Would You Take this Deal?

[FUEGO]

Similarly, note that Ryan's proposal makes SS solvent partially by reducing benefits. So it would be 60-70% of the reduced benefit. The big reduction is the "progressive indexing" which hits high income workers but not low income workers.

I think I will look like a "low income worker" to the SS formulas. I'll have probably 14-15 years of moderately high earnings when I FIRE (but still not close to the ~$106000 annual limit) plus maybe 7 more years of piddling incomes. But the way I understand their formulas, they will increase my salaries over the years for inflation, then sum them and divide by 35 to figure out my hypothetical average salary over my career. Since half of my 35 highest earning years will be $10,000 or less, many being zero, my "average" salary will probably be around $30,000-35,000 or so in today's dollars. So the fact that progressive indexing hits the high income workers the hardest may not really impact me that much. Another advantage to having the government think you are poor!

 

[kyounge1956]

It is an interesting plan but it would require a commitment on the part of the country to let people who blow their PSAs suck rocks in old age without even the minimal safety net of SS. It is a tough call on whether that would be good or bad.

I don't think it would. The proposal says:

At retirement, the participating worker would be required to purchase a life annuity with CPI-indexed payments using the portion of PSA accumulated assets necessary to provide a total monthly payment (including any OASDI monthly benefit under the plan) that is at least equal to 150 percent of the Federal poverty level.

If I understand this correctly, the only part of the account that can be blown, if that means withdrawn and spent, is what remains after the account holder has a lifetime inflation-adjusted income of 1.5 * poverty. Last year that was $16,245 for one person or $21,855 for two, which is certainly not ample, but neither is it the sort of utter destitution that I took "sucking rocks" to describe.

 

[endthefed]

i reject any social security 'plan'. abolish it now - stop payments immediately. the money has been spent.

to keep funding it you have to take it from other people.

spending it was wrong - as is bilking the public more to pay it back.

wrong + wrong = ?

 

[growing_older]

Just to clarify, one who gets the 4% plus $400 is still being taxed at the current 6.2% tax rate on their earnings, plus the employer pays another 6.2% on their earnings? Or a total tax rate of 12.4%. And the employee gets only 4% plus a flat $400

So a worker earning $30,000 per year would get $1600 ($1200 + $400) put in the "savings account" while paying $1860 plus another $1860 "from the empoyer" or $3720 total. A lot of the ultimate benefit amount will depend on the investment options available in the "savings account" portion of the plan. If it can earn a long term average of 8% annually, then the annuity available at age 65 might be $1900/mo or comparable to SS benefits. If the account is limited to investments earning only 5% (or whatever investments are allowed suffer poor performance) then the annuity might be under $1000/mo.

By the numbers this could be difficult to see a benefit, since a lot will depend on what choices are allowed to be made, and what "safety net" will be used if those choices do not work out well.

 

[Independent]

Here's the language on investment choices:

any of the following six investment options under Tier II: the default lifecycle fund, a government securities fund, a fixed income fund, a broad representative stock index fund, a small cap stock index fund, and an international stock index fund. The Personal Social Security Savings Board (PSSSB) would combine the assets of individuals for the purpose of transactions with private investment firms. Upon achieving a total PSA balance equivalent to $25,000 in 2011 (CPI-indexed thereafter), a broader range of investment options would be available in the Tier III fund. These options would be provided by qualified private investment companies, but would still be combined by the PSSSB for transactions with the investment firms. Due to the nature of the accounts, an ultimate annual administrative cost of 0.25 percent of PSA assets is assumed to be reasonable.

There is a side guarantee of at least CPI+0%.

I'm not sure if I follow your calculation. $1,900 a month seems bigger than the SS benefit on a $30k salary.

 

[growing_older]

That's because there is a lot of inflation to account for. I did a rough approximation based on a constant salary, but in the real world salaries go up like inflation, sort of, and there are SS formulas to adjust for that. A worker currently making $30,000 was probably making under $10,000 35 years ago, and possibly for many of those 35 years. Current SS calculators will "adjust" for that, while I was trying to project forward and tried to do it in constant (current) dollars. OTOH, if you want to project inflation forward, a worker with a $30,000 salary now, will likely make a lot more than that 35 years in the future.

In short, it looks like small adjustments in assumptions make big differences in benefits. Hard to compare the options with that much unknown variability in play.

 

[Independent]

That's because there is a lot of inflation to account for. I did a rough approximation based on a constant salary, but in the real world salaries go up like inflation, sort of, and there are SS formulas to adjust for that. A worker currently making $30,000 was probably making under $10,000 35 years ago, and possibly for many of those 35 years. Current SS calculators will "adjust" for that, while I was trying to project forward and tried to do it in constant (current) dollars. OTOH, if you want to project inflation forward, a worker with a $30,000 salary now, will likely make a lot more than that 35 years in the future.

In short, it looks like small adjustments in assumptions make big differences in benefits. Hard to compare the options with that much unknown variability in play.

I see that I was mentally backing out inflation and you weren't.

I think your last sentence is important. If we had a voluntary PSA, people would have to decide, and their decisions have long term impacts. I expect that most people would struggle to understand the complexities of the rules (e.g. What happens if I retire early?), and doing a mathematical analysis is even harder. I'm not saying that's sufficient reason to avoid PSAs, but it is a real complication.

 

[FUEGO]

Here's the language on investment choices:

Stock index, international, small cap blah blah blah...

There is a side guarantee of at least CPI+0%.

Sweet! So we can try to shoot the moon in our PSA and if we fail miserably, then we still get CPI+0% as a consolation prize for playing.

 

[M Paquette]

I tend not to trust anything where I feel an urge to set up simulations to search a parameter space for minima and maxima.

But that's just me...