Vanguard's Bogle: America's Retirement System Facing a 'Train Wreck'

Wednesday, 15 May 2013 07:17 AM

By Glenn J. Kalinoski

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Without corrective action the U.S. retirement system is headed for a "train wreck," according to John C. "Jack" Bogle, senior chairman and founder of The Vanguard Group.

He identified three pillars of the retirement system: Social Security; the defined-benefit plan and the defined-contribution plan.

"They are all in terrible shape," Bogle told philly.com. "Social Security, I could fix it in five minutes. 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."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

He also suggested other changes, including raising the maximum taxable earnings for Social Security "to, maybe, $140,000, $150,000." This year the maximum is $113,000.

"Raising it would pour money into the Social Security system," he said. "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. We have a fundamental conflict in the way Social Security is done. It's essentially younger people paying for the retirement of older people," he said.

"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."

As of June 30, 2011, 54.8 million people, or 17.6 percent of the U.S. population, were receiving monthly Social Security benefits, according to justfacts.com.

Bogle was also asked about Social Security making up the vast majority of income for a large percentage of retirees.

"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," he said.

"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."

The failure of defined-benefit pensions, he said, can be traced to the fact that they still assume they will earn 8 percent annually in the future.

"They are not going to earn 8 percent in the future," he said. "It's broken, This is a bad system. It's a disabled system. To make matters worse, corporations are dropping these things everywhere."

Defined-contribution plans, the most common being 401(k)s, were described by Bogle as thrift plans, "and it doesn't work" as a retirement plan.

"If you want to borrow money from it, you can borrow money from it," he said. "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."

Bogle also was asked 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," he said.

"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," he said.

"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."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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