Retirement Security for All

[kyounge1956]

This is in response to a post on "Should Public Pensions start Later?" nun wrote:

It's ironic that getting a pension at 55 is an issue on an ER forum. If the arguments were solely financial I could understand it, but there is a streak of envy and outrage that mystifies me. I have yet to read a comment that starts " It's great that you can get a pension at 55, if there are problems with funding we should fix them while protecting the availability at 55".(snip)

to which ziggy replied:

Maybe as soon as those who have pension plans start caring about the increasingly raw deal the private sector "have nots" are getting, that can be arranged.

I don't exactly read many comments from someone who has a nice pension for ER who says they are concerned for the raw retirement deal those without pensions are increasingly getting. ... How about we defend retirement security for everyone regardless of where their paycheck comes from??

So, how would we go about creating "retirement security for all"? It seems to me there are several basic options already in existence:

1) government-based plans, e.g. Social Security,
2) employer-based plans, e.g. defined benefit pensions, and
3) self-directed plans, e.g. IRAs and defined contribution plans, to which I would add a fourth possibility which AFAIK is not available at this time
4) voluntary cooperative plans
​

Unfortunately Monday is not my night to stay up late, or I would flesh this out a little more with some thoughts on the advantages and disadvantages of each. I hope this is enough to start the ball rolling.

 

[traineeinvestor]

At the risk of oversimplfying the major problems which some retirement schemes face:

1. schemes which are characterised by providing defined benefits, can suffer from underfunding;

2. schemes which are based on pay as you go financing, can also suffer from underfunding;

3. schemes based on contributions, have their own issues, including the willingness and ability of participants to manage their own retirement planning.

These are generalisations and do not apply to all retirement schemes in each category.

In addition, also as a general statement, the participation rates in retirement schemes generally are too low (and no, I do not work in the financial services industry).

Given that there is no way to predict the future with certainty, it follows that there must be a degree of uncertainty in any proposal and we should look for the plan which offers the lowest level of total risk, not undertake a futile search for a risk free plan.

I advocate the following:

1. compulsory contributions as a % of salary - from both employers and employees with upper limits for higher income earners and a waiver for very low income earners. To allow people to adjust, the mandatory % should start low (say 3% each) and increase to whatever level is needed over a period of years (at a guess, somewhere in the 6-10% range). People would be free to make additional voluntary contributions but should not get any additional tax benefits as a result

2. defined contribution only - this will reduce (not remove) the risk of underfunding

3. a default low risk investment plan for those who are either unable or unwilling to get involved in managing their money - whether this should be government managed or private sector managed would be open for debate (I prefer private sector)

4. considerable flexibility for those who do wish to manage their own investments, including entirely self managed portfolios with a service provider of choice

5. encourage the availability of annuities for those who prefer to have an income stream rather than a lump sum or a portfolio of assets when they retire

6. a taxpayer funded safety net should remain for those whose savings fall below an acceptable threshold (for whatever reason)

7. for those whose occupations have inherently shorter than average durations, the shortfall should be made up through higher contributions by the employer during the period of employment

8. complete transparancey on fees etc

9. personal finance classes in schools and in the workplace

This proposal is similar to what Australia uses and which has been very successful.

In addition to removing what appear to be the biggest issues with existing retirement schemes, it would also take away some other issues which have been politely discussed in this forum - "spiking", "generational transfer" and the general lack of understanding on just how much does need to be put aside to provide for a given level of income in retirement.

It does not address health care in retirement, but the possibility of increasing the mandatory contributions to also fund future health care costs could be looked at (I suspect the numbers would be ugly but am willing to be corrected on this).

 

[keegs]

Australia has a national health care system that provides taxpayer funded medical care in publicly funded facilities and subsidizes 75% of the cost of private care.

Austrailia requires all employers to contribute nine percent of an employee's wages to a defined contribution pension system and provides a means tested, taxpayer funded pension for all citizens who's income and assets fall below statutory levels.

