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Old 12-02-2008, 11:28 AM   #41
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I should have said, but didn't, that with such an alternatative pension plan, my Social Security benefit should be reduced proportionate to how much of my Social Security tax I redirect. If I pay full SS tax I get full SS benefit; if I redirect half the tax I get 50% of the payment, etc.
My point was that the decreased revenue to SS happens right away, your reduced benefit happens sometime in the future. If you are 17 or more years from retirement, your willingness to accept a reduced benefit has no impact on the cash benefits that will be paid for the next 17 years, but your "re-directed taxes" need to be made up by cutting benefits to current or soon-to-be retirees, or by raising some other tax, or by more borrowing from China (or whomever).
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Old 12-02-2008, 11:36 AM   #42
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Still, a problem remains. If everybody saves, we do not automatically find ourselves in paradise. There have to be some workers, someone who produces to support the retirees living off their investments. So, I will stop badmouthing the "spendthrifts". They make my early retirement possible.
Exactly. This is the core problem with all retirement policies. What works for one individual doesn't necessarily work for an entire society.

I can get a good return on my investments precisely because a lot of other people aren't saving. If we all try to save a lot, we'll discover that when we're retired there aren't enough workers to produce all the things we thought we were going to buy with our accumulated savings.
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Old 12-02-2008, 12:57 PM   #43
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I have always thought of SS as Insurance.

As life insurance goes... you do not want to draw the best cost/benefit ratio because that means you die after making you first premium payment (that would be the best cost/benefit possible I think)

With SS if you are getting the best cost/benefit then that means your poor --

My goal is to prepare as best as possible so that SS is as small a % of my retirement income as possible.

I do not mind paying my share so if my plans fall flat I will have a baseline income to work with in retirement.
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Old 12-02-2008, 02:04 PM   #44
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I have always thought of SS as Insurance.

As life insurance goes... you do not want to draw the best cost/benefit ratio because that means you die after making you first premium payment (that would be the best cost/benefit possible I think)

With SS if you are getting the best cost/benefit then that means your poor --

My goal is to prepare as best as possible so that SS is as small a % of my retirement income as possible.

I do not mind paying my share so if my plans fall flat I will have a baseline income to work with in retirement.
That is not a bad way to view SS.

But I just want the population to be educated to think the same way, meaning people must have IRA, 401k, after tax savings, etc... in addition to SS.

Samclem, in a post somewhere, conveyed the same idea. He also stated as to expanding SS beyond the bare necessities would not be a good idea.

I am sure there are politicians who want the population to rely totally on the guvmint, and to give them total control. That bothers me to no end. And my libertarian friends keep telling me how the public has been "dumbed down".
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Old 12-02-2008, 02:15 PM   #45
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SS is a progressive tax. Right now, if you pay 50% into it, you actually get more than 50% out, compared to someone who pays 100%. (snip)
I'm not doing very well explaining myself. I'm trying to say, my proposal for these hypothetical cooperative pension plans would be that if I redirected half of my SS tax (over my entire career) into a cooperative plan, I'd receive 50% of the SS benefit that I would have received had I paid full SS tax into the SS system, and 50% of the cooperative pension benefit I would have gotten if I had redirected all of my SS to that plan. My idea of these cooperative plans is that they would be a way to reduce one's vulnerability to a failure of either system, not a way to get more money overall (unless you contribute amounts over and above the total SS tax that would have been due).

If such a plan ever did come into being, there would probably be some people who switch from 100% SS to 100% cooperative pension or vice versa during their career, or split other than 50/50. That would have to be taken into account too in calculating their benefit from each system. I daresay it would be quite a complicated formula, but that's why there are online benefit calculators, right?
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Old 12-02-2008, 02:31 PM   #46
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My point was that the decreased revenue to SS happens right away, your reduced benefit happens sometime in the future. If you are 17 or more years from retirement, your willingness to accept a reduced benefit has no impact on the cash benefits that will be paid for the next 17 years, but your "re-directed taxes" need to be made up by cutting benefits to current or soon-to-be retirees, or by raising some other tax, or by more borrowing from China (or whomever).
That's a problem. I wonder if it would be possible to phase in such a program, by (for example), only opening it to people who are 17 or more years out from retirement, or at least they have 17 years to go before SS eligibility? Many people in that age bracket (and younger) don't expect to get SS anyway. If they all jumped ship into cooperative plans, would SS go bankrupt immediately, leaving all of us baby boomers selling pencils on the streetcorner?

