This Can’t End Well: Debt Slaves Won’t Make Effective Freedom Fighters

I always thought that the main reason why people build up consumer debt is a rosy view of the future. If you are confident that you are only going to become more prosperous, that naïve confidence can lead a person to make irrational decisions.

But I must be mistaken.

A majority of Americans with 401(k)-type savings accounts are accumulating debt faster than they are setting aside money for retirement, further undermining the nation’s troubled system for old-age saving, a new report has found.

Three in five workers with defined contribution accounts are “debt savers,” according to the report released Thursday, meaning their increasing mortgages, credit card balances and installment loans are outpacing the amount of money they are able to save for retirement.

The imbalance is expanding even as policymakers are encouraging people to set aside more by offering generous tax breaks and automatically enrolling workers in retirement accounts that in some cases automatically escalate the amount of money over time.

Currently, workers with retirement savings accounts put aside more than 11 percent of their pay for retirement — 5 percent in their own accounts, and 6.2 percent in Social Security.

Despite that — and despite the $2.5 trillion the report says employers have poured into defined contribution accounts from 1992 to 2012 — the retirement readiness of most Americans has been slipping, according to the report by HelloWallet, a D.C. firm that offers technology-based financial advice to workers and conducts research of economic behavior.

I’m amazed people are living this way. I thought everyone knew that we have passed (for a while at least) the standard of living peak. Expecting some time of future wealth when it will be “easy” to pay off debts should be more obviously a foolish hope now than ever before.

All of us who are taking on more debt would be far more rational to simply stop contributing to their 401(k), get an extra part time job if possible, and pay off all our loans, before resuming saving. There is no magic rescue coming. The interest on consumer debt typically far exceeds the returns on a 401(k), even if there is no crash.

People in debt feel vulnerable. Anything that destroys your hope for the future, as debt surely does, makes you easy prey for self-styled political saviors who will promise to help you. They never deliver the help. They’re far more likely to allow your creditors to get your 401(k) or even your Social Security if there is a debt crisis.

If you have never thought about this issue before, I recommend Dave Ramsey and Gary North as two resources. I especially like Rachel Cruz’s YouTube Channel (she is Ramsey’s daughter) and this free book linked at North’s site.

The fight for freedom, for each person, usually begins in his or her checkbook. Happy hunting!