In my last post, I reviewed the book America, Welcome to the Poorhouse: What You Must Do to Protect Your Financial Future and the Reform We Need. Jane was nice enough to agree to answer a few of my questions; my thanks to her for taking the time to do so.
- In the first part of your book, where you focus on retirement, you often compare the retirement situation in the U.S. to that in Australia. Given that many of the retirement reforms you advocate are directed at the government and/or employer level, do you foresee any difficulty in applying the Australia model to the U.S. due to the fact that the U.S. has roughly ten times the population as Australia? Is scalability a concern when talking about reforms such as requiring employers with at least 10 employees (who don’t offer a regular pension plan) to contribute 9% of the employees pay to their 401(k)?
I’m not sure scalability is the issue as opposed to relative wealth. While companies in the third world shouldn’t be expected to provide deferred compensation to their employees, first world companies whose executive paycheck are many multiples of their reports should. What’s more, most employees in the U.S. had pension coverage in the post-World War II era when wage freezes forced employers to compete for employees by offering pensions. The difference between the U.S. and Canada or Mexico or Denmark or Germany has nothing to do with the size of the countries but the fact that others have a social contract–either the employers are required to offer the pensions or the government provides it. We started to have a social contract under Franklin Roosevelt and then it was destroyed under Reagan.
What’s more, what drives me nuts on Capitol Hill is that outside of you wonderful reviewers of my book, nobody’s talking about the fact that nobody can retire–they are perfectly willing to allow the insurance industry to sell high-fee annuities that can’t make empty 401(k) nest eggs full.
- In your book, you say “In a logical world, the [SEC] would require anybody in the investment community to convey a buy-and-hold message – along with revoking the licenses of the brokers who profit by conveying the opposite message.” While I personally adhere strictly to the buy-and-hold philosophy and understand its importance as it applies to retirement savings, that message appears to shift some of the responsibility for the investment from the individual investor to other entities, such as the SEC, brokers and the federal government. Where do you think the line is between good practices and punishable mandates, and how would you divvy up the responsibility for maintaining a healthy retirement account between the individual, the brokers and the government?
Unfortunately, unlike their counterparts in the retail arena who compete for their customers’ business, the so-called financial services industry colludes for it. In a logical world, TD Ameritrade and Charles Schwab would be out of business because you can’t time the market with brokerage accounts and Fidelity and T Rowe would be out of business because you can’t beat the market with managed funds. The same thing is true with mortgage banks who have basically bought off the so-called Blue Dog Democrats, who refuse to back mortgage reform because it would “stifle innovation.” As I can attest to as a ripped-off homeowner in 1987, if making loans to people who can’t afford them is innovation, then I’m Shirley Temple.
- One of my favorite passages in your book describes an issue that I feel receives far too little attention in the mainstream media. And that is the problem of the “revolving door” that exists between the SEC and other regulatory agencies and the financial services industry. How do you feel that revolving door has affected financial policy over at least the last decade? Has this always been an issue, and do you see any changes on the horizon that might, as you said in the book, “lock the revolving door”?
I’m really glad that resonated with you because you know your country is going down the tubes when bad Republicans not only don’t even consider it immoral to put the business lobby’s interest over the electorate but created the K Street project to ensure lifetime employment. I must admit I’m frustrated because I was hoping internet ass-kickers like Daily Kos and Move.on.org would do something like issue report cards that would cause corrupt politicians to get kicked out of office. Accountability Now, whose goal is to replace bad Democrats in the primaries, but I haven’t heard much from them lately. Here’s hoping they groom somebody to take over Chris Dodd’s job because the only candidates opposing him is this wacky Republican Worldwide Wrestling CEO lady and another Republican. And trust me, I don’t always vote Democratic–I backed McCain in the last election. Unfortunately, he’s unique in his party for condemning K Street–maybe because Cindy’s worth $100 million so he has no financial worries.
- Obviously a debate exists between whether an individual should view the purchase of a home as an investment, or as another consumer product that has the potential to appreciate in value. Obviously, which side you lean towards will have an effect on how you go about purchasing and maintaining the house. Which side do you advocate and why?
Home equity makes up more than 50% of the retirement equity of the Greatest Generation and it’s even more crucial to Boomers and Gen X and Y-ers if my 401(k) reform doesn’t get passed. As I say in my book, folks should “buy and hold” their homes and only use home equity loans for home improvements that will increase the value of your home.
