Two linked problems & solutions: retirement savings and Social Security/Medicare

[Nords]

America's looming retirement crisis - MSN Money

After a few years on this type of discussion board, a cycle becomes apparent. The media becomes aware of an "unsolvable problem" or "unstoppable failure", the issue gets lots of hysterical front-page attention, someone writes a ground-breaking research paper or a book, everyone debates the publication, and the problem is eventually declared solvable or the failure is averted. On to the next inevitable crisis!

Take, for example, the 4% SWR. That concept has advanced quite a bit in the 15 or so years since Bengen first brought up the idea. Today you could shake any of us awake out of our hangovers at 3 AM, shine a light in our eyes, and ask us what the SWR is. Some of us would answer "4%!" while a bunch of us would answer "It depends!" but none of us would say "Who the #$%^ are you and what the heck is an SWR?"

These days I think we're at the second attention-getting step with two linked problems: "saving for retirement", and "saving Social Security/Medicare". I'm wondering why the third step hasn't happened yet-- or maybe it's already happened and we just haven't focused our analysis on it.

Let me summarize the article's two issues:
- Workers aren't saving enough money to be able to retire at age 65, so they're gonna keep working until they die.
- There aren't enough workers paying payroll taxes to fund Social Security & Medicare as it is, and people are living so much longer that they're going to bankrupt them through longevity.

When the problems are stated this way, are the solutions apparent? People will retire when they either have enough savings or when they physically can't work anymore. If they're not saving enough today, their longevity might enable them to save enough over another extra decade of work. If they can't work anymore then they're going to cut back their lifestyles to be able to live within their savings, or they're going to find people/businesses willing to shoulder their debt even if default is likely. In any case the problems are "solved". We'd all like for people to save enough money to be financially independent as early as possible, but it's frequently an issue of how much financial pain they're able to endure at different parts of their lives. With their help or in spite of it, the problem is still solved one way or another.

While they're "solving" their retirement savings problem, they're working longer and paying more SS/Medicare payroll taxes. They're sucking down SS benefits at age 62 but they're either losing some SS benefits (because their earned income is above a minimum) or they're paying taxes on their SS benefits (because their earned income is above another minimum). They'll either keep working for many more years (while paying into SS) to build up their savings, or they'll stop working because their health is failing and they'll die earlier. Net result is that less money is paid out by Social Security.

Same with Medicare. People are working longer (and using more of their employer's insurance) while paying more payroll taxes into Medicare. Eventually they go on Medicare but they're still working and paying payroll taxes into Medicare. When their health begins to fail they stop working. They become an immediate (perhaps expensive) burden on Medicare but they may die sooner, "using" fewer Medicare benefits than an ER who lives for another 20 years and then consumes 2-3 years of benefits in progressively declining health. Net result is less money paid out by Medicare. Problem "solved" again.

At some point it should occur to the media or to researchers that longevity means extra money is going to be paid into SS/Medicare. Despite that same longevity, retirement will be no longer or even shorter, and less money may be paid out. I don’t think anyone has actually tried to quantify it yet.

Aside from the occasional comments on this board, has anyone seen any papers or articles claiming that SS/Medicare may be able to turn around due to the superior sustained payroll taxes efforts of indebted & undersaved Boomers?

[samclem]

Wow, it turns out that when you add the topics of government policy and depressing demographics, the "dismal science" of economics can become "dismal-er"!

Quote:

Originally Posted by Nords Aside from the occasional comments on this board, has anyone seen any papers or articles claiming that SS/Medicare may be able to turn around due to the superior sustained payroll taxes efforts of indebted & undersaved Boomers?

Nope, I haven't seen such. It probably wouldn't get much play, though.

Let's not rule out the possibility that government will "help." There will be a lot of pressure to ease the burden on the working elderpoor, it's entirely possible that SS withholding, the tax penalty for those working and drawing SS, or income taxes as a whole will be reduced on this group, thus saving us from saving ourselves.

[REWahoo]

Quote:

Originally Posted by samclem ...it's entirely possible that SS withholding, the tax penalty for those working and drawing SS, or income taxes as a whole will be reduced on this group, thus saving us from saving ourselves.

Are you suggesting those who aren't already retired should save up so they can be safe from saving us from saving ourselves?

[huusom]

Quote:

While they're "solving" their retirement savings problem, they're working longer and paying more SS/Medicare payroll taxes.

I don't think this is a realistic assumption. There is not enough jobs to go around. If this is true then we will expect to see serious competition for walmart greeter positions.

[freebird5825]

No help from this corner as far as positive articles.

Some of the data about IRA and 401(k) accounts for the averages person blew my mind. I'd have to go back and look, but I think I can say I achieved those numbers (savings rate and balance) in my mid-late 30s. Whew!

Seeing my Mom struggle to live on her SS (from age 62 to 74 with no pension) was a good reality check for the need for me to get started early and at the right level. She did OK with some help from me and some CDs she managed to squirrel away over the years.

