I don’t know Robert C. Merton personally. Reading his biography, he seems smart and accomplished. He holds degrees from Columbia, Caltech, and MIT. He was also awarded the Nobel Prize in Economics in 1999, which was right after his hedge fund, Long Term Capital Management, almost destroyed the U.S. financial system.
Sometimes smart people make bad decisions. When it affects their own lives, that’s too bad. When it affects the rest of us, we need to stop it before things get out of hand.
Right now Mr. Merton, along with co-author Arun Muralidhar, is touting a solution to the looming American retirement crisis. He has introduced an idea for a new sort of bond that provides income. Unfortunately, his solution isn’t just unworkable for future retirees. It would also redirect capital away from businesses and to the government.
There is a better way.
Google the words “American retirement crisis†and you’ll get millions of hits. There’s no shortage of research pointing out the problems we will face as boomers retire.
Bloomberg reports that Americans 55-64 years old have a median amount of $14,500 in retirement savings, meaning half are above that number, and half below.
If that’s not enough to make you gag a little bit, consider that the average Social Security monthly benefit check is a paltry $1,300, and just over 30% of all recipients rely on that check as their sole source of income.
Mr. Merton and Mr. Muralidhar seem to think the problem is that Americans are focused on wealth accumulation, when they should be focused on replacing income in retirement. This misplaced priority has the typical Joe taking too much risk in his 401(k) or IRA, chasing stocks or buying questionable bonds. At the end of his working life, this average guy has precious little to show for his efforts, and no simple way of turning his small nest egg into a lifetime of income.
Their assessment is correct – Americans need to focus on income replacement instead of wealth accumulation – but it doesn’t start in the right place. If you’ve only set aside $15,000 to $25,000 for retirement by the time you’re 60 years old, it doesn’t matter what your focus is.
