Retirement Security for All

[chinaco]

I think SS and Medicare are good base programs to ensure the elderly (retirees) have medical attention and a very basic income.

The best thing the govt could do is to simplify the convoluted tax code around personally directed tax-qualified saving plans. Get rid of 401k, IRA, etc. Create a single portable tax deferred and a single Roth type plan that is not tied to a company or organization. Let the person control it and put it wherever they want (like an IRA). But unlike and IRA... it should have maximum legal shielding (like a pension) and be consistent across all states (unlike IRAs).

The govt should direct our school systems (probably high school) to have mandatory classes in basic personal finance (including retirement issues and preparation). There should probably 1 class per year for the last 3 years. Ignorance is our greatest problem.

Should people be forced to save over and above SS? No! But they should be encouraged to do so... tax incentives are probably the best encouragement for Americans.

 

[samclem]

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.

Good point. So the taxes would actually be lower than the "wag" I did. Of course, to some extent these other beneficiaries might become "costs" to other government programs, but I think that puts the burden ("responsibility", whatever) where it belongs.

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.

Yes, and that would be a big political fight. IMO, going with general revenue funding takes us in exactly the wrong direction (as it unleashes the "something for nothing" political forces at the zero% tax bracket).

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 proposal, any decision to give retirees a share of productivity gains would require political action. Pure paygo funding would help people understand this.

Yes, and one mechanism for making this clear (CPI vs wage-based benefits) would be in how the program's growth was to be determined--supply-driven or demand driven,
-- Supply-driven: Predetermined (probably declining over the years, as noted previously) tax rates which would give a de facto wage-based program. SS checks to beneficiaries would vary each year based on the growth in wages: Divide the "pot" by the number of beneficiaries, everyone gets the same amount. From a political standpoint, this gives both wage-earners and SS recipients a stake in improving US productivity, which is a good thing.

or
-- Demand driven: Benefit check is adjusted for CPI. The SS tax rate would be adjusted annually to bring in enough money to cover the checks. From a political standpoint, this separates retirees from concerns about US productivity (their check will be the same regardless of what workers earn), which may not be optimum. It also insulates retirees somewhat from the effects of inflation, which is good for them but maybe not good for society. They vote, and I want them voting for policies that are going to result in good monetary policies for everyone.

Another major question: What happens to the money that is now going to SS taxes and which would be "freed up" by the new lower SS tax rates? The libertarian, free-market, small government answer is to let the worker keep his money, investing it if he chooses. The big-government answer is to pump these funds into another government controlled annuity program that provides rising benefits based on higher input levels (and, coincidentally, produces a lot of tax revenue that can be spent immediately, just as the SS surplus was). Or, the law might require that the funds be put into individually-owned accounts invested in a selected universe of asset types, perhaps with asset allocations becoming more flexible with higher balances. This last option is unattractive for various reasons, but I think offers the best chance for avoiding a repeat of the American SS experience.

Politically viable? I think so. No one loses anything, and some gain a lot. Those at or near SS eligibility get their promised checks and a solid, actuarially sound system. Those farther out get a solid SS system (which surveys show most don't believe exists now) and (under the third option above) significant private accounts that will outstrip the promised (but undeliverable) promises of the present system.

 

[Rustic23]

TP,
Just a guess but New Mexico has a fairly small population and several large military bases and other federal installations. I was surprised Virginia was not higher. My guess there, lots of gov. spending, but lots of wealth also.

 

[Independent]

Yes, and one mechanism for making this clear (CPI vs wage-based benefits) would be in how the program's growth was to be determined--supply-driven or demand driven,


Another major question: What happens to the money that is now going to SS taxes and which would be "freed up" by the new lower SS tax rates? The libertarian,

Politically viable? I think so. No one loses anything, and some gain a lot. Those at or near SS eligibility get their promised checks and a solid, actuarially sound system. Those farther out get a solid SS system (which surveys show most don't believe exists now) and (under the third option above) significant private accounts that will outstrip the promised (but undeliverable) promises of the present system.

I agree with the advantages of your supply-driven option in the long run. I happen to like the "automatic stabilizer" function demand-driven (stable benefits) in the short run. I'm not sure if there is a clever way to get both.