Like I said, I'm not an economic analyst, but ISTM if that were the way the country decided to go, there would be some way to do it without causing a crash & burn of the SS system. Maybe phase-in would have to be even more gradual, with only those workers just starting out now eligible to split their SS tax, or by delaying SS eligibility for people who elect to split their SS tax at the beginning of the system.

It's just an idea, and unlike the other plan that's floating around, and has been discussed on a couple of threads here (it would end tax deferral on 401ks and substitute a mandatory 5% savings with gov't match for low income workers) it's voluntary, and it would allow those who wish to retire earlier than SS "early retirement" age to do so by contributions over & above the SS tax amount.
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Old 12-02-2008, 02:36 PM   #47
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If such a plan ever did come into being, there would probably be some people who switch from 100% SS to 100% cooperative pension or vice versa during their career, or split other than 50/50. That would have to be taken into account too in calculating their benefit from each system. I daresay it would be quite a complicated formula, but that's why there are online benefit calculators, right?
Here's one rub: We, as a society, will not allow anyone to starve just because they cannot/will not provide for themselves. So, if an individual decides to take all his SS money and convert it to the cooperative pension, then that group of pension-fund managers puts all the money into "Styrofoam Lawn Ornament Company, Ltd" and loses everything, who is left holding the bag? You and me--we'll be providing welfare, food stamps, etc for the rest of his life. So, if this idea you've proposed is implemented, I'd strongly urge that there be a floor set--that no one can be allowed to put at risk the funds needed to keep their heads above water (because, from a practical standpoint, they aren't gambling with their money below that level, they are gambling with mine). The result would be pretty much what we have now: A small govt-guaranteed SS annuity to assure folks need no/very little other public assistance, and the individual market-based system (IRAs, 401(k)s,) that people can use to lift themselves above this level. If they want more income security (with a near gaurantee of lower overal return), they can buy a private annuity with this private money.
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Old 12-02-2008, 03:03 PM   #48
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Here's one rub: We, as a society, will not allow anyone to starve just because they cannot/will not provide for themselves. So, if an individual decides to take all his SS money and convert it to the cooperative pension, then that group of pension-fund managers puts all the money into "Styrofoam Lawn Ornament Company, Ltd" and loses everything, who is left holding the bag? You and me--we'll be providing welfare, food stamps, etc for the rest of his life. So, if this idea you've proposed is implemented, I'd strongly urge that there be a floor set--that no one can be allowed to put at risk the funds needed to keep their heads above water (because, from a practical standpoint, they aren't gambling with their money below that level, they are gambling with mine). The result would be pretty much what we have now: A small govt-guaranteed SS annuity to assure folks need no/very little other public assistance, and the individual market-based system (IRAs, 401(k)s,) that people can use to lift themselves above this level. If they want more income security (with a near gaurantee of lower overal return), they can buy a private annuity with this private money.
Aye, aye, aye...

It comes down to the fact that if our own personalized savings in whatever form beats the lowly return of SS, we want to keep it to ourselves. But if it fails, we want a "bailout" by the public. In order to avoid this, the only solution is then to have just one fund, or "one size fits all".

Ugh... I'd rather we keep the current system, SS augmented by 401k and IRA. I'd take my chances with the market, thank you.

Samclem, you have convinced me that no change is needed. Or at least people should be allowed to "opt out" of the new system and keep their existing 401k+SS.
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Old 12-02-2008, 05:05 PM   #49
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That's a problem. I wonder if it would be possible to phase in such a program, by (for example), only opening it to people who are 17 or more years out from retirement, or at least they have 17 years to go before SS eligibility? Many people in that age bracket (and younger) don't expect to get SS anyway. If they all jumped ship into cooperative plans, would SS go bankrupt immediately, leaving all of us baby boomers selling pencils on the streetcorner?

Like I said, I'm not an economic analyst, but ISTM if that were the way the country decided to go, there would be some way to do it without causing a crash & burn of the SS system. Maybe phase-in would have to be even more gradual, with only those workers just starting out now eligible to split their SS tax, or by delaying SS eligibility for people who elect to split their SS tax at the beginning of the system.

It's just an idea, and unlike the other plan that's floating around, and has been discussed on a couple of threads here (it would end tax deferral on 401ks and substitute a mandatory 5% savings with gov't match for low income workers) it's voluntary, and it would allow those who wish to retire earlier than SS "early retirement" age to do so by contributions over & above the SS tax amount.
I hate to keep being negative, but I don't see any painless way to transition to a private account system.

