Concern about Guaranteed Retirement Accts

[chinaco]

+1 on Ha's comment.


The sad fact is that most (and that is the large majority of the population do not understand and cannot manage prep for retirement.)

Once one get's past the rhetorical political debate... they are left with only a few choices:

• Insurance Companies
• Investment (DIY or Financial Planner)
• Govt
• Work till you drop

While I would bristle at a mandatory participation type setup... I think it might be a good idea. But more details need to be described.


Bottom line: If you are not competent to go it alone... who do you trust more? The Life Insurance companies or the Govt? Those are the only options.


BTW - The Life Insurance industry is rubbing their greedy hands together at the mere prospect of lobbying to get their taste of 401ks! Talk about a group with an agenda... they are the group that wants to take over the 401k (different debate).... they are lobbying hard to get the "Default Investment of an annuity" in 401ks. That is a fact!

[dex]

Quote:

Originally Posted by traineeinvestor I am a fan of the Australian model which has mandatory contributions from both employer and employee.

It is one of the better systems I've read about.

[Independent]

Quote:

Originally Posted by supalong52 I also posted this on Bogleheads, but wanted some feedback from you guys. I recently read .... What do you guys think? Am I overreacting? Misunderstanding?

It would help a lot if you posted a link to whatever you read.

[rescueme]

Quote:

Originally Posted by chinaco Work till you drop...

I agree; that's the answer for everybody (except me )....

[Independent]

Quote:

Originally Posted by haha This is the first I have heard about this. But here is a summary of some main points: • Employees would make mandatory contributions equal to at least 5 percent of their earnings. Workers could contribute higher amounts if they wish. • Those contributions would be offset by a $600 federal tax credit each participant would receive. • As with a 401(k) plan, workers would have individual accounts they could track. The balance of each account would depend on each worker's contributions and income level. • The Social Security Administration would handle account management, and the Thrift Savings Plan -- a well-regarded retirement plan for federal employees -- would manage the money. • Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent. For instance, if inflation stood at 2 percent, the worker would earn 5 percent; if inflation reached 3.5 percent, the worker would earn 6.5 percent. Participants could receive an inflation-beating return above 3 percent if the government's investment returns were high enough. At retirement, participants' account balances would be converted into a lifetime stream of income that adjusts for inflation. There would be options to take partial lump sum payments, opt for lower payments in return for survivor benefits and, upon death, leave a portion of a financial account balance.

This sounded like a fine idea to me, after all, who can turn down free money? But then I realized it seems to be missing two bullet points.

• The $600 credit (which is $90 billion in total) will be funded by an new tax of ___% on all ____.
• If the gov't needs to make good on the 3% guarantee (which could be $100 billion in a single year if the average retiree earned 2.5%( it would institute a new tax of ___% on all ____.

[kyounge1956]

Quote:

Originally Posted by Independent This sounded like a fine idea to me, after all, who can turn down free money? But then I realized it seems to be missing two bullet points. • The $600 credit (which is $90 billion in total) will be funded by

....reducing the maximum tax deferred contribution to IRA's, 401k's etc to $5000/year, if I understood the factcheck article correctly.

Quote:

• If the gov't needs to make good on the 3% guarantee, which would happen on many balances at the same time, it would institute a new tax of ___% on all ____.

I don't know the answer to this one.

[Independent]

Quote:

Originally Posted by kyounge1956 ....reducing the maximum tax deferred contribution to IRA's, 401k's etc to $5000/year, if I understood the factcheck article correctly.

Thanks for the update, I should have caught that. Now I'm wondering if the 5% that goes into these accounts is before or after tax. To make the numbers work, it seems that it would need to be after tax money.

[kyounge1956]

One other thing I don't understand about this proposal. Even supposing, for purposes of discussion, that government retirement benefits should increase, why not just increase Social Security taxes and raise Social Security benefits, rather than create a separate second program? Social Security benefits are already guaranteed for life, already inflation adjusted, already portable between jobs. Does the Ghilarducci plan add or improve something that simply expanding Social Security wouldn't?

[kyounge1956]

Quote:

Originally Posted by traineeinvestor I am a fan of the Australian model which has mandatory contributions from both employer and employee. (snip)... HK's wealth destroying MPF scheme.

HK=Hong Kong?
MPF=?

[haha]

Quote:

Originally Posted by kyounge1956 One other thing I don't understand about this proposal. Even supposing, for purposes of discussion, that government retirement benefits should increase, why not just increase Social Security taxes and raise Social Security benefits, rather than create a separate second program? Social Security benefits are already guaranteed for life, already inflation adjusted, already portable between jobs. Does the Ghilarducci plan add or improve something that simply expanding Social Security wouldn't?

As presented, yes. As presented this plan would pay out similarly to anyone, depending only on their account balance.