If we could jump to this system on 1/1/11, then we would have tax dollars freed up and we could talk about what to do with them. If we transition into it, then it mostly just heads off the pressure for tax increases in the future. Maybe it could be structured to save 1-3% in taxes, but that's pretty small dollars on median wages.

As I mentioned in the first post, I take the libertarian view and say that once the current workers have guaranteed retirees a basic income, people should be free to save, invest, and withdraw however they choose.

Politically, I'd like the chance to convince young people that paygo is a solid long-term system, and this version is economically viable indefinitely. It seems that many would consider that better than what they expect today. One problem is that so many people believe there is some sort of magic in mandatory private accounts. I think that is just wishful thinking, but pleasant fantasies are hard to dislodge.

 

[samclem]

One problem is that so many people believe there is some sort of magic in mandatory private accounts. I think that is just wishful thinking, but pleasant fantasies are hard to dislodge.

Well, maybe not "magic", but . . .
I find this idea of "forced savings" to be very distasteful, but my support for it comes from an appraisal of the world as it is, not as I'd wish it to be. Factors:
- We know from our national experience with both IRAs and 401Ks that Americans are, at present, crappy savers. For whatever reason, they aren't saving enough to provide for their own later years, even if their later years include more years of working. There's plenty of incentive, and there's enough disposable income for XBoxes, $100/month cable TV, and new cars every 3 years, but in good times and bad most don't save enough to provide for their later needs.
- We know from the behavior of individual investors that many/most people are making investment decisions that are not in their long-term interest.
- When people fail in the US, those who have succeeded have to bail them out. The degree of wealth transfer in this regard will increase as there are more poor people voting to "soak the rich."
- A strong middle class is good for a democracy, and, conversely, democracies are dangerous places when the middle class declines. History is full of examples where a majority has freely elected radical populists, dictators who come to power promising law and order, and authoritarians who promised various brands of state theft of individual property. All these bad ends are a lot more likely if we've got a lot of poor people and fewer middle-class people. While the existence of a robust middle class will continue to require solid employment opportunities in manufacturing and services, there's no doubt that global pressure is already driving down wages across the board in the US. As I see it, the best hope for maintaining a strong American middle class is to turn many more people into investors. A world of new factories will require a lot of capital, and thousands of new companies around the world will provide a big opportunity for equity investors in the US, if they get on board. I want those Indonesian, Chinese, and Brazilian companies who are making products and undercutting American labor rates to be paying dividends to American middle-class investors.

A voter who is dependent on the government has a different outlook from a voter depending on his own investments for his security.

I don't believe these mandatory saving accounts are magic. I don't even much like the idea, except that it's the least bad alternative given what we know and where we are.

 

[Independent]

Well, maybe not "magic", but . . .
I find this idea of "forced savings" to be very distasteful, but my support for it comes from an appraisal of the world as it is, not as I'd wish it to be. Factors:
1) - We know from our national experience with both IRAs and 401Ks that Americans are, at present, crappy savers. For whatever reason, they aren't saving enough ...
2) - We know from the behavior of individual investors that many/most people are making investment decisions that are not in their long-term interest.
3) - When people fail in the US, those who have succeeded have to bail them out. The degree of wealth transfer in this regard will increase as there are more poor people voting to "soak the rich."
4) - A strong middle class is good for a democracy, and, conversely, democracies are dangerous places when the middle class declines. ... As I see it, the best hope for maintaining a strong American middle class is to turn many more people into investors.

A voter who is dependent on the government has a different outlook from a voter depending on his own investments for his security.

I don't believe these mandatory saving accounts are magic. I don't even much like the idea, except that it's the least bad alternative given what we know and where we are.

You can probably predict my response. I'll re-order your comments by my notion of "importance":

(3) is by far the most important to me. I've suggested a simplified version of SS to assure that we don't need to bail out people who failed to save. IMO, that removes the only good rationale for mandatory savings.

(1) I don't think that mandatory savings would have much impact on the total savings rate. People who voluntarily save today will save less because they will deduct the mandatory savings from their voluntary. (That's me.) Some people who don't save will simply borrow more - they've got the mentality that will justify the borrowing by looking at the big lump sum in their mandatory savings.

