Audio Length: 00:55:17

Slate Money talks how the retirement system is broken and how to fix it, how to improve your retirement options, and the befits of living in a co-op.

Transcript:

S1: Hello. Welcome to the hire someone to rob you episode of Sleep Money, your guide to the business and finance news of the week, I’m Felix Salmon Axios. I’m here with Emily Peck of fundraise. Hello. I’m here with Stacy-Marie Ishmael of Bloomberg. Hello. And guys, we have an incredibly special guest this week. Teresa Ghilarducci. You welcome. Hello. Hi. Introduce yourself. Who are you? Where are you?

S2: I’m a professor of economics at the New School for Social Research in Manhattan.

S1: So Teresa, we have an unbelievably fun and wonky and awesome episode coming up with you. We are basically going to be talking about retirement, which is a subject that we got a lot of questions about and we very rarely have answers to. So you’re going to provide the answers. We’re going to talk about who is retiring, who’s saving, how they’re saving, how we can fix the system, why the system is broken, why everyone should be living in a co-op, why it’s good to own your neighbor’s toilet. We even have a Slate Plus segment on Logan Roy and his retirement plan. It’s all coming up on Slate Money. So Teresa, welcome. You are an expert on all things retirement,

S2: right, and also wealth. You know, it sounds a little narrow to be just on retirement. It really is about wealth. And when you talk about wealth that workers have, it’s really about worker power. I just get at that through retirement.

S1: So basically, if I’m working and I’m building up my wealth, that means I’m getting more powerful. And if my wealth is going down, that means I’m becoming less powerful

S2: a lot like that. Now you may not be powerful. Well, you probably powerful in a lot of places at home, but mainly at your workplace. And that’s the whole point. I mean, if workers have wealth or security because a lot of people just want insurance, not wealth, and the way in America that we backstop the risk that we will get tossed out in the labor force or will live too long is with wealth, but in most other nations is with the social insurance. But if you have that the wealth or the insurance, not only do you have a dignified way to think about your life, like I work really hard now and then I’m going to have the reward at the end of my life to control the pace and content of my time. But you also have some ability towards, you know, in your late fifties or late 60s, the kind of shape, the kind of work you want. You can tell the employer, you know that this is what I want because if you’re tossed out, it doesn’t matter as much. And if you’re not in that situation, you have a whole precariat of older workers. And in most nations, that group is getting larger like tens of millions of them. Then you have employers, have a group of workers on their hands that really are more malleable. So retirement wealth, you know, is a personal finance issue, but it’s also a real big macro issue.

S1: And then the big macro thing that has happened over the past year or two is we’ve had this great resignation, the great retirement. We’ve had a whole bunch of older workers leave the workforce and not come back. We’ve had every survey of consumer finances from the Fed and everyone else has been showing that people are richer than they’ve ever been. Especially poor people are richer than they’ve ever been. Is this like the silver lining of the pandemic? It just made everyone richer. It’s a good thing. I know.

S2: You know what? No, it really depends upon who you are. I call it just the tale of two retirements. You know, the tale of two big resignations, the tale of two wealth buckets. So people who are older, like in their 60s, 65 to 70, those Americans are retiring. In all the true sense of the word, it sounds like they’re making the decision and they’re probably making the decision. We’ve asked them, but we also can see how the build up of their wealth. They’re doing it voluntarily. So the great resignation, you know, is happening among older workers like over 65 who have wealth and more wealth than they ever imagined. The stock market’s gone up double digits of the first digit isn’t one. But the other tale of retirement so-called retirement is not a workers choice at all. It is mostly among younger, older workers. So this is fifty seven to sixty five. They don’t have college degrees. They are retiring. They’re telling surveyors that they’re retired. But in fact, they’ve been pushed out of the labor market. And we know that because they haven’t gotten wealthy and the only way that the poor are wealthier than they ever have is because some of the stimulus money may have helped them pay down some debt. But in terms of any kind of wealth, you know, as a backstop for any of their life choices or for these big disruptions, it’s mainly because they’ve paid down some debt.

S3: Can I ask you, I’m going back to what you said before about the U.S. not really having social insurance. I mean, we do have Social Security for when you retire. Is that just so insufficient that so?

S2: Well, you know, we do have social insurance in retiree and Social Security and Medicare, and it’s wonderful and I celebrate it, you know, rah rah do it right here. But in terms of the rest of the of the nation, it provides the least in terms of replacement rate. So a middle-class worker under Social Security would only get about thirty five percent of their pre-retirement earnings in other countries. What comes from social insurance is much larger in other countries. Even do it smarter. They have social insurance and then semi social insurance kind of built on top of that. So let’s talk about the Danes, you know, even though they’re off on another planet. But it could be the Netherlands and even some parts, the parts of France and even England, where you have got a mandated so. Social insurance that layer the tiramisu of of social insurance, and on top of that, a mandated or nearly mandated pension plan where everybody has to contribute to their pension plan and then it grows and then at the end of their work lives, they can take it out as an annuity. This is really, really easy. All you have to do is put money in really have it not be stolen or badly managed and not have fees, high fees take take the money away from it, you know, degrade its value. Keep it there until you retire, you retire and then take it out and have it lasts the rest of your life. And in America, we doesn’t have a system that does that for people.