I'm not sure how you define "bankrupt", but if we tried to phase-in some type of individual account carve-out, the regular SS system would be short money. If the younger half of the current workers all opted to redirect 50% of their taxes, then we would need to cut benefits by 25% for everyone currently retired. And the cut would get grow to almost 50% before the current "younger half" starts to retire.

If we limit the carve-out option to people who were born after 1988, then the immediate cut wouldn't be noticeable. But, benefits would still eventually be cut by 50% for the people who don't participate in the carveout before the after-1988 generation retires (that's in addition to any benefit cuts we need with the current system).
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Old 12-02-2008, 06:35 PM   #50
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Here's one rub: We, as a society, will not allow anyone to starve just because they cannot/will not provide for themselves. So, if an individual decides to take all his SS money and convert it to the cooperative pension, then that group of pension-fund managers puts all the money into "Styrofoam Lawn Ornament Company, Ltd" and loses everything, who is left holding the bag?
What prevents the managers of existing pension systems from doing the same thing? Aren't there accounting standards, etc etc, that put this sort of mis/malfeasance out of the picture? The same would apply equally (if not moreso) to cooperative pension plans. I'm not suggesting just anyone should be able to start a fund and call it a cooperative pension and have people start diverting their SS tax into it. That would be a gold-edged invitation to scammers! What I have in mind is creating some way that people can buy into the equivalent of the professionally managed (not self-directed) DBPs that were once commonly available through one's employer, but have now mostly gone the way of the dinosaur. I'm eligible for a defined benefit pension through my job with City government, and there are minimum funding requirements, audits, and other safeguards to make sure that City retireees actually get their pensions, and as far as I know, they always have. Cooperative pension plans, as I envision them, would be subject to the same kind of regulations, but be available through connections other than one's employer.

However, to answer your specific question, the (required) pension insurance would "hold the bag". Now, from what I hear the PBGC that covers existing pension funds doesn't charge nearly enough in premiums to actually guarantee the pensions it covers, and if the pension fund you are depending on goes bust due to bankruptcy of the sponsoring company or whatever, you will probably get a much lower benefit than you were promised. In order for cooperative pension funds to pay the higher premiums necessary to provide adequate insurance, I suppose they'd have to pay a lower benefit for the same salary + years of service than SS would. Some people would think that's a bad deal, and stay in the SS system. Maybe there wouldn't be a stampede out of SS after all, once people saw what the actual benefit offered by a pension coop would be.

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You and me--we'll be providing welfare, food stamps, etc for the rest of his life. So, if this idea you've proposed is implemented, I'd strongly urge that there be a floor set--that no one can be allowed to put at risk the funds needed to keep their heads above water (because, from a practical standpoint, they aren't gambling with their money below that level, they are gambling with mine).
As I wrote, it would be the CPPI (Cooperative Pension Plan Insurance) who would be paying for all that. Even if cooperative pension plans never come to be, we're all still required (through SS taxation) to put the funds needed to keep our heads above water at risk--at risk that the SS sytem will not pay the benefits promised, will delay eligibility, will pay benefits with the right hand and tax them away with the left, or that the government will just print the money to pay everyone "in full" and the resulting inflation will reduce the purchasing power of the benefit as much as a cut in the dollar amount would have done without the inflation.

What I'm proposing is the addition of a fourth leg to the "three legged stool" analogy. Right now a person has at least two, possibly three retirement savings possibilities: Social Security, personal, self-directed savings (IRAs, 401k's etc), and for some, employer pensions. I propose adding the option of allowing individuals to redirect part of their SS tax into a professionally-managed, defined-benefit pension system. The problem with a three-legged stool is that if it loses a leg, it can't stand. If one of the legs of a four-legged stool is lost, there are still three, and at least a chance that it won't fall over. It may not be quite as comfortable as it would have been with four, but at least it's still functional. How much money goes to each leg would be up to the individual, after the SS tax amount. Anyone who wanted to stay 100% SS could do so, and anyone who wanted to go 100% coop could do so (asssuming that there is a solution to the difficulty pointed out by independent). Anyone who wanted to do a self-managed 401k or IRA instead of a coop pension could do that--and given the inadequacy of the average American's investment management skills, my guess is that it would be the people who opt for self-managed plans who would end up on the dole.

