Retirement System Headed for 3 Train Wrecks, Says Bogle
Festering problems with the U.S. retirement system need to be fixed, Vanguard founder Jack Bogle told the Morningstar Conference on Thursday.
"The retirement system faces not one train wreck, but three train wrecks," Bogle said of the challenges confronting Social Security, defined benefit retirement plans and defined contribution plans.
Bogle said that small fixes to an underfunded Social Security system could make a major difference in making sure it's adequately funded.
He proposes changing the cost of living adjustment from being waged based to consumer price inflation based. Delaying the retirement age also would help. And raising the wage base for Social Security taxes, Bogle said, would create "staggering revenue."
But while the fixes are small, they're controversial and require political will, Bogle added.
Defined benefit plans, meanwhile, will need greater contributions from both the states and corporations that offer them if they are going to be able to meet their obligations. Bogle pointed out that the 8 percent return many funds are expecting is going to be nearly impossible to achieve.
Tweaks are also needed to 401(k) plans. "The problem is we've taken a thrift plan and turned it into a retirement plan," Bogle said.
He proposes making it more difficult to withdraw money and putting investments into low-cost index funds. "These plans own the market, but with higher costs than a low-cost index fund," he said.
Target date funds that have become popular in many retirement plans also need to take into account an investor's total capital base. Social Security is a "fabulous fixed income alternative," Bogle said. And that needs to be part of the retirement math.
Using the example of having $300,000 saved in a retirement plan and $300,000 in capital from Social Security, Bogle said if an investor has a retirement plan entirely in equities, the total retirement savings is divided equally between stocks and fixed income.
Ultimately what matters for retirement, Bogle said, is income generation.
"We're all transfixed with the movements of the stock market," Bogle said. But for retirement savers, "you should be looking at the stream of income."
Bogle said that investors should think of their retirement as the envelope they get from their retirement fund and the envelope they get from the government each month.
"That's what should matter in retirement," he added.