People, can we face some hard truths about how Americans save for retirement?

It Isn’t Happening

Here’s a fact: most people aren’t seriously saving for retirement. Ever since we chucked widespread employer based pension systems for 401K’s and personal responsibility, people just haven’t done very well saving. They take money out for college for their kids, or an unforeseen medical expense, or they just never put money in in the first place. Very few people are saving adequately.

In Fact, It Shouldn’t Happen

Next: it’s actually, mathematically speaking, extremely dumb to have 401K’s instead of a larger pool of retirement money like pensions or Social Security.

Why do I say that? Simple. Imagine everyone was doing a great job saving for retirement. This would mean that everyone “had enough” for the best-case scenario, which is to say living to 105 and dying an expensive, long-winded death. That’s a shit ton of money they’d need to be saving.

But most people, statistically speaking, won’t live until 105, and their end-of-life care costs might not always be extremely high. So for everyone to prepare for the worst is total overkill. Extremely inefficient to the point of hoarding, in fact.

Pooled Retirement Systems Are Key

Instead, we should think about how much more efficient it is to pool retirement savings. Then lots of people die young and are relatively “cheap” for the pool, and some people live really long but since it’s all pooled, things even out. It’s a better and more efficient system.

Most pension plans work like this, but they’ve fallen out of favor politically. And although some people complain that it’s hard to reasonably fund pension funds, most of that is actually poorly understood. Even so, I don’t see employer-based pension plans making a comeback.

Social Security is actually the best system we have, and given how few people have planned and saved for retirement, we should invest heavily in it, since it’s not sufficient to keep elderly people above the poverty line. And, contrary to popular opinion, Social Security isn’t going broke, could easily be made whole and then some, and is the right thing to do – both morally and mathematically – for our nation.