THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, January 8, 2020

Rethinking Saving for Retirement

It’s a truism that has become engrained into American life.  Go to school to get good grades.  Get good grades to get a good job.  Get a good job to get a good pension for retirement.  Be sure to save enough on the side in an IRA or 401(k) to supplement your pension and Social Security so you can afford to do all the fun things you see other people doing on TV.

That’s all very well, but the whole scenario takes for granted that there will always be highly paid jobs for well-educated willing workers.  That this might be a trifle unrealistic in light of the habit that advancing technology has of eliminating jobs at an accelerating rate.
True, there will always be work that only human beings can do, and such work often requires highly skilled and educated people to do it . . . but it is the sort of work that often is underpaid, when it is paid at all.  “Starving Artist” is not so much a label as a description.  Nor does this sort of work guarantee recognition or even acceptance; “Full many a flower is born to blush unseen and waste its sweetness on the desert air.”
Of course, such “leisure work” is never truly wasted.  If nothing else, someone who works for the sake of the work itself at the very least develops his or her own character and acquires and develops virtue.  Yes, people who work at wage system jobs can also acquire and develop virtue, but they often have to work harder at becoming more fully human than someone who works for the sake of the work, not just because it is the only way to earn income.
That segues into today’s topic, saving for retirement, or, How to Have Adequate Income When You Can No Longer Work.  A large part of the problem with retirement today is the fixed idea that you must physically toil to be justified in having income.
Reverend Vincent McNabb, O.P.,
Connected with that is the equally fixed idea that income derived from something other than physical toil is illegitimate.  Brain work, or work that does not produce a tangible good or service, is theft according to extreme proponents of this theory.
The Reverend Vincent McNabb, O.P., friend of G.K. Chesterton and something of a character himself, believed that everyone should engage in manual labor to produce goods needed for one’s own consumption.  In his book, The Church and the Land (1926), Fr. McNabb claimed that people like lawyers and accountants contribute nothing to society and are mere drones feeding off truly productive members of society.
This attitude, of course, undermines the concept of private property.  If — as people like Fr. McNabb, Henry George, and Karl Marx believed — only labor produces private property, then income from capital (i.e., all non-labor inputs to production) is illegitimate . . . including whatever land produces and all natural resources.  If only labor grants private property, then no one has a right to take anything whatsoever from nature.
Henry George
This includes “adding labor” by hunting or gathering.  If collecting fruits and nuts from field and forest gives ownership, then so does shoplifting or cattle rustling.
Obviously this is wrong; only the owner of the land and trees or the people to whom he or she had granted the right has the right to gather fruit or nuts.  Anyone raiding someone else’s orchard or herd of cattle is a thief.
Thus, the contradiction in the “labor alone” theory should be immediately obvious.  If only labor produces anything and only labor creates ownership, then not even an owner necessarily has the right to the income from capital.  All income is attributable to whoever’s labor created the capital.  Trade, inheritance, even charity become illegitimate because there is no right to own conveyed in any transaction, only by labor.
Nor does the theory improve by claiming that humanity in general has the right to own, but not individuals in particular.  The problem with that theory is that “Humanity” is an abstraction created by human beings; it exists only as an idea, not as a concrete reality.  “Humanity” therefore only has such rights as its creators — actual human beings — give it.  As a result, it is contradictory (and therefore nonsense) to say that humanity created by human beings has rights that human beings created by God do not.
Louis O. Kelso
This is important because private property is not the thing owned, but the absolute and unlimited God-given right to be an owner inherent in every single human being, and (this is important, but not to be confused with the right to be an owner in the first place) the necessarily limited and socially determined bundle of rights that define what an owner may do with what he or she owns.
These rights of property (as opposed to the right to property) include the right to exclude others from using what one owns, and the right to receive any income generated by what is owned.  As Louis Kelso pointed out, “Property in everyday life, is the right of control.” (Louis O. Kelso, American Bar Association Journal, March 1957.)
All of this leads up to the issue of “saving for retirement.”  Under current law — and popular understanding — retirement plans are construed as “deferred compensation.”  Money is set aside now, usually on a tax-deferred basis for a “qualified plan,” and distributed after retirement (or retirement age, whichever comes first).  It is then taxed at a presumably lower rate.
"Do you suppose he meant the other IRA?"
There is a slight misconception embodied in current law and popular understanding relating to the belief that money distributed from a qualified plan is money that has been earned by labor.  That is true only of the principal, money “contributed” (funds put into a qualified plan are always referred to as “contributions”) by the participant(s) or plan sponsor for the benefit of the plan participants.
The bulk of distributions from most qualified retirement plans — including IRAs and 401(k)s — are not usually made from funds contributed by the participant or the plan sponsor during the participant’s period of employment.  However construed in current law or popular myth, distributions are not, therefore, actual deferred compensation.  That is a “legal fiction” for tax and accounting purposes.
Somehow the irony escapes them. . . .
So where do the bulk of distributions come from in most qualified retirement plans?  From earnings on assets purchased with past contributions made by plan participants and plan sponsors, and from current contributions made by plan sponsors after the recipients terminated employment.
Given the belief that labor is the only thing that justifies receipt of income, the inescapable conclusion is that most payments out of qualified retirement plans are therefore illegitimate.  Only private property in capital — that is, ownership of productive assets — justifies the bulk of distributions from qualified retirement plans.
The fact that most distributions from qualified retirement plans are actually derived from earnings on invested capital and not directly from savings suggests that the whole concept of retirement income needs to be rethought.  In fact, it may be time to rethink the whole concept of retirement, but one thing at a time.
Actually, there has been something of a shift from saving for retirement, to investing for retirement, but the idea is still that both investment earnings and the principal should be depleted during retirement.  “Retirement planning” therefore consists largely of a guessing game with far too many variables, viz., how long do you expect to live after retirement, what rate of return do you expect to receive, what will the tax laws be like, do you want to leave a residual for your heirs, and so on, so forth.
Is there maybe a just, third way to go?
It is an economic truism that “savings equals investment.”  Retirement planning under current assumptions therefore really consists of trying to guess how much of your assets should you liquidate and still have an adequate income.  The idea of accumulating assets with the goal of receiving investment income without liquidating any of your principal is alien to most people, something that only “the rich” need to trouble themselves.
There are sound financial and economic reasons why it is extremely harmful to assume that financing of all new capital formation comes out of past savings, but we will not look at that — today.  Instead, we will very briefly address the real issue here: what is the best way for people to have an adequate and secure income for retirement . . . or any other reason?
The answer, in light of advancing technology, lack of “quality” jobs, inadequate rates of saving, and so on, ad infinitum, is that both retirement and career planning must shift from saving out of current consumption income to have something to consume later.  It has to change to saving out of future production to have something to consume now.
In short, the only way to address the problem of both inadequate current income and future income is to have an intensive program of expanded capital ownership that allows people to accumulate self-liquidating capital (i.e., capital that pays for itself out of its own future profits) that provides an adequate and secure income for an entire lifetime without reducing or spending the principal.