S1: That’s well, that’s harder, though in the very low interest rates environment, right? Like an annuity is something where you take a lump sum of money and you convert it into an income. And when interest rates are super low, the income you get from a lump sum of money is kind of tiny. And you’re like thinking to yourself, why do they even bother?

S2: You know, so so people, we have really good systems in America, too. We don’t even have to look to Denmark or the Netherlands. You can look to the United Auto Workers, you know, or to janitors in who are in in in SEIU, locals who are the building managers who are, you know, cleaning up your commercial buildings are doormen, you know, in our in our who are in the 32BJ. They have a pension system, Social Security. And then on top of that, they have a defined benefit system. That money is put in and managed professionally by managers. And they have a little bit of Blackstone a little, you know, a little bit of a Brazilian timberland. They have, they have stocks, they have bonds, they have a diversified assets and they don’t have to really look at just the retail available interest rate. They can have a diverse portfolio now. They may not get seven or eight like you could before, but they’re getting five. And so if we all put in five percent of our pay for the beginning of our work lives like these, janitors do have an accumulate at five percent, you know, for the rest of your lives. Add that to Social Security. You actually have maintain your middle class lifestyle. So that’s actually not that hard

S1: when you’re saying that, like the Joneses are getting five percent. What does that mean?

S2: You got you have two janitors. One is in Ohio and doesn’t have a union, and the other one is in New York and does so. The one in Ohio has the 401k type plan. The one the one in in New York has a plan. So they have to save a dollar every week for their retirement plan that the janitor without a DC plan, they’re on their own. They just invest. They will have to go to retail managers at high fees, and they have to rely on their own profit, their own investment advice, which is usually to put it in a safe asset or to put it all in stocks or whatever their brother in law sets to do. But they manage their own money over time. They are going to earn a lot less on that continually dollar contribution than the janitor who is in a DB plan and has to sacrifice a dollar of his wages. That’s according to his union contract that goes into a defined benefit plan. So their whole work life, let’s say thirty five years, the one who is on their own and and contributing to a 401k got a much lower rate of return than the janitor in the DB plan. So then the game ends and they both retire. The janitor, who was always in a 401K plan, has a much smaller accrual than the the janitor in the DB plan,

S1: but they both have a lump sum.

S2: They also love some, but the one that had it in a DB plan has much, much higher.

S1: OK, so that’s the bit which I didn’t understand. I didn’t realize that you had defined benefit plans that paid out a defined benefit that was some lump sum rather than a defined benefit that was some ongoing income.

S3: I’m just a little confused because and maybe this is because I’ve conflated defined benefit plans with pensions, which I thought basically guaranteed a retiree a fixed income until he or she died. Was different from what you were describing, which sounds like you just drawdown from a lump sum.

S2: So the DB plan does give you an annuity for life. A DC plan could also give you an annuity for life. So what’s crucial is like how much money do you have to convert into an annuity? A DB plan does it automatically, but it has a lot more money to do it with. Of. For lots of reasons that Felix was just saying, but the DC plant just has less money, that’s the simplest thing that if you have one dollar that you’re saving, you’d much rather do it in a diverse plan with long term short term assets with a manager who could bargain down the fees, you know, and and has a much longer time horizon.

S1: But Teresa, why do you even care if if you’re in the DB plan and you are getting guaranteed a certain salary for life? Why do you care what the returns were in the pension plan when you are going to be getting that salary, no matter what returns?

S2: Yeah, because because in the end, the employer reduces the wages according to how much money they have to put into the pension plan. So you’re the United Auto Workers, you’re bargaining for the United Auto Workers. The auto workers want $100 per month extra. The employer says, OK, how much is that going to cost me? If the pension plan is really well-managed like they are, then they don’t have to take so much out of the workers wages. If the pension plan was not well managed, then they would have to actually contributed a lot from the workers wages. So essentially the incidences on the worker the worker has to pay no matter what. So you care a lot and you can see lots of unions wanting to have a say in the way their pension plans are managed. Really fuss about the like the private equity managers who might be in it that don’t really yield anything. They’ve pushed for legislation. So there’s no there’s no conflict of interest. So you care a lot. You know what your rate of return is, even if it’s an indirect, indirect benefit. If you’re represented by a union, you know, it’s you know that what the what the pension plan earns will redound back to you and in higher wages.

