Remember, about the time the last financial bubble was bursting, all the yapping over the ruin that would have befallen America if Washington had carried through with individual/privatized Social Security accounts? Of course you do.
Wonder, now that all the major Wall Street indices have surged past their pre-bubble highs — boosting all manner of IRA-
and 401(k)-style accounts — what’s become of the doomsayers? Of course you don’t.
We all know they’ve gone into hiding rather than take responsibility for their reckless rhetoric. The jittery investors they helped drive out of the market near the lows of 2009 with their Wall-Street-casino hysteria have missed the financial recovery that more than restored those heart-stopping losses.
Meanwhile, individual investors — including employees with IRAs and 401(k)s — who stayed calm, covered their ears and, with paycheck-by-paycheck deposits, looked to the horizon, have never been better off, all the while reaffirming the durable magic of what financial guys call “dollar-cost averaging,” the indisputably successful tactic of funding your wealth-building strategy steadily over a working lifetime.
We mention this
for a couple of reasons, neither of which, surprisingly, have much connection to the current tussle in Washington over Social Security’s future. Our previous advice stands, and is available in the TBO.com archives.
First, investing of any sort, but especially retirement investing, never should be viewed as a snapshot. Bad decisions are inevitable when people get the idea this particular moment is the way things always will be.
Second, despite the sorry fate, sealed in the Senate Tuesday, of state House Speaker Will Weatherford’s push to create a 401(k)-style retirement model for future public-sector hires, Weatherford promises the plan will not go away. Nor should it.
Weatherford, a Republican and our guy from Wesley Chapel, is right to make the argument on behalf of taxpayers, who should not be held accountable for potential shortfalls as the Florida Retirement System ages and its population of beneficiaries swells.
FRS may be financially sound at the moment, but there we go again, projecting the future from a snapshot. So many other states’ pension plans have flipped so quickly and so completely upside down that it requires an act of hubris to believe it can’t happen here.
Nonetheless, in a flourish
of legislative malpractice, eight Republicans, including John Legg, the freshman from Trinity, joined all 14 Senate Democrats to reject the Weatherford plan, which would have prevented new state employees from entering FRS.
Listen, even Wilton Simpson, the Trilby egg farmer, serial entrepreneur, freshman senator and — by the by — Weatherford’s employer, despite his sympathy for pension reform, denounced the House bill. After the Senate kneecapped Weatherford’s bill, Simpson withdrew his alternative: 401(k)s as an opt-in.
So the reformers will tinker and come back next year. But it may be they simply need sharper arguments. Begin here: Under the Weatherford plan, civil servants will do far better.
Those served by FRS now receive benefits based on an arcane multiplication scheme, and from the clucking noises made by public sector union leaders, you’d think FRS was all that held the state together. This is steroidal nonsense designed to brainwash public employees into accepting meager retirements that will, in all likelihood, require part-time jobs.
Is investing risky?
Over a career of 25 to 40 years, not even remotely. Since its inception in 1926 — including the Great Depression, the Great Recession and several downturns in between — the conservative S&P 500 stock index fund has been the ultimate set-it-and-forget it investment vehicle, managing a 9.77 percent annualized return.
Imagine, then, a teacher who entered the classroom in 1973, averaged $48,000 (the Pasco average salary) and steadily fed one of those dread defined-contribution accounts. Winding down after 40 blissful years, and having dutifully socked away — pretax, mind you — 5 percent of each paycheck, she’s looking ahead to retirement with about a $1 million nest egg. (If she’s managed to invest 10 percent per pay period, she has more than $2 million; yes, despite the Great Recession.)
You can do the calculations yourself at bankrate.com.
Financial advisors say she can take about 7 percent each year from her account and never touch the principle. That’s roughly $70,000 a year, minimum, and up to well into six figures. Under FRS’ complicated crunching scheme, she will do well to crack $40,000 annually.
So forget the upside for taxpayers, which is nice but doesn’t make legislative juices flow. This, instead, is Weatherford and Co.’s better pitch: We’re going to make teachers and clerks and cops and firefighters and anyone else who makes a career in civil service rich.
Let the union bosses explain their opposition to that.