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Old 06-17-2013, 05:49 AM   #21
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There is a big question in my mind why they didn't coordinate the tax deferral limits between 401ks and IRAs. It should be one limit, shared between the two forms, without any prohibitions on using the latter instead of the former, if you so choose. That would make 401ks viable only if they provide advantages superior to IRAs.

There must be some pretty strong 401k-specific lobby out there protecting 401ks, by ensuring that the limit on IRA contributions remains small, and ensuring that folks with a certain salary or higher, eligible for a 401k, cannot contribute tax deferred to IRAs.
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Old 06-17-2013, 08:19 AM   #22
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Originally Posted by LOL! View Post
Not if most of the forced savings go to financial sales reps. Do you have a proposal that would ensure or force those "reasonable assumptions"?

Here's an idea: Forced savings unless/until one had $500,000 or a some other large amount in a government sanctioned retirement plan like the TSP. That way, folks would be forced to save unless they had already saved enough. And they couldn't blow their savings on weird investment plans or other odd things like starting a business.
I'll agree that those forced savings could be chewed up with outrageous fees. That's a good reason to avoid a forced savings program.

I can't figure out why I should be telling my neighbor how much he should spend and how much he should save.
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Old 06-17-2013, 08:33 AM   #23
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I'll agree that those forced savings could be chewed up with outrageous fees. That's a good reason to avoid a forced savings program.

I can't figure out why I should be telling my neighbor how much he should spend and how much he should save.
If as a society we choose to eliminate poverty as an objective, creating a mechanism to ensure adequate savings for retirement would be one aspect. Not all are equally competent to make the choices needed to achieve this. Telling each of us how much to spend and save is not the same as making sure minimum savings are in place.
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Old 06-17-2013, 08:46 AM   #24
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I don't get how 15% saving can provide any where close to 100% replacement for a 40 year retirement. Every time I've tried to model it with a spreadsheet. I've come to the conclusion that combined (employee/employer) saving to provide an income replacement ratio 2%*salary*years of worked needs to be 25-35%. Looking at pension funds the only ones that are close to being fully funded have historically had this level of funding, and good investment returns.

In today interest environment with TIPS paying. ~0% real return, if you start working full time at 22, put in 40+ years for a 20+ year retirement you need to save 1/3 of your salary. Since you are only living on 2/3 of your salary than you only need 2/3 during return. Assuming a real return greater than 0% immediately brings up the host of issues that we discuss on the board every day.
I'll agree that my claim is way off if I assume a 0% real return.

I wouldn't use the current interest environment for long term planning. The the S&P has averaged 25% over the last four years, I wouldn't use that number, either.

I figured that if a worker saves 15% at age 25, and that money accumulates at 5% real for the next 40 years, he'll have 106% of his age 25 earnings at age 65.
If he saves 15% at age 26, accumulates at 5% real for 40 years, he'll have 106% of his age 26 earnings at age 66. etc. 40 years of earnings provides 40 years of retirement.

I know that his earnings are likely to go up faster than inflation, so I'm just replacing his "average, inflation-indexed earnings" instead of his highest earnings. OTOH, most people have some earnings before 25, and in the future people will probably work past 65.

Is the 5% realistic? Who can know? Shiller's stock data gives an average compound real return of 6.82% for 1925-2013. The worst 35 year stretches were around 5%. If I do a 40/60 blend of 3% (a guess on historic bond yields) and 6.82%, I get 5.3%.

(You seem to have some information on pension plan funding, can you give me a source?)
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Old 06-17-2013, 08:51 AM   #25
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If as a society we choose to eliminate poverty as an objective, creating a mechanism to ensure adequate savings for retirement would be one aspect. Not all are equally competent to make the choices needed to achieve this. Telling each of us how much to spend and save is not the same as making sure minimum savings are in place.
I agree that if people arrive at old age with no savings and no income, the rest of us a likely to be called on to support them. That's why I support the Social Security program. In my first post, I said that I think that SS is enough "mandatory" stuff. Beyond that, I would rather not claim that I am more "competent" than my neighbor in handling his finances.
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Old 06-17-2013, 08:57 AM   #26
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I agree that if people arrive at old age with no savings and no income, the rest of us a likely to be called on to support them. That's why I support the Social Security program. In my first post, I said that I think that SS is enough "mandatory" stuff. Beyond that, I would rather not claim that I am more "competent" than my neighbor in handling his finances.
Got it and agree. We could probably accomplish more by reducing the amount needed to live (e.g., health care costs, etc) than pushing for greater minimum savings.
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Old 06-17-2013, 10:27 PM   #27
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Eh? They're inextricably linked, right? If a pension's discount rate is much higher than reality, then the funding can be much lower. This will create a shortfall when people start to retire.

