In America, Welcome to the Poorhouse, Jane White sounds a strong warning to the nation’s citizens that change is needed in order to retire with enough in the bank. White uses this book in order to promote specific political changes and bills that she is sponsoring in Congress.

While other financial planning books address what we as individuals need to do in order to retire comfortably, White approaches the issue by placing the fault and needed change at Congress’, corporations’, and wealthy tax payers’ doorstep. She firmly believes that political reform creating a USA that mirrors other nations is what we need in order to climb out of the retirement poor nation we currently live in. While I do not disagree with the need for reform, I disagree with certain tenets of White’s argument as well as the bill that she is sponsoring in Congress right now.

About the Author

From the book, “Jane White is Founder and President of Retirement Solutions, LLC, which promotes 401(k) reform and provides investment education. In 2007, at the U.S. Department of Labor’s invitation, White presented recommended 401(k) contribution rates to the ERISA Advisory Council…A Congressionally appointed delegate to the 2002 National Summit on Reitrement Savings, White first observed the 401(k) savings crisis in 1993 as associate editor of Standard & Poor’s Your Financial Future. A former syndicated personal finance columnist for Gannett News Service, White first observed the housing bubble and the risk of adjustable rate mortgages in her 1991 book, The Cost Conscious Homebuyer’s Guide. Her articles have appeared in The New York Times, Barron’s, and Employee Benefit News.”

Tenets of the Book

The book is divided into five tenets or sections.

1. 401(k) Reform
2. Mortgage Industry Reform
3. College Grants and Loans Reform
4. Credit Card and Other Borrowing Reform
5. Creating a Citizen’s Lobby

Each section aptly describes the current situation in America and how we arrived here. At the end of each section, White prescribes her solution to each problem.

The Interview

I had the opportunity to ask Ms. White several questions. I selected the most salient responses.

RabbitFunds: You advocate in your book that employers and financial institutions should be required to recommend the amount of money that consumers should be saving in order to have sufficient funds upon retirement. How do you plan to address the legal ramifications of employers, who are not licensed, acting as certified financial planners?

Jane White: Actually CFP’s know absolutely nothing about saving for retirement. Incredibly, they are not obliged to learn the ten times final pay formula from pension actuaries nor the savings rate needed to achieve it. That’s why the editor of Investment News, a publication that circulates to 65,000 financial planners, asked me to write an op-ed about it. Pretty incredible, huh? Employers would hire pension actuaries to calculate the formulas and personalize them based on individual savers’ current assets and investment time horizon.

RF: Typically, 401K or defined benefit plans are offered as a benefit above and beyond the normal salary or wage. As benefits, they are a mechanism for employers to attract superior employees as well as show additional appreciation. Why do you believe that employers should be required by law to fund an employee’s retirement?

White: There is no other country in the advanced world–that I know of–where neither the government nor the employer is obliged to provide deferred compensation. It’s called a social contract. The same thing is true with health care coverage–it’s utterly unconscionable that 15% of the U.S. population has no health care. The U.S. was able to muddle along until the 1980s because we were a “fortress economy” where everything consumed here was made here so that employers offered benefits as a way of competing for employees. So we’re not used to social contracts and if the right-wing gonzoes in Congress gets their way we won’t have any.

RF: Is not the employee responsible for funding his or her own retirement through prudent planning and living?

White: Please see above. What’s more, if it is our responsibility we should be told that. What’s unconscionable is that when employers dumped defined benefit plans and replaced them with 401(k) plans, they didn’t disclose that nobody could retire from a 401(k) plan. What’s more, all the Democrats will do is to automatically enroll people in an inadequate plan and then “automatically annuitize” an inadequate balance.

RF: If your retirement act were to pass, have you estimated the economic impact of imposing the equivalent of a 9% payroll tax on all employers with more than 10 employees? If so, what is that financial impact?

White: Not a single Australian employer went out of business as a result of having to adopt Superannuation. As I mentioned, if we are still facing recessionary times, we can do a phase-in: start with 4% and gradually raise it to 9%. On the other hand, any company that’s paying out obscene executive bonuses and executive pensions and health benefits and/or repaying TARP money less than a year after they took the loan is not facing any recessionary times.

RF: How will companies with slim margins still be profitable?

White: Here’s the deal.  A company that’s facing financial stress should address that stress by reducing the workforce, not keeping the workforce on the job and then screwing them. As I mentioned, this immoral behavior pretty much started in the 1980s when the notion of “right-sizing” took over from down sizing. Employers decided that laying off people and then training new hires was more expensive than keeping them on the job and getting rid of their benefits and taking away raises.

RF: For employers with fewer than 10 employees, you believe that a government fund or entity should pay the 9% 401K contribution. What is the estimated tax burden to taxpayers to adequately fund this initiative?

White: I’m rethinking this one. Small employers aren’t necessarily cash-strapped employers–think of medical practices or law firms or accounting firms. I’m considering instead saying that companies who have been in business for less than five years don’t have to offer the plan but they must disclose to employees that they don’t offer coverage.  I chose the five years because half of all startups go out of business within first five years of startup. So there would be no taxpayer burden.

RF: Under the 9% contribution system, does Social Security dissolve after paying out to current retirees and everyone over the age of, for example, 50?