S4: I feel like as a person who started in and for years and years didn’t have access to a 401k, for example, or to, you know, when the brief window that I worked in the UK, I joined right when they were like, Nope, no more pensions for anyone. What is the kind of percentage of American workers or workers in the U.S. who even have access to these kinds of options?

S2: Half of workers right now have access to a pension plan at work. So in Denmark and almost every other country you are automatically put into, they’re not nudged. You’re shoved into a pension plan that earns a pretty good high rate of return. You can’t take it out to remodel your kitchen. You can’t take it out for the kind of emergencies that happen. You have to keep it in, just like we have to keep our Social Security. And at the end of their working lives, they have enough money to replace what they had earned. The Americans are the only ones that are asked to save are for the long term and short term instruments. It’s totally mismatched and really the unintended consequences of it and thought out system. It makes no financial sense at all. So our system does not let ordinary people invest in the things that union workers have or wealthy people have a well-balanced, diversified portfolio

S3: are the assets that I can invest in through my 401K is much more limited than what I could get if I had a defined benefit benefit. And what kind of assets are those? Because like, I don’t I don’t want to invest in a hedge fund Teresa. I don’t think,

S2: yes, you do. You do. You do so. So I’m a trustee of a $60 billion fund. Our liabilities of the United Auto Workers, retirees health care. We earn more money than we pay out in benefits because we have a little bit of a hedge fund. We have twenty three people managing it with a little bit of a hedge fund. Little bit of private debt. A lot of private equity, but only the best. We have access to the best managers because we’re so, so large. They come to us because there’s some there’s some prestige in having a big fund. So big, well managed funds that are diversified have much better returns and lower fees. But you Emily and me on our own do not want to own a hedge fund because you won’t get the good ones. We are left with the bottom feeders, we retailers, you know, every New Yorker knows that you want to buy wholesale, not retail and poor and poor. 401K participants were only stuck with retail.

S1: How much of the advantage of defined benefit plans is a function of what you’re talking about in terms of they get to invest with Sequoia or whoever. And they get higher returns and how much of it is a function of what I was mentioning earlier, which is the sort of actuarial cross-subsidy where the people who die early effectively wind up subsidizing the people who live longer?

S2: Yeah, yeah. It’s called the longevity credit. It’s probably it’s probably 80 percent asset allocation and a and a little and the rest. Longevity credits and also fees and and scale. So, you know, the scale economies and the longevity credits, but most of it was probably 85 percent as asset allocation. I mean, you’ve heard this before. It’s really important to take your contribution levels, but it’s much more important to figure out what your asset allocation is really like.

S1: I’ve always written the exact opposite. Maybe I’ve been wrong the whole time.

S2: Well, yeah, this better. Because if you didn’t get another one percent, you know, risk adjusted and fee adjusted that can that could be the same as adding two two percent more contribution rate. I know it’s I mean, all I’ve done it is brute force. I don’t know how to invest, even though I’m an economist, it’s really hard as an individual. So I just put a lot of money into it and close my eyes, which is what most of us do. Or we go to the barbell. We say, I’m a risky. I believe in the stock market because you, I don’t know you had you were in a good mood that day and you went all in. People who retired in the seventies who did all that retired on half of what they could live on, then somebody who retired, you know, in right before the crash in two thousand nine. I mean, so our system not only hurts people because they don’t know how to invest, they get lousy rates of return. But but they can’t change the time that they have to retire. And so if you retire in a good market, you’re lucky. If you retire in a bad market, you’re not. Even though we’re supposed to have a system that kind of rewards people for the same kind of behavior. I mean, if you’re a saver like an aunt, you’re supposed to like, be rewarded like that. If you’re a grasshopper, you know and you don’t know, then maybe you won’t. That’s the kind of justice in the system, but one that just has to do with timing of the market through no fault of your own is really a broken down system. And it’s really unequal.

S1: I’ve always written the exact opposite. Maybe I’ve been wrong the whole time.

S2: Well, yeah, this better. Because if you didn’t get another one percent, you know, risk adjusted and fee adjusted that can that could be the same as adding two two percent more contribution rate. I know it’s I mean, all I’ve done it is brute force. I don’t know how to invest, even though I’m an economist, it’s really hard as an individual. So I just put a lot of money into it and close my eyes, which is what most of us do. Or we go to the barbell. We say, I’m a risky. I believe in the stock market because you, I don’t know you had you were in a good mood that day and you went all in. People who retired in the seventies who did all that retired on half of what they could live on, then somebody who retired, you know, in right before the crash in two thousand nine. I mean, so our system not only hurts people because they don’t know how to invest, they get lousy rates of return. But but they can’t change the time that they have to retire. And so if you retire in a good market, you’re lucky. If you retire in a bad market, you’re not. Even though we’re supposed to have a system that kind of rewards people for the same kind of behavior. I mean, if you’re a saver like an aunt, you’re supposed to like, be rewarded like that. If you’re a grasshopper, you know and you don’t know, then maybe you won’t. That’s the kind of justice in the system, but one that just has to do with timing of the market through no fault of your own is really a broken down system. And it’s really unequal.

