Good read on DB/DC plans and poverty

[daylatedollarshort]

Be careful what you wish for - Federal Govt. regulations paint with a broad brush. "Everyone" will be subject to that legislation. Would most likely lose everything gained with IRAs and ROTHs as a DB replacement in an effort to pay for those that have chosen to ignore saving for retirement. I don't imagine those with nice Govt. pensions would like to be subjected to legislated DB plans of the Federal Govts. doing to be implemented for all U.S. workers. That could be a possibility.

I am not really wishing for anything. I have just had time to read books on behavioral economics lately and I think it is more realistic that changes will be made to enforce more retirement savings in some way because otherwise many people, maybe most, won't do it on their own.

I see crazy financial stuff going on in regards to savings / spending / huge student loans / unaffordable homes and lifestyles / no retirement savings with former co-workers, neighbors and friends who I thought would have had the income and education to know better. I don't really understand it but it is what it is.

 

[Big_Hitter]

What needs to happen IMHO, is that employees need to be mandated to contribute to a 401K that is National in scope (like your SS is now) to eliminate all the bad plans businesses select for your retirement (choices, fees, security). This should be a mandated minimum % of one's salary. Employers (optional) matching should be mandated to be placed in employees natl. account, and not in their own stock. The funds should not be available for borrowing except in extreme emergencies - determined by process. Retirement funds of this type would be managed like a guaranteed investment account.

I'm guessing there will be some form of reactionary legislation (like most, if not all US pension legislation has been) regarding mandatory savings (or superannualtion) plans with mandatory annuity payouts once a fixed age is obtained. It will probably happen in a few more years when the number of destitute boomers over age 65 gets large enough. This is just MHO.

 

[Greencheese]

A solution that may work could include a cash balance pension plan that I've seen several employers go with. Require something like 3% of an employees salary to go into a cash balance that is untouchable until 60 (or whatever retirement is in the future) and require the employer must pay something like 1-2% over year end treasury levels interest on it. Even if the employee quits the employer must pay interest on the balance they contributed until it is cashed out. Should the company go bankrupt then the government would pay treasury yield interest on that specific balance's behalf. Then upon retirement the money can only be cashed out into an annuity purchased off the market.

This way people can still save for their own retirement via IRAs and 401Ks but at least the fools who save nothing could have a little something in addition to SS and its fully funded the entire time without any government "magic" funding acts. I'm sure there would be problems with this but hey, couldn't be any more of a mess than SS right?

 

[samclem]

A solution that may work could include a cash balance pension plan that I've seen several employers go with. Require something like 3% of an employees salary to go into a cash balance that is untouchable until 60 (or whatever retirement is in the future) and require the employer must pay something like 1-2% over year end treasury levels interest on it. Even if the employee quits the employer must pay interest on the balance they contributed until it is cashed out. Should the company go bankrupt then the government would pay treasury yield interest on that specific balance's behalf.

I can't see why we would deliberately continue with the idea that employers should be involved with paying anything to retirees, maintaining their accounts, or anything to do with the accumulation of their retirement savings. It's just an extra level of costs and it has companies involved in something that's not their core business. Pay people and let them invest their money.

We have a national system that forces employees to make contributions and keeps retirees from becoming destitute and keeps them off pubic assistance--it is Social Security. That's enough.

 

[fritz]

I can't see why we would deliberately continue with the idea that employers should be involved with paying anything to retirees, maintaining their accounts, or anything to do with the accumulation of their retirement savings. It's just an extra level of costs and it has companies involved in something that's not their core business. Pay people and let them invest their money.

We have a national system that forces employees to make contributions and keeps retirees from becoming destitute and keeps them off pubic assistance--it is Social Security. That's enough.

I suggested that it still be an optional scenario - this is how it is now. I did suggest that it not be funneled by the company into their own stock if they offer it, but rather the contribution be secured by placing it into the employees retirement plan (also not controlled by the company).