By contrast, in America, defined benefit pensions, one of the legs in the aforementioned three legged stool have for the most part been eliminated and what remains of them in the public sector won't last. Social Security, the second leg, is and will remain under assault making its future viability tenuous at best. What remains are in many cases insufficient/meager private savings for which the vast majority of Americans are utterly and completely unprepared to manage.

In America we spend double what other spend around the world on healthcare. What's in store for Medicare is anyone's guess.

What will provide retirement security for the middle class and those of modest incomes in America is a return to balance in our political system. The shift in income distribution over the past decades, the resulting hyper-concentration of wealth and income and the overwhelming political clout it has put into the hands of a small group of monied interests has addled the government’s capacity to address what can only be characterized as a moral issue.

How about those tax cuts.

 

[brewer12345]

Let's make this really easy: there is no foolproof panacea.you pays your money and you takes your chances. And not everyone gets the same deal.

 

[donheff]

I would go for a system like Australia's but it will never happen here. There is no consensus and will probably never be on on adopting a new or expanded national system run or regulated by the Federal Government. I believe SS and Medicare will survive relatively intact. Beyond that it will remain DiY.

I too am surprised at the hostility of some here toward public servants with pensions. In many cases that was a choice to accept lower pay for early retirement -- a DiY choice IMO. To be fair, I think a lot more people assert that we need to modify public pensions going forward than express hostility to those who have already earned them.

 

[travelover]

........
I too am surprised at the hostility of some here toward public servants with pensions. In many cases that was a choice to accept lower pay for early retirement -- a DiY choice IMO. .............

I'm really hostile to people that have invested in stocks that have appreciated dramatically while I plod along in index funds. When they start feeling sorry for me, then I'll be less hostile.

 

[W2R]

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.

I would like to see some sort of government funded system which provides minimum subsistence and medical care to all the truly elderly. SS and Medicare are nowhere near perfect, but could provide a good starting point IMO.

Beyond that, we all make our best deals and have to live with them in life, and I don't think that should be changed to create an "everybody's a winner" society (no matter what our kids are being misled to believe in school contests etc).

Finally, I don't insist that I am right and I could be completely wrong (often am) so feel free to disagree. The above paragraphs are just what I am thinking this morning. I do feel very strongly about my first paragraph of this post.

OK, that's all I had to contribute to this thread. Carry on.

 

[Rustic23]

W2R,
I am not sure there are many out there that want to see anyone 'living outdoors unprotected from the elements'. Most, I think, would agree, that if someone is there through no fault of their own, and they are doing everything they can to change that, then they should be helped. But who should help them? Is this a function of government or charities? Should you be forced to help them? How do you separate those that are there because of life style choices i.e. failure to save, vs accidental i.e. health related expenses? Does it make a difference? If it is a function of government, is it federal, state, county, or city government. Should the good folks of Kansas be taxed to help the homeless in New York?

At the heart of this is the debate going on in the country today. How much of a socialist country should we be. Like you just some thoughts off the top of the head.

 

[Independent]

At the risk of oversimplfying the major problems which some retirement schemes face:

1. schemes which are characterised by providing defined benefits, can suffer from underfunding;

2. schemes which are based on pay as you go financing, can also suffer from underfunding;

3. schemes based on contributions, have their own issues, including the willingness and ability of participants to manage their own retirement planning.

These are generalisations and do not apply to all retirement schemes in each category.

In addition, also as a general statement, the participation rates in retirement schemes generally are too low (and no, I do not work in the financial services industry).

Given that there is no way to predict the future with certainty, it follows that there must be a degree of uncertainty in any proposal and we should look for the plan which offers the lowest level of total risk, not undertake a futile search for a risk free plan.