(2) Most people here think that retiring at 55 is a big deal. I wouldn't say that people who are willing to work to 65 are "wrong". In fact, we need them.

(1&2) If we really want to increase saving for macro-economic reasons, IMO we'd make more progress by eliminating the tax deduction for mortgages/HELOCS, and by working on our balance of trade*. (We also had lots of middlemen lying to both borrowers and lenders in the last decade, leading to too much borrowing. Hopefully we've learned our lesson.)

(4) I think the key to saving the middle class is good middle class wages. Saving money doesn't make up for low income if you don't have the income to save.

Note that mandatory savings plans involve lots of gov't control - mandatory contributions, limited investments, prohibitions on withdrawals while you're working, mandatory annuitization. I don't see much personal independence there.


*Any country that has a trade surplus with the US must lend us money to offset the trade. This lending in recent years has driven down our interest rates so rational consumers are incented to borrow more and save less.

 

[cb7010]

I've read through most of this thread and there are many well written and well thought out posts. I stand in the corner that says the government should simply not be involved at all in administering retirement or health care programs. How is that for simplicity?

The people of this country must once again, "learn how to fish" and to start saving for their own good. We have to take away our ability to vote ourselves other people's money. Conversely, I tend to believe there will always be less fortunate people who, for the good of society (crime, disease, etc.), will need some assistance. And, I also believe that Americans are generally compassionate and will find ways through private charity to help those that most need it. To me, it's that simple. Despite our good intentions, we need to resist continuing down the path of government sponsored social welfare as there is a whole spiderweb of negative economic and social consequences that come with it.

 

[ERD50]

I've read through most of this thread and there are many well written and well thought out posts. I stand in the corner that says the government should simply not be involved at all in administering retirement or health care programs. How is that for simplicity?

Sounds like the kind of crazy talk that a bunch of revolutionaries would come up with, ummm, a couple hundred years ago. They'd probably give it an impressive, self-important sounding name like "The Constitution".

I've been reflecting this past week about how the Constitution (IIRC) never mentions anything about the strong taking care of the weak, the well off taking care of the poor, etc. Not that those aren't good things that we want to have, but is it the job of the Govt?

-ERD50

 

[haha]

I've been reflecting this past week about how the Constitution (IIRC) never mentions anything about the strong taking care of the weak, the well off taking care of the poor, etc. Not that those aren't good things that we want to have, but is it the job of the Govt?

-ERD50

It is according to government workers.

Ha

 

[keegs]

I suggest you all gather round for a SS check burning demonstration..!

 

[ERD50]

I suggest you all gather round for a SS check burning demonstration..!

This tired old phrase always gets dragged out. It is empty and meaningless, not 'clever' at all.

Give me back my FICA and my employer's FICA contributions and all the investment gains I would have made during one of the greatest bull markets in history, and we'll talk.

-ERD50

 

[Independent]

I've read through most of this thread and there are many well written and well thought out posts. I stand in the corner that says the government should simply not be involved at all in administering retirement or health care programs. How is that for simplicity?

The people of this country must once again, "learn how to fish" and to start saving for their own good. We have to take away our ability to vote ourselves other people's money. Conversely, I tend to believe there will always be less fortunate people who, for the good of society (crime, disease, etc.), will need some assistance. And, I also believe that Americans are generally compassionate and will find ways through private charity to help those that most need it. To me, it's that simple. Despite our good intentions, we need to resist continuing down the path of government sponsored social welfare as there is a whole spiderweb of negative economic and social consequences that come with it.

The way I read the bold is that certain types of aid to the poor really benefit "society", where "society" means everyone. So we have spending that benefits everyone, but you would fund it with voluntary donations.

That's the perfect set up for the free rider dilemma. I can get the benefits of lower crime, fewer beggars, etc. without spending my money by simply sitting on my hands when they pass the hat. We typically (but not always) deal with that by funding such activities (think national defense) with taxes.

AFAIK, all rich industrialized countries provide some social safety net with tax supported programs. It seems to be one of those things that people (as in whole societies) decide to do when they get richer.