Quote:
The result would be pretty much what we have now: A small govt-guaranteed SS annuity to assure folks need no/very little other public assistance, and the individual market-based system (IRAs, 401(k)s,) that people can use to lift themselves above this level. If they want more income security (with a near gaurantee of lower overal return), they can buy a private annuity with this private money.
IMO, sending the individual retiree to purchase an annuity is not equivalent to allowing groups of retirees to form a pension fund and have it professionally managed. It replaces a pension fund controller who has a professional duty to maintain the fund in a financially sound condition so that the promised benefits can be paid with a salesperson whose professional duty, if you can call it that, is to sell an annuity no matter what. I can guess who will get the short end of the stick on that deal.
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Old 12-02-2008, 07:58 PM   #51
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I'm not suggesting just anyone should be able to start a fund and call it a cooperative pension and have people start diverting their SS tax into it. That would be a gold-edged invitation to scammers! What I have in mind is creating some way that people can buy into the equivalent of the professionally managed (not self-directed) DBPs that were once commonly available through one's employer, but have now mostly gone the way of the dinosaur. I'm eligible for a defined benefit pension through my job with City government, and there are minimum funding requirements, audits, and other safeguards to make sure that City retireees actually get their pensions, and as far as I know, they always have. Cooperative pension plans, as I envision them, would be subject to the same kind of regulations, but be available through connections other than one's employer.
How is this different from an annuity or a target date retirement fund. The obvious solution to me is to have a program which takes a target date fund and turns it into an annuity.
Quote:

However, to answer your specific question, the (required) pension insurance would "hold the bag". Now, from what I hear the PBGC that covers existing pension funds doesn't charge nearly enough in premiums to actually guarantee the pensions it covers, and if the pension fund you are depending on goes bust due to bankruptcy of the sponsoring company or whatever, you will probably get a much lower benefit than you were promised. In order for cooperative pension funds to pay the higher premiums necessary to provide adequate insurance, I suppose they'd have to pay a lower benefit for the same salary + years of service than SS would. Some people would think that's a bad deal, and stay in the SS system. Maybe there wouldn't be a stampede out of SS after all, once people saw what the actual benefit offered by a pension coop would be.
There are 4 issues as I see it which combine SS, IRA/401k type plans, and your own suggestion.

1) Is there a need for a minimum goverment insurance program?
2) Is there a need for privately managed investment accounts for IRAs, 401ks and similar?
3) Is there a need for a 3rd program (pensions) available to the general public?
4) Is there a reason all of four of these programs need to be grouped together or funded from one "tax"?
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As I wrote, it would be the CPPI (Cooperative Pension Plan Insurance) who would be paying for all that. Even if cooperative pension plans never come to be, we're all still required (through SS taxation) to put the funds needed to keep our heads above water at risk--at risk that the SS sytem will not pay the benefits promised, will delay eligibility, will pay benefits with the right hand and tax them away with the left, or that the government will just print the money to pay everyone "in full" and the resulting inflation will reduce the purchasing power of the benefit as much as a cut in the dollar amount would have done without the inflation.

What I'm proposing is the addition of a fourth leg to the "three legged stool" analogy. Right now a person has at least two, possibly three retirement savings possibilities: Social Security, personal, self-directed savings (IRAs, 401k's etc), and for some, employer pensions. I propose adding the option of allowing individuals to redirect part of their SS tax into a professionally-managed, defined-benefit pension system. The problem with a three-legged stool is that if it loses a leg, it can't stand. If one of the legs of a four-legged stool is lost, there are still three, and at least a chance that it won't fall over. It may not be quite as comfortable as it would have been with four, but at least it's still functional. How much money goes to each leg would be up to the individual, after the SS tax amount. Anyone who wanted to stay 100% SS could do so, and anyone who wanted to go 100% coop could do so (asssuming that there is a solution to the difficulty pointed out by independent). Anyone who wanted to do a self-managed 401k or IRA instead of a coop pension could do that--and given the inadequacy of the average American's investment management skills, my guess is that it would be the people who opt for self-managed plans who would end up on the dole.
Look at my highlighted portion. You assume all retirement plans have 3 legs. I bet many people here have different legs than the ones you mentioned:

1) taxable accounts, IRAs and annuities (no SS)
2) taxable accounts and IRAs (no SS)
3) IRAs and SS
4) Real estate and IRAs
5) Annuities and SS
the permutations and combinations are probably quite large.

