Securing the Future

PUBLIC OPINION COURT ANALYSIS

The Lincoln Institute’s Public Opinion Court was held on September 22, 2007 at the Historic Inn at King of Prussia, Pennsylvania. The Public Opinion Court was funded by a grant from the Templeton Foundation and focused on the topic of “Securing the Future”, a look at personal finance issues and the role government should play in securing retirement for America’s aging population. The focus group session involved 14 diverse residents of southeastern Pennsylvania. The group engaged in a probing and in-depth discussion on issues and questions as:

PRESENTATION

The program began with a presentation by Ryan Shafik, Communications Director, Lincoln Institute. His presentation detailed arguments for and arguments against government involvement in areas such as retirement, the economy, the housing market, and health care.

PROS

In arguing for government involvement in the personal financial affairs of Americans, Mr. Shafik elaborated on the benefits that Social Security has provided since it was signed into law by President Roosevelt on August 14, 1935. He described how the Social Security Act was designed primarily as a social insurance program to pay retired workers 65 or older a continuing income after retirement. He argued that Social Security has provided a safety net for many aging Americans (Social Security represents 41% of the income of the elderly*) and will continue to be a viable program for future generations to come.

Another topic surrounded struggling homeowners. With the turmoil in the sub-prime mortgage market, measures have now been taken to help struggling homeowners avoid foreclosure. The Federal Housing Administration is now in a position to back refinanced loans for thousands of borrowers who are delinquent on payments because their mortgages are resetting to sharply higher rates from low initial “teaser” levels. Mr. Shafik argued that the American dream is in peril for many families as foreclosures rise and that government can step in and help.

With regards to the economy, Mr. Shafik pointed out that the recent ½% Federal Reserve rate cut has erased some of the huge uncertainty surrounding the risk in the economy and that the Federal Government via the Federal Reserve does play a key role in securing our financial well being. From helping spur economic growth after 9/11 to the steady and consistent control of inflation during the Greenspan years, our government through fiscal and monetary mechanisms can help sustain economic growth and full employment for Americans.

In light of these positives, Mr. Shafik claimed that government has and should continue to assist Americans in protecting their dream of a secure future.

* Social Security Administration data December 2006

CONS

Concerning Social Security, Mr. Shafik argued that the program was never intended to function as a retirement plan for Americans. With life expectancy rates increasing, one can question the long-term feasibility of Social Security. And with that in mind, should younger generations pay for the benefits of older generations without expecting much in return?

While it is apparent that the Federal Government will proceed in helping struggling homeowners avoid foreclosure, Mr. Shafik holds that much of what we have seen is a bailout and that mortgage companies and borrowers need to held accountable for buying products that ultimately they could not afford. The bailout encourages excessive risk and creates a moral hazard that should not be funded with tax-payer dollars.

Relating to the Federal Reserve’s recent rate cut to help the roiling credit marketplace, Mr. Shafik pointed out that today’s problems were created by the Federal Reserve in the first place because interest rates were artificially low between 2001 and 2004. He pointed out that loans are available to credit worthy borrowers and that credit problems are only visible in the highly leveraged, asset-backed marketplace – a market that was not pricing risk correctly and got itself into trouble because it expected interest rates to stay at absurdly low levels forever.

In closing, the real threats to prosperity are the probability of tax hikes and massive government involvement in the healthcare system. No matter how much money the Fed prints, it cannot offset the damage from too much government interference.

FOCUS GROUP DISCUSSION

Led by Douglas Keegan, CFP®, the focus group discussion touched on many of the arguments, both pro and con that Mr. Shafik detailed during his presentation. In addition, Mr. Keegan highlighted several of the focus group survey questions and encouraged debate. Following debate, Mr.Keegan surveyed focus group participants to assess if opinions had been swayed.

Retirement and Social Security

Carried over from Mr. Shafik’s focus on Social Security, a discussion ensued concerning retirement and government’s role in securing a retirement income. The younger members felt that retirement was not a priority for them while the older members were very concerned about whether or not they have set enough aside for their future. Several participants indicated that “behavior” plays a key role in whether or not an individual or family will have enough resources set aside for retirement.

To which, Mr. Keegan asked, if we know that as a society we are less inclined to save when we are younger, should we institute a government forced savings program?

The overwhelming response was no (13 no and 1 yes). Most felt that the government controls enough of our lives already. Others felt that government should encourage long-term savings via the tax code instead (increase on deferral limits on retirement programs, for example).

The lone argument supporting a government forced savings program centered on the belief that individuals are incapable of providing for themselves and that by forcing new entrants into the workplace to save, retirement savings can be secured for generations to come. They argued that in the long run, this will save the government money and help lessen the dependence on Social Security.

Following this talking point, Mr. Keegan then reminded everyone that we already have a forced savings program called Social Security. The question then became: Do you think we should have a forced savings program like Social Security as a safety net?

The response changed to neutral (7 no, 2 yes, 5 yes but don’t expect to benefit from Social Security). The younger members felt that while their contribution to Social Security will obviously help current retirees and perhaps the baby boom generation, they personally are not relying on it. They just view it as any other tax. This corresponds to the survey question where 4, or 28%, of the participants expect practically nothing in return from their contribution to Social Security.

As for those opposed to Social Security as a forced savings program, several participants remarked that they have no confidence at all in the system (view it as money “stolen” from them by politicians) and that it just burdens business (business currently contributes 6.2% up to $97,500 of compensation in 2007 per employee to Social Security).

Mr. Keegan then asked: What if you could invest a portion of your Social Security in the stock market? To this, someone remarked that it would be just a crappy 401k. Others feared that if investment results were less than satisfactory (indicating that individuals let to their own devices are not educated enough to make smart investment choices), at that point, who would then be responsible for those underperforming accounts? They argued that poor investment results on Social Security savings would just create a bigger burden on the system and would enlarge welfare roles. So the idea of investing a portion of Social Security in the stock market met with great resistance.