I'd like to see (I'm serious here, not being sarcastic) some examples of rich countries that deal with the poor exclusively through voluntary charity. See what characteristics such societies have and compare them to the US. I know that we've got posters who have lived in a variety of countries, maybe someone can give some examples.

But, without that, I'm pretty skeptical that voluntary charity would avoid the downward spiral of free riders.

 

[GregLee]

The people of this country must once again, "learn how to fish" and to start saving for their own good. We have to take away our ability to vote ourselves other people's money. Conversely, I tend to believe there will always be less fortunate people who, for the good of society (crime, disease, etc.), will need some assistance. And, I also believe that Americans are generally compassionate and will find ways through private charity to help those that most need it.

I see a couple of problems with this. The minor problem is the weasel word "most" in "help those that most need it". It might be true that private charity would suffice for those that "most" need it, but how about others that need it?

The other problem is a tendency to self-contradiction. If you're going to teach people to save, you have to punish those that don't, else where is the incentive? But if we could really depend on private charity to help those in need, where would the punishment come in?

 

[samclem]

Apologies to those who've seen this before, but the topics here are well addressed by William Bernstein in "God Bless This Ponzi Scheme".

In addition to the humanitarian/charitable rationale for SS, he brings up a practical one:

. . . Long, long ago, around the turn of the last century, we lived in a world of unfettered Ayn-Randian capitalism, with minimal government interference in daily life and commerce. And no income tax¾ a gauzy sort of New-Right Valhalla. The only problem was that the reaction to this system's excesses and inequities led to a backlash that inflicted communism and fascism on most of the planet. The US escaped these modern plagues, but just barely. This was largely because our political leadership had the courage and foresight to modestly redistribute income and wealth via antitrust legislation, a progressive income tax, and finally, Social Security. Of course, social and political peace also require a functioning market economy—Bismark’s prototypical welfare system did not save German society from the depredations of the Versailles Treaty, and the social benefits of the communist state did not overcome its crippling economic and political disadvantages.

So, in this view, SS, welfare, etc is the money we pay to keep social order, to keep the poor from taking to the streets with pitchforks and torches, or at least from voting themselves even more loot. There are a lot of problems with this idea (where does it stop? What about the Constitution? etc), but I can appreciate the reasoning. It's true that a mob is tough on business and prosperity, and that security/law enforcement can be more expensive than just paying the protection money.

 

[HFWR]

It's worth remembering that the Constitution was a replacement for the Articles of Confederation, which provided such a weak government as to be useless. Plus, it provided no good mechanism for paying our war debts.

The federal government supported expansion westward in many ways, including creating huge railroad monopolies by dangling tracts of land as a reward for laying tracks. Not to mention "handling" the Indians...

Most of the frontier was unlivable until there was "law and order", from every level of government. Neither the libertopia nor the "worker's paradise" ever existed. Those with the power tend to enrich themselves and their backers...

Ol' Joe Stalin wasn't standing in line for bread or shoes...

 

[keegs]

This tired old phrase always gets dragged out. It is empty and meaningless, not 'clever' at all.

Give me back my FICA and my employer's FICA contributions and all the investment gains I would have made during one of the greatest bull markets in history, and we'll talk.

-ERD50

I was only half joking about the demonstration ERD. Such a protest would certainly drive home your points about self reliance and fiscal austerity for which I share your concern.

But to you point about a refund on SS, if you're 65, then you've benefited from the protection of FICA your entire life.

Would you expect such a deal from the good hands people?

 

[cb7010]

Let's frame it this way..Let's say we all recognize that helping the poor acheive a reasonable standard of living is generally good for society. The question really is, how we do it most efficiently? Today, we run much of our support through large and grossly inefficient government programs that are administered by money/power hungry beaurocrats and politicians. I think then, we can all agree based solely on their track record, that this is NOT the best way to do this.

So, what do we do about it. Yes, the complete other end of the spectrum is to get government completely out and rely only on voluntary contributions. To me, this would be an interesting experiment that; but, it seems to scare people who want to cite "other Western societies" and "greedy capitalist free riders" as reasons to keep the current apparatus intact. Why don't we meet somewhere in the middle then..