A better plan (IMO) would be to
a) provide a government sponsored 401k plan (similar to a TSP) where any person could divert the money to this plan from their payroll. This would not lower the SS contribution though. This would allow anyone with a bad 401k to opt out.
b) provide a government annuity (which returns higher than SS) which would be backed similar to FDIC on savings accounts. I realize there is something which allows annuity contracts to be transferred from one insurance carrier to another, I am suggesting an annuity which is held by the US government and paid out. This would be a more conservative annuity than what you might get at Vanguard, but because it has the US gov't behind it, maybe it gets better press. US government can only invest in Treasuries, I-bonds, TIPs and similar paper (gov't paper), not in equities or anything with a volatile price.


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IMO, sending the individual retiree to purchase an annuity is not equivalent to allowing groups of retirees to form a pension fund and have it professionally managed. It replaces a pension fund controller who has a professional duty to maintain the fund in a financially sound condition so that the promised benefits can be paid with a salesperson whose professional duty, if you can call it that, is to sell an annuity no matter what. I can guess who will get the short end of the stick on that deal.
How does a person choose between the pension of Vanguard and T Rowe Price? Someone has to sell something somewhere for this to work.

It is not up to government to take away choices or dictate choices on retirement plans. Anyone which is suggesting to take away a choice is working against what is being done by so many which come to this board.
4 legged plans can be created now. I have a 6 legged plan which I am working on implementing which includes SS, dividends, real estate, 401k, annuity and an inheritance. Even if 4 of the legs fail, my plan can work with SS and 401k.
If you think SS tax is too high, there are other solutions to this problem (other than divert some of the 12.4% of salaries going into SS now).

If something generic is going to be created, realize that healthcare is more directly related to your employer than your retirement plan is. Fix the healthcare from this perspective first, then maybe I might have confidence the government could manage pension funds and retirement plans second.
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Old 12-02-2008, 08:32 PM   #52
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How is this different from an annuity or a target date retirement fund. The obvious solution to me is to have a program which takes a target date fund and turns it into an annuity.
There are 4 issues as I see it which combine SS, IRA/401k type plans, and your own suggestion. (snip)
I can only give a brief reply (choir practice tonight!) but the difference between a cooperative pension plan as I envision it and a target retirement fund is the CPP is guaranteed to pay a defined benefit for the life of the retiree, while AFAIK the target fund is not.


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It is not up to government to take away choices or dictate choices on retirement plans. Anyone which is suggesting to take away a choice is working against what is being done by so many which come to this board.
Everything I am suggesting is strictly voluntary. If you want to opt-in, you can. If you don't want to, you don't have to.

Your other suggestions might indeed be equivalent to my idea, but I will have to wait until I get back from practice and can read them more thoroughly to know. Later!
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Old 12-02-2008, 08:45 PM   #53
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What prevents the managers of existing pension systems from doing the same thing?
Apparently, not very much. Pension plans (subject to many rules) do go bust. And when they do, the government (you and I) come to the rescue. We do so by way of the Pension Benefit Gaurantee Trust Corp (jointly paid for by premiums to the member pensions but also the govt) and by way of welfare/foodstamps/other public assistance when the formerly-OK-but-now-destitute retiree needs help. But, most people in this situation qualify for SS, so the damage to the public is limited. But if we've allowed them to gamble away their social security check, then we're on the hook for even more payments. One way or another, because of the empathy of our voters, folks who make bad choices (or belong to a pension plan that makes bad choices) and thereby fall into poverty will be bailed out at my (and your) expense. That's why I (and you) have an interest in actively preventing people individually or as a group investing in anything with this money. On a personal level I wish society had different priorities, but it doesn't, so this "mandatory pay in to pay for the safety net" is a must-have feature.

I understand what you are trying to accomplish, but I'm afraid the fix is worse than the disease. Keeping the public side of this separate from the private side is the best way to optimize what each does best:
Public: See to the welfare of the poor.
Private: Encourage individual savings and the quest for best return on investment commensurate with risk.

If we mix these two "systems," I think it's nearly certain that policies will be enacted to migrate resources from the private system to the public one, and that the restrictions placed on the private system will make it less effective.


I think the future you describe (groups of people getting together and pooling resources, buying stocks, mutual funds, other investments, paying out to retirees) already exists. This is what insurance companies and MF companies do. It is obviously a lot of work, which is why it is done by corporations. Some of these have very low expenses and costs, and individuals are free to "buy in" with their money. I don't think calling it something else would reduce the costs or risks to clients. But maybe I'm not seeing the idea clearly.
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