How should retirements be funded?

[DC Al Fine]

I think people and their retirements can be roughly divided into four classes:

1) People unable or unwilling to work (housewives, disabled etc.)
2) People who work but are unable or unwilling to save (working poor, lazy upper middle class etc.)
3) People who work and save
4) The rich

Each of these classes requires different sorts of retirement funding.

1) For people who don't work there should be some minimum amount of "don't starve" money that should be paid out of general revenues. This should be enough to cover food, a bus pass, and rent on a studio apartment etc. (I'm assuming there is a universal healthcare system here)

2) There should also be a pension program funded by invested payroll taxes. Canada Pension Plan is well funded and is able to pay about $1000 per month to most workers on about a 5% payroll tax. I would expand on this program to provide somewhat more funding for those who don't make enough or are unwilling to save by forcing them to save via payroll taxes.

3) For those who are able to save their should be generous tax-deductible and tax free accounts in order to encourage investing for retirement. I would stick with roughly the current Canadian system of being allowed to deduct up to 18% of one's taxable income for a tax sheltered account and put up to $5000 per year in tax free investment accounts. There would be a cap on the 18% to prevent the ultra rich from cutting their income taxes too much.

4) The rich can afford to pay for their own retirement with current capital gains and dividend taxes. No program is needed for them.

[DC Al Fine]

To clarify, I meant that all of these programs should be available for almost everyone. (There would be clawbacks so millionaires won't get subsistence payments, but other than that, it's wide open.)

[DC Al Fine]

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There's no "oh you're too rich, you can't have any tax break" they're just capped at very high levels. For example in Canada, you can deduct 18% up to about $22 000 which works out to be about $120 000. I would expand that so that all but the consistent high earners would be able to take full advantage of the tax break. (With a cap around $250 000 or so)

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C'mon now, you really think a reactionary like me isn't going to subsidize housewives? I'm the guy who wants to restrict divorce, remember? Their husbands would be able to take advantage the tax breaks, and if I were King of the World, there would be all sorts of subsidies and tax breaks and whatnot to encourage women to stay home. What I outlined above is added on top of what the husband would save.

[DC Al Fine]

There's no "oh you're too rich, you can't have any tax break" they're just capped at very high levels. For example in Canada, you can deduct 18% up to about $22 000 which works out to be about $120 000. I would expand that so that all but the consistent high earners would be able to take full advantage of the tax break. (With a cap around $250 000 or so)

In the united states numerous deductions are phased out entirely for high wage earners already.

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C'mon now, you really think a reactionary like me isn't going to subsidize housewives? I'm the guy who wants to restrict divorce, remember? Their husbands would be able to take advantage the tax breaks, and if I were King of the World, there would be all sorts of subsidies and tax breaks and whatnot to encourage women to stay home. What I outlined above is added on top of what the husband would save.

Encouraging women to be even more dependent on their husbands money management is exactly the wrong thing to do.  If you read personal finance magazines a very common letter is my husband didn't save any money or my husband sunk all our money into pets.com, etc.

Tax break for husband =/= husband does 100% of the money management.

[DC Al Fine]

Tax break for husband =/= husband does 100% of the money management.

No husband's paycheck means vast majority of the time husband does the money management... particularly in more right leaning households.

Cite?

[DC Al Fine]

Raising the retirement age for SS/Medicare to 70 for those who are under 50 today would do a lot to ensure the solvency of these programs.

Some guy who has worked in a coal mine since he was 18 should work till they are 70?

I think this is a fair point. I think government pensions should be based on years worked rather than age. People in the softer jobs tend to go to school for much longer than coal miners, fishermen etc.

[DC Al Fine]

"The risk of dying decreased for all age groups but was greater for younger age groups with a 94 percent reduction in death rates at 1–4 years compared with a 38 percent decline at 85 years or more."

Would you mind telling me even today what percentage of the population is 85+?  Since you bolded it and it seems to be the lynchpin of your argument.

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There is a whole litany of restrictions involved.

Really?  Like what?  When I was a teenager instead of just trolling on the internet I simply wrote a check, filled out some pretty basic forms, and opened an account at Vanguard.  Pretty easy.  So what restrictions did I overcome with my genius at the ripe old age of 18?

I think he's talking about the retirement/disability requirement to withdraw funds.

[DC Al Fine]

I favor increasing the retirement age to 70 and leaving rates where they are. Link presumably favors more taxes since the alternative is the insolvency of the programs. I am curious what most people on here would prefer: A higher retirement age or higher taxes.

It doesn't matter what people say they would prefer.  A bunch of teenagers with no jobs who have never paid a penny of taxes in their lives will say all kinds of fanciful things about what they will be doing at 70.  The fact of the matter is by 65 most people are completely broke.  Even with the absurdly easy to use IRAs most people have a negative net worth by 65.  Any system that lets them pay less taxes will ensure there will be even less money for their care and support at 65.

Demonstrably false



At ages 65-74 more than half the population is worth more than $200 000, and their net worth on average is much more than their working age peers.

Quit pulling unfounded assertions out of your ass.

[DC Al Fine]

To put the 200K median net worth number in context for olds, the present value of social security upon retirement is more in the range of 500k. Managing to save but 200K over a lifetime is rather pathetic as a median number. Social security that you can depend on, despite your own fecklessness and lack of investment expertise, is just critical to a stable and just society. There is just no escaping that in my opinion.

I completely agree. I was merely pointing out that Link's "seniors are all broke" meme is completely incorrect. The net worth charts merely point out that the situation isn't a complete disaster. A pension scheme is absolutely needed to maintain society, but the current way SS is run is completely inefficient and backward.