How about getting the federal government out of social welfare and let districts and communities, towns, cities, maybe even States determine their own systems. Typically, the more local government is, the more control we have over it. Again, the issue here for most of us is not that we don't agree on giving assistance to those in need; but, how to best administer it. And, nobody can stand up now and say our current system is great.

One last point, I am talking about society helping needy individuals. The concept of the government having any hand in dictating the nation's retirement program is one that I really abhor. Perhaps that would be a good first step, let's re-define what Social Security is supposed to be?? A safety net for the poor? Or, a government administered retirement benefit program for all?

 

[Htown Harry]

Great thread...

It's not exactly what you are looking for, Independent, but here's a Mercer comparison of 14 countries' systems, and an article with some critical analysis of Mercer's scoring system.
http://www.globalpensionindex.com/pdf/Mercer-Global-Pension-Index-Report-2010.pdf
U.S. retirement system ranks 10th

AFAIK, all rich industrialized countries provide some social safety net with tax supported programs. It seems to be one of those things that people (as in whole societies) decide to do when they get richer.

I'd like to see (I'm serious here, not being sarcastic) some examples of rich countries that deal with the poor exclusively through voluntary charity. See what characteristics such societies have and compare them to the US. I know that we've got posters who have lived in a variety of countries, maybe someone can give some examples.

 

[rescueme]

How about getting the federal government out of social welfare and let districts and communities, towns, cities, maybe even States determine their own systems.

You can have a combination of different levels of government along with local organizations to organize various social services. It is that way in Sweden:

"Local politicians are directly elected at general elections and both municipalities and county councils levy taxes. The legislation on social services and on health care allows the municipalities and the county councils very great freedom to plan and organise their own services and levy taxes in order to finance them. Thus, services for the elderly are organised and prioritised differently in different parts of the country."

Reference:

Care of the elderly in Sweden

However, you must remember (regardless of government or local support), it does take a funding source and cannot just be supported by contributions from the general public (unless those "contributions" are taxes).

And in places (like Sweden) that do supply such services, the tax rates are much more (than in the U.S.) to ensure such services.

 

[samclem]

And in places (like Sweden) that do supply such services, the tax rates are much more (than in the U.S.) to ensure such services.

And the public sentiment in favor of contributing to charity is much lower than in the US. In general, citizens of countries with high government safety nets believe their taxes take care of their obligations to materially provide for the poor.

The main argument used against more local control of welfare systems is the fear of a "race to the bottom." According to this argument, if poor people can migrate to where public welfare benefits are the highest, states which provide higher benefits will be swamped by the indigent. States will be in a race to reduce benefits to induce the poor to go somewhere else.
This makes sense in theory, but I don't know if it works in the real world. The gradient would probably need to be fairly steep to get folks to move.

 

[rescueme]

And the public sentiment in favor of contributing to charity is much lower than in the US. In general, citizens of countries with high government safety nets believe their taxes take care of their obligations to materially provide for the poor.

I can confirm your statement...

I did work in Sweden for a bit, so I'm aware of their "social system" of management not only those that are elderly, but also those that have drug/alcoholic challenges.

While you won't find any panhandlers and any apparently intoxicated person in public are looked down upon with distain (yes, I saw that), you are correct that they feel no desire to help out anybody/group for the "public good". They feel their (quite substantial) taxes will take care of any problems.

I was in a conversation one day in the office, with a Swede that had worked a bit in London. It was approaching Christmas, and we were talking about a tree we had in our office (I was based in the U.S.) that had cards - each one represented a "wish" from a child in a low-income home that we would buy a gift, put it under the tree, and have volunteers deliver the gift to a distribution point a week before Christmas.

He mentioned that he had gone through this same type of "charity" while living/working in London, and had a young daughter that he wanted to introduce to such charity. His wife (a Swede who never lived outside of the country) could not understand his reasoning. To her, charity was not the "obligation" of anybody personally. They were paying taxes and it was the obligation of the state/local government (and local councils) to take care of such "problems".

Everybody has their own way of looking at the challenge, based upon their social/local norms.

