How should retirements be funded?

[Torie]

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).

Link, what you describe is due to inadequate incomes.  Who makes enough to be able to spare $5,000/year for savings?  I know no one like that.  That would be over $400/month!  Most people make barely enough to keep a roof over their heads, transport themselves to work, etc.

Can't think of one single soul eh?

[opebo]

Link, what you describe is due to inadequate incomes.  Who makes enough to be able to spare $5,000/year for savings?  I know no one like that.  That would be over $400/month!  Most people make barely enough to keep a roof over their heads, transport themselves to work, etc.

Can't think of one single soul eh?

No, not really.  Of course I'm only in touch with a few people.

[Indy Texas]

http://www.economist.com/news/finance-and-economics/21571883-financial-education-has-had-disappointing-results-past-teacher-leave-them

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This is why I do not trust the majority of the people in this country to be responsible for their own retirement funding, paternalism and elitism be damned.

[Politico]

http://www.economist.com/news/finance-and-economics/21571883-financial-education-has-had-disappointing-results-past-teacher-leave-them

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This is why I do not trust the majority of the people in this country to be responsible for their own retirement funding, paternalism and elitism be damned.

I so wish we could find results for such a poll from BEFORE the era of Big Government...

[Politico]

Link, what you describe is due to inadequate incomes.  Who makes enough to be able to spare $5,000/year for savings?  I know no one like that. That would be over $400/month!  Most people make barely enough to keep a roof over their heads, transport themselves to work, etc.

Can't think of one single soul eh?

No, not really.  Of course I'm only in touch with a few people.

It is about $96/week. If somebody cannot manage that, or at least a number somewhat close to that, they probably ought to rearrange their priorities. Obviously there are exceptions.

[Politico]

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.

There has been a big mistake.  DC Al Fine, you have to realize I don't have a problem with people pointing out real factual errors that I make.  I welcome all relevant objective data.  My estimate of the median net worth of people at 65 was incorrect but that does not mean the idea that retirees are in a precarious financial situation is a "meme."  Nor does it mean that assessment is false.

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.

Delayed taxation is clearly not a powerful enough incentive. Business as usual is NOT working. We need a stronger incentive to save, and my idea is one such bold initiative. The floor would not need to be as high as $250K. That number is negotiable (whatever number it takes to pass Congress). Furthermore, you act like the tax savings are simply going to sit under a mattress. On the contrary, those resources will be put to use in a far more productive manner than they would be by going to Washington, home of the piggies who play around in the dirt.

[Link]

Delayed taxation is clearly not a powerful enough incentive.

Explain to us how a ROTH IRA is "delayed taxation."

[Torie]

Delayed taxation is clearly not a powerful enough incentive.

Explain to us how a ROTH IRA is "delayed taxation."

Ouch!

[Politico]

Delayed taxation is clearly not a powerful enough incentive.

Explain to us how a ROTH IRA is "delayed taxation."

What's your solution again? Tax-and-spend more on SS/Medicare? Increase taxes on capital gains, interest and dividends in order to divert more resources from the productive private sector into the piggy public sector?

The last thing we need is more resources flowing into the bottomless pit that is Washington, DC. We all know the foreigners lending to us are suckers, but some of us are in denial as to whether or not they'll eventually wise up. Of course they'll wise up. It's just a matter of time. Ultimately, any debate over whether or not to increase federal spending on anything in particular, including SS/Medicare, is rather pointless. I mean, we've effectively created an environment over the past few decades where the beast will starve to death before the end of this decade. Are we going to allow the United States to default as soon as foreigners stop lending to us? Of course not. We'll simply be forced to swallow federal cuts across-the-board, and state governments will pick up the slack on the REAL necessities (hey, at least they respect taxpayers and have to balance their budgets). In other words, the days of piggies playing in the dirt are coming to an end. Of course, we can save Medicare/SS for all Americans, but that will require raising the retirement age. To promote a culture of saving among Americans, especially since the days of foreigners lending to us are coming to an end soon, we need to do something bold. That means strong incentives to save, not counterproductive tax-and-spend measures. One strong incentive to save would be eliminating taxes on capital gains, interest and dividends up to a high level. I would love to hear any other ideas people may have other than mindless liberal drivel.

