Retirement Security for All

[Independent]

I'm not sure how this would work out in practice, especially for people at the lowest income levels. Is minimum wage minus "same absolute $$" greater than poverty level, i.e. would someone working full time at minimum wage have enough left to live on in the present, after contributing toward retirement income for the future?

I also wonder how demographics would affect this idea. We've probably all heard about the difficulties expected to arise with SS, at least partly because the soon-to-retire baby boomers are so much more numerous than the generation following us. I just heard recently on the radio that there is a "baby boomlet" expected as the children of the boomers are now reaching childbearing age themselves, so the demographic issue may arise again 70 years from now when all of the boomers' grandchildren are retiring. I've also heard (but it was quite some time ago, so it may not be what current population projections are saying) that by mid 21st century, the U.S. population will level off and then start to decrease, which would make the demographic of a smaller generation coming after a larger one more or less permanent. Would a minimum retirement benefit funded by equal absolute dollar contributions from all workers be financially sound under those circumstances?

I also wonder if the $800 amount was a serious suggestion for the income to be provided by these benefits. That's less than $10K a year. I doubt that it's enough for rent, food and utilities, even sharing living space. Never mind medical care. To me, "retirement security for all" means that nobody, including minimum wage earners, works their whole life only to wind up old and destitute. A benefit of $800 a month doesn't meet that standard, IMO. Or was that just a number pulled out of the air?

I respect the effort it took to pull all those scattered comments together and try to make sense of them. I'll try to respond from my perspective.

When I said "paygo" I intended to mean "pretty much like SS, just scaled back benefits". So I envisioned a payroll tax, but everyone gets the same monthly benefit. The benefit would be lower than the current average benefit, so the payroll tax rate could be a little lower. I think Sam may have had a different view on the taxes.

Low income people could "afford" that tax to about the same extent they can afford the current payroll tax. Note that the current Earned Income Tax Credit is essentially a payroll tax rebate for some workers, I wouldn't change that.

IMO, demographics impact all retirement income schemes, it's just more obvious with a public paygo system than with others. (One reason I don't see the gain from mandatory savings plans.) If you index the retirement age to longevity, then the affordability is driven by birth rates. As long as we don't go back to the "3 children per couple" of the WWII generation, we won't get back to their favorable dependency ratio. BUT, it doesn't get worse either, if future generations stay with 2 children per couple.

The $800 was a guess, but something in that range is right. The current average SS benefit is around $1,150, and I assume that means about half the people get less. There's a limit on how much I'm willing to compel people to do. I'm okay with enough so you can live indoors and eat, but I don't know if I'm willing to force taxpayers (or savers, for that matter) to provide a lot more. Note that I would give everyone the choice of how much saving they want to do so they can have more than a basic lifestyle.

 

[ERD50]

Just had a little time so mostly skimmed these posts, but...

The problem I see with the Original Post is that it jumped to 4 possible solutions before it even defined the problem and/or goals. It is common for people to skip that definition step, but you can't even know that you came up with a "solution" without knowing what it was you were trying to solve. I've seen it time and time again in real life and it usually derails from the real solution.

W2R touched on it in post 7 (IIRC) as did a few others. Are we defining "retirement security for all" as some basic level of food, shelter and health care? Or are we talking about retiring in the style that we may have enjoyed during our careers, or something close, regardless of personal savings? Is "retirement security" the same for all, or different for some? Those were off the top of my head, there are probably a bunch of other valid definitions to consider.

-ERD50

 

[Independent]

Just had a little time so mostly skimmed these posts, but...

The problem I see with the Original Post is that it jumped to 4 possible solutions before it even defined the problem and/or goals. It is common for people to skip that definition step, but you can't even know that you came up with a "solution" without knowing what it was you were trying to solve. I've seen it time and time again in real life and it usually derails from the real solution.

W2R touched on it in post 7 (IIRC) as did a few others. Are we defining "retirement security for all" as some basic level of food, shelter and health care? Or are we talking about retiring in the style that we may have enjoyed during our careers, or something close, regardless of personal savings? Is "retirement security" the same for all, or different for some? Those were off the top of my head, there are probably a bunch of other valid definitions to consider.

-ERD50

Good point. I'll try to clarify.

If "retirement security" means basic needs, then I thought it's good policy to have the gov't guarantee that.

If "retirement security" means maintain your lifestyle, than the layer above basic needs should be your own business, not the government's.

 

[samclem]

Good point. I'll try to clarify.

If "retirement security" means basic needs, then I thought it's good policy to have the gov't guarantee that.

If "retirement security" means maintain your lifestyle, than the layer above basic needs should be your own business, not the government's.

