In 1926, George Samuel Clason published a series of pamphlets written in parables that was set in the ancient city of Babylon. The book became known as The Richest Man in Babylon, a series of tried-and-true lessons for accumulating wealth, and has become a classic in financial literature. I first encountered this little book after I graduated college and eagerly opened it and read feverishly in search of the golden secret to riches! What I found was not so exciting, sexy or complicated in any way. Any reader would consider the method to accumulating somewhat modest riches (not Google riches) to be quite simple. And, that these riches surely could fund a comfortable retirement? Well, not so fast. Sure, the theoretical steps to wealth accumulation outlined by Mr. Clason in the 1920’s was simple, but in reality it was not easy. And, over time, the impact of government “good deeds”, in particular Social Security and Medicare, have made becoming rich even more difficult today.
While there are several “tried-and-true” lessons in The Richest Man in Babylon, let me focus on a couple; 1) pay yourself first and 2) live below your means. The author suggests that if one simply set aside 10% of whatever they make (ensuring 1) and 2) at the same time), surely not only financial security, but indeed riches would come to you. I will save you the entire history of Social Security to explore on your own, but it was born in 1935, in the heart of the Great Depression, as part of President Roosevelt’s New Deal. While contributions to the program were rather modest in the beginning, combined employer and employee contributions for all components of Social Security and Medicare today total 15.3% up to $118,500 in wages (2015) indexed for inflation. Those making above this amount continue to pay the Medicare portion of 2.9% on wages to infinity. (Additional income and investment related taxes introduced over the past couple years also apply, but we will ignore this for now.) Suffice it to say,
by force for our own good we place over 15% of our hard earned wage and salary income into an “account”, and thanks to the US federal government, we will be even wealthier than the richest man in Babylon! At least I hope we will…
It almost goes without saying that at least one group of people have read The Richest Man in Babylon and are applying the principles of wealth accumulation. If there is any one organization that ensures it is being paid first and seeing to it that everyone lives well below their means, it is US federal government employees. Nearly every federal bureaucrat and politician that has worked for any length of time in Washington, DC over the last several decades is, most assuredly, a millionaire. And, most likely, many times over. But, who are we to complain about them taking their “fair share” for “managing” our money? These friendly folks have robbed us of our ability to fund the 10% of income required to amass comfortable nest egg, so surely they are taking our 15+% “contribution” and are making us rich beyond our wildest dreams. In fact, the last time you spoke with a government official or supporter of Social Security, they reassured you that, not only was Social Security safe, but you were indeed rich!
Or, did it go something like this; “you can’t count on Social Security to fund all of your retirement needs. In fact, this is only one leg of the stool as you will also need a pension (the second leg of the stool) and your own savings and investments (the third leg) to fully fund your retirement.”
Wait a second… I only need to save 10% to be rich under Mr. Clason’s plan, but you are telling me 15% under the federal government plan funds only 1/3 of my retirement? For those not great at math, one “only” needs to set aside 45% of their income to be rich under the government plan. How, on earth, is that possible? It’s not! Let’s go back to the beginning and the “Aid to Needy Old People Plan”. Is this really an aid to needy old people plan? For all practical purposes, maybe in the beginning it was. But today, clearly it is not. This is a transfer of wealth from young people to old people plan, regardless of economic status. Forcing young people to hand over the first 15.3% of their income to older citizens, most of whom, are better off than they are, have doomed them to government dependency, not made them wealthy. If you do not find it absolutely disgusting that the working poor are required to transfer a substantial portion of their limited income to non-working wealthy Americans, you have a severe morality problem. And, if you ever believed you were part of a retirement program where you placed your own funds into an account, for yourself, you have been and continue to be suffering from child-like delusions. .
Many studies have been conducted and, on the whole, they estimate that up to 90% of Americans have not saved enough for retirement. This includes the limited income they receive from Social Security. Say what you want about the downside of any other retirement alternatives, but with a 90% failure rate, it is hard to imagine any other option being worse than the system we have today. Not that we have a choice. The bottom line truth with regards to Social Security is; non-compliance leads to jail, compliance leads to poverty.
And, just in case you are wondering, Mr. Clason did NOT list “giving the government 15% of your lifetime income for safekeeping and growth”, as a tried-and-true path to riches. For that, The Poorest Man in Babylon, surely would have been a better title.