[DC Al Fine]

There is no dishonor in admitting you are wrong.  Look at the latter part of this thread.  I made a clear cut factual error and it was pointed out.  All you have to do is admit you're wrong and retract your previous statement.  It's part of being an adult.

Link, the title of the youtube video was "Breaking Bad Season 5 ending "You Got Me""

[DC Al Fine]

DC Al Fine, please go back and look at why I made that statement.  I made it in response to the absurd assertion that the way to get Americans to save enough for retirement is to exempt the first $250K/yr of Capital gains and dividends from all taxation.  Even your numbers clearly illustrate that strategy is absurd.  All working people are eligible to put away $5,000 tax free a year into an account that they will pay no taxes on for decades.  And even with that generous offer very few Americans take full advantage of that give away.

Ending up with a net worth of $200K at 65 when you were given the opportunity to put away thousands of dollars tax free for decades clearly illustrates either Americans suck at saving (they do) and/or they are not that great at managing their money (also true).

Furthermore what is their net worth once you remove their primary residence and vehicle from the equation?  I suspect in many cases that is six figures right off the top of their net worth.  Your home is not an investment.  It is where you live.  Even if you sell it you still have to find somewhere to live.  You still need your car for transportation.  I can assure you that $200K is not 100% in stocks, bonds, or liquid assets.

So, DC Al Fine, if you believe giving an across the board $250K capital gains and dividend exemption is the magic bullet to bolster SS then please just say that.  Otherwise temper your comments.

Link, apologies for the long time replying:

I agree with you in the following respects:
1) Americans in general have failed at saving and will fail at saving regardless of incentives
2) It is immoral to let non-saving seniors starve
3) Even if we decided to let the non-savers starve, their voting power would prevent it

I think government should offer some sort of pension or subsidy to ensure seniors don't starve. My main concerns are that SS is "pay-as-you-go" and that it subsidizes spenders at the expense of savers.

For example: I took a couple making $36 000 and $12 000. If they never got a real wage increase and invested their FICA premiums in a 60/40 plan from age 22 to age 67, they could withdraw about $2000 more per year in real terms than they would get in Social Security and get to leave their investments to their children.

Obviously you can't take away all the Social Security, but I don't believe it's right to take away the middle class's ability to accumulate wealth anymore than necessary.

I think Social Security benefits are adequate, but the payroll taxes to finance them should be increased and the funds should be invested.

American tax deferral/tax avoidance schemes are adequate for higher income individuals who wish to save, although I'd look at lowering the capital gains/dividend/interest income tax rates for those with total income less than X (X being less than the $250 000 per year being thrown around on the thread, but still significant.)

Thoughts?

[DC Al Fine]

Let's see how the math would actually work out...

Suppose we have a married couple and they have two dependent children under the age of 18. Let's say their gross income is $53,000 per year, which is roughly the median income.

They pay 6.2% of that in Social Security taxes, or $3,286.
They pay 1.45% of that in Medicare taxes, or $768.50.

Leaving federal withholding out of the equation for now, that means $48,945.50 in take-home pay, or roughly $4,079 a month.

Now let's suppose they live in Texas.

Housing is relatively inexpensive here. Whether they're making a mortgage payment or a rent check, let's suppose 25% of their monthly income is spent on housing ($1,019.75).

Both parents work. They need to be able to drive themselves there and back. Gas and insurance, all adds up to let's say $600 a month. (I'll be optimistic and assume their cars are paid for).

Groceries for a couple with two kids, let's say their food bill clocks in around $700 a month.

Mom works part time so she's able to pick the kids up from school, so she doesn't get health insurance from her job. Dad has health coverage for himself and his kids through his job, but he has to pay for his wife to be on the plan too. $250 a month in premiums for her, and let's say they spent about $100 a month on copays and miscellaneous.

And then let's give them $500 a month for miscellanea - clothing, cell phone bills, fees for the kids' after school activities, whatnot

4,079 gross pay
(338) payroll/FICA taxes
(1,020) housing
(600) transportation
(700) food
(350) healthcare
(500) miscellaneous
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That leaves $571 a month. Before taxes. Assuming they've done everything right, are living quite frugally, all the stars have aligned, and nothing goes wrong (i.e. a trip to the ER, a broken refrigerator that needs to be replaced).

So, again, in the best of times, they will have $571 a month left over pretax. They could put that entire $571 into retirement savings. But they wouldn't be saving any money for emergencies. They wouldn't be able to save money for their children to go to college. No family vacation in the summer.

So I'm just not sure what people like Politico expect this family to do. I'm not sure where they expect them to magically get all this money to retire with.

IIRC, Politico wants to abolish SS. The 6% in payroll taxes would go a long way towards retirement savings.

If the hypothetical couple wants to retire well, they'll need about 25 times their annual spending, or 300 times their monthly spending. In today's dollars, Social Security will pay out about $2000/mo. If the couple spent everything they made, and continued to spend everything they made, they'd need another $1700/mo or so in income. However, if they decided to save, the amount they would need to save would drop because of their reduced spending.

If the couple's mortgage was say $700/mo (Based off an average 3 bedroom house in Dallas-Fort Worth bought today with 20% down, with a 15 year fixed mortgage), they could pay it off by 45, and invest the payments until 67. This would give them about $385 000 in savings or about $1280 in a monthly income stream.

Yes, federal taxes would come into play, but my point is that with some small sacrfices, that couple's retirement is definitely achievable.