That's pretty much the view I was taking. I'd just slightly re-word one part:

If "retirement security" means basic needs, then I thought it's good policy to have existing workers fund that[-] gov't guarantee that[/-].

And, I think from what we've already experienced, I would prefer to keep things on a strict year-to-year PAYGO basis. That would mean that due to demographics the tax rate would vary over time, but the same thing is going to happen with the present "build-up-a-surplus-of-promissory-notes-but-really-spend-it-and-then-pay-ourselves-back" approach. Let's instead just pay the bill as it comes due and leave the max amount possible for people to save in their discretionary personal retirement accounts.

 

[Rustic23]

So, it appears what we are creating is a new right. 'The right to retire' If you can't afford it, for what ever reason, the government has to provide it. I guess we can find that in the constitution some where. We seem to have found several others.

 

[dex]

So, it appears what we are creating is a new right. 'The right to retire' If you can't afford it, for what ever reason, the government has to provide it. I guess we can find that in the constitution some where. We seem to have found several others.

You might have missed one of the assumptions with this discussion i.e. the consequences of your plan do not have to be addressed.

 

[samclem]

So, it appears what we are creating is a new right. 'The right to retire' If you can't afford it, for what ever reason, the government has to provide it. I guess we can find that in the constitution some where. We seem to have found several others.

It's just a bow to reality. I agree that the Constitution doesn't provide for this, but since 1935 this is what we've had. So, from my perspective, what we're trying to do is limit the damage.

The most honest thing to do would be to require a Constitutional amendment to allow government taxation of some private citizens for the purpose of providing resources to other private citizens. That would prompt a long-overdue national discussion on the issue and at the very worst it would result in an explicit statement of what we're trying to accomplish and the means of accomplishing the goal. That's better than the creeping collectivism we've been conducting.

 

[clifp]

Why not? Isn't this what insurance companies do when they sell annuities? And they don't just do it, they make a profit doing it. If an insurance company can do it, why not a pension fund?

It may be true that many, or even most, pension systems, have skimped on X & Y, or made Z too high, or both. But that just means they have done their math wrong, not that what they are trying to do is inherently impossible.

I think you answered your own question in a previous post.

The only way I see that your suggestion could provide income for life is if the money were used to purchase an annuity, but annuity prices vary with interest rates at the time of purchase. I had occasion to look up the interest rates on Treasury bonds for another thread a short time ago, and found that rates today are only about half of what they were ten years ago. That means that someone retiring today would get a lower income from their pot of money than an otherwise identical retiree who left the workforce in 2000. They worked the same, earned the same, saved the same, and invested the same, but they are less secure than the retirees from 2000, because they have less income, and/or a lower proportion of their total income is impossible to outlive.

Note also that insurance companies sell a product that is if you invest X$ for Y years will give you $Z for the rest of your life. The amount that $Z can increase is generally limited to a couple of percent per year. This is different than the typically COLA provision of public pension. Defined benefit differ from insurance annuities in another very important way.
Your benefit is typically ~2% * number of years * your final salary, while your contribution is percentage of your current salary. Since the final salary is unknown insurance companies don't sell this product, there are simply to many variables.

In addition, remember that insurance company have a group of people supervising them (insurance commissioners) who's job is to make sure insurance don't over promise the benefits. Despite this supervision insurance companies do still go broke on occasion and leave their policy holders screwed.

 

[Independent]

That's pretty much the view I was taking. I'd just slightly re-word one part:

If "retirement security" means basic needs, then I thought it's good policy to have existing workers fund that[-] gov't guarantee that[/-].

And, I think from what we've already experienced, I would prefer to keep things on a strict year-to-year PAYGO basis. That would mean that due to demographics the tax rate would vary over time, but the same thing is going to happen with the present "build-up-a-surplus-of-promissory-notes-but-really-spend-it-and-then-pay-ourselves-back" approach. Let's instead just pay the bill as it comes due and leave the max amount possible for people to save in their discretionary personal retirement accounts.

I like your italics, it's clearer than my wording.

I'm also in favor of "pure" paygo as a good communication and spending management tool. However, I know that maintaining SS across sudden drops like the current drop is one of those "automatic stabilizers" that economists like. I think I could go either way if it were possible to do the other stuff I suggested.

 

[Independent]

So, it appears what we are creating is a new right. 'The right to retire' If you can't afford it, for what ever reason, the government has to provide it. I guess we can find that in the constitution some where. We seem to have found several others.

I think "right" is a much over used word. I wouldn't say that funding public schools, or roads, or cancer research or anything else creates a new "right".

