants to invest all their money in equity funds. Moreover, anyone at or near age 70 1/2 ought not to have much, if any, exposure to the stock market anyway.
So if McCain is right and compulsory withdrawals are forcing large numbers of retirees to sell stocks (i.e., stock funds within the account), then the corollary is that large numbers of retirees are idiots who are investing in stock funds rather than less volatile alternatives, which they generally should not be doing at that point in their life cycle.
(And these are supposedly the “smart ones” who contributed to 401(k) accounts in the first place!)
I had always defended Social Security reform, by which I mean voluntary partial privatization, against charges that it would mean investing in “risky” stocks, by reminding people that private accounts would surely include money market options. I also miss no opportunity to remind Wall Street’s enemies that 401(k) accounts, regardless of their performance in any particular context, were tremendously beneficial to the American economy and collective mindset, by empowering people to move easily from employer to employer without worrying about forfeiting an antiquated defined-benefit pension (which itself is not a riskless enterprise).
I am course not arguing for paternalism (e.g., forcing people to move their 401(k) money out of stock funds at a certain age). I’m just wondering whether, after a generation of defined-contribution pension saving, people are still so financially illiterate as McCain’s proposal would suggest.
Thoughts?
Filed under: Politics, Social Security
I was talking to a neighbor just this week who is retired (early) and was complaining that his retirement fund took a 20% hit which tells me he's mostly in stocks not the money market. This guy is a former city manager (small but bigger than Wasilla) used to managing a $50M budget. Yes he really ought to know better, but I suspect he's not atypical.
I think part of the problem is cultural. For too long we've been told that someone else will take care of us rather than taking responsibility for ourselves.