Financial Freedom the American Way
Chapter 16
Yes, People Retired Before Social Security
No one retired before Social Security.1
Nobody can retire on Social Security.2
Those two contradictions sum up the American zeitgeist on aging. Thank God for FDR or we could never retire, which is good because we can’t afford to anyway. Twin pessimisms about the past and the future, both are utterly false.
Okay, Doomer. Americans were retiring well before Social Security, and you will be just fine retiring with it.
* * *
The Book of New Deal Pensions is established canon, and contradicting it is heresy. Standard fare in college textbooks and major news outlets, according to this telling (to quote just one headline of many), “Before Social Security, Most Americans Faced Very Bleak Retirement.”3
To be sure, there was real suffering for the old then, as there is now. One New Deal official put it bluntly: “Many workers can escape the economic problems of old age only by dying.”4 Before his racist blockbuster Birth of a Nation, D. W. Griffith5 was best known for the heartrending movie What Shall We Do with Our Old? The silent film follows the demise of an elderly carpenter and his sick wife. He goes to jail for stealing bread. She dies. “Nothing for the useful citizen wounded in the battle of life,” reads the last scene. Even today, it’s a bit of a tearjerker.
Then bravely rode in the hero, FDR, demanding two reforms. The first, Social Security, provided a government guaranteed retirement to everyone over sixty-five. The second, wrangled away from Big Industry, was private pensions for workers.6 Now the future was bright. Your pension at the factory combined with your Social Security checks made tomorrow secure, life longer, and retirement communities full. Commentators credit the New Deal with “the near elimination of destitution among the elderly.”7
Only the standard view isn’t entirely true. It mistakes an effect for a cause—the things you get from economic growth are not the cause of that growth.8 This is rather like saying your neighbor’s fancy car is making him rich. The car came from the wealth, it isn’t creating the wealth. Retirement came from abundance. It did not create it.
In reality, people were retiring in steady numbers long before Social Security. The first large-scale retirement communities were not in Maricopa County, Arizona, in the 1960s. They were in Coral Gables, Florida, in the 1920s. Something else was going on. Americans were on a retirement streak well in advance of government assistance.
The same holds true for pensions: retirement plans managed by employers that gave “guaranteed” retirements to loyal workers. The nostalgia for the pension age is understandable. It sounds like the best of two worlds: capitalism’s wealth with feudalism’s loyalty. For those who earned them, they were as good as advertised (unless you worked for Studebaker).
The pension era was glorious, yes, but also brief and small. In the 1930s around 15 percent of American workers were part of a pension plan. At their absolute height in the early 1980s, pensions covered around 40 percent of workers.9 You will hear that “most people used to have a pension” but, so long as “most” is defined as over half, that just wasn’t true.
Besides, not all old people wanted to use them.
The final error in the Sacred Social Security and Precious Pension narrative is that Americans were not actually begging for retirement—they were begging not to retire. People weren’t enamored with the endless weekend; they were terrified of it.
Fear was justified. The olden days were exceedingly boring. There was no recorded music. No sports teams to watch, and no television to watch them on. No social media to scroll on the toilet. Pickleball wasn’t invented yet. Retirement was a mental health hellscape of dullness, more nightmare than dream.
Having nothing to do meant having nothing to do.
Everyone understood this. John Adams, thinking about life after the presidency, dreamed that “I may have Farm enough to amuse me and employ me . . . that I may not rust alive.”10 Long Island in the 1830s, noted a traveler, was mostly farmed by old businessmen from the city. “Retired, or half retired merchants are . . . farming about as much for amusement as profit.”11 As late as the 1950s, American leaders genuinely worried retirees were dying early from boredom, so they proposed a national leisure education program. Fearful congressmen wanted to teach old people to have fun.12
If this drudgery jail wasn’t bad enough, young people were forcing you into it. Pensions were not acts of benevolence. They were a basis for bias, born of obsessions with operational efficiency where elderly workers lingered in jobs that others wanted. The Department of the Treasury was, notoriously, a semi-retirement community for federal workers. When a new Treasury secretary took office in 1897, he was aghast to find he couldn’t fire anyone because he’d been tasked with a caretaking agency. Progressive Presidents Theodore Roosevelt and Woodrow Wilson both desperately tried to get the old out of government jobs. “The Firing Process was to be bureaucratized,” as one historian explained. The goal was not to take care of the old, but to give their jobs to younger workers.13
Shadow retirement systems were quite prevalent, and highly controversial. One study of the supposedly heartless industrial sector found rampant hiding of elderly workers. Some businesses paid full benefits for part-time work. Others gave regular “gifts” to the aged. The most common tactic was to shift the old to easier factory roles. When The New York Times ran an exposé during the Depression, the controversy wasn’t the heartless treatment of the aged. The paper excoriated employers’ irrational loyalty to the less productive. In a world with young men ready and willing to work hard, why coddle the old?14
Even in the post-war era, more Americans worried about how to achieve financial independence and retire late (FIRL) than early. Forced retirement at sixty-five, not voluntary retirement before, was the hot button issue. There were robust and well-publicized debates at Johns Hopkins University advocating forced retirement at sixty, proclaiming “the comparative uselessness of men above forty years of age”! Pensions eased the old out to pasture.