As for annuities - not a big fan, but this should be optional as the fees associated with them are for the most part excessive and the plans are difficult at best to understand. I suggested that the employee have the option of annuitizing or taking equal payments over predicted lifespan. I would also suggest that retirement income have special tax treatment on payouts for further pushing people to save for retirement (make it an offer they can't refuse). Mentioned that we do this now with wealthier folks income in the form of qualified dividends and capital gains favored tax treatment.

As for SS - don't care for the program and would like to see it replaced with something like I've suggested - more of a DC plan where you could opt for increasing your retirement savings at tax deferred status. If something likethis were implemented with features similar to the above - people would be forced to save, but the end result would not be lost like it is now with SS. You would still have the choice to gamble with it and annuitize...

 

[Walt34]

They are annuity rich enough to go new car shopping, but struggle to come up with 20% to put down on a new home (downsizing/moving.) Does anyone else see this sort of behavior?

Yes, with people both retired and not retired. DW and I look at each other and wonder "What are they thinking?"

I see crazy financial stuff going on in regards to savings / spending / huge student loans / unaffordable homes and lifestyles / no retirement savings with former co-workers, neighbors and friends who I thought would have had the income and education to know better. I don't really understand it but it is what it is.

We see that going on too and don't understand the behavior either. Likewise I have been reading a lot of financial behavior books like Predictably Irrational. In a sort of academic sense I sort of understand why people do that but I really don't "get it". But this is a guy who, when I lost a paycheck in the mid '70's and it was going to take six weeks to get a replacement, it wasn't a big deal because I had that much in savings and more even though the inside of my apartment was bare. Other people raised eyebrows at that.

 

[mpeirce]

Pay people and let them invest their money.

We have a national system that forces employees to make contributions and keeps retirees from becoming destitute and keeps them off pubic assistance--it is Social Security. That's enough.

+1

Exactly. A basic safety net so old folks aren't going hunger, but beyond that let people make their own choices.

If someone wants to spend all of their income when they are younger, then that's their business.

 

[NW-Bound]

...It will probably be more reasonable to eventually legislate some type of enforced retirement savings or resurrect DB plans than it will be to try to change human nature. Most people just aren't wired to plan for 40 years into the future.

They may just have to learn the hard way. Most people are not dumb and pick it up pretty quick.

Consider China. In 1990, their government realized that there was no way that they could deliver on the pension promise, and told the people so. Ever since, the Chinese are scared, and have been saving as much as 1/2 of their income.

“Now they’re saying, ‘Gee, no one is going to take care of me when I get old,’ so they’re funding their own retirement.” —Nelson Mark

See: Chinese Consumers Cling to Saving, Suppressing Spending - Bloomberg Business.

 

[daylatedollarshort]

+1

Exactly. A basic safety net so old folks aren't going hunger, but beyond that let people make their own choices.

If someone wants to spend all of their income when they are younger, then that's their business.

I hope it is enough. I have read average SS benefits are $13K a year. We're budgeting $5K a person just for retirement healthcare. $8K leftover is less than most cost estimates I've seen for personal expenses for even a college student lifestyle in the U.S. Maybe with other safety net programs like food stamps and section 8 that would be enough to get by in some areas of the country.

 

[pb4uski]

If your income was only $13k a year you would qualify for Medicaid so your healthcare cost would be much less than $5k a year.

 

[jim584672]

If your income was only $13k a year you would qualify for Medicaid so your healthcare cost would be much less than $5k a year.

Actually only if you are <65 would you qualify, but you would qualify for Medicare at >=65. Also at 13K you could might qualify for the Part B ($104.90) Medicare reimbursement depending on your state. (Some states have an income and resource test for this.)

 

[pb4uski]

Either way, if your only resource was $13k/year of SS your annual healthcare cost would likely be a lot less than $5k a year as suggested in DLDS' post.

 

[samclem]

I hope it is enough. I have read average SS benefits are $13K a year.