 

[youbet]

And in places (like Sweden) that do supply such services, the tax rates are much more (than in the U.S.) to ensure such services.

The Swedes also have more stringent requirements for non-citizens receiving their generous benefits than the US. That is, they are more likely to be able to predict and fund future needs than the US who, at the call of a political whim, may suddenly have millions of additional folks to care for.

 

[Independent]

Let's frame it this way..Let's say we all recognize that helping the poor acheive a reasonable standard of living is generally good for society. The question really is, how we do it most efficiently? Today, we run much of our support through large and grossly inefficient government programs that are administered by money/power hungry beaurocrats and politicians. I think then, we can all agree based solely on their track record, that this is NOT the best way to do this.

So, what do we do about it. Yes, the complete other end of the spectrum is to get government completely out and rely only on voluntary contributions. To me, this would be an interesting experiment that; but, it seems to scare people who want to cite "other Western societies" and "greedy capitalist free riders" as reasons to keep the current apparatus intact. Why don't we meet somewhere in the middle then..

How about getting the federal government out of social welfare and let districts and communities, towns, cities, maybe even States determine their own systems. Typically, the more local government is, the more control we have over it. Again, the issue here for most of us is not that we don't agree on giving assistance to those in need; but, how to best administer it. And, nobody can stand up now and say our current system is great.

One last point, I am talking about society helping needy individuals. The concept of the government having any hand in dictating the nation's retirement program is one that I really abhor. Perhaps that would be a good first step, let's re-define what Social Security is supposed to be?? A safety net for the poor? Or, a government administered retirement benefit program for all?

You didn't specifically quote me, but I assume this is a reply.

I don't think "We can all agree .... NOT the best way ..." is correct. In fact, that is the issue. We can probably agree that any system has problems and the current US system isn't exempt. The question is would your idea is better.

I'm sure I didn't cite "greedy capitalist free riders". Why did you feel the need to add the two words to a piece of common economic jargon?

We already "meet in the middle" to some extent. For example, Medicaid is a federal-state partnership. I've never studied it, but I think the federal dollars come with a requirement that the state meets minimum benefit standards. That would be an attempt to prevent the race-to-the-bottom that Sam mentions. I've noticed that most communities seem to have subsidized elderly housing complexes. I'm pretty sure there is some federal money in them, but I don't know if or how there is a federal-local split.

The topic here is Social Security. I have trouble seeing any local old age pension scheme that would work in the US, due to our mobility. If you have an idea, why not write it up?

I agree that clearly stating a goal is very important. ERD pointed that out in post #52 and I tried to give my answer in #53. I think that means tested old age benefits incent behaviors that I'd like to avoid - consuming instead of saving during working years and manipulating/hiding assets, so I prefer systems without the means testing. Maybe you have some comments on goals.

 

[Independent]

Great thread...

It's not exactly what you are looking for, Independent, but here's a Mercer comparison of 14 countries' systems, and an article with some critical analysis of Mercer's scoring system.
http://www.globalpensionindex.com/pdf/Mercer-Global-Pension-Index-Report-2010.pdf
U.S. retirement system ranks 10th

Thanks. My question was roughly whether there are any rich countries that handle old age pensions (or any social safety net) through purely voluntary means. For pensions, that would mean that people can choose to save or not save without gov't interference, and those who end up poor are supported by private charity. I didn't see any countries like that on this list.

 

[rescueme]

The Swedes also have more stringent requirements for non-citizens receiving their generous benefits than the US. That is, they are more likely to be able to predict and fund future needs than the US who, at the call of a political whim, may suddenly have millions of additional folks to care for.

They did have a problem with some folks from other areas of Europe (East/West) with "inferior" social programs (related to retirement) that did emigrate there in order to collect on retirement benefits, for whatever the minimum time was to collect benefits.

I remember reading a paper (English language) while working there, noting the problem and mentioning that even if the person passed, they continued to send retirement income in the person's name, to another country. There was no easy way to confirm that they were no longer eligible for the benefit (but their relatives still would intercept the check).

I don't know if that problem has been taken care of since I no longer work there (hey, I'm retired - yes, I was in Stockholm in June, but that was just on a get-away )...