The current rule basing the discount rate on 25 years of bond rates eviscerates whatever is left of any remaining private pension.
No, funding requirements are based on ERISA rules. Accounting is defined by the FASB or the GASB depending on the nature of the reporting entity.

Totally different rules.

Quote:
In general, pension plan sponsors are concerned with two primary financial issues:
• Pension Funding – the cash contributions that are made to the pension plan. Pension funding is
governed by laws described in the Internal Revenue Code (IRC), which determine the annual
minimum required contribution and the annual maximum tax-deductible contribution.

• Pension Accounting – the annual pension expense calculation and disclosure of a pension plan’s
assets and liabilities in a company’s financial statement. The Financial Accounting Standards Board
(FASB) governs pension accounting under generally accepted accounting principles (GAAP) in the
U.S.
Amounts calculated under pension funding rules are completely different than those calculated for
pension accounting, and one must be careful not to mix the two topics.

PENSION PLAN COST: THE BASICS

The cash contribution and pension expense calculations are both often referred to as the cost of a
pension plan – one as a cash outlay and the other as a reduction (or increase) in company earnings. Both
are calculated using similar principles, although the rules for calculation are very different.
Also see http://www.actuary.org/pdf/pension/f...ntals_0704.pdf
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Old 06-17-2013, 11:02 PM   #28
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I'll agree that my claim is way off if I assume a 0% real return.

I wouldn't use the current interest environment for long term planning. The the S&P has averaged 25% over the last four years, I wouldn't use that number, either.

I figured that if a worker saves 15% at age 25, and that money accumulates at 5% real for the next 40 years, he'll have 106% of his age 25 earnings at age 65.
If he saves 15% at age 26, accumulates at 5% real for 40 years, he'll have 106% of his age 26 earnings at age 66. etc. 40 years of earnings provides 40 years of retirement.


(You seem to have some information on pension plan funding, can you give me a source?)

Five+ years ago I made spreadsheet (unfortunately lost when I switched computers) that tried to model how much a private worker would have to save to match a typical public employee pension. Which typically provide 2%*final salary*years of service. Most allow retirement at 55 with modest reduction in benefits and plenty allow retirement at 62 will full benefits.
The inputs were
Real returns I used 4-6% same as you
Percentage of salary saved
Annual real wage increases
Number of years working
Number of years in retirement.

The output was the years of final salary saved. So if you got 25x of salary then you could say withdrawal 4% or alternative take that lump sum and buy an annuity making it an fair comparison to a pension.

In your first post you talked about a 40 year retirement, which I don't think you meant if you are taking about working until 65. If you figure a person first starts earning real money after age 22 (obviously some folks start making good money before then and fair number after that age). Then you have ~55-56 years of working+retirement the shorter the retirement the less you have to save.

But the key thing I believe you are missing in your calculations is wage growth which makes a huge difference. For example starting teacher salaries are in the low 30s in most places, but by the end of their career many teachers are making near 100K. So for most professions there is at least 2x and more often 3x range in real dollars from your starting salary and the final one. This works out to annual 2-3% increase in real wage growth, now the recession has certainly slowed this but it is traditional that people get merit/experience raise.
.
Now most people wouldn't want to live of their salary they got when the just got of college,even after adjusting for inflation.
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Old 06-18-2013, 10:03 AM   #29
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Originally Posted by clifp View Post
Five+ years ago I made spreadsheet (unfortunately lost when I switched computers) that tried to model how much a private worker would have to save to match a typical public employee pension. Which typically provide 2%*final salary*years of service. Most allow retirement at 55 with modest reduction in benefits and plenty allow retirement at 62 will full benefits.
The inputs were
Real returns I used 4-6% same as you
Percentage of salary saved
Annual real wage increases
Number of years working
Number of years in retirement.