Some data from SSA: The average retired worker gets $1,334.21/mo (almost $16K per year). Also, the average spouse of a retired worker gets $679.20/mo (over $8k per year). So the average retired couple probably gets somewhere between $24K and $32k from SS per year, depending on whether it was a one or two income couple.
It's not luxury, but in most parts of the country it's enough to get by, especially if the house is paid off.

 

[daylatedollarshort]

Either way, if your only resource was $13k/year of SS your annual healthcare cost would likely be a lot less than $5k a year as suggested in DLDS' post.

I was using numbers extracted from posts here and the Fidelity estimates ($220K for a retired couple). We're not on Medicare yet so I hope I am budgeting too much for premiums, deductibles, hearing aids, dental and vision care, etc. We have relatives with serious illnesses and Medicare that seem to spend more than the $5k out of pocket.

Added -

I just looked at the CES and over 65 households spent on average $2,805 per person ($4,769 household / 1.7 people per household) in 2011 dollars for health expenditures ($2,965 in 2015 dollars).

Average benefit $1,220 a month per SSA here, $14,628 annual.

$14,628 - $2,965 = $11,553 leftover, per retiree, for everything else.

 

[hnzw_rui]

We're not on Medicare yet so I hope I am budgeting too much for premiums, deductibles, hearing aids, dental and vision care, etc. We have relatives with serious illnesses and Medicare that seem to spend more than the $5k out of pocket.

Those relatives likely have greater income/means than $13K per year then.

Afaik, $13K is already poverty level so someone making only that qualifies for more benefits such as food stamps, section 8 housing, etc. There's also the benefit of not having to pay federal and state income taxes. My grandmother's combined pension + SS was around $13K and iirc, her out of pocket for medical expenses was pretty low (pretty much just subsidized Part B premiums). I think her prescription co-pay was just $4-5 or something.

 

[jim584672]

Basic Medicare...
Medicare Part B $105
Medicare Part D $40
Medigap Policy $160
Total $305

 

[samclem]

Average benefit $1,220 a month per SSA here, $14,628 annual.

If we are talking about retirees, then I think you are using the wrong figure. The $1,220 a month averages every SS beneficiary: disabled people with a very short work history, spouses with no work history, dependents of retirees, etc. The correct average benefit check for retired workers is $1,334.21.

 

[hnzw_rui]

Basic Medicare...
Medicare Part B $105
Medicare Part D $40
Medigap Policy $160
Total $305

Isn't Medigap optional? Hmm, I think my grandmother qualified for Medi-Cal as well. All I know is practically all her healthcare is paid for by government.

Unfortunately, she had no savings at all (and even got into debt) because she gave most of her income to support one of my uncles and one of his lazier children.

The debt, my mom eventually took over but my aunt had to monitor her finances to curtail her excessive giving.

 

[daylatedollarshort]

If we are talking about retirees, then I think you are using the wrong figure. The $1,220 a month averages every SS beneficiary: disabled people with a very short work history, spouses with no work history, dependents of retirees, etc. The correct average benefit check for retired workers is $1,334.21.

But not everyone who is over 65 will have been in the workforce. I should have probably used the $1,288 number, the the SSA average for retirement benefits. That adds $68 a month to the $1,220, though those are averages, and not floors, so many will have to live on less than average.

The Washington Post article states that many seniors are currently living in poverty:

"And despite having Medicare, many seniors struggle with out-of-pocket medical bills. As my colleague Michelle Singletary pointed out over the weekend, the Employee Benefit Research Institute has found Medicare only pays for about 60 percent of seniors' total health costs. Sarah has written about how out-of-pocket costs tend to pile up particularly at the end of seniors' lives."

Senior Poverty is Worse Than You Think
http://www.washingtonpost.com/blogs.../senior-poverty-is-much-worse-than-you-think/

 

[Independent]

We have a national system that forces employees to make contributions and keeps retirees from becoming destitute and keeps them off pubic assistance--it is Social Security. That's enough.

+1

 

[Independent]

Those relatives likely have greater income/means than $13K per year then.