S4: I feel like we talk a lot about things that are fundamentally very depressing on this podcast, but this is like, exceptionally depressing. So just to just to bring the tone down even further, what is someone supposed to do, right? If they’re part of that 50 percent, they don’t have access to either DC or DB. They don’t necessarily have access to liquid assets, either. What what is which sounds to me just that. There’s just a tremendous amount of policy failure here. What do you tell people to do?

S2: One is to really vote. The government does. It is your most important financial partner and politicians that say they’re going to preserve your Social Security and Medicare and maybe lower the Medicare age, you know, a really important financial managers. So make sure that those programs are are in state. I’m not kidding. You know, it’s a really important part of your financial management is to pay attention to those programs. But second, if you are a gig worker or intermittent worker and you don’t have access to those workplace plans, then an individual retirement account with Vanguard. And I’ll tell you why Vanguard is your next best option and you want to save depending upon your age, you know, five to 10 percent if you’re young, you know more or five if you’re older, you need to save time. And the reason why I say Vanguard is because it’s the only money manager that has a fiduciary responsibility to you, the saver. Nobody else does. And it’s because of their ownership structure that every owner, every account manager is an owner. So corporate has a responsibility to you as a shareholder, and that’s a fiduciary responsibility. And they don’t have a responsibility to any other shareholders, so they don’t have to extract profits from you.

S1: America has done a very good job of of like moving to Vanguard. You know, they have this total market fund with $1.3 trillion dollars and it like the passive investment gospel. I feel like I’ve been I’ve been writing about this quite a bit, but we Gen Xers have completely bought into this right. We like the people have like Emily in my generation who who have been understanding why low fees are good and all of this kind of thing. I think that’s actually one of the reasons why Emily and I probably a little bit reluctant to buy into your tale of like, Oh yeah, you should. You should put more money into two and 20 private lenders, really, because what we’re doing 20, that’s that’s that’s like crazy. Like, no, we want Vanguard with four basis points. Yeah, that’s part of it. But I I am also especially post-pandemic looking at a whole new generation of investors, you know, in crypto on Reddit, who have learned that stocks only ever go up, who are making astonishing returns, who are young enough to be able to afford to take substantial losses if and when that ever happens and who are not like outsourcing their retirement plans to vanguard 2055 target, but by taking control, learning about investing and becoming much more financially sophisticated than like any of we than any of us lot were at that age. And half of me shudders because I’m like, You can’t do that. You have no idea what you’re doing. And then half, then another half of me goes, Well, you’ve made a lot of money and you seem to be learning a lot. Is it really that bad?

S2: Yeah, it’s that bad. They’re making a lot of money now, but there’s two things for everybody else who isn’t in the professional plan and a big one and one that’s, well, maintain Vanguard’s 60, 40 or a target date fund is exactly the right thing to do. It’s actually what the federal government employees are in. They even have even better funds. That’s a fiduciary, really. Low fees of the federal government, six million of them in that. But but if I didn’t have a professional manager, I’d I’d be in Vanguard. In fact, when I have a choice, I’m always in Vanguard. So 60 40, but I’m in. I’m a trustee of the $60 billion fund and we benchmark what we get according to what we could get in Vanguard every quarter. I make us do that exercise and it’s close, but we always get a little bit more, and that means we can add in dental and vision. We could actually spend more money that way. So it adds in the little luxuries, the difference can make a good man.

S1: But Teresa just think of all of the billions of dollars you’re giving to send Hill Road, and they’re driving up the property prices in San Francisco to the point at which people just the cost of living goes up.

S2: Well, there is another issue about the complexities of capitalism in, you know, and the way that we invest our money is actually hurting our communities and our livelihoods. But that would be another subject if now I’m just talking about how you get your maximum rate of return as a little individual with not access to these conservatives, do two things in your individual individual retirement account. Save a lot. Put it in vanguard and put it in a fund according to your age. The second thing you do if you’re in a 401k is absolutely insist that they have passive. They have passive choices because now you’re going to have a 401k with all sorts of words naming your your mutual funds growth. This that, and you can’t even tell if it’s a stock or a bond fund. And it’s usually garbage. And now we’re seeing lots of lawsuits about the garbage stuff that these employers put in the 401. Because they outsource it to, they outsource to consultants. The mighty 401K type plan was filled with a bunch of products from from Fidelity because Fidelity was on their board at MIT. So the universities have just been been ravaged by this.

