Friday, September 23, 2011

It Makes Me Wonder -- Ramblings on our Financial Illiteracy

Were we better off in the years before television? How about cable TV? Do you wonder where I'm going with this? I do as well. But, sometimes that's the beauty and the beast of blogging. You just start your nimble little fingers pecking away at the keyboard and something comes out. Some days, your readers like it, some days they don't. And, some days, they ignore you entirely.

But, back to my original premise. I am not familiar with those days, but I understand that back in the days before the boob tube (which doesn't have tubes anymore), reporters on the radio and in the print media for that matter usually knew what they were talking about, or at least did the research to try to learn. You didn't get your job there because you had a pretty face. Nobody saw your face. You didn't get your job there because you wore short skirts or had sexy stubble on your face. Nobody saw those things either.

But today, it doesn't seem to matter what you know. And, it doesn't seem to matter if you do your research. If you have a TV voice and a TV face and fit the profile (demographic, appearance, political leanings) that your potential TV employer is looking for, you can be an anchor. And, if you seem somewhat intelligent among those who may not, you might even get to ask questions of potential candidates at a Presidential debate.

Last night, there were nine individuals who put themselves forth as Republicans, all of whom say that they want to become President of the United States on January 20, 2013. It looks like there is roughly a 50/50 chance that someone from that group of nine will succeed in that goal (if you think the polls are way off and that either President Obama will easily get re-elected or will easily be defeated, don't argue with me here). Last night, many of them got asked questions about Social Security by one of the chosen panelists.

I don't know who underwhelms me more -- the pretty faces who get to ask the questions or the politicians who attempt to answer them. Yes, there are candidates who appear to financially literate -- financially savvy -- but the bulk of them spew forth as if they understand things like present values and actuarial projections

So, how does this all relate to anything (unless I am changing this to a political or news media blog)? Well, people that Americans look to for information and leadership are not financially literate. If you're getting your information from these people, or scarier still, being led by these people, you are more likely than not to turn out financially illiterate as well. And, that makes me wonder (apologies to Led Zeppelin if you think I am plagiarizing from "Stairway to Heaven") ... It makes me wonder if our massive financial ignorance will bury us in the current financial downturn (or whatever you choose to call it) forever.

Let's consider some of the things that we know if we listen to the talking heads or the politicians:

  • The Patient Protection and Affordable Care Act (health care reform) will save the country money. Wait a second. If the CBO projections are correct, health care reform will save the country money in total over its first 10 years. By year 11, that savings is fairly likely to turn into a cost. But the CBO follows its rules (as it should) and politicians spew forth.
  • The Social Security Trust Fund will go broke by 2040. Yes, there are forecasts that show this to be the case, but there are all forecasts that show it to go broke sooner and those that say it will be later. These are long-range forecasts with many variables. If employment picks up, more money will be paid into the system, presumably by younger workers, and more older workers may postpone drawing their benefits. If it doesn't, then the Social Security system may be in bigger trouble.
  • Defined benefit plans are one of the primary reasons that we are in financial turmoil as they are far more expensive than 401(k) plans, but the actuaries hid that from us (yes, I heard that [paraphrased] on TV). Simplifying somewhat, a 3% of pay cash balance plan (adjusted for things like turnover) is not materially more or less expensive than, for example, a 3% of pay non-elective contribution to a 401(k) plan. A traditional final average pay defined benefit plan can be designed to have the same costs as either one of them. The fact is that the cost of a defined benefit plan may have more volatility and that there will be times when defined benefit plans will, generally speaking, be underfunded (or overfunded), but if Congress had better understood defined benefit plan funding when they enacted some of their silly laws, neither the volatility nor the underfunding would be as much of a problem.
  • Don't check your 401(k) account balance today, the markets are down too much. If you're checking your 401(k) account balance every day, you need to find something else to do with your time. A 401(k) plan is a retirement plan. The idea is to build up your account over time, more rapidly when investments are performing well, and conversely, at a slower pace when your investments are not performing as well. The markets will go up and they will go down. Deal with it.
I could go on. You could go on. But, I had my say, and now I feel much better (I usually feel better after blogging; it's my drug of choice.). What's your say?

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