The output was the years of final salary saved. So if you got 25x of salary then you could say withdrawal 4% or alternative take that lump sum and buy an annuity making it an fair comparison to a pension.

In your first post you talked about a 40 year retirement, which I don't think you meant if you are taking about working until 65. If you figure a person first starts earning real money after age 22 (obviously some folks start making good money before then and fair number after that age). Then you have ~55-56 years of working+retirement the shorter the retirement the less you have to save.

But the key thing I believe you are missing in your calculations is wage growth which makes a huge difference. For example starting teacher salaries are in the low 30s in most places, but by the end of their career many teachers are making near 100K. So for most professions there is at least 2x and more often 3x range in real dollars from your starting salary and the final one. This works out to annual 2-3% increase in real wage growth, now the recession has certainly slowed this but it is traditional that people get merit/experience raise.
.
Now most people wouldn't want to live of their salary they got when the just got of college,even after adjusting for inflation.
Thanks. You're correct that I wasn't trying to match a public pension that allows retirement at 55. I was assuming retirement at 65. I quoted 40 years of retirement to indicate that this is a lot of savings for people who start with their very first job. I could have said "118% for a 30 year retirement" but that required that I build a worksheet, I could do the 40 year thing with a calculator.

And, I was targeting a more or less average replacement ratio. If I assume that my worker's wages double in the first 10 years, than plateau at that level for the next 30 years, I have enough to fund 100% of the final wage for 30 years.

I think teachers are kind of unique in that many still have contracts that give longevity based raises. Nobody at my megacorp had a deal like that. Top executives often get promotions after age 55 (one reason final salary is popular in DB plans). But I expect most workers have real wage increases early in their careers than flatten out.

I did some research and discovered that the SS actuaries study wage patterns by age. Here's an example Scaled Factors
They show wages peaking out just before age 50. But that table is ratios to the Average Wage Index. If I assume that the AWI has a 1% real growth, then real wages peak at age 52. Using that pattern, I get 15% savings, accumulated at 5%, funding a 30 year retirement at 98% of peak earnings or 110% of the average of the last 30 years of earnings.
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Old 06-18-2013, 03:57 PM   #30
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Thanks. You're correct that I wasn't trying to match a public pension that allows retirement at 55. I was assuming retirement at 65. I quoted 40 years of retirement to indicate that this is a lot of savings for people who start with their very first job. I could have said "118% for a 30 year retirement" but that required that I build a worksheet, I could do the 40 year thing with a calculator.

And, I was targeting a more or less average replacement ratio. If I assume that my worker's wages double in the first 10 years, than plateau at that level for the next 30 years, I have enough to fund 100% of the final wage for 30 years.

I think teachers are kind of unique in that many still have contracts that give longevity based raises. Nobody at my megacorp had a deal like that. Top executives often get promotions after age 55 (one reason final salary is popular in DB plans). But I expect most workers have real wage increases early in their careers than flatten out.

I did some research and discovered that the SS actuaries study wage patterns by age. Here's an example Scaled Factors
They show wages peaking out just before age 50. But that table is ratios to the Average Wage Index. If I assume that the AWI has a 1% real growth, then real wages peak at age 52. Using that pattern, I get 15% savings, accumulated at 5%, funding a 30 year retirement at 98% of peak earnings or 110% of the average of the last 30 years of earnings.
Ok if you were talking about retiring at 65-67, than I completely agree that saving 15% or 10%+5% employer match (optimistic) is adequate. For people making people the median wage or below starting at 10% and then ramping up to 15% as they get raises is also adequate. Of course this does assume a 4-6% real return, which is probably fine if they invest heavily in equity or even just use a reasonably low cost target retirement fund. Sadly, the average worker seems to be incapable of doing even that.

The Scaled Factors report is nice find, I vaguely remember seeing this when I was exploring the subject several years ago. While I agree the longevity raise like teachers get are increasingly rare. I do think the concept of getting merit raises based partially on experience or time in job is still pretty common. There is an element of time involved in a promotion from Captain to Major, Teller to Sr. Teller, Shift Manager to Asst Manager, Engineer 2, to Senior Engineer. The factors .271 of average wage at age 21, .325 at age 22 to peak of .931 at 48/49 are certainly very close to my ballpark of 3x delta. If I ever recreate this spreadsheet I'll assume a 3-4% annual real wage increase for the first 25 years and then flat 0-1% after that.
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Old 06-19-2013, 09:06 AM   #31
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Yep. It looks like once we clarified the terms, we got similar numbers.