Afaik, $13K is already poverty level so someone making only that qualifies for more benefits such as food stamps, section 8 housing, etc. There's also the benefit of not having to pay federal and state income taxes. My grandmother's combined pension + SS was around $13K and iirc, her out of pocket for medical expenses was pretty low (pretty much just subsidized Part B premiums). I think her prescription co-pay was just $4-5 or something.

The 2015 Federal Poverty Level is $11,770 for singles and $15,930 for couples. Federal Poverty Level 2013 - 2015

The food stamp rule is that you should spend 30% of your income (after some deductions) on food. You get food stamps (SNAP) if the 30% of adjusted income is less than $180/mo per person. I'd guess that most people with $13k annual incomes do not get food stamps.

OTOH, most communities have subsidized senior housing. I think a typical rule is that they cap rent at 30% of gross income. So $13k will probably get you an apartment for $330/month.

 

[pb4uski]

.....The Washington Post article states that many seniors are currently living in poverty:

"And despite having Medicare, many seniors struggle with out-of-pocket medical bills. As my colleague Michelle Singletary pointed out over the weekend, the Employee Benefit Research Institute has found Medicare only pays for about 60 percent of seniors' total health costs. Sarah has written about how out-of-pocket costs tend to pile up particularly at the end of seniors' lives."

Senior Poverty is Worse Than You Think
Senior poverty is much worse than you think - The Washington Post

I was guardian for both my grandmother and my great aunt and also manage my mother's finances and my experience is totally the opposite. Other than Rx co-pays which were modest, they had no medical bills that were not covered between Medicare and Medigap insurance and their monthly insurance costs were similar to those shown in post #41.

I wonder if the people referred to in the article skip Medigap. If so, then their large medical bills are a result of their own neglect.

 

[daylatedollarshort]

I was guardian for both my grandmother and my great aunt and also manage my mother's finances and my experience is totally the opposite. Other than Rx co-pays which were modest, they had no medical bills that were not covered between Medicare and Medigap insurance and their monthly insurance costs were similar to those shown in post #41.

I wonder if the people referred to in the article skip Medigap. If so, then their large medical bills are a result of their own neglect.

I don't have any experience myself with Medicare, but the EBRI article in the Washington Post link had this to say:

"A 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses (excluding long-term care) in retirement, $227,000 to have a 75 percent chance of covering those expenses, and $283,000 to have a 90 percent chance of doing so. These estimates are 1–2 percent lower than the savings targets estimated in 2011."

The EBRI article was from 2012, but not far off from the Fidelity health costs estimates for a retiring couple in 2014 at $220K:

Fidelity Analysis Reveals

 

[pb4uski]

If "health care expenses" includes health insurance premiums as well as co-pays and deductibles, that seems a bit high. If it is just deductibles and co-pays, it is crazy high IME.

Using the $305/month that jim posted above times 12 months times 2 people divided by 4% WR (for a 65 year old) you would get ~$183k for the health insurance. Add in co-pays and deductibles and you're probably around $200k rather than $283k.

That is a great example of how a relatively modest $305/month/person health care cost can be manipulated to be a scary high number.

 

[Independent]

Basic Medicare...
Medicare Part B $105
Medicare Part D $40
Medigap Policy $160
Total $305

I don't have any experience myself with Medicare, but the EBRI article in the Washington Post link had this to say:

"A 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses (excluding long-term care) in retirement, $227,000 to have a 75 percent chance of covering those expenses, and $283,000 to have a 90 percent chance of doing so. These estimates are 1–2 percent lower than the savings targets estimated in 2011."

The EBRI article was from 2012, but not far off from the Fidelity health costs estimates for a retiring couple in 2014 at $220K:

Fidelity Analysis Reveals

These numbers aren't so far apart. If the each spouse in the couple lives another 20 years, the $163,000 is a little over $4,000 per year.

Medicare Part D doesn't cover 100% of prescription costs, so add a little to Jim's numbers and $4,000 doesn't seem out of reach. Note that Medigap premiums vary by age.

Some of the increase for 75th percentile and 90th percentile costs result from longer life spans in the 75th and 90th percentile cases.