[ziggy29]

Quote:

Originally Posted by huusom I don't think this is a realistic assumption. There is not enough jobs to go around.

This is, to me, one of the problematic aspects of raising the retirement age. On the other hand, current benefit levels with current assumptions are not sustainable. But I would agree that raising the retirement age means more people in the labor pool without a corresponding increase in available jobs. Instead of paying out SS, we'd be paying out unemployment checks.

That doesn't even begin to address the rampant age discrimination they'd face, anyway.

[FIREd]

Quote:

Originally Posted by Nords Same with Medicare. People are working longer (and using more of their employer's insurance) while paying more payroll taxes into Medicare. Eventually they go on Medicare but they're still working and paying payroll taxes into Medicare. When their health begins to fail they stop working. They become an immediate (perhaps expensive) burden on Medicare but they may die sooner, "using" fewer Medicare benefits than an ER who lives for another 20 years and then consumes 2-3 years of benefits in progressively declining health. Net result is less money paid out by Medicare. Problem "solved" again.

Actually, I think that most people will likely sign up for Medicare at age 65 even if they have access to private health insurance via their employer because: 1) you are automatically enrolled in Medicare part A when you turn 65 and 2) Medicare penalizes people who enroll in Medicare part B at a later age. Also, older people are likely to get lower paying jobs (with few or no benefits) to supplement their SS/pension. For a minimum wager for example, making say $8 a hour and working 40 hours a week, Medicare payroll taxes would amount to less than $40 a month. Given the kind of health care costs a typical senior generates, it's really a drop in the bucket.

[Free To Canoe]

Nord,

It seems to make sense. I have not seen any writing on it.
Like any problem, the devil is in the details. It would be good to see someone (not me, sounds like work) crunch some numbers on it.

Free to canoe

[Robert the Red]

Quote:

Originally Posted by FIREdreamer Actually, I think that most people will likely sign up for Medicare at age 65 [...] 2) Medicare penalizes people who enroll in Medicare part B at a later age.

This, at least, is not quite true. If you are 65 and still covered by an employee group plan, you can delay your Medicare Part B enrollment until you leave that plan (say, at retirement), and then you have up to 8 months to enroll in Part B without a penalty.

[FIREd]

Quote:

Originally Posted by Robert the Red This, at least, is not quite true. If you are 65 and still covered by an employee group plan, you can delay your Medicare Part B enrollment until you leave that plan (say, at retirement), and then you have up to 8 months to enroll in Part B without a penalty.

I didn't know that.

[Bikerdude]

Quote:

Originally Posted by Robert the Red This, at least, is not quite true. If you are 65 and still covered by an employee group plan, you can delay your Medicare Part B enrollment until you leave that plan (say, at retirement), and then you have up to 8 months to enroll in Part B without a penalty.

As a retiree my company paid HC plan converts to a 'medigap' plan at age 65. So they sort of 'encourage' you to sign on to medicare. I don't know if they do the same for current workers when they turn 65.

[armor99]

Nords..... I really liked your assessment.... seems fairly accurate to me. But the thing that I see even under that, is that some choose to plan.... and others choose to leave their lives to random fate and chance. Nothing new here... the same ant vs. grasshopper situation.

The only problem is, the govt far too often is stepping in and "saving" the grasshoppers! I fully believe that if we had the stomach for it, and allowed more grasshoppers to fail, and it became known that failure really was a real possibility out there, then it would happen far less often. Sadly, there are many that I know personally, that will only take action if a problem is "right in their face", and not before.

I have had many tell me directly... "Why should I plan anything for retirement... it is a waste of my time and energy. Some random thing will happen to me and then where will I be... I am planning on having a good time as long as I am able to. I will handle tomorrow when it comes..." And that is fine.... no real problem with that one either. Just PLEASE do not come to me begging for my money when things did not work out for you due to your shortsightedness....

I live out here in the desert... and I think the rules of hiking in the desert are very similiar to planning for retirement.... The desert wants you dead.... and if you do something stupid along the way, the desert will take your life... it does not really care about your excuses either.... "

[LoftyNotions]

Pray for Seagulls.

[samclem]

Quote:

Originally Posted by huusom I don't think this is a realistic assumption. There is not enough jobs to go around.

There is no fixed number of jobs. If/when more people come in to the labor market, wages will go down and more people will be hired (eventually) as the US becomes more competitive with foreign labor rates. We don't have to match Sri Lankan hourly rates for US workers and businesses to become more competitive and for our economy to flourish and employment rates to stay high. The US infrastructure, transparent corporate governance, good capital markets, and high English literacy are all significant plus factors that will allow us to do well in a global economy--but not if we are paying workers $30 per hour. So, we'll see a drop in hourly pay from the artificially high levels that we enjoyed from WW-II through the mid-70s. America, welcome back to the real world, the same one our grandparents knew. In this environment, you want to be an investor and have your capital producing your income. If you are earning a living by the sweat of your brow, life will not be a picnic.

The older folks will be there alongside everyone else.