S1: I really I’m fascinated by by this whole syndrome of 401K plans being chosen by some random person in H.R. who was never really qualified to pick a four one K plan on the basis of basically the sales technique of these large companies and the ones with the most persuasive sales techniques. And also, I think the ones with the most recognizable brand names are the ones that wind up tending to get chosen in the back of my head. I’ve always had this idea that there was some kind of implicit or explicit like kickback that the 401K provided somehow pay the companies to choose them rather than someone else. But this is that not happen.

S2: It happens all the time, and your only recourse is to sue. So they’re suing. There’s a case going up to the Supreme Court. Absolutely. There is no as long as you went through a process and interviewed people and they gave you a good, they gave you a good consulting. I’ve seen this evolve and a big part of their services is to say, and we’ll fold the administration fee and make your workers pay for it, then then they get chosen. And it is. It is somehow just malfeasance, just some random person in H.R. picking, or it’s a personal friend and some kickbacks, which would be illegal. But but most of them are indirect, and they’re just kind of professional relationships with people at your club. It’s not. It’s not well-run and it’s very particularly American. The lack of oversight and the result of this is that people who have higher income and do investments, they’ll go out and hire a financial adviser. So the American system requires you to go find a financial adviser. Most of us might get the advisers in the tech and the phone, you know, and the on Google, or you have worst. The worst are the ones recommended to you by family and friends. They’re the worst. You get one of those and and you get told to be put into a lot of high fee funds. The very the wealthy of us go to a non conflicted advisor and go to them like you would go to a therapist, you know, or a specialist and say, I’ll pay you a thousand bucks here. Here’s my life. Recommend what I should do, and that person doesn’t get any financial benefit from what they recommend from you. That’s what the. Very wealthy and sophisticated, too. And they get much higher returns. So the system is built that if you want to do it well, you have to go extracurricular if you have to do, if you really want to do it well, you have to go extracurricular, find your own adviser and get one. That’s not conflicted. And they really only exist in concentrated areas. So if you’re in the suburbs or in a rural area, you don’t even have a chance to win win at this.

S1: The government is subsidizing the rich enormously here. Like, if you are someone with enough liquidity to be able to sock away $17000 a year in your 401K, then the government will let you do that all tax free. But if you are a normal person who does not have $17000 a year to tuck away into a 401k, then all of those tax benefits just go to the rich and you wind up with a much smaller or possibly zero tax benefit. And it always astonishes me when I see the numbers of like the tax expenditure is called of the 401K program, just how much money the government spends on the 401K program, and the way that that money is skewed overwhelmingly to the top quintile of the population.

S2: So we know that the rich get tax breaks on all sorts of things that nobody else does, like the mortgage interest deduction, short term capital, long term capital gains tax. And we all know that the rich do better, but the retirement benefit is the most unfair. Seventy percent of the of that total two hundred fifty billion dollars goes to to the top 20 percent. And these we know behaviorally as economists that these are people that would save anyway for retirement. Yeah, they. They don’t need it to say they don’t need to meet the public interest that we want. They also have enough how much they have to save. Then they’ll spend it later. It will not hurt their lifestyle, but they get over seven thousand dollars a year for saving the maximum. But somebody who makes $17000 or twenty thousand dollars like the maximum they can, they can put in spending on your age. They could. They could be just as virtuous as the rich person. Put away money. Find Vanguard, but they’ll get nothing from the government.

S4: I want to talk more about gender as an explanatory variable, right, because it’s. Is it indeed true that woman who live longer but also make less money and are in a lot of cases disadvantaged by the tax code, are up against an even worse set of conditions. Even though, you know, according to the behavioral studies, they are more likely to make so-called good investments and savings decisions.

S2: They’re also disadvantaged because they have kids and husbands. How those that both both really hurt accumulation. I was working with an anthropologist. We did focus groups with, with low income women asking about their retirement and asking about their financial security and their financial future. And we really identify we did this in a very positive way, but they really wanted more Social Security. And the reason is is because their husbands and kids couldn’t get it. And so what happens is it goes back to bargaining power. You have a couple retiring in their early sixties and you have a difference of opinion about how fast the money should be spent. So there is some evidence that the one who will not live as long wants to live it up, go on trips and and it could not in isn’t always conflictual. It’s a joyful idea. You know that we could do all these things together, but it doesn’t take into account the what the wife need needed. 80. So a woman subordinate bargaining power and her assignment of being a chair, being care, carrying her children and her husband puts her at a disadvantage for wealth accumulating, making it last. And then you add in their low wages and then that hurts. What helps women is that they tend not to think that Dogecoin or any risky investment is something they should be. And they have. They’re there, they’re more safe and they are a little more suspicious of advisers. So there is they really just assume they’re getting ripped off. Now that could hurt them because their assets are really too safe, you know, really maybe tucked in their checking accounts, but they don’t trade it and they also don’t trade as often. So there are gender differences. Most of them hurt women.

