Retiring Models

Anyone that reads this Blog will get sick of “models”. Partially because of the computer software background, and partially because of reading too many books on the brain and how we think, I am tied to the thought that we NEVER work with “reality”, as humans we are ONLY able to work with a model of reality in our brains. A common way of saying this is “the map is not the territory”. Note that this does NOT mean that I find “truth” or “reality” to be “relative”. Your “model” may be that you can jump off a 100’ cliff without being injured, but reality will show you that model is flawed. One definition of “intelligence” is “how predictive are your models”? Unfortunately, that often means changing models to conform to reality.

Today’s model to be explored is the “retirement model”. Prior to FDR, many folks hoped that they would die before they were FORCED to “retire” by ill health, or that they could find some way to “slow down easy”. FDR created Social Security with the model that if you lived beyond the average life expectancy, you would be able to stop working and have enough of a “pension” from the government to get by. There were two fundamentals to this model:

1). The average person would never use it, since they would be dead before they were eligible to receive payments.

2). Since the set of people that received the money was small, and the set of people paying in was large and growing, it would never cost workers very much.

Like all government programs, Social Security became an institution. What is more, businesses bought into the model as well and came up with ideas like “30 and out” … again, with roughly the same assumptions. Much like the lottery, younger people could be motivated (by business), and votes could be bought (by the FDR Democrats) with the idea of a sweet deal at the end of the working years. Both parties had the expectation that most of the employees would never see the money, and both the Social Security programs and the Pension programs were set up so that you didn’t “own the pot”. The business or the government “had the money”, the government of course had NONE, and just kept moving it from younger workers to the elderly, business funded the pensions and some percentage, assumed to be “enough”.

Both of the assumptions of these programs have of course turned out to be FALSE in very large ways. The life expectancy has shot up and shows signs of shooting up more, the population growth as stalled, so less and less workers are making payments to more and more retirees. But, like typical humans, we would rather wail and wring our hands than look at the situation that we are now in. Unfortunately, the signs have started to show up that indicate that the fallacy of the kind of retirement model that FDR bequeathed on the nation is coming unraveled faster than the Social Security program.

United Airlines declared Bankruptcy last week and their retirement plan was too under funded to pay out the rates that retirees had counted on. It sounds like their pensions will be cut by 40%. When IBM declared disappointing results the first quarter, a major part of the reason was the need to put $250 Million in the pension fund, and it sounds like that will be done every quarter this year for a cool 1 Billion $ drained off profits. GM and Ford have had their bonds reduced to “junk” status, and a major reason is the cost of funding their pensions. This has been coming for some time of course … IBM has NO pension plan for people starting out today … they have a nice 401K plan and they do some good matches, but YOU carry the task of saving for your retirement. The model of retirement that we were sold is simply not possible with the changes to reality.

The old model has been broken for a long time, and if we were honest with ourselves, we would have seen it long ago. We rarely are that honest though, we LOVE “wishful thinking” … some folks have been able to retire with pensions and Social Security, so it isn’t “fair” if we can’t too. I certainly know the feeling VERY well, I signed up for “30 and out” when I came into IBM, just as I signed up for “Lifetime Employment”. Both of those are gone now. There is still some chance that I might be able to do “35 and out”, but an honest appraisal would indicate that while I may well be out of IBM at that point, being out of the workforce will be more problematic.

We ought to enjoy a good laugh at ourselves. What we are complaining about is:

1). Living longer

2). The population not growing as fast

I won’t waste effort trying to convince anyone that living longer is a good thing, if you aren’t convinced already, my efforts won’t help. On the population, when I was in school, the idea of the population growing too fast was a HUGE problem … mass starvation, lack of room, horrible pollution, and general disaster were a “certainty” before the millennium. Having a relatively stable population, growing as much because of the elderly living longer than because of the birthrate, is supposed to be completely wonderful.

It is very human to “feel entitled”, to want reality to conform to our mental models. When we see reality failing to conform to our models, our natural reaction is to behave much like a child … to bluster that “someone in charge” needs to CORRECT this RIGHT NOW! We need to have our way! We need to have models, but when reality changes, we need to change our models to conform or things tend to be much more painful.