I advocate the following:

1. compulsory contributions as a % of salary - from both employers and employees with upper limits for higher income earners and a waiver for very low income earners. To allow people to adjust, the mandatory % should start low (say 3% each) and increase to whatever level is needed over a period of years (at a guess, somewhere in the 6-10% range). People would be free to make additional voluntary contributions but should not get any additional tax benefits as a result

2. defined contribution only - this will reduce (not remove) the risk of underfunding

3. a default low risk investment plan for those who are either unable or unwilling to get involved in managing their money - whether this should be government managed or private sector managed would be open for debate (I prefer private sector)

4. considerable flexibility for those who do wish to manage their own investments, including entirely self managed portfolios with a service provider of choice

5. encourage the availability of annuities for those who prefer to have an income stream rather than a lump sum or a portfolio of assets when they retire

6. a taxpayer funded safety net should remain for those whose savings fall below an acceptable threshold (for whatever reason)

7. for those whose occupations have inherently shorter than average durations, the shortfall should be made up through higher contributions by the employer during the period of employment

8. complete transparancey on fees etc

9. personal finance classes in schools and in the workplace

This proposal is similar to what Australia uses and which has been very successful.

In addition to removing what appear to be the biggest issues with existing retirement schemes, it would also take away some other issues which have been politely discussed in this forum - "spiking", "generational transfer" and the general lack of understanding on just how much does need to be put aside to provide for a given level of income in retirement.

It does not address health care in retirement, but the possibility of increasing the mandatory contributions to also fund future health care costs could be looked at (I suspect the numbers would be ugly but am willing to be corrected on this).

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.

Step 2) If you want more in retirement, save as much of your income as you choose, invest as you choose, and withdraw as you choose.

Step 3) If employers want to contribute to workers' savings in (2), fine.
If they want to make DB promises like "At least $x of monthly income at age 65", okay, but they are subject to anti-fraud rules to assure they aren't promising something they can't deliver.

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.

 

[samclem]

Step 1 provides them a minimal income in their old age. That's all the rest of us should care about.

Even the hard-core libertarians should favor this, if they are realistic. The fact is that the American public will demand that the government (i.e. taxpayers) not let people starve. That's just the way it is, and is gonna stay. If we grant that, then we have to decide how to fund it--is it more "fair" that everyone contribute to this baseline "net" that will provide a check for them, or is it best to make "the rich" pay for a few other people?

Once it is means-tested, it becomes a welfare program.

 

[Alan]

The UK is considering legislation similar to Australia where companies have to provide a private pension scheme by law. The original proposal was drawn up under the previous government and the new government looks like they might implement it. (I heard the Pensions minister being interviewed yesterday on this ).

Millions of workers to be enrolled in company pension scheme under opt-out reform - Telegraph

Steve Webb, the pensions minister, will today announce that following a review of the plans, which were first proposed under Gordon Brown, the Coalition is going ahead with "auto-enrolment" from 2012.

It means that employees will be assumed to belong to their company scheme unless they specifically opt out.


Experts predict that as a result, membership of company pension schemes will rise by seven million, relieving much of the future burden on the state of paying for the elderly.
The plans mean that firms with more than 50 employees will be required to provide a company scheme.

 

[keegs]

W2R,
I am not sure there are many out there that want to see anyone 'living outdoors unprotected from the elements'. Most, I think, would agree, that if someone is there through no fault of their own, and they are doing everything they can to change that, then they should be helped. But who should help them? Is this a function of government or charities? Should you be forced to help them? How do you separate those that are there because of life style choices i.e. failure to save, vs accidental i.e. health related expenses? Does it make a difference? If it is a function of government, is it federal, state, county, or city government. Should the good folks of Kansas be taxed to help the homeless in New York?

At the heart of this is the debate going on in the country today. How much of a socialist country should we be. Like you just some thoughts off the top of the head.

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.

 

[keegs]

Even the hard-core libertarians should favor this, if they are realistic. The fact is that the American public will demand that the government (i.e. taxpayers) not let people starve. That's just the way it is, and is gonna stay. If we grant that, then we have to decide how to fund it--is it more "fair" that everyone contribute to this baseline "net" that will provide a check for them, or is it best to make "the rich" pay for a few other people?