S1: So let me ask you about this. The mother of all trade-offs here, and this is this is the big one. The really overarching is this entire conversation is do I spend the money today or do I save it for some hypothetical future

S4: point may have higher inflation. I was going to ask that. It’s like a big

S3: existential question that I think about a lot. It’s like I want to spend my money while I’m still alive. Like if I was in retirement. The scam perpetuated by like just another Charles Schwab survey that is sent to me, you know, like just another press release from a finance company telling me how unprepared I am.

S2: It is. It is disgusting. That’s the central question that John Maynard Keynes addressed it in a book called The General Theory. So the really the general theory is about how societies decide whether governments or people decide to spend now or save later. And it is the most philosophical of questions because you have to believe in your own future and the future of these institutions. It’s quite amazing that we’ll put money into the bank at 30 or a pension fund and really see that people collected, you know, 30 years later. I mean, what a achievement to have that much trust and stability in the financial system that that is actually a really amazing. But there is a problem. I I want to do a whole scan. An anthropological sound of financial advisers is that they think people want to leave money to their children or their legacy. And it turns out that’s just not true. The bill? Well, it’s so untrue. Now it’s really hard to admit that to a surveyor. But that’s not why people are saving. They’re usually saving because they don’t know how long they’re going to live. And it’s this it’s like not having health insurance means that we all put $25000 or two hundred fifty thousand dollars in a shoe box just in case we need a kidney transplant. I mean, that’s really crazy. So what if we have longevity insurance? You know where you could put a little extra in and you would get more Social Security as you grow older and you need more money? Or you would have a higher Social Security if you live past eighty five? People would do that in New York minute and when to put it really put it in a shoe box or hoard it most bequests or accidental? And that’s actually sad. Market failure and it’s what you fear. And it’s also means that we have a totally inefficient retirement system. Most inheritance that people get and most people don’t get anything, and the average inheritance is fifty thousand is it is an accident. Your mother left you a house that was worth over $100000. And if she only knew she would have spent that, she would have spent it and not on you. You know, she still does. You would have had a lot, a lot more fun.

S1: So that’s my question. Let’s say Teresa. And this is, you know, we can ask this question a bunch of different ways, but let’s ask it from the point of view of someone who’s 65, maybe 70 years old, who’s just retired, who has four million dollars and they’re like, I want to die with nothing.

S4: Yeah, yeah. My email is slate money.

S1: How much is too? How much is too much? Like, I don’t want to. I don’t want to die. I don’t want to reach nothing before I die, because then I’ll be left with nothing but be broken. I don’t want that. But like what? There was always been this sort of actuarial rule of thumb that you should spend down about four percent a year, and that actual actuarial rule of thumb predates this like new secular, low interest environment. And I’ve seen I’ve seen people say that that should not be four percent anymore. It should be more like two and a half percent. How much of that money can I spend if I have no desire to pass anything on to my kids?

S2: Yeah, yeah. So I’ve written about this. Everybody’s read about it, and it ranges from two point five to three point one eight. It’s lower. The point is it’s lower than than four percent. So that’s that’s a good problem. You just have to decide whether it’s two point five. And if you take out less than you, the chances that you’ll leave something behind that you don’t want to give up. And if you spend a little bit more, the chances are they going to run out of money goes up. So you just have to titrate it. But the number you should not anchor it at for anchored at three and you’ll be you’ll be about right. But the big problem is like your house. We have this weird system where people are asked to buy their house in Germany. Only half the people they live in nice houses own their house. Most of it is is regulated rent control and the builders build it with that intent that they’re going to regulate it in New York City. Most people, middle class people live in rent. So in America, buying your house is really pretty peculiar. And it doesn’t really match an aging society. One of our biggest problems is that we have big mismatch between the kinds of housing that we have and the kinds of households we have. So if you go to Kansas City and you go to the suburbs, you have a lot of old ladies rattling around a three bedroom, two bath ranch that they have no reason to have. It might be left over when she dies, and it’s extra hundreds of thousands of dollars she could have spent. So we have an inefficient system, not only because of retail mutual funds available to the likes of us and the wholesale well managed funds available to the likes of the rich. But we also have a wealth accumulation process that relies way too much on the house. So if you want to, not if you don’t have anybody you want to leave money to, maybe you’ve given enough money to your kids during the whole life and having a bequest is not a goal. Then you also have to do something about your house. But right now, what something called a reverse mortgage is is not exactly.

S1: It’s not bad. I thought the reverse mortgage is the solution to this problem. How is it not a solution to this always bad?

S2: Because if you look at consumers reports they will, they will tell you that probably selling your house and going someplace else would be more efficient because that’s the and then just taking just taking the money.

S1: Yeah, but that involves like going through all the shit in the garage and who isn’t it?

