Where Goldman Sachs Misses the Mark and Where it Hits the Nail on the Head

I had a Hallelujah moment with a Workforce related show to the point where I was screaming at my car radio like a sports fan screaming when his team has a last second come from behind win.   It was absolutely that kind of moment.  

Let me start at the beginning.   I listen to podcasts, lot’s of podcasts because I like them so much.  I even have one of my own to promote and support my writing.  Mostly it’s for entertainment purposes (the ones I  listen to, I mean).  For example, I don’t get to play video games all that much because of my life commitments but some of those video game podcasts are kinda funny.  They also have the added benefit of allowing me to be informed on the products so when I do play a game so I only spend my limited time with the really good ones.  Then there are some podcasts I listen to that aren’t really humorous but are still very entertaining.  Think of these as the documentaries of the podcast world.  Planet Money is a good example of this type.  It’s NPR’s edutainment podcast about economics.  Squirrel moment: I have no idea when it happened but at some point in my life I became absolutely fascinated with economics.  I’m sure the girl obsessed 16 year old Mike Peluso would be in absolute shock at this turn of events.

Back to podcasts.  I listen to one or two that are dry. Like super dry.  Like professor in college who lectures the entire class  in mono-tone and whose source material is a 20 year old textbook dry.  – Yes, I had a professor who did this, for three classes… back to back… when I first went away to college.  I registered late that first semester and it’s shocking how these were the only classes that didn’t fill up, don’t you think?

The thing in common about Professor Monotone from back in college and the really dry podcasts I listen to is that the delivery may suck but the information is good, sometimes it’s great.  Sometimes if you can push yourself through the dry delivery you’ll find the raw concepts fascinating.  There is one podcast in particular that is like that.  It’s called “Exchanges at Goldman Sach’s”.  The host is ok, but the poor sound quality of the podcast added to the less than stellar delivery of the guests make it hard to listen to.  The guests on the show  are mostly financial researchers whose responses are filled with sector jargon that makes it very difficult to listen to unless you are committed.  They don’t need to really improve the show because their audience is investors, and investors know the jargon already.  They are willing to put in the effort to listen to it to get the important information contained within.  As an example, the show will use phrases like asset liquidity, Securitisation of the equity markets, and sector credit default swap yields. Definitely a little bit more intimidating than the bad segway’s and puns used on the Xbox oriented  Podcast Unlocked show. But I still listen to the Goldman Sach’s show because it gives me the 40,000 up view of the business world.  The topics always are communicated in very broad strokes and tend to focus on macro trends.  

Then one day, out of the blue all the discussion wasn’t about energy derivatives funded by debt capital markets portfolios, it was about the risk being shouldered by the common worker. Wait. What?!?

Ok, the show was still dry, but it was about a report on the future of the workforce.  The professional workforce.  The report was created by the Goldman Sachs Global Markets Institute which is the public policy arm of Goldman Sachs.  It’s the part of the organization that focuses on research and high-level advisory services to policymakers, regulators and investors around the world.  Or to put it another way, this is the stuff that they feel the world’s governments need to fix to drive long term economic growth.  

So what does the report say?  

The biggest surprise was that it centered on Risk, something I have written about at length but don’t see in the popular literature on workforce and careers.  I guess in retrospect I shouldn’t be surprised that a financial research firm would look at the skills gap as a risk measurement.  After all, risk is fundamentally a financial term and the firm’s research work is primarily aimed toward the financial sectors.  A risk assessment asks who’s responsible if things go up the creek?  When it comes to careers, the individual is responsible.  

The report does a good job of defining the idea that the skills gap originates from the accelerated change of the information age.  In short, change has always happened.  Farming was 80% of the workforce, now it’s 2%.  That took nearly a century to change, and a century is not that big of a deal as when people age out of their careers, the next generation simply finds something different to do.   The current workforce displacement is happening faster and faster now, to the point where the change is happening mid-career for a huge chunk of the workforce.  That’s not too surprising as all technology at it’s core is an accelerator and the workforce at large can’t keep up.  It’s happening at Every level with the current displacement disproportionately higher at the mid tier, i.e. the professional class. This is especially true for mid-career types who are engaged in the business of life.  They don’t have money or time to go get the new skills when they are responsible for mortgages and kids and elder care.