Once it is means-tested, it becomes a welfare program.

Sam,

Am I misunderstanding you or have you just described SS?

The contribution is based on a flat rate (tax) up to 104k.

 

[Rustic23]

The good folks of New Jersey should not be taxed to help the economy of Texas or any other state other than New Jersey. And, they should not be taxed to build a stadium, art museum, zoo, hotel, local road i.e. one not used for interstate commerce, or anything else Texan's might want. Neither should Texans have to pay for things New Jersey wants.

Yep, you guessed it, I am am not a proponent of the way the commerce clause has been interpreted. "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes".

 

[GregLee]

Even the hard-core libertarians should favor this, ...

Oh, I don't think so. The libertarian position is that charity should be private, not governmental, as I recall.

 

[dex]

So, how would we go about creating "retirement security for all"?

You are looking for a solution before determining why pensions were eliminated. Basically, the current (employer contribution) and continuing (after employee retired) contributed to higher labor costs and a resulting product cost that was not competitive with non USA mfgs. So, pensions were eliminated and eventually, the companies outsourced the labor to lower priced areas or went out of business.

So the answer needs to address the pension and possible other issues - increased labor costs resulting in unemployment and/or companies going out of business or increased taxes with similar results.

One suggestion that does not increase labor costs would be to require all workers to put a % of their gross salary into a plan where the $ was segregated and invested conservatively (e.g. US treasury Bonds and world stock fund; % allocation determined by age) and the pot of money at a retirement age was theirs or if they died prior to retirement the $ went to their beneficiaries. The $ could not be touched by gov't in any way and could be administered by a commission.

 

[keegs]

You are looking for a solution before determining why pensions were eliminated. Basically, the current (employer contribution) and continuing (after employee retired) contributed to higher labor costs and a resulting product cost that was not competitive with non USA mfgs. So, pensions were eliminated and eventually, the companies outsourced the labor to lower priced areas or went out of business.

So the answer needs to address the pension and possible other issues - increased labor costs resulting in unemployment and/or companies going out of business or increased taxes with similar results.

Dex,

A worker at the BMW assembly plant in South Carolina makes half the salary and benefits of his counterpart in Germany. It has double the union participation rate of the US. It has a system of universal health care. It has some of the highest energy costs in the industrialized world. It also has the second largest export economy in the world just behind China.

Globalization is part of this no doubt, however it's not the full story.

 

[Independent]

Sam,

Am I misunderstanding you or have you just described SS?

The contribution is based on a flat rate (tax) up to 104k.

I think Sam was referring to my post. The difference is that the current SS system has graded benefits that reflect what you earned when you were working. My suggestion was that everyone gets the same flat, minimal benefit.

 

[dex]

Dex,

A worker at the BMW assembly plant in South Carolina makes half the salary and benefits of his counterpart in Germany. It has double the union participation rate of the US. It has a system of universal health care. It has some of the highest energy costs in the industrialized world. It also has the second largest export economy in the world just behind China.

And at not too many years ago Germany was ahead of China. You have to look at the trend not just a data point.

Globalization is part of this no doubt, however it's not the full story.

Who said it was?
Companies moving to lower cost labor areas can be from the Northeast USA to the Southern. Or closing a high cost plant in one part of the USA and moving the production to a lower cost plant.

 

[FinanceDude]

Dex,

A worker at the BMW assembly plant in South Carolina makes half the salary and benefits of his counterpart in Germany. It has double the union participation rate of the US. It has a system of universal health care. It has some of the highest energy costs in the industrialized world. It also has the second largest export economy in the world just behind China.

Globalization is part of this no doubt, however it's not the full story.

Germany is doing well these days, but it has little to do with health care coverage or union participation.........

Comparing the USA to Germany isn;t even apples to oranges, more like pineapple to carrots...........