OTOH, social security aims to replace approx 90% of a low wage workers monthly average SS taxable earnings, 32% over some fairly low threshold, and only 15% of monthly average SS taxable earnings after that. So the SS system has steep redistribution built into it. And of course, the government doing various shenanigans with one's earned benefits is being bandied about. Even at present, SS is largely a confiscation from the POV of high wage earners. That is why certain government workers who at least in the past were able to escape coverage, almost always elected to do so.

Amazing what can be done at gunpoint, no?

Ha

[kyounge1956]

Quote:

Originally Posted by haha As presented, yes. As presented this plan would pay out similarly to anyone, depending only on their account balance. OTOH, social security aims to replace approx 90% of a low wage workers monthly average SS taxable earnings, 32% over some fairly low threshold, and only 15% of monthly average SS taxable earnings after that. So the SS system has steep redistribution built into it. And of course, the government doing various shenanigans with one's earned benefits is being bandied about. Even at present, SS is largely a confiscation from the POV of high wage earners. That is why certain government workers who at least in the past were able to escape coverage, almost always elected to do so. Amazing what can be done at gunpoint, no? Ha

Please clarify. Suppose there are two hypothetical wage-earners. The first, Larry Lowpaid, makes $20,000 SS taxable wages per year. He pays 6.2% of this, which is $1240 a year, in Social Security tax, and at full retirement age is eligible for an annual benefit of 90% of his taxable wage, which is $18,000. The other, Harry Highwages, who makes $200K a year, pays SS tax of 6.2% of the first $106,800 earned, which is $6621.60, and gets a benefit of 15% of wage subject to SS tax, which is 0.15 x $106,800=$16,020. Is this correct? Harry Highwages pays over five times as many dollars each year in SS tax but gets a smaller annual benefit at retirement? With the Ghilarducci proposal, I suppose Larry would only put the minimum required 5% plus the tax credit into his GRA, while Harry might put in considerably more than that, resulting in a much larger balance than Larry's at the end of his career. Since he earned ten times as much, let's suppose his ending balance is ten times as large (I left my financial calculator downstairs and I'm too lazy to go get it and use real numbers). If I understand you, that would mean Harry's annuity payment would be ten times as much as Larry's?

Even if I haven't gotten anything confused, it still seems to me that the same net result could be produced by a combination of raising Social Security taxes, increasing Social Security benefits overall, adjusting the degree of redistribution, and maybe allowing voluntary increased contributions (since the proposal only has a minimum contribution of 5% but AFAIK no maximum). The Ghilarducci plan doesn't completely eliminate redistribution. It decreases a tax advantage which at present mainly helps higher earners, who have income they don't need to spend for basic living expenses to sock away in 401k's and IRAs, and redirects the increased revenues thus generated to a tax credit that would chiefly help low wage folks. The $600 tax credit is like a 60% "match" to Larry Lowpaid (5% of his salary is $1000), while to Harry Highwages it's only a 6% boost, or even less if he voluntarily increases his GRA contribution above the minimum. I just don't see the benefit of having two systems rather than one. If I'm right that the same net result could be produced by modifying the existing SS system as by adding a second retirement benefit alongside it, what does the second benefit actually do, except increase complexity, confusion and administrative costs?

[traineeinvestor]

Quote:

Originally Posted by kyounge1956 HK=Hong Kong? MPF=?

HK = Hong Kong

MPF = Mandatory Provident Fund - a compulsory savings scheme in which everyone (with a few exceptions) is required to contribute a % of their incomes to a registered retirement scheme. There is a mandatory employer match. The problem is that the scheme is (i) very inflexible and (ii) characterised by some of the most outrageous expense ratios known to the financial industry (and it is very difficult to find out what they are) and (iii) regulatory restrictions on scheme operators contribute to below market performance.

[CyclingInvestor]

Quote:

Originally Posted by kyounge1956 Please clarify. Suppose there are two hypothetical wage-earners. The first, Larry Lowpaid, makes $20,000 SS taxable wages per year. He pays 6.2% of this, which is $1240 a year, in Social Security tax, and at full retirement age is eligible for an annual benefit of 90% of his taxable wage, which is $18,000. The other, Harry Highwages, who makes $200K a year, pays SS tax of 6.2% of the first $106,800 earned, which is $6621.60, and gets a benefit of 15% of wage subject to SS tax, which is 0.15 x $106,800=$16,020. Is this correct?

Your Retirement Benefit: How It Is Figured (2010)

Once you calculate your average monthly inflation-adjusted SS wages over your best 35 years, if you retire at your full retirement age in 2010 you get 90% of the first $761/month, 32% of the next $3825, and 15% of anything over that.