What changed?
The world got wealthier.
Productivity boomed, life expanded, and leisure exploded. All of this predated most pensions and the New Deal. A graph of Americans retiring tracks nicely with an increase in wealth per person and growth in productivity. The wealthier Americans got, the more they wanted that pecuniary independence once reserved only for elites.
Productivity explosion (more stuff made in less time) created a world you would want to retire in: baseball broadcasts, records, news shows, picture magazines, television. None of this existed for someone born in 1900.15 By the time they turned sixty-five, it was all there at an affordable price. The idea of having no work meant having more time to enjoy amazing things. The nightmare of 1900 was the dream of the 1960s.
Saying modern retirement was created by governments is like saying Lionel Messi invented soccer. He mastered the art, but the field (and Pelé) was there long before. The growing wealth that made doing nothing doable and enjoyable had already put the ball in play. Play Americans did.
* * *
When Ida Fuller cashed the nation’s first Social Security check in 1940, nearly half of all workers over sixty-five had already retired.16 Half.
That percentage had been rising steadily for nearly two lifetimes. In 1870 less than 10 percent of the elderly retired. By 1900 it was one in three. When Ms. Fuller had her picture taken for the newspaper with her government check, the cake was already baked. Americans were growing into this retirement thing.17
Without Social Security or a pension, how were they paying for it? Everyday people’s retirement plans had four parts: land, business, kids, and annuities.
Paid-for farmland could be leased to young farmers.18 Those who built businesses gradually handed the reins to junior partners or sold outright. The less successful moved in with children. Children were required by the English Poor Laws to care for aged parents. Early American courts regularly received claimants of adult kids being sued for not taking care of elders.19 About four out of ten retirees had to move in with family, suffering the indignity of putting their kids in charge of bedtime.
The most popular retirement strategy was also the newest: the annuity. Annuities are DIY versions of Social Security. You pay a lot of money up front, and an insurance company promises to send you checks in your old age.
Since fewer Americans had farms to sell and many had city rents to pay, annuities became the go-to investment for retirement. Isabel Ely Lord, a librarian turned 1920s finance writer, advocated that women should put their savings “into an income bond,” aka an annuity, because “the old lady who receives a hundred dollars on the first day of every month . . . is independent and self-respecting.”20 A hundred dollars went a lot farther back then.
* * *
Social Security did not revolutionize retirement. It standardized it. The federal government substituted a single, national annuity for a diverse array of individual, employer, and local ones. The growth rate of Americans retiring by sixty-five after Social Security was nearly identical to before, until it finally peaked in 2000 at 83 percent.21
The supposed golden age of retirement after World War II isn’t that old, either. Social Security didn’t pay out until the 1940s, and even then, paid little. Pensions didn’t really shape the average family until about the 1980s, when those who earned Cold War–Era pensions began retiring en masse. The Roth IRA was created the same year Mark McGwire and Sammy Sosa were trying to hit sixty-two home runs.
For better or worse, today’s world is much like the earlier period with a vast array of options. Annuities, Social Security, and pensions are called defined-benefit plans, meaning you know what you will get when you are old. Today’s workers are offered defined-contribution plans, meaning you know what your employer will help you save. These are popularly called 401(k)s, and they effectively ended the short-lived reign of King Pension.
The 401(k) was a historical accident. In the 1970s, top tax rates were 70 percent. To get around this, Congress authorized a special retirement savings where money went in, but no taxes came out until retirement. For C-suite executives, 100 pennies to invest was better than 30 pennies to invest. They hid this little gem deep in the tax code: in section 401 subsection k. You know this was never intended to transform economic life, or some politician would have introduced the Saving for Happiness and Income Tomorrow bill. The SHIT Act would have been hailed as a bold initiative for controlling your own destiny. Alas, it was just a tax loophole until enterprising HR managers discovered it could unburden them from pension expenses. By 1996 they were the most common offerings. Today they are nearly universal. All in all, Americans have made their peace with the SHIT Act. It is hard to beat a tax-free investment.
We should be more cautious. The typical American’s income tax rate today is just 15 percent, not the 70 percent 401(k)s were designed to avoid. That is better than nothing, but most people never consider the opportunity cost of having inaccessible savings. Their money would probably be better used buying real estate, starting a small business, or paying for higher professional credentials. Show me a nurse anesthetist married to an IA-rated aircraft mechanic, and I’ll show you what financial security looks like. Those trainings, though, take time and money.
