Will Your Retirement Fund Come Up Short?

It would be a joke – if it weren’t so serious.  The retirement savings of the average worker in America comes to a paltry fourteen and a half thousand dollars.  Yet the bare minimum he or she needs is almost three hundred thousand dollars – an unbridgeable chasm. But now a noted labor economist and the head of an investment firm have joined forces to show the federal government precisely how to fill that gap.

Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School, and Tony James, president of New York-based global asset management firm Blackstone, have put together a national plan they believe guarantees American workers a more secure retirement.

Their proposed Guaranteed Retirement Accounts (GRAs) would cover workers who, under the plan, would still own and control their accounts. Workers would contribute one and a half percent of their annual income; their employer would match that with another one and a half percent.  The eventual total of employee/employer contributions and monthly Social Security income would provide the minimum needed to fill the alarming gap in retirement funds.

These contributions would be paid into a pooled trust managed by an investment entity chosen by the employee. While the Ghilarducci/James plan might seem innovative, Tony James points to Australia’s superannuation system as a similar program that works well.

The proposed plan’s mandated employee deduction cost is a regressive one, since it amounts to a greater chunk of a lower-income employee’s paycheck than that of a higher-income employee. But Ghilarducci and James propose to balance the cost with a federal tax credit of six hundred dollars for every worker, making it practically negligible for lower-income families.

The plan’s architects conceive of it as a solution to a “broken retirement system.” In her blog, Teresa Ghilarducci dramatically claims that if America stays on its current course, it “will face rates of poverty among senior citizens not seen since the Great Depression.” What’s more, she asserts, the program entails no new taxes or burden to the federal deficit.  It’s simply sustained through a reshuffling of existing government resources.

While it’s pleasant to think you could hook into a government-approved program that will eventually provide you with a blissful retirement, you know full well you’re likely going to have to do something to provide for your own financial security.

While the Ghilarducci/James proposal seems well intended, it shares at least one glaring weakness with the defined contribution system it’s designed to replace – the employee choice of investment entities.  Does that choice entail investments in stocks? What kind of stocks? Without training and experience, how is a worker to know which is the right plan for his or her needs?

Barely one week into 2016, one trillion dollars disappeared from the stock market in the worst trading year on record for the Dow and S&P 500. Clearly, value in 401(k)s holding those stocks was guaranteed to no one.

The premise of the Ghilarducci/James plan is that retirement funds would be invested on the long-term model of pension plans, which historically have significantly higher returns than 401(k)s.  One reason for this is that pension plans are better diversified, also holding alternative investments including real estate and commodities.  It’s compelling, but in the new world economy even pension plans aren’t as healthy as they once were.  Ghilarducci and James also assume Social Security will be available and paying out at expected levels, a supposition that may be more doubtful than hopeful.

Given these factors, the “guaranteed” part of the pair’s Guaranteed Retirement Accounts could be a misnomer.  Regardless, wouldn’t it be wise to put your own retirement protection system in place by investing in physical gold? History has shown gold consistently offsets losses in paper investments. The performance of gold vs. stocks in these early months of 2016 provides a perfect example. While stocks were tanking, gold shone as the best-performing asset.

So while economists and other experts keep coming up with new ideas to fix a broken retirement system, don’t wait for a miracle.  Attend to your own retirement account by investing in gold.