[kyounge1956]

Quote:

Originally Posted by armor99 Nords..... I really liked your assessment.... seems fairly accurate to me. But the thing that I see even under that, is that some choose to plan.... and others choose to leave their lives to random fate and chance. Nothing new here... the same ant vs. grasshopper situation. The only problem is, the govt far too often is stepping in and "saving" the grasshoppers! I fully believe that if we had the stomach for it, and allowed more grasshoppers to fail, and it became known that failure really was a real possibility out there, then it would happen far less often. Sadly, there are many that I know personally, that will only take action if a problem is "right in their face", and not before. I have had many tell me directly... "Why should I plan anything for retirement... it is a waste of my time and energy. Some random thing will happen to me and then where will I be... I am planning on having a good time as long as I am able to. I will handle tomorrow when it comes..." And that is fine.... no real problem with that one either. Just PLEASE do not come to me begging for my money when things did not work out for you due to your shortsightedness....(snip)

Yes, but I doubt we do have the stomach for it. I know I don't. It is easy to suggest that the grasshoppers should be allowed to fail, but any ant can look around and see that you don't have to be an improvident grasshopper to end old and broke. Even though I am saving for retirement, I could, if there's another really big bear market after I retire, or the City pension system goes bankrupt, or I can't work and save as long as I need to because of illness or injury, or even from just living longer than I expect to, and probably other ways, none of which I have control over.

As long as there are ants who look around and think "it could happen to me", or who just don't want to have to step over starving grasshoppers on the sidewalk on our way to the grocery store, I doubt that a policy of letting the grasshoppers fail will be put into practice.

[Nords]

Quote:

Originally Posted by armor99 I fully believe that if we had the stomach for it, and allowed more grasshoppers to fail, and it became known that failure really was a real possibility out there, then it would happen far less often.

I've seen that retirement system in action.

In Bangkok.

I'm not so sure about the "less often" part.

Come to think of it, I've seen that failure right here in the U.S.-- on Oahu's Leeward Coast. The penalties for sleeping on the beach are considerably less hazardous than those for sleeping in the desert... or over a subway grating in NYC. But still hazardous.

The "living within one's means" retirement I'm referring to are the retirees collecting only SS and living in trailer parks, group homes, or no homes at all. But they've "ratcheted back" their lifestyles to fit within their SS benefits. When confronted with that very scary reality, I think people in their 50s will keep working (and maybe even saving) for as long as they possibly can.

[dex]

Quote:

Originally Posted by Nords Let me summarize the article's two issues: - Workers aren't saving enough money to be able to retire at age 65, so they're gonna keep working until they die. - There aren't enough workers paying payroll taxes to fund Social Security & Medicare as it is, and people are living so much longer that they're going to bankrupt them through longevity.

Let me throw a few monkey wrenches not mentioned:
1. Workers might want to work longer but:
a. jobs may not be there - the recent 4.5% unemployment rate are historical lows - we will have sustained higher unemployment rates in the future
b. Employers may/do not like older workers - ageism and they tend to be higher paid
2. Workers keep working while collecting SS
3. Expansion of the programs - e.g. current partial drug program expanded to pay all
4. Don't forget SS & medicare/cade not only covers the "old" but those on disability - so as the population grows these costs will increase.

More importantly, politicians and the American people do not have the political will to address the issue. The problem will not be addressed.

[Ed_The_Gypsy]

Quote:

4. Don't forget SS & medicare/cade not only covers the "old" but those on disability...

dex,

I understand that it is virtually impossible to qualify for SSI disability. Expect it to get harder.

[dex]

Quote:

Originally Posted by Ed_The_Gypsy dex, I understand that it is virtually impossible to qualify for SSI disability. Expect it to get harder.

It does look like a small number.
Gov't programs tend to expand.

Social Security Disability Insurance: Some Facts

Almost 2% of SS deductions are directed to it.
Who Are SSDI Beneficiaries?

Disabled Workers. In 2001, more than 6.7 million people were receiving SSDI benefits. Of those, approximately 5.1 million were disabled workers. There were:

• 2.9 million men, and
• 2.2 million women

Of all disabled workers:

• 75 percent are white,
• 18 percent are black, and
• 7 percent are other.2

Most SSDI beneficiaries are age 50 and older. Almost two-thirds are aged 50-64; only 2.8 percent are younger than 30.

[Texas Proud]

Quote:

Originally Posted by FIREdreamer Actually, I think that most people will likely sign up for Medicare at age 65 even if they have access to private health insurance via their employer because: 1) you are automatically enrolled in Medicare part A when you turn 65 and 2) Medicare penalizes people who enroll in Medicare part B at a later age. Also, older people are likely to get lower paying jobs (with few or no benefits) to supplement their SS/pension. For a minimum wager for example, making say $8 a hour and working 40 hours a week, Medicare payroll taxes would amount to less than $40 a month. Given the kind of health care costs a typical senior generates, it's really a drop in the bucket.

I would think most companies stop health insurance when you qualify for medicare.... the last two I have been with did not offer it....