I think your comment about ramping up the saving rate is interesting. If people expect to get real wage increases over time, then it seems to me the rational thing is to vary savings rates over time to produce more levelized consumption. No point in eating peanut butter in my 20's just so I can eat steak in my 70's (assuming I still have teeth in my 70's).
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Old 06-19-2013, 09:31 AM   #32
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In a recent Morningstar interview John Bogle made a point of saying that 401(k) plans were not designed to be a retirement plan, but were actually a thrift plan that has more flexibility than a real retirement plan has. (Loans, emergency withdrawals etc. weaken the retirement value). We are stuck with it now.
I think he even suggested that an improvement to the 401k would be to make the rules for withdrawls more rigid.

Even if one prepares for their retirement, life is unpredictable.... e.g. medical emergencies, job loss, divorce ... Seems to me somewhere in here is a question of whether or to what extent retirement savings should somehow be isolated from these potentially costly events.
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Old 06-19-2013, 11:58 AM   #33
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While I know that the 401k wasn't meant to be a replacement of defined benefit pension plans, I always thought of them as such since I knew that I was on my own for retirement savings. Even though my last employer sponsored a DC plan and the previous employer sponsored a DB plan I never expected to stay with any one employer long enough to maximize the benefit so I knew it would be up to me and the 401k was a great vehicle for me.
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Old 06-26-2013, 11:09 PM   #34
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Got it and agree. We could probably accomplish more by reducing the amount needed to live (e.g., health care costs, etc) than pushing for greater minimum savings.
While reducing costs of things is a nice thought and is always good to strive for, the reality is that some people plan for the future and others do not.

Making healthcare totally 'free' (to take the position to the extreme for illustration) would only mean it is 'free' to someone who needs it with payment shifted to others, past, present, or future.

Many people just prefer to spend now on the McMansion, cars, etc., and hope things work out later. What this means is that there will be increasing clamoring for the government to work it out instead. When you push dependence on entitlements (yes, SS is an entitlement) or subsidized healthcare (another entitlement) it does not motivate people to exercise financial discipline.

Spending all/most of your money as you go along, and then expressing shock about the cost of retirement and demanding higher benefits which you did not pay for, is not a financial plan. I for one do not wish to pay for those folks bad calls, and I don't want my kids to pay for it either.

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Old 06-27-2013, 04:17 AM   #35
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The reality, though, is that our economy is very specifically structured such that a number of people do and will have inadequate resources for healthcare and retirement in general even if they don't spend money they earn on much more than they absolutely need to live. We don't have a healthy labor economy, where everyone who can work can find work that pays so much more than what is needed to live that there is more than enough to save for retirement, and so basic decency requires us to make up for that on the other side.

The parameters of decency don't go away; they generally expand as civilization gets more civilized. So if your concern is "McMansion, cars, etc." then we have to have a solution that disincentivizes such spending. Personally, I think its nonsense. I would guess that the number of people who struggle in retirement who lived in homes that they paid for that would truly qualify as "McMansions" is far smaller than those who lived in small apartments.
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Old 06-27-2013, 09:23 PM   #36
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I am not 'concerned' about McMansions' I think people should spend how they see fit. Trying to use government to 'discourage' spending is just wrong, lets try personal responsibility, a novel idea. If you live in a small apartment because you choose, then fine. However if you sit in there with a big screen and demand rent control and free healthcare it effects the rest of us. We should not need to pay for bad decisions of others. We all agree with 'decency' but that does not mean handouts for those not willing to plan and prepare and perhaps spend less time in front of the TV and more time out hustling work and economic opportunity. I cannot agree that our economy is 'structured' to provide inadequate resources. That seem to merely be an excuse for lack of effort and blaming the system.

Equality of outcome is classic socialism, which has never worked. We are not a socialist country and most don't want us to be.
Capitalism rules, and does work! It made us strong and our country is based on it. To believe otherwise is truely nonsense..
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Old 06-28-2013, 05:01 AM   #37
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You claim that you are not 'concerned' about McMansions. If that's really the case then please go back and explain why you mentioned in it that specific point in this discussion. Your comment that you think people should spend how they see fit is the exact opposite of what you said earlier.