This led to a general exchange concerning what age participants plan on retiring. The survey had asked participants if they planned on retiring at or near age 65. Mr. Keegan addressed the question with the group and asked participants to elaborate. The group overwhelmingly said they anticipate working longer (9 or 64% working longer, 3 at or near 65, and 2 earlier). Compared to the survey, where 6 participants said they planned on retiring at or near age 65, the group discussion seemed to have changed opinion.

It seems that with some discussion, participants began to realize that perhaps they weren’t as prepared for retirement as they had indicated on the survey (60% said they were very confident or somewhat confident that they have set aside enough for retirement). Yet, remarkably, 50% did not feel it important to have a “safety net” like Social Security, despite being unsure if they themselves had set aside enough resources for retirement.

Economy

With regards to the economy, the group was very negative. In general, opinions focused on: slow to no wage growth, higher prices for everything (inflation), outsourcing, hard to make ends meets, working longer hours to keep up, weakening dollar, tax cuts going to the wrong people, home equity values decreasing, record government debt, and the tendency for government to use policy and politics to make Americans go away (hinting at the Fed rate cut and the Federal Housing Administration bailing out struggling homeowners from foreclosure).

One participant related how it used to an ideal in America where primarily the husband of the household was able to work and the wife was able to stay at home and nurture the children to establish a strong foundation. They related that while they are trying to achieve that ideal, they are having difficulty making ends meet and that it seems to make it in American society today, both parents need to generate an income (the “80” hour workweek syndrome). They would like to see government policy be directed towards helping younger families.

A small group of participants hinted that inflation is out of control in relation to wages. Basic goods such as gas, food, and housing they suggest are at prices that prohibit many from being able to save more.

A middle aged male chimed in relating how 15 years ago he had more disposable income than he does today. However, he did mention that 15 years there was not as much “stuff” to buy. This led to a general discussion concerning American consumerism and how Americans are relentlessly marketed to and asked to spend. In other words, many felt we live in a consumer society on hyper drive that as a result does not encourage personal savings.

In sum, the group felt that the government does play a large role in the economy and that they are not happy with current government fiscal and monetary policy.

Personal Financial Situation

In terms of the group’s personal financial situation, the group was nearly unanimous in expressing that they are the same or doing better financially from this time last year. This opinion corresponds to the survey question where 90% said they were better off or the same financially from this time last year. Yet, despite being upbeat on a personal level, they expressed grave concern for the U.S. economy.

Mr. Keegan then asked the group to elaborate on why they felt this way. For many, it surrounded uncertainty with regards to:

This expressed uncertainty is in line with nationwide polls, where most Americans feel that while the economy stinks, on a personal level, they feel the same of better off.

One can glean from this that unresolved national policy issues weigh heavily on how focus group participants view the economy as a whole. Despite strong “private sector” economic indicators (low unemployment, contained inflation, strong corporate profits, etc.), the focus group equated the U.S. economy with government policy and are frustrated with the uncertainty surrounding the country’s direction.

Housing and Government Help

The focus group had an interesting largely unanimous take on the housing and mortgage markets. However, during the discussion that ensued, a surprising change occurred with regards to opinion on whether or not the Federal Government should bail out mortgage companies

On the survey, while the group unanimously said government should not help struggling homeowners avoid foreclosure they were split on whether the government should financially assist mortgage companies who may go bankrupt as a result of poor business decisions.

Following a lively discussion, the group suddenly changed its stance. The group decided to overwhelmingly say “no” on whether the government should financially assist mortgage companies who may go bankrupt as a result of poor business decisions.

The change of opinion was primarily due to a lack of knowledge regarding the financial issues surrounding the sub-prime mortgage mess.

Mr. Keegan took some time to explain how the Federal Housing Administration backs re-financed loans and how it could help so many first-time homebuyers stay in their homes without a large cost to taxpayers.

Despite Mr. Keegan’s explanation, the focus group held firm to its contrary position, suggesting that the Federal government is just encouraging “bad” financial behavior (moral hazard) if it helps struggling homeowners avoid foreclosure.

Financial Education

While this topic was not on the survey, the group decidedly felt that financial education should be part of the curriculum in the school system. The group raised this concern after completing the survey, suggesting that most of the challenges related to personal finance stems from a lack of financial education in our public school system. Most felt that the average person has no clue when it comes to personal finance and that they mostly learn through making poor decisions.

FOCUS GROUP DISCUSSION SUMMARY

The focus group changed its opinion only on a couple of topics. It largely held its ground, otherwise. As the discussion evolved, however, the group began to question some of its earlier responses to retirement income planning but in general felt that government should not play a significant role in helping Americans with retirement. Most felt that government cannot be trusted with “their” money.

The general sense was that government should get out of the way and let Americans save more by reducing taxes and offering tax incentives. They also felt that the government needs to change “priorities” with regards to fiscal policy (the national debt while not mentioned was implied). This feeling was strongly associated with the negative outlook for the U.S. economy and how participants tied the U.S. economy with government policy.

Of particular note, though, the focus group did suggest on the survey that government does have a role in paying for nursing home care (non-medical). Unfortunately, there was not enough time to discuss this topic with the group. Generally, there is a misunderstanding (lack of education and awareness) in the marketplace as to what government covers under “Medicare” and “Medicaid” with regards to nursing home care (non-medical care). Though currently not a hot public policy topic, this subject will undoubtedly become a very hot topic issue as the baby boomer generation ages and demands government help for the cost related to non-medical care (long-term care).