I'd reserve "right" for things that Congress can't change - stuff like freedom of speech and assembly.

I'd also say that my suggestion is a scaled back version of Social Security, so it's kind of hard to imagine the "new" part.

 

[Rustic23]

I would except that, however, 'right' has been used for everything from voting to health care! Only one of those, IMHO, is a right. Most entitlements are held as rights now a days.

 

[samclem]

I think "right" is a much over used word. I wouldn't say that funding public schools, or roads, or cancer research or anything else creates a new "right".

Rights are fundamental. Possession of personal property is a right. So, if the government is going to deny a person of their personal property (through taxation), it should be for a purpose we deem to be more fundamental than the right to own personal property. There are many specific duties for the federal government spelled out in the Constitution--but providing alms for the poor, a guaranteed retirement and providing medical care are not among them.

 

[harley]

Rights are fundamental. Possession of personal property is a right. So, if the government is going to deny a person of their personal property (through taxation), it should be for a purpose we deem to be more fundamental than the right to own personal property.

Exactly! Like taking people's homes and giving the land to a developer to never actually follow through on plans to build a Walmart or a basketball stadium. Profit for cronies, the most fundemental right.

 

[NW-Bound]

I am straying away from the topic, but can't help posting my opinion here on taxes.

Yes, the level of income inequality bothers me sometimes. I have nothing against people who get rich due to their talent or hard work, but we all know about outrageous CEO pays that are awarded to them from board of directors full of cronies, or Wall St bankers who got rich from selling CDOs. I hate to see those guys get rich while they ruin the economy for the rest of us.

Sadly, because it may be more difficult to stop all that illicit income, people try to "get back" at them by levying higher income taxes. That penalizes all high-wage earners alike, whether they have truly earned it or not. And then, all that money that should rightfully be spread among stock holders and company employees, it goes to the politicians to dish out as they see fit. Two wrongs do not make it right!

 

[samclem]

Sadly, because it may be more difficult to stop all that illicit income, people try to "get back" at them by levying higher income taxes. That penalizes all high-wage earners alike, whether they have truly earned it or not. And then, all that money that should rightfully be spread among stock holders and company employees, it goes to the politicians to dish out as they see fit. Two wrongs do not make it right!

I dunno. This reads a lot like a rationalization to me. People have always envied people with more than they have, and viewed their success as "unfair" regardless of how they got it.
In this country, the only "illicit income" is income that is gained illegally. If society disapproves of a particular way of earning money, then we should do the straightforward thing and pass a law against it. Collective punishment isn't right. More importantly, it hurts society as a whole.

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.
This is known as "bad luck."
- Robert Heinlein

 

[clifp]

I am straying away from the topic, but can't help posting my opinion here on taxes.

Yes, the level of income inequality bothers me sometimes. I have nothing against people who get rich due to their talent or hard work, but we all know about outrageous CEO pays that are awarded to them from board of directors full of cronies, or Wall St bankers who got rich from selling CDOs. I hate to see those guys get rich while they ruin the economy for the rest of us.

Sadly, because it may be more difficult to stop all that illicit income, people try to "get back" at them by levying higher income taxes. That penalizes all high-wage earners alike, whether they have truly earned it or not. And then, all that money that should rightfully be spread among stock holders and company employees, it goes to the politicians to dish out as they see fit. Two wrongs do not make it right!

One thing I always find curious is that people really get POed about CEO pay, but not other highly paid people in the country. Now obviously many CEO do in fact get sweetheart deals, turn out to be horrible managers etc. and deserve the criticism.

A while ago I started to look at professional athlete salaries. I am not 100% sure on this but I pretty sure that collective salary of NFL, NBA, and MLB players exceeds the collective salaries of the top five executives of each of the fortune 500 firms. It is comparable number of people (2500 vs <3,000 athletes) I'm not huge sports fan but I know that each year there are generally several superstars, signed to multiyear 10 or even 20+ million , that bat less than .250, throw as many interceptions as touchdowns, or don't produce as many points or rebounds or assist as they are supposed to.

You virtually never hear the general public bitch about how overpaid these guys are or the movie star, who get $20 million for making a crappy movie.
I can never figure this out. Even if you never go to a ball game, you are still paying the athletes salary in the form of higher prices for products like beer, soda, and cars which are heavily advertised at sporting events. Movie star salary result in higher ticket prices etc. and lower profits for media companies, which impacts us shareholders. So why are overpaid CEO vilified and others not?

 

[NW-Bound]

So why are overpaid CEO vilified and others not?