The World’s greatest analogy:

The best part of the podcast was the world’s greatest analogy.  It was of course a financial analogy, but the basic premise was this:  What if your financial planner asked you to go take 100% of your money, and put it into a single stock, and you couldn’t change your mind or cash it out for 10 years?  That’s pretty much what happens in a mid-career move. You are the ‘money’.  You get one choice in your next skill set.  Once you go back to school there is two to six years of schooling coupled with 3-5 years of career growth that has to happen in the new field.  Then, and only then, you may start seeing a return on this investment to achieve parity or exceed what you were getting in your old profession.  What do people do?  They say “screw that risk, it’s better to stick with where I’m at.”  This is exactly why there is a skills gap.  The report argues that jobs are being created by the new tech but people can’t transition to the new jobs because they don’t have the in-demand skills.  

So how to fix the problem?  The report discusses how the skilling up of the workforce isn’t a challenge with people entering the workforce.  The Risk is currently shared among government, individuals, and corporations.  They say placement decision making, apprenticeship programs, grants, subsidies and student loans all work in concert to help get young people skilled up to enter the workforce.  Plus the people entering the workforce generally aren’t dealing with mid-life problems, like mortgages, car payments, health care for the entire family and little side things such as how do you pay for your own tuition when you have to pay for your kid’s tuition at the same time?   I would debate some of the points associated with shared risk, especially when it comes to student loans and placement decision making, but generally speaking, all the parties who have a vested stake in the workforce and are engaged in facilitating the skilling of youth are at the table in some capacity.   

The conversation about reskilling mid-career workforce participants included calling for the same players to all be involved: Private Sector, Public Sector, and Individuals themselves.  The first and biggest issue is the income maintenance associated with the needs of mid-life.  There was some outside the box answers to this mid-career issue that included the gig economy.  I refuse to give the gig economy discussion any credence as the entire point of the modern gig business model is for the parent organization to drive 99% of the risk of any transaction onto the individual.  Not a good place to start looking for answers to mitigate risk for the workforce.  They talked about commitment contracts for corporations to pay for upskilling their workforce.  This isn’t a bad idea if there was some way to make it universal, portable and incentivize it.  Their was one other answer that was discussed more than others.  

The wrong answer.

The report suggests that one solution is to turn the 401K (defined contribution) from a retirement account into a life account where you can save to reinvest in your own skills mid-career.  It goes on to say that the workforce really needs to keep working past their retirement age and that’s why this is a good idea.  There are two things wrong with this idea.

The first challenge is that you need the longer term to generate wealth.  This is because of the concept of the time-value of money.  Money is worth more than it’s current face value assuming you can invest it.  A dollar today is really worth $10.00 for when you retire. If you put that money into your new skills, you don’t have that $10 when you retire.  But those skills will help you generate income for when you were going to retire, right? You will just keep working because we are all living longer, right?  Well those shiny new and in-demand skills won’t mean a hill of beans when life happens and you can’t work or can only work at a limited capacity because of challenges associated with life or age.  I’ve also argued that for real retirement, the kind that is addressing all sorts of needs beyond just maintaining lifestyle, you need more than the 70% of your working income.  Assuming you don’t want to work until you simply are unable to anymore, then this solution doesn’t work.  