S2: Yeah. That could be worth hundreds of thousands. I really think most people are left with a crap from their parents and the money that goes along with it just because no one wants to go do this stuff in the garage. My mother just died. That was that was sorry, but by before we had to do it, her obituary was posted and somebody came and robbed it. Oh, and after the tears, oh boy. Although it’s kind of, well, I have this left. They didn’t take this, just that. But you know, if that happens, I’ll be better. What is

S4: that? None of you can see this because this looks like

S1: a rip off. What are you showing us? Is that carriage clock?

S2: It’s a clock. It’s really heavy. He thought it might be worth a hundred dollars, maybe. But they took a lot of this stuff. That’s awful. Yeah, it was awful. But but it really did help my weekend. The next weekend, it was pretty close.

S4: This hour of sleep money,

S1: just just to hire someone to rob you, then you don’t need to worry about moving your stuff. So then you can move to a smaller place and then you can free up hundreds of thousands of dollars that you have in your house, which you can use to take your kids out for a lovely restaurant. Meals, I mean, it’ll make sense.

S4: This episode has been a tiny bit heteronormative, so I want to ask a couple more questions. One of the stories that I was reading recently is about, you know, the elder millennials of a generation to which I belong, realizing that they have no inheritance, they don’t necessarily have kids, they’re not necessarily married. And perhaps we do not have 401ks, but are trying to do like the one thing to your earlier point that can help get them on the ladder, which is like, they want to buy a house. So they’re trying to pool assets with other folks. But there’s no kind of good legal mechanism or recognition for these kinds of relationships. You know, you have same-sex marriage being mostly legal in the United States, though who knows what’s legal about for anything anymore and for how long? And again, for a long time, you know, folks who were outside of the conventions of whatever we defined as the status quo were locked out of these kinds of benefits. You’ve talked about Vanguard being kind of a good idea for people, but what is the advice for folks who don’t even have the scraps of access to getting on these types of ladder?

S2: Yeah, no. Right? I mean, so I work with my colleague Derrick Hamilton, who is a fan of baby bonds. And that’s that’s the whole idea is that you have to have a system of accumulation. We had that idea that we would equalize wealth processes with with Pell Grants and low, low cost public education, that it was the human capital that everyone was supposed to be able to get advantage of. And then that was really harmed by student loans that was just replaced by debt instead of grants. So we need to actually change the human capital accumulation to be cheaper and more available and get rid of student debt and do it with cheaper health care, education and the world. I have the equivalent of Vanguard in the housing and wealth process would be co-ops so that you don’t have to provide, you know, have to create a cooperative relationship outside of the, you know, of the traditional marriage. But you provide a court, you computer, you create a cooperative relationship among a handful of people that you have a close relationship and a legal obligation. So that’s a legal form.

S3: But if you live in a co-op, like if you live in a co-op and like yours and something breaks, isn’t there just like one person that you get to call as opposed to like every time something breaks, it’s like, Oh, who are we going to call? I don’t know. And that just seems like a bad thing when I’m old and retired to have to deal with all the different things breaking all the time.

S2: So owning a home has a lot of cost to it that nobody ever takes into account, and that’s these maintenance cost and headache cost and risk costs. So that’s about four percent of the of the purchase price of the home. Add in property taxes and you have a pretty close to a rent equivalent. Take a co-op form and that you’re like, you’re like shareholders, you know, in a big building. And so your neighbor owns your toilet and your toilet breaks. Your neighbor has this cooperative relationship that that the super comes in and fixes your toilet because they don’t want your toilet to run or be broken. That’s as good as it gets. That’s as good as it gets, and it’s really important for older people. We’re now the union for doormen are now training their doorman how to do some elder care and to watch for elder abuse so that you actually have a professionals there to watch for who’s going up there, whether or not Katherine Neno has come out of her apartment so that that’s what her family does. That’s what couples do. You know, it’s not. It’s not based on sort of a sexual relationship, but it’s completely cooperative and self caring outside of a hetero normative couple’s relationship. And I am really looking forward to the foundation or to the academic or to the to the, you know, to Mayor Pete. You know, somebody like that, some the leader, you know, who will try to create these these organizations, the the the Jewish home for the aged is actually a a really progressive way to think about aging and living in cooperation. That’s not that Kansas City suburb.

S1: We are running a little bit long and I do want to make sure that we include at least include a nod to your big proposal that you have going on with Kevin Hassett specifically. And just to be just to flesh it out a tiny bit more than you have already. The idea is that the federal government has a really good pension plan and people pay into it, and there’s no reason why normal Americans shouldn’t be able to pay into. The same pension plan that members of Congress get. And it’s your money, it’s not like it’s even necessarily subsidized by the government, but if you just had access to that plan, the outcomes would be would be fantastic.

