How Political Instability Could Mess Up Your Retirement Plans
What to think about now.
No matter what side of the political aisle you are on, American democracy appears to be caught in the throes of an enormous confrontation, and people on both sides see it as an existential crisis for America. For many, the Jan 6th committee is seeking the truth about what happened on an awful day in history, and particularly to discover how the official channels of government were or were not involved. The committee wants to know if the events of the day were actually an attempt at a coup d’etat to reverse the election outcome, or not. For them, the committee is in a high-stakes effort to save democracy and the powers of the legislative branch of government. For many others, the committee is a politically motivated witch hunt that is grossly stepping on all norms of freedom and privacy, particularly of the people who were in government that day. They also see it as a test as to the powers and limits of executive power vis-à-vis the other branches of government.
No matter what your viewpoint is, this is bad for retirement planning.
As I outlined in a separate article, there are several new uncertainties most financial planners don’t even consider — like COVID and climate change. Political uncertainty is another one because it has not been an issue on this scale since the Civil War. Yes, there was the McCarthy communist witch-hunt and the Nixon disaster, but for all their problems and challenges, it never seemed that the system itself was threatened. The Watergate committee was bipartisan. There were no questions of election outcomes. A leader’s bad behavior was exposed, and he agreed to step down so the country could move on.
In this case, we have a mostly partisan committee, which includes the only two dissenting Republicans in the House. Related House votes, such as on contempt charges, are nearly totally along party lines — much as the impeachment actions were. Both sides see the other as the incarnation of autocratic overreach. One wonders what comes of this — and that is precisely the point.
Assume for a minute that either side is right — the people on the other side are autocratic, dictatorial, maybe even fascist or communist totalitarians. Assume also that one side or the other brings that framework to power. Some autocrat takes power, Congress is reduced in scope and power by whatever means necessary, possibly including control by a colluding political party, and courts look the other way. It’s a scenario not hard to imagine.
If that happens, what happens to your retirement strategy?
These risks are not considered by most people, much less understood. I have not met a planner yet who is actively discussing the risks of political discontinuity with clients. Yet as the country hurtles toward increasingly extreme divisions, one remains blind at one’s s own peril. Here are a few things I am considering.
Conservatives have criticized social security for generations, but the block of voters it benefits is so strong that it was hard to rein in social security and Medicare. The confidence one could have in social security despite the conservative rhetoric was nearly complete for most retirees and financial planners.
But if an autocrat owes nothing to the voters who backstopped social security, there is nothing to protect it. Social security could be reduced or eliminated. Does your plan take that into account? Can you figure out how to handle that? What would you do if you retire and social security stopped writing checks?
Are you living where you want to be in case an autocrat rises to power in the USA? When would you move or relocate? Many people will wait and see. But here is the thing: Both Biden and Trump, nearly immediately upon assuming office, issued executive orders with profound effects on immigration. It is a common theme in autocratic regimes to limit emigration — people leaving the country. Even in America, an autocratic leader could move immediately on an executive order limiting emigration if he or she thought it was in their interest to do so.
People often say, rather flippantly, “I’d just go to Canada,” as if that is easy, they have the money to do it, and Canada would take them. It will be difficult, for example, to pick up and go to Canada if all your money is sunk into a house that can’t be sold — perhaps because of a moratorium on sales to prevent emigration. Once you get there, you may not be able to buy real estate due to Canadian law. And you might have a real challenge in terms of moving funds as well. If social security exists, it may or may not follow you. Perhaps dividend payments that are sent to your US Bank cannot be exported under a new law. The easy answer of going to Canada as if it is just the same as here simply does not pan out.
The problem, of course, is that any focus on this area has profound financial consequences, some of which I explored in more detail here. Selling your home, redeploying the equity to other real estate or other investments, and what to do with the leftover cash (especially in this high inflation environment we are heading into) are questions with enormous implications. Same with leaving the country.
Autocratic governments have a habit of obtaining money and playing favorites wherever they can. Except in the worst communistic autocracies, most such funds are easier to find in public and semi-public locations rather than private ones. The question is: If you are a public employee and contributed to a public pension program, can you count on the money? And the same question if you have a private pension?
In my view, the risk with pensions has more to do with playing favorites than with needing money. An autocratically controlled government will be able to borrow money endlessly in the USA, so it won’t need it. However, autocrats often view the world through a loyalty lens, which we saw in Trump and cannot discount in a leftist leader either. Trump was unabashed about favoring Republican-controlled states and refusing to fund Democrat-controlled states. An autocrat on the left would likely do the same thing. So if you have a publicly funded pension, you may face risks you never thought to consider. What would happen if the pension plan became unable to make its payments? What is your plan for that?
It is a fool’s errand to try to predict the market’s response to the rise of new leadership. After both recent elections, I heard people bemoan the future of their 401k accounts. So far, such bemoaning has been misplaced.
Although markets hate uncertainty, political uncertainty of this type is rarely considered. An unpredictable autocrat may produce enormous uncertainty and therefore depress markets even further. Autocracy would pose a risk to investment portfolios on a macro scale.
More specifically, autocrats tend to pick winners and losers, much as they do with states. Some businesses are seen as supportive and loyal while others are not, and autocracies naturally pursue those who are not loyal. This history of autocracy around the world has always had this feature to one extent or another, so if autocracy rose to power in the USA, it would be foolish to ignore its prospects on business results.
Interest and Dividends
The key to interest and dividend income is to assess the source — is it sustainable in a political autocracy? Aside from all the macroeconomic considerations, I would assess each industry or company for hostility from the government. Any company the government targets could have a hard time with dividends, and possibly with bond payments. Similarly, local or state government bonds could have the same exposure.
Some Considerations, No Answers
Because we don’t know when an autocratic government might rise, what its angle would be, or what steps it might take, there are no answers. All of that is conjecture. But, here are some things I am considering for myself. Readers should consult with their financial professionals for their own cases.
Preserve cash — hard with inflation, but probably necessary
Identify a place that would be easy to go and where one could live without some of the planned retirement funds — social security, pensions, exported dividends, etc. — in case they vanish
Don’t get overinvested in real estate in case you need to move quickly and cannot sell.
Set up accounts now that will enable you to move or obtain cash after leaving the country, if necessary.
Preparation is Not Fear-Mongering
When one considers the possibilities, it is easy to get overwhelmed with fear. Let me be clear: I don’t think the rise of an autocratic government is likely — not from either end of the political spectrum. Nonetheless, the very successful physicians in Syria ten years ago never thought they would find themselves and their families in refugee camps either. Nor did the eastern European Jews in the 1940s anticipate the Nazi wrath. Because it is a remote possibility or hard to imagine does not mean it won’t happen. Prudence is valuable; paralyzing fear is not.
I hope all my readers can plan for and have a great retirement.
You can find my newsletter Intertwine: Living Better in a Worsening World here.
Ideas, insights, and imagination to help you live better in a worsening world.