White: Most people still need Social Security. A defined benefit plan only covers 30 to 50 percent of final pay and the goal is to replace 70% of final pay so most people except the truly wealthy will need a supplement. As I mentioned in the book, in a logical world, investors would be told that they can’t time or beat the market and the vast majority of businesses in that oxymoron known as the financial services industry would go out of business–from TD Ameritrade to Fidelity.

RF: Your book compares the % of federal budget spent on education in America to that of other nations. Using a percentage can be very misleading when we are talking about vastly different GDPs and population sizes between countries. Have you calculated a more meaningful and insightful statistic such as the $ spend per capita? And if so, how does America rank?

White: So far as I can tell the OECD is the only organization that measures spending so I have to rely on them. On the other hand, I think it’s safe to say that if you were to measure our country’s wealth by median wage or household assets: savings, home equity, etc., we would rank at the top or near the top of OECD countries. What’s more, if we were to measure the median income of say, the top 5% of the population compared to these countries we would definitely rank near the top, if not number one.

RF: You wrote, “Why should we expect our citizens to foot most or all of the bill’s cost for higher education…” I ask, why wouldn’t we? What entitles an individual to something for nothing?

White: As I point out in the book, we don’t expect people to foot the bill for elementary or secondary school, why should we do so for college? As I also pointed out, before Reagan took office, Pell Grants accounted for the bulk of college expenses, as opposed to loans.

RF: You refer to ARMs and Introductory Promo Rates on credit cards as bait and switch schemes. However, the documents that accompany both accounts contain all of the information about the pending change in the interest rate. Why is the individual not responsible for understanding something as important as a mortgage or innocent when he or she spends too much on a credit card and is then hit with high interests that were fully disclosed when the account was opened?

White: For the same reason that we’re not expected to assume that cars shouldn’t blow up on this when we buy them, thanks to Ralph Nader. You can sue a merchant if they sell you a damaged good or a doctor if he or she damages you when they operate on you. It’s the concept of assignee liability.

Read my review

For a review of the book and my analysis of Ms. White’s argument, please see REVIEW: “America, Welcome to the Poorhouse” by Jane White.

When Grandpa Michael started his business several decades ago, he borrowed money from Uncle George. Business went well, but the relationship soured. In fact, the relationship ended after years of fighting over money and just how much Uncle George should earn. I learned from observing this experience that family and business don’t always mix. As a result, I’ve often asked myself, “Self, should family ever be involved in my finances?” My general reaction is to say no. However, there is a bigger picture to consider. In certain situations, my answer changes to, “Well, yes.”

In the last few years, the Internet has seen the rise of social lending. For those of you unfamiliar with social lending, it’s when you receive a loan from someone other than a bank. So every time you ask your roommate to lend you $20 so you can go to that concert, you just participated in social lending. Sites such as LendingClub.com and PertuityDirect.com have formalized the process and allow nearly anyone to participate. Another big hitter in this market is VirginMoney.com. Sir Richard started his empire through a loan from his aunt. He now wants to help other individuals secure a loan from family or friends in order to start a business, pay off some debt, go to school, or even pay for their home.

So why use social lending, especially if the money comes from family, instead of obtaining a traditional loan from a brick and mortar bank?

1. Maybe you don’t credit qualify. We have all made mistakes and that might reflect on your credit report. Social lending provides an opportunity that might not otherwise exist.
2. You may find a better rate. Certain social lending sites, such as LendingClub, set the interest rate on each loan based on the credit history of each loan applicant. However, VirginMoney allows you to negotiate the rate yourself if you know the person(s) funding the loan. So if a bank offers you 10% on a personal loan, Grandpa Michael might agree to 8% (he knows you’re good for it).
3. Family wealth, or money passed on through the generations in your family, is difficult to maintain when you pay so much of it to financial institutions. Most of us want to leave assets or money to our children (whether that be funds to be used specifically for college tuition or a first home purchase or just good old hard cash). Either way, we cannot pass on what we have given to banks. By borrowing from family, you keep it in the family and encourage the growth of family wealth.

But what about mixing family and finances? Sure, it sounds like a good idea to keep money in the family, but what if you risk repeating what happened with Uncle George? This part is tricky. How you answer that question for yourself depends a lot on your relationship with family members. Though, I do have a few simple suggestions. First, keep the term of the loan short (2-4 years) if you believe problems may arise. Grandpa Michael and Uncle George were business partners for 30 years. Second, if you use a social lending site, then your payments are set, scheduled, and can be automated. Meaning, Dad doesn’t have to wonder when the payment is coming. And last, do not borrow money without a legitimate reason. This may seem obvious but consider the current economic condition and how we arrived here. There is a difference between needing a new car because you have outgrown the old one and needing a 2010 Escalade. If you overextend yourself with family, they may or may not be more forgiving than a bank.

In short, borrowing from family via a formalized process helps you receive the financing you need and has the added benefit of growing family wealth. Though as with any loan, ask yourself this question first, “Do you really need the money and can you afford the payments without a high risk of overextending yourself?”

So have you or would you borrow a substantial sum of money from family? Leave your comments below.

 Loading ...

(This post was featured in the Carnival of Personal Finance – History of College Footbal Edition)