Well, we go to the movies once every 2 or 3 years, whether there is anything worthwhile or not. And I do not even watch sports game on TV, leave alone go to a stadium. Indirectly, I still pay for the outrageous incomes of actors and athletes, I am sure, as those are built-in to the other products that I have to buy. But if my countrymen want to give them lots of money, it is their right to do so.

If stock holders approve of CEO's pay, I guess I couldn't complain either. In contrast, the other highly-paid people incomes were directly "voted" on by their audience. Now, those bankers who made lots of money on CDOs, they should thank their lucky stars we no longer have the guillotine.

And speaking of the guillotine, do you know it was last used in France in 1977?

 

[samclem]

Wow. I have a much simpler plan.

Step 1) The gov't provides a paygo plan with the same minimal benefit for everyone. Say, anybody over age __ gets $800 per month. The $800 is probably CPI indexed.

. . .
I don't see the advantages of complex mandatory savings schemes. "But what about the people who don't save?" Step 1 provides them a minimal income in their old age. That's all the rest of us should care about.

So, some preliminary back-of-the-envelope numbers with what you've proposed. Right now there's approx 3:1 ratio of SS tax payers:beneficiaries. If we stipulate an $800 monthly benefit, then each employee would have to pay $267 per month. The median US hourly wage (not mean) is $15.95 (2008 numbers), which equals $2550 per month. The SS tax would need to be 10.4% to make that work. The effective SS tax in the US now is 12.4% up to the income cap (that 12.4% is the real tax the worker pays without the "employer contribution" smokescreen), so we can see already that workers would gain a raise of 2%. It sounds small, but put into private accounts, that 2% would make a big difference in the ultimate ability of workers to afford to retire. Given recent zero % savings rates, 2% is a very good start.

Note that this is still "progressive", as higher-paid workers pay in more than lower-paid workers for the same promised benefit.

IMO, we can and should retain the "cap" on taxed income as a mater of fairness (since all individuals will get the same absolute benefit when they retire). The math to figure out where the cap should be is beyond me, since it would depend on the distribution of US earned income.

But, just for argument (and as "red meat" for the class envy fans) what would happen if we got rid of the cap on taxed income? This would allow a significant reduction in the tax rate needed to generate those $800 checks. The mean monthly income in the US (from wages alone, in 2008) is $3621. To get the needed $267/mo contribution to fund existing payments, the SS tax rate would need to be only 7.4%. For those earning less than the present SS cap, this represents a net increase in pay of 5%. If that amount is placed into private retirement accounts it would significantly improve the lot of many folks. This would also be a huge tax increase on many highly paid workers (those earning more than approx $179K would be net losers compared to the present higher-tax-but-with-a-$107K-cap system).

How could this be phased in? Use the $$ in the SS trust fund to make up any difference between the $800 checks and the "promised" SS amount for existing retirees and those retiring soon. Gradually reduce the promised payments for those coming later. As a reference for what might be required: The average SS check (Jan 2010) was $1,164. There won't be enough in the trust fund to carry this out very long, so we'd likely need to gradually transition from the present 12.4% rate to the 10.4% (or 7.4%) rate as obligations decline.

Two other things:
- The payer : payee ratio will gradually get worse over the coming decades. We'd have to adjust for that. Increase the age at which those $800/mo checks start?
- It's important to remember that the present SS taxes won't sustain the promised benefits. Comparing present taxes/present promised payments only works if we lop off 22% of the present promised payments to reflect the shortfall. After doing that math, the present average SS check today ($1,164) would be $908/mo. This "sustainable under the present system without further taxes" benefit level isn't far off from what you've proposed. The difference is all that extra income workers will be able to take home and save for their own use if we started reducing SS taxes now.

 

[Texas Proud]

I just don't want to see elderly people (those who are too old to work), starving, sick, and living outdoors where they are unprotected from the elements. I don't care if they were stupid when younger in life or not; this is simply inhumane.

Just jumped into this thread... so I am behind the times....

OK... but what do you suggest We can build some 'slum' housing to put them in... but I would not go over say 450 sq.ft. of space... that seems to be what you can get for $2500 per month at a senior citizen home...

Why should someone who did not plan for their old age get any better than what my mom probably will be in later in life?

 

[Texas Proud]

Should the good folks of New Jersey be taxed to help the economies of Texas....? Alabama....? Alaska...? Are those residents there socialists?

This is an absurd argument ...I know.

Being that NJ gets more back in federal funds than it sends in.... and Texas does not.... I think the statement should be reversed...


(note: have not check the numbers in years, so it might be different today)..

 

[kyounge1956]

Just had a little time so mostly skimmed these posts, but...