Larry Lowpaid made $1667/month, so he gets 761*0.9 + 906*.32 = $974.82 SS benefit

Harry Highwages made $8900/month of SS wages and gets 761*0.9 + 3825*.32 + 4314*.15 = $2556 SS benefit

[dex]

Quote:

Originally Posted by traineeinvestor MPF = Mandatory Provident Fund - a compulsory savings scheme in which everyone (with a few exceptions) is required to contribute a % of their incomes to a registered retirement scheme. There is a mandatory employer match. The problem is that the scheme is (i) very inflexible and (ii) characterised by some of the most outrageous expense ratios known to the financial industry (and it is very difficult to find out what they are) and (iii) regulatory restrictions on scheme operators contribute to below market performance.

Is the fund only for HK nationals?
I worked in HK for 2 years in 95/96 & paid HK taxes. I don't remember this fund. I don't remember any deductions for the fund.

[Independent]

Quote:

Originally Posted by kyounge1956 Even if I haven't gotten anything confused, it still seems to me that the same net result could be produced by a combination of raising Social Security taxes, increasing Social Security benefits overall, adjusting the degree of redistribution, and maybe allowing voluntary increased contributions (since the proposal only has a minimum contribution of 5% but AFAIK no maximum). The Ghilarducci plan doesn't completely eliminate redistribution. It decreases a tax advantage which at present mainly helps higher earners, who have income they don't need to spend for basic living expenses to sock away in 401k's and IRAs, and redirects the increased revenues thus generated to a tax credit that would chiefly help low wage folks. The $600 tax credit is like a 60% "match" to Larry Lowpaid (5% of his salary is $1000), while to Harry Highwages it's only a 6% boost, or even less if he voluntarily increases his GRA contribution above the minimum. I just don't see the benefit of having two systems rather than one. If I'm right that the same net result could be produced by modifying the existing SS system as by adding a second retirement benefit alongside it, what does the second benefit actually do, except increase complexity, confusion and administrative costs?

I'll agree. This plan still has a redistribution. Only high wage people pay the extra tax, but everyone gets the $600. That $600 is a bigger % of pay for the low income worker than the high income worker.

Like SS, this plan has mandatory reductions in take home pay and benefits which must be paid as a monthly annuity. You can't opt out at any point along the way. It seems we could just increase SS taxes by 5% and invest the total sum in the gov't run TSP fund. We could also put a tax on 401k contributions over $5,000 per year and add that to the fund. Then at retirement we can calculate annuities based on presumed contributions of 5% + $600. The "individual" accounts seem to be just show.

[kyounge1956]

Quote:

Originally Posted by Independent I'll agree. This plan still has a redistribution. Only high wage people pay the extra tax, but everyone gets the $600. That $600 is a bigger % of pay for the low income worker than the high income worker. Like SS, this plan has mandatory reductions in take home pay and benefits which must be paid as a monthly annuity. You can't opt out at any point along the way. It seems we could just increase SS taxes by 5% and invest the total sum in the gov't run TSP fund. We could also put a tax on 401k contributions over $5,000 per year and add that to the fund. Then at retirement we can calculate annuities based on presumed contributions of 5% + $600. The "individual" accounts seem to be just show.

After mulling this over, maybe the "individual" accounts are the real difference. Part of the original proposal back in 2008 was to allow (not require) people to swap an existing 401k account for a guaranteed income stream (see Prof. G's Congressional testimony, linked from the factcheck article). If the idea had gone into effect then, some people would have converted their accounts, and some wouldn't. The other individualized aspect is that individuals would be allowed to contribute more than the 5% minimum—again, some would and some wouldn't. But still, the Social Security Administration already tracks each worker individually, so maybe even these two features could have been accommodated with adjustments to the existing SS system.

I wonder how many people would have opted to put more into a GRA, rather than a taxable account or non-deductible IRA savings. If one was planning anyway not to retire until after age 62, putting extra into a GRA might work out well, while anyone aiming at retiring younger than that would use a different vehicle.

[FinanceDude]

Quote:

Originally Posted by bssc Here is the factcheck.org link Quick Summary

Her proposal is starting a sound a lot like the Health Care bill..........

So, we should limit deductibility of 401K contributions, but not "require" people to put money into the govt plan paying 3%? In other words, she wants the American people to trust the govt to handle their retirement money as well as they are handling SS? No thanks, I think I'll uddle around on my own..........

[chinaco]

Quote:

Originally Posted by FinanceDude Her proposal is starting a sound a lot like the Health Care bill.......... So, we should limit deductibility of 401K contributions, but not "require" people to put money into the govt plan paying 3%? In other words, she wants the American people to trust the govt to handle their retirement money as well as they are handling SS? No thanks, I think I'll uddle around on my own..........

Problems don't get solved without ideas being floated (good and bad).