The second challenge in this is that if you do make a mid-career change it’s such a big change you can’t afford to screw up.  The mistake may not even be your fault.  This goes back to the root cause of this conversation.  What if your shiny new skill set is outsourced five years after getting those skills because of technology disruption?  I’ll cite the CDL.  There are hundreds of dislocated workers in my local area going to school to be a truck driver.  This makes sense, it’s a high demand industry, it’s got a relatively low barrier to entry, and a high ROI.  Except for one thing.  Anyone who is paying attention knows that every single part of the chain from auto manufacturers to large logistics based companies to the government is driving (heh!) as fast and hard as they can to eliminate costs through self driving vehicles.  Imagine if you took one and a half years off of work, pulled 50K out of your retirement/life account to pay tuition and life expenses, and got that shiny new CDL, and then your promised 40-60K a year dissolves to 15K or worse, nothing because Peterbuilt is now Peter-self-drive.  You have wasted a good chunk of your work life and a massive chunk of your retirement seed. We can all see the CDL becoming useless today, but what about all of those jobs where we can’t see the disruption coming?  

The biggest challenge to the life account idea is ultimately the same as what the report cites as the biggest barrier to the skills gap problem.  The 401K life account may be portable but it’s still individual risk.   Let’s not forget it would take a lot of work by government regulators to really make a life account happen properly.    Participation would have to be mandatory.  Then there are some people who may need it and some who may not which means we go to haves (people who can retire) and have nots(people who can’t because of a mid career upskilling or two).  I’ll grant the Goldman Sachs report is supposed to be high level and very forward leaning so a discussion about the effort involved in implementing a solution is different than a discussion about what the real solution actually is.  I say this but I also don’t forget that Goldman Sachs would love an expansion and extension of the 401K system because it’s more capital they can manage and commensurately more fees they can make.  Most likely this was why the 401K as a whole life solution was the primary focus of the conversation.  I think there are some other ways this can be achieved.

What about a Skills pension?   

So what’s an alternative solution to the Life 401K?    The beauty of defined benefit programs are that they are shared risk.  In a pension scenario, for every person who dies early, someone lives longer.  You only need to save half as much because your benefiting from the person who died. What if there was a mandatory skills pension? Everyone has to pay into it, it’s structured so that it’s partially pegged to your income and as long as your going to school, you get all the benefits of maintaining your career and life.  It would have to be portable so as your jumping job to job to job you can take it with you and the companies would have to be forced to support it.  

This eliminates the challenges associated with losing the retirement time value of your money and also eliminates the haves and have not’s problem.  As the career equivalent of the layaway program, It keeps people from being burdened with individual school and life related debt as well.  

I don’t think we have anything like this, and that’s the biggest barrier to entry.  The concept is foreign, hell a regular pension is foreign to most Employees.  So rather than do something completely new and have to figure it out, why not extend something that we already have that works pretty well.

Apprenticeship Everywhere.  

Apprenticeship in four words: “Earn while you Learn”.  Apprenticeship in five words “The other four year degree”  Both explanations are appropriate.  Another great option, but one that has it’s own challenges is Apprenticeship programs.  We’ve worked out good apprenticeship programs for construction trades and for advanced manufacturing but not for everything else.  Nursing, Cooking, for Computer Programming, engineering, etc… these could all be great apprenticeship programs.   Then your Skills pension is going to buy you 3-5 years of income equalization while you are learning the new industry.  There is a ton of work involved in setting this up apprenticeship as well, but at least this work has already started by community colleges across the world.   

The report got one thing absolutely right.  The Risk to reskilling needs to be removed to truly eliminate the skills gap that exists in the workforce.  I have been saying this for the last couple of years, albeit not nearly as succinctly or comprehensively as this report puts it.  I’m not quite sold on the idea of a 401K to facilitate all the needs of a mid-career change but I love the idea of all the partners being at the table and sharing the risk.  I know one thing for certain, and i’m sure it’s not surprising, but if the education 401K did take off, Goldman Sachs and the financial management sector would benefit greatly.   

Maybe that’s a good place to invest for my skills gap: Some sort of whole life, risk sharing 401K.  Now I just have to find someone who’s willing to offer it.  

Original Podcast: http://www.goldmansachs.com/our-thinking/podcasts/episodes/09-12-2016-lawson-strongin.html

Full Report: http://www.goldmansachs.com/our-thinking/public-policy/narrowing-the-jobs-gap-report.pdf