Yes, You Will Retire
People retired before Social Security, and you will retire with it. There is a lot of screaming that Social Security isn’t enough. In equal measure, there is shrieking that our savings and 401(k)s are a fleet of tiny trollers sailing directly into a category 5 hurricane of inflation and volatility. We aren’t ready. Nobody has enough. We’re all going on food stamps!
Wait. They stopped making food stamps in 2008?
We’re all going to starve!
Here are five quotes from The New York Times22:
“Retirement for the majority will be a difficult and unhappy period of readjustment with loss of needed income and a lower standard of living.”
“To earn supplemental money, former salesmen may sell part-time, women may baby-sit. . . .”
“Retired couples . . . should lower their expectations. A lot of dreams about trips and doing other things are not going to be possible.”
“Everyone agrees that the system needs to be fixed quickly, because otherwise it will begin to run out of money.”
“. . . I won’t be taken care of, . . . I work because I have to, not just because I want to.”
The years? 1958, 1964, 1988, 1998, and 2001. A 1980 bestseller claimed23 just 2 percent of sixty-five-year-olds were financially secure enough to retire, just as a massive gray wave swamped places called Sun City and Palm Springs.
Here is what you should know as it relates to you, and your retirement.
The doom-mongers are correct about subtraction, but they forget about addition. It is true that Social Security isn’t enough to live on honorably for forty years, neither is there enough in most 401(k)s to hang out for four decades in Boca.
But when you add all the strategies up, as Americans did both before and after Social Security, you usually do just fine. Social Security, private annuities, pension plans, 401(k)s, rental real estate, paid-for homes, and kids who aren’t screwed up are a pretty potent combination.24
Let’s apply the financial returns of retiring in every year since 187725 (the most reliable date we have such data) to see just how transformational combining strategies is. Take a couple in which one spouse has the typical 401(k) balance and the other has half that amount, retiring at sixty-five, whose spending tracks with typical retirees. All on their own, they are guaranteed only two years before running out of money becomes a real concern. By the time they are seventy-one not a single historical return from 150 years of data has them with anything left.
Now add their average Social Security benefits to their modest savings. In every single scenario, their money outlasts them. In fact, in the worst scenario they die with more money than they started. The most typical outcome is dying with $1.1 million. Social Security is what turns average savings into actual nest eggs.
We’ve still not added in most Americans’ largest asset: home equity. For those retirees who, as most do, downsize to a small, paid-for patio home outside of Tucson, their costs go down while their account balance goes up.
The divergence between cultural pessimism and financial reality is wonderfully summarized in a longitudinal study by Gallup.26 Twenty years before they retired, nearly half of people said they wouldn’t have enough. When they retired, however, nearly 80 percent reported being comfortable. The divergence between anxious expectations and pleasant reality held up across all cohorts for two decades.
The lesson? You are richer than you think you are. Social Security is worth,27 to the average middle-class earner, about half a million dollars in future income. You have a half million dollar annuity preloaded by the feds on your balance sheet. Your ancestors bought their own, yours goes through the government. The results are roughly the same.
Count me in as a begrudging fan of the safety net. There are people who, by ill choice or ill luck, simply won’t or cannot save. For society to force on them an old age plan may be paternalistic, but it saves money in the long run. In 1816, the town of Salem, Massachusetts, spent half of tax revenue on poor relief.28 Trust me. This is cheaper. Around 20 percent of Americans have only Social Security29 in retirement. For the 20 percent, that is a harsh reality. For the other nearly 80 percent, combining strategies means they’re likely to be just fine.
Why? Because, like retirement itself, this is all brought to you courtesy of a booming economic engine. You don’t deserve retirement because you pushed yourself so hard. Rice farming peasants of the 1500s worked harder than you ever will without playing a single round of golf. Every swing of the pickleball racquet comes courtesy of the explosive growth that birthed this incredible moment to be alive. Count your blessings more than your account balance. You live in a wonderful moment to grow old. If I gave you a time machine and took you everywhen, you would choose to be eighty right now.
There is no money to be made making you feel good about retirement, but there are huge profits (and political power) for those who can prophecy your financial doom (and their ability to save you). Ignore them. Social Security probably isn’t going away. If it does, we will just bring back its annuity predecessors which can be purchased from any insurance salesman you drank beers with in high school. Save, but maxing out your 401(k) probably isn’t your path to wealth. Compared to the post-war period, you barely pay income taxes to begin with (10 to 36 percent), and you will do better investing in yourself, your kids, or other assets. Take the employer’s free match, but don’t be scared to build your own Me, Inc. investment fund on the side. Betting on you is your best retirement strategy, anyway.