 

[ronocnikral]

Dex,

A worker at the BMW assembly plant in South Carolina makes half the salary and benefits of his counterpart in Germany. It has double the union participation rate of the US. It has a system of universal health care. It has some of the highest energy costs in the industrialized world. It also has the second largest export economy in the world just behind China.

Globalization is part of this no doubt, however it's not the full story.

if you're suggesting we follow a model of other countries, i'm sure the average voter would vote down that proposition if given all the facts. while the US is roughly 3.5x larger by population than germany, the US also lacks the generally higher income tax rates, the ~15% or so SS/healthcare tax (other half matched by employer) and the 19% VAT.

if we could "fix" SS to keep it solvent for an infinite number of moons and distribute the burden of that balance to everyone, i would be happy to turn it more into a limited insurance program to provide basic necessities to those who are unable to. of course, the debate then turns into what are "basic necessities."

 

[zinger1457]

We have to accept the unfortunate conclusion that the majority of Americans are ignorant about personal finances. Never mind the debt and credit problems that so many get themselves into. Was reading an article in Money magazine that stated 45% of Americans believe that 10-15% is a safe withdrawal rate to keep their retirement savings from running out, 26% believe 7% is a safe withdrawal rate. Unless we can fine a good way to educate our folks on finances we probably need a system that forces them to save toward a personal pension plan, would like to see one that can be transferred from one company to another like a 401K.

 

[clifp]

Let's make this really easy: there is no foolproof panacea.you pays your money and you takes your chances. And not everyone gets the same deal.

I think the biggest problem with our current pension system, and many of the proposals is that benefits are completely divorced from the economic situation of the institution (company, city or country) that provides the funding. The Detroit Three pensions are a classic example, other than health care cuts AFAIK GM retirees didn't see their benefits cut until the very end. We are seeing same thing with city and state pensioners, the mere thought of them not getting the mandatory annual increase is causing howls of protest.

I don't believe it is a possible to design a pension system which says if you contribute X$ over Y years we are going to give you a pension of $Z for the rest of your life no matter what happens. The world is too uncertain for us ever to have made that promise and it is irresponsible for us to do so in the future.

We a need a system that recognizes that when the Dow drops from 14,000 to 7,000, interest rates go from 5% to 0%, inflation drops from 3% to 0%, and unemployment jumps from 4.5% to 9.5%, that keeping social security and pension (both public and private) checks the same is crazy.

Now I am not advocating that we tie your pension check size to the Dow Jones directly. We need to buffer and moderate the effects. However, I don't think it is unreasonable to have seen a decrease of 5-10% in SS and pension checks in the last couple of years. Plenty of American families have had to with getting by on one instead of two income, many many more have seen a cut in their hours and/or wages. By and large retirees have accumulated the stuff they absolutely must have cars, houses, clothes and are in a better position than a single mom who's full time job just cut cut back to 20 hours a week to tighten their belt.

 

[harley]

Oh, I don't think so. The libertarian position is that charity should be private, not governmental, as I recall.

Nope, that is the liberal interpretation of the libertarian position. For some reason liberals can't spell anarchist, so they replace it with libertarian. In the first place we aren't talking about charity. That definitely belongs in the private sector. But a good case could be made that a minimal lifestyle for poor, unlucky, or incapable citizens is a function of the gov't. Maybe the federal government, maybe state level. But Sam's comment was pretty accurate.

I personally like the option I read in a SF book long ago. Let those who can't or don't want to work live in cheap housing, eat nutrutious if not delicious food, have free pot, beer, and cable TV. That will keep them happy. Then those who like to work or want a better lifestyle can get on with it. JMO, of course. Not the platform of the Libertarian Party.

 

[Rustic23]

Clifp,
It should not be who can do what easier, or fairer. IMHO, a pension is a promise/contract. At the end of a work week, does your employer, look around and distribute the weeks payroll based on who needs it the most? Or, does he distribute it based on what he promised to pay each individual.