No one suggested using government to "'discourage' spending". What I said was that if you feel that certain types of spending are damaging to society, so much so that you criticize people who make such purchases and you seemingly seek to characterize them as bad people, then you should be working to have government discourage that spending you consider so damaging.

Who, specifically, isn't "trying personal responsibility"? If you're going to hinge your comments on a throw-away reckless aspersion, i.e., that people in need are categorically irresponsible, as you're implying here, then you better have some hardcore evidence that that is actually the case for the vast majority of them, rather than other explanations, such as those I alluded to. The reality is that there is hard data showing that as productivity and therefore profitability have skyrocketed over the last thirty years, wages have fallen far short, and have been for all intents and purposes flat for the last decade. You could be the most responsible person in the world, but if you're paid for the work you do less money than it takes to live then it is irrational for someone to expect you to save 10%, 20%, 30% of that money for retirement. There is a real problem, that you're trying very hard to sweep under the rug: Our society has developed into one where the prospects are no longer positive for hard working people. Ignoring that fact doesn't help you get to a worthy solution - ignoring such realities makes it impossible for you to get to a worthy solution.

You talk about people not needing to pay for the bad decisions of others, so presumably you agree that those who aren't as lucky as you to have the opportunities you have shouldn't need to pay for the bad decisions that led to today's unjust economy, where there are too few jobs that pay a living wage. Or do you feel that these maxims of advantage you're putting forward apply only to yourself?

You said that we all agree with 'decency'. That's good to see. Is it true, though? How does decency work its way into claims that society shouldn't apply decency to the construction of its social safety net? "It's right that those people should 'die in the streets'." "It's right that those people's children should be locked into poverty." Is that decency?

So it comes down to this: Who isn't "willing" to plan and prepare? You're again projecting negative characterizations by assuming, without evidence, that people who didn't succeed didn't succeed solely because of negative aspersions you want to cast on their character, negative aspersions that you need to support your suggestions, but that have no basis in fact. Are there lazy people? Yes. Are most struggling people lazy? No.

And you made it clear above ("I think people should spend how they see fit") that you're the one "unwilling" - "unwilling" to take the time and effort to pick out which ones are "unwilling" and take action with regard to them. Instead, you seem to be implying that society should abandon decency toward all because some are "unwilling". Some children are bullies so all children should be given detention? That makes no sense.

The reality is that our system of economic opportunity is unjust. That shouldn't be so difficult for you to agree with. Economic opportunity has been unjust since time immemorial. Your claim that you cannot agree with that shows you have a good heart, that you realize that there should be justice in this regard. And the level of economic justice has been increasing, century by century, for at least the last four hundred years. However, there has been a recent, hopefully short-term backfall. For the last generation the remediation of economic injustice has slowed, and stopped, and over the last decade or so there has been substantial regression.

We have allowed the system to become more corrupt instead of allowing progress to make it less corrupt, and we have the data to show for it, the aforementioned comparison of productivity to wages being just one of them. We could fill pages and pages with supporting data. We already have here on this forum, such as here: Labor's Falling Share, Everywhere

So yes, as you suggested, there are excuses being made for lack of effort, but the system is the blameworthy target. The excuses are being made by those who benefit from the backfalling, who benefit from the injustice, or those who have heard those who benefit describe the situation in a deceptive manner and were convinced by the deception.

No one is looking for equality of outcome. Economic equality is seeking equality of opportunity, opportunity to live, opportunity to live healthfully to enjoy life, opportunity to advanced out of poverty. Those who are benefit from the backfalling, who benefit from injustice, they often make the point when they're attacked that the economy is not a zero-sum game, that the economy grows. However, they seem to bristle when that it turned back on their arguments, when the point is made that everyone is better off when everyone can afford to live, to live healthfully, to contribute to society and to their families. They reject the notion that human decency should be applied to codify minimum expectations placed on them for their participation in society's economy to their own benefit; that society should determine a fair rent to charge for what is their conceptual storefront in the commercial marketplace that society furnishes, maintained and protects for their benefit. They rail against fairness and compassion when it makes it harder for them to exploit what society offers for the personal enrichment. It's truly nonsense, projected to defend fostering their own comfort and luxury at the expense of justice for all.
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Old 06-28-2013, 09:06 AM   #38
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Well BUU, I have to say that I disagree with a lot of what you have to say. There is still a lot of economic opportunity out there, but you really have to chase it. I'm not going to get into a long, drawn out fight with you about it, but the fact of the matter is that your "decency" and mine or others are very different things. And, people have to be willing to start with "where they are" and work their way up.