[Link]

Delayed taxation is clearly not a powerful enough incentive.

Explain to us how a ROTH IRA is "delayed taxation."

What's your solution again?

It's a simple question.  How is a ROTH IRA "delayed taxation?"

[Politico]

Delayed taxation is clearly not a powerful enough incentive.

Explain to us how a ROTH IRA is "delayed taxation."

What's your solution again?

It's a simple question.  How is a ROTH IRA "delayed taxation?"

www.youtube.com/watch?v=Mo2nQABhdKk#t=00m22s

[Link]

Delayed taxation is clearly not a powerful enough incentive.

Explain to us how a ROTH IRA is "delayed taxation."

What's your solution again?

It's a simple question.  How is a ROTH IRA "delayed taxation?"

www.youtube.com/watch?v=Mo2nQABhdKk#t=00m22s

I don't have time to watch your youtube videos.  All the forum wants to know is how a ROTH IRA is "delayed taxation."  You are speaking very emphatically so your explanation must be pretty straight  forward and compelling.  We're waiting...

[Politico]

Delayed taxation is clearly not a powerful enough incentive.

Explain to us how a ROTH IRA is "delayed taxation."

What's your solution again?

It's a simple question.  How is a ROTH IRA "delayed taxation?"

www.youtube.com/watch?v=Mo2nQABhdKk#t=00m22s

I don't have time to watch your youtube videos.

I don't have time to waste on this...again.

[Link]

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.

[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""

[Torie]

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""

LOL!  Politico after being way behind, pulls it out in the end. 

[Link]

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""

I did not watch the video.

My apologies Politico.  By the way my intention was not to "get you."  I just wanted to have a fact based dialog on this subject.  Your characterization of me as someone that wants government control and increased taxation is wrong.  Sometimes in life even if you don't like something it is still necessary.

I would love to live in a world where there was minimal social security taxation and everyone was left on their own to invest for their retirement.  The problem is I just haven't seen any evidence that that would end in anything other than wide spread disaster.  And once the disaster occurred people would demand the government help them out.  So you are right back to the same point except this time you didn't collect taxes for all those years.

I must say that Link's body of work on this thread is well - impressive. Maybe it is because in this instance I happen to agree with him.  Who knew?  

Well I'm trying to be as honest with the facts as possible.  The situation is neither simple nor pleasant.  Something needs to be done about SS and Medicare.  It just seems the American public doesn't want to face up to it.  It's like the whole "death panel" thing.  Denying medicare to people at 65 is definitely going to increase the number of deaths.  No one calls that "death panels."  Personally if someone has to die I think it is far better to have doctors triage the patients and determine what is a reasonable way to deploy our finite medical resources... versus drawing an absolute zero tolerance line somewhere north of 65 and leaving everyone below that line to their fate.

Besides if someone wants to take their own personal money and prolong their loved ones life on a respirator for a few months I see no one proposing a law to prevent that.  I just think when it comes to Medicare they should say with public money this is what we will and will not do.  If you choose to override a doctor's recommendation then use your own money.  Medicare should be a reasonable safety net for a broad swath of society... it should not be a blank check to let anyone do anything they please in a hospital.

[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?

[Link]

DC Al Fine, a lot of what you propose is reasonable.  Perhaps a baseline SS tax should be in place for everyone and then people who make enough should have a mandatory savings account.  It should be withdrawn from their paycheck like social security but maybe they should have a choice about what they invest it in.  Like they could invest it in a S&P or broader fund with an option to switch in and out every ten years.  That way you could prevent people from day trading it or buying at the peak and selling at the bottom like most people do.  You could have various bond and foreign funds as well.

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

Even with my proposal with broad based index funds covering various sectors with controls in place to eliminate trading I have a concern that there simply are not enough good investments.  I look at valuations across stocks and bonds and I don't see, on a historical basis, amazing valuations.  Bond prices are already sky high.