S2: We propose a very simple plan that everybody has access to what the federal government have. This makes sense. It’s called the Thrift Savings Plan. That’s the federal government’s pension plan. And that’s what members of Congress are. And that’s what the that’s what they’re the workers are in. And that’s what everybody who worked for the federal government across the country are in. So there’s a member of this pension plan in your neighborhood, and the idea is that we could as Americans, since it’s actually run by the American government, could have access to this platform. The platform is efficient. It’s the one that you want to be in because of the fees and the information and the way it’s handled. And it also goes with you, no matter what kind of work you’re in, self-employment one day a part part-time employee, another year a full time employee, another year. It’s always with you. It is as efficient as having one Social Security count. You have one pension account, so I can’t stress how important. Just that simplicity would matter to people that they could see their savings grow. They would get encouraged by it. They would know what it would mean for their for their retirement. But a lot of people want more than just the simplicity. They also need the money. And so if you’re earning below the median wage, which is around fifty five thousand dollars per year, the government would provide the contribution the employer wouldn’t have to they could if they wanted to. But the employer would give you that six hundred to a thousand dollars, depending upon how much you made every year, and you would add at least one percent, but you could go, you could go much higher. So it comes from what we found in behavioral finances that people have a match. They will readily involve themselves in the wealth accumulation plan if they can see it grow. They will be encouraged to plan more and if they trust the administration, they will even keep the money in. So it is actually the best ever idea I’ve had in a thirty five years of ideas that we just it’s like, it’s like Medicare for all. We’ve all heard of this idea that we have a Medicare. This would be just a thrift savings plan for all. It’s already there and it can take in. It can take in the sixty three million or even more Americans that don’t have anything now.

S1: Teresa, thank you so much. It’s been absolutely amazing having you on the show, glad. And thanks for listening. Thanks to Shannon Roth for producing and we will be back next week with another sleep money. I feel like we have time for a sleepless segment on Logan Roy and his retirement planning.

S2: I’m in the papacy, always had this problem. You know that in order to get a new pope, they had to die. But then Pope Benedict had this idea that maybe I could have some of the trappings of the job and still wear white and go to the meetings I want to go to. So he was the first pope to retire. And he had a really good defined benefit plan, which means that no matter what you need, you can maintain your standards. And now we have we have Pope Francis. Everybody loves. So he’s a new Pope Francis for the New Times. Benedict was an old pope for the old times, and everybody’s happy and a miracle. Roy just had a way out.

S1: Well, yeah, this is. This is why he’s been offered by by Lucas Madsen. And yes, although what he has not been offered, I have to say, as far as I know, on the table from Lucas Mattson was not like, I will make sure you have Swiss guards outside your bedroom every day wearing amazing outfit.

S2: Yeah. You know, if Logan Roy thought of it would probably get he right. He could get. He could wear white. He could get all those Swiss guards. What’s really interesting is I realize that Carolyn is also thinking about her legacy and what she wants. She’s kind of off ramping for her children as well. OK. So it’s from her

S4: children is just an increase in double

S2: digits. Have been off ramps inspired? Yeah. Although I read that Madsen gave him a pension, a DB pension plan, just like just like Benedek. Got it from Pope Francis.

S3: Isn’t that maybe this isn’t the knock anymore, but it used to be like millennials would be like if only those those boomers refuse to retire, and I will never be able to advance in my career because of all these old people that refused to stop working. I feel like that’s not a thing anymore, except for Logan Roy, who obviously needs to retire.

S2: Yeah, it’s kind of a thing in universities. That’s what I imply to imply is that there are a lot of us. I’m not too old, of course, but the older ones. It’s all relative to me and the open old we’re cranking out, you know, they’re cranking out the PhDs. And yet nobody is stepping aside to give those new PhDs. So it is a real problem in universities. There’s this. And so you see actually universities freezing the English department and you know, the scientists are and are staying on because they have actually a defined contribution plan and they’re staying on, you know, why not get another year of, you know, stock market run up? But but the professors like it, you see at University of California University of Massachusetts, they retire around sixty five or sixty six because they have a guaranteed pension and health care for life.

S1: You know what? You see this the West is in the Senate. The median age of a senator has been going up like basically one year per year for the past, like 20 years. It’s insane. They just stick around forever. They never retire.

S2: No, it’s the best retire. You know what? They can control the pace and content of their of their work. It’s so much better than the house because you in Washington and people might recognize you. There’s a hundred of you who you are. If you’re a house member, you have to wear those big red pins so that people recognize that you’re a house member. But all you know, all the people will keep their jobs if they can control the pace and content and Logan’s losing it. You know, he is not controlling the pace of content or is not getting rewarded for he’s really he’s really depreciating his good, as Mattson says. You know, it’s the product is depreciating and he’s such a good business man. He knows it. So that’s what we saw. We saw that was the retirement episode. And the retirement plan

S1: of this is if you are a retirement economist, everything is a retirement episode, you

S2: know, but you have no idea.

S4: Oh my gosh, this is awesome. Thank you so much.