- How do you feel about the recent credit card related legislation passed by the Congress and signed into law by President Obama that goes into effect this upcoming February (February 2010)? Do you feel like the Credit Card Consumer’s Bill of Rights does an adequate job of closing the loopholes exploited by the credit card industry in an effort to increase their profits? If not, what reformations would you like to see passed in the future?
From my understanding, the legislation may have had its heart in the right place, but because there was a lag time between when it passed and when it went into effect and because it only applied to fixed rate cards, the card companies wound up switching many of its customers to variable rate cards so that they could rip them off more effectively. For the most part, I advise folks to limit their credit cards to two so they can keep their debt under control. Second, go to Bankrate.com to shop for a cheap card–it appears that Discover offers the lowest rate. Third, keep your credit debt to a minimum. And I confess I have a soft spot for American Express so I recommend making this your second card. I have no idea what their typical rate is because I pay my balance off every month but I love the fact you can get points that translate to miles on Continental Airlines. And you can dispute charges.
- What role do you see the education system playing in the financial education of the next generation? As a high school student I took an economics class but all I remember from that semester was a supply and demand example using pizzas and Pepsis. Most of what I’ve learned in regards to personal finance has been self-educated. Do we need to do a better of teaching responsible financial management at a younger age, and what do you propose we do to achieve that goal?
Absolutely. I would make a personal finance class mandatory for high school graduation–maybe we can convince President Obama to convince Education Secretary Arne Duncan to incorporate it into his No Child Left Behind revisions–maybe we’ll re-cast it as No Child Left Broke.
- What motivated you to first get involved in the financial policy discussion?
I started out as a financial journalist in the early 1970s. One of my first jobs was doing press releases for the Federal Reserve Bank of Boston. It was at that point that I discovered that Economics is Everything. Unfortunately, a couple of years later the oil spike hit and then Fed-Chairman Paul Volcker responded by raising interest rates through the roof–despite the fact that nobody takes out a mortgage to fill their gas tanks. Hence my second revelation: If Economists Were Doctors We’d All Be Dead.
- Who are your financial idols?
I wish I had some. I used to admire Ralph Nader, who courageously took on General Motors but then deteriorated to the role of political spoiler/bad novelist. Same goes with John Bogle. Vanguard dumps him from the wonderful company he founded and instead of starting a new company he continues to work there and write books while Vanguard essentially morphs into another Fidelity. Apparently Ralph Nader is considering running against Chris Dodd
Currently my hero is Frances Perkins, FDR’S Secretary of Labor, because she managed to think up Social Security and fight for minimum wage and against child labor despite opposition by unions (because she was a woman) and a lonely family life–both her husband and daughter were nuts.
- Does the direction that the U.S. is currently headed in give you cause for hope or distress? What is the most essential thing that you think needs to happen within the next 5 to 10 years to ensure a stronger, healthier U.S. economy?
The good news is that we’ve got Barack Obama at the helm–the bad news is that I can’t clone him and replace most of Congress with his duplicate J. We desperately need to reverse the Reagan tax cuts and use taxes on high earners to subsidize college for lower and middle class kids–because a college degree is essentially for most people to succeed. As Obama pointed out, we need to be more export-oriented and less consumption oriented. So we need to create more innovators who will be the next Steve Jobs, Bill Gates, Sergey Brins and Larry Pages.
- If you could give one piece advice to someone my age (25), my parent’s age (50) and my grandparents’ age (75) what would that be?
Twenty-five year olds are best positioned to save for retirement because you’ve got years of compound interest on your side. Save 10% of your paychecks–and that goes for both you and your spouse because I presume both incomes are needed to pay the mortgage, etc. The Boomers have the biggest challenges because they are the least likely to have pensions and have a short time horizon. DINK Boomers are especially challenged. I hate to say this more than any group Boomers need to contact Congress and get them to pass my 401(k) reform. Otherwise you will literally have to work two more decades. Your grandparents’ generation is most likely to have a pension–that’s good news. I would suggest holding on to your home and then using the proceeds to move into a Continuing Care Retirement Community, which offers “one-stop” nursing-home, assisted living, hospitalization and live-on-your-own accommodations. I advise this strategy over moving first to a condo in a retirement community because you risk that you won’t be able to unload it at a profit when you’re ready to move into a CCRC. Again, I take a buy and hold approach.
Thanks again to Jane White for being gracious enough to take the time to answer my questions.