Case 1: my sister and I grew up in the same household, with the same parents, same upbringing, and essentially the same opportunities. She CHOSE to be lazy and work only the minimum. She chose to go into debt up past her eyeballs. And she now admits that she made these choices and still makes them. She is not a go getter, but she has on numerous occasions told me that it isn't fair that I get to live the life I do while she lives in relative poverty. Mind you, I built on every opportunity I had. She devoured hers instead. She finally went back to school and graduated university a couple years ago, after having left two classes unfinished in her youth. I asked her about her job search. She says she's waiting for one where she knows the incumbent who is trying to sell her home for a move several states away. Mind you, there is no guarantee she'll get that job. She interviewed for it once and was shortlisted, but because the incumbent did not submit her formal resignation or so long, the process has to restart. She is doing nothing in he meantime but collecting aid. I don't see my sis very often, due to her laziness and taking advantage of handouts that she would not need if she worked, and her consideration that it is not fair for me to enjoy the fruits of my labors while she does not get to enjoy the fruits of my labors.

Case 2: I used to own several rental properties. At one point, a family came to me and asked if I would take section 8 as the husband had lost his job and was having a hard time finding work. I had compassion for them and accepted it. Over the 2-3 years they were there, I got to know them a bit better. I learned that they were getting about $7200 per year in rent support, about $24k per year in welfare, and another $6k per year in food stamps. Plus, they had free medical/Medicaid. Their total "take" in govt support was about 37k per year (w/o medical). Mind you, this is at a time when I was making 50k per year, paying a mortgage on my own home and also had two kids about the ages of their kids. A) they ate better than we did. No store brand sodas, only Pepsi products, no cheap beer, just the good stuff, no PBJs for lunch. B) they had better household items that we did, I.e., TV, cable, video games for the kids, bikes for the kids etc. Why? Because my take home pay after taxes and 401k etc was less than their take from the govt.

So, why would you want to work if you can live very comfortably without working? I also found out later that the guy was not really having trouble finding work. He found plenty. He just quit after 3 days or a week each time, because it was harder to work than to mooch.

So, while I believe that there is a certain amount of inequality or "issues" out there, I have seen first-hand that many of these issues are self-made. There are many, many other examples of this but those two are top of mind, and when I think of them, I cannot help but feel a little bit of disgust when folks complain of inequality. Taking from those who work to pay the subsistence of those who refuse to work will bring the downfall of our society, and we are already a long way down that road.

R
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Old 06-28-2013, 09:09 AM   #39
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I'm going to guess that you two would disagree on quite a few public policy issues.

However, I think you agree on the one that arose in the OP. Munnell seemed to be saying that the gov't should introduce a mandatory savings program on top of Social Security.

Based on your posts, I think you both would say that's a bad idea:

Quote:
Originally Posted by Malcolm2 View Post
I am not 'concerned' about McMansions' I think people should spend how they see fit. Trying to use government to 'discourage' spending is just wrong, ...
Quote:
Originally Posted by bUU View Post
You could be the most responsible person in the world, but if you're paid for the work you do less money than it takes to live then it is irrational for someone to expect you to save 10%, 20%, 30% of that money for retirement.
You may get there from different directions, but you end up at the same place on this particular issue.
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Old 06-28-2013, 09:24 AM   #40
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Agreed that there isn't a guarantee that those who are responsible and hard working can afford the necessities of life and be able to fund a retirement. But increasing safety nets to cover all basic needs lends us to the risk that many people will settle for what they receive in subsidies and call it a day. Additionally, when the rest of the population doesn't qualify for the subsidies they must work to cover their basic needs, put in extra hours to pay for those who are subsidized and then work additional hours to cover wants. Unfortunately, we find ourselves in a position that the average Joe has run out of hours to accomplish this. So, in the past few decades Joes wife began to work. And yet, there is a problem with funding retirement still. Good thing the DOMA went down yesterday because it's gonna take a threesome to keep up going forward.
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