The problem I see with the Original Post is that it jumped to 4 possible solutions before it even defined the problem and/or goals. It is common for people to skip that definition step, but you can't even know that you came up with a "solution" without knowing what it was you were trying to solve. I've seen it time and time again in real life and it usually derails from the real solution.

W2R touched on it in post 7 (IIRC) as did a few others. Are we defining "retirement security for all" as some basic level of food, shelter and health care? Or are we talking about retiring in the style that we may have enjoyed during our careers, or something close, regardless of personal savings? Is "retirement security" the same for all, or different for some? Those were off the top of my head, there are probably a bunch of other valid definitions to consider.

-ERD50

That is a good point. As I said in the original post, it was late at night and I didn't have time to flesh it out. Unfortunately, it's late at night again! And since Thursday isn't my night to stay up late either, the threads on "What is Retirement Security?" and "Should there be Retirement Security for All?" will have to wait until tomorrow—unless someone else starts them before I get back.

 

[brewer12345]

Being that NJ gets more back in federal funds than it sends in.... and Texas does not.... I think the statement should be reversed...


(note: have not check the numbers in years, so it might be different today)..

Its a tad bit different these days. The list I saw earlier this year had NJ as #49th on what we get vs. what we give to the feds.

 

[Texas Proud]

Its a tad bit different these days. The list I saw earlier this year had NJ as #49th on what we get vs. what we give to the feds.

OUCH.... I just looked it up and you are now 50!!!


I take back my comment...


How did New Mexico become #1 Probably should be another thread...

The Tax Foundation - Federal Taxes Paid vs. Federal Spending Received by State, 1981-2005

 

[Texas Proud]

I don't think your alternative would provide "retirement security for all". To my way of thinking, retirement security does not exist unless it's impossible to outlive your income. The only way I see that your suggestion could provide income for life is if the money were used to purchase an annuity, but annuity prices vary with interest rates at the time of purchase. I had occasion to look up the interest rates on Treasury bonds for another thread a short time ago, and found that rates today are only about half of what they were ten years ago. That means that someone retiring today would get a lower income from their pot of money than an otherwise identical retiree who left the workforce in 2000. They worked the same, earned the same, saved the same, and invested the same, but they are less secure than the retirees from 2000, because they have less income, and/or a lower proportion of their total income is impossible to outlive.

That doesn't sound like "security for all" to me.

My bold....

And this is the problem that I have with DB plans... things change over time... different earnings etc. etc....

We can use your same example and say the first guy had saved up his own money and bought an annuity that paid out X... and the second guy saved up his own money and when he retired he could only by an annuity that paid out .8X (or whatever)... should someone come in and pay the extra amount of cash right now so he can get up to X That is what you are suggesting...

To me, just because the savings are in a different kind of account does not mean we should ignore the realities of the market....


Now, what we could do is tell the first guy "well, you are making too much now compared with the current rates, so we are going to take some of your money and pay the second guy so you both are even"....

That does not sound fair either...

The risks of the markets are real.... someone has to bear them... that is one reason private companies dropped DB plans because they did not want to take on the risk... Now the employee has the full risk of the market..

 

[Independent]

1. So, some preliminary back-of-the-envelope numbers .... 2% is a very good start.

2) IMO, we can and should retain the "cap" on taxed income as a mater of fairness ....

But, just for argument ....

3) How could this be phased in? .....

4) Two other things:
- The payer : payee ratio will gradually get worse over the coming decades. We'd have to adjust for that. Increase the age at which those $800/mo checks start?
- It's important to remember that the present SS taxes won't sustain the promised benefits. ....

1) My math gives similar results. Note that your numbers include disability and "young" survivors taxes and benefits. I was focusing on old age only.

2) I could go with the current payroll tax with cap, or with removing the cap, or with including investment income in the tax base, or with "general revenue" funding. I can make pro/con arguments for each. Your math helps with a reality check.

3) Paul Ryan's SS plan (and others) calls for "Progressive Indexing" of benefits, which moves the 32%/15% bendpoint down. It goes in this direction. I'd do more of that - introduce a 0% range, then move bendpoints down over time.

4) Yes, it's not really about freeing up a lot of current tax dollars as much as preventing tax increases in the future.
I consider raising the retirement age a "must do", not just for SS, but for any retirement scheme.
One technical opportunity is that current law indexes the initial SS benefit to wages not CPI. So if wages go up faster than CPI, real benefits grow. (Ryan is using this.) I was thinking my flat benefit would be CPI indexed. In my propostal, any decision to give retirees a share of productivity gains would require political action. Pure paygo funding would help people understand this.