And the bond market is much bigger than the stock market.  So really there are not that many places to shove a few trillion dollars.

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Withdrawing trillions of dollars from US Treasury auctions would send government borrowing costs up.  And once you withdrew that money it is not at all clear you would have a lot of great choices to invest all of it.  Some money would definitely do better in other investments but pumping trillions into those investments would drive yields down.  I haven't crunched the numbers but I've never heard anyone address the affects of that much money entering the system.  Frankly even today's stock market valuations that I've seen people describe as "cheap" are well above long term historical norms.  Is this time different?  I don't know.

I am not some kind of stock market doom and gloomer.  I kept my mother who is only a few years away from retirement 100% invested in stocks throughout the housing collapse and recession.  I just told her to hang on tight.  She got all her money back.  So I am not squeamish.  Well I didn't tell her to increase her investments aggressively which would have been the right call so it's not like I have ice water in my veins.

I don't know.  We live in a finite universe.  There are multiple times in our recent history that have illustrated to me that we have exceeded the private markets ability to absorb any more money.  The tech boom and tech wreck are a prime example.  The housing bubble is another.  Even with the government confiscating large amounts of money we have routinely exhausted most of the good private investments and poured our money into absolutely ludicrous "investments."  Frankly I would be for a more dynamic taxation system.  Instead of playing games at the FED I would be for tax rates that increase during times like the tech and real estate boom and fall during recessions.  When there is too much money sloshing around chasing too few worthwhile investments we should have a mechanism that kicks in and uses the excess capital to pay down the debt.  Paying the national debt is a real concrete investment.  Pets.com or the floor plans for a condo in Boca are nonsense.

Anyway what I propose is pure fantasy.  But to me it makes sense.

[Indy Texas]

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
===========
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.

[opebo]

Link, what you describe is due to inadequate incomes.  Who makes enough to be able to spare $5,000/year for savings?  I know no one like that. That would be over $400/month!  Most people make barely enough to keep a roof over their heads, transport themselves to work, etc.

Can't think of one single soul eh?

No, not really.  Of course I'm only in touch with a few people.

It is about $96/week. If somebody cannot manage that, or at least a number somewhat close to that, they probably ought to rearrange their priorities. Obviously there are exceptions.

What the heck, buddy, you can't be serious, can you?  The toiling masses take home around $250/week at best, so they're supposed to save 40% of their income?  On $1,000/month, already about 60+% of their income is going for rent and utilities, so you leave absolutely nothing for food or transportation.

[Torie]

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Are you mixing up Thailand with the US opebo? if not, I think you pulled that number - errantly - out of your butt. But yes, for maybe 40% of the population, saving any money is unrealistic. Typically, what happens is that they fail to pay many of their bills in the end. The consumerist culture does not help either. Everybody wants things that they cannot afford - like cable TV and the like, with all the extras. That is such a ripoff really.

[opebo]

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Are you mixing up Thailand with the US opebo? if not, I think you pulled that number - errantly - out of your butt.

No, I used a calculator:

40 hours times $7.25/hour = 290, and assuming the tax, leaves maybe around $250/week.

In Thailand the working class makes maybe that much in a month.

[Torie]

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Are you mixing up Thailand with the US opebo? if not, I think you pulled that number - errantly - out of your butt.

No, I used a calculator:

40 hours times $7.25/hour = 290, and assuming the tax, leaves maybe around $250/week.

In Thailand the working class makes maybe that much in a month.

Opebo, what percent of the US working population fits within your definition of the "toiling masses," given that your definition is folks making the federal minimum wage who don't live in states with a higher minimum wage, like California? 

I also question your Thailand figures actually (the standard of living in Thailand is going up - and rapidly), but I digress.

[opebo]

Opebo, what percent of the US working population fits within your definition of the "toiling masses," given that your definition is folks making the federal minimum wage who don't live in states with a higher minimum wage, like California?

I've no idea, Torie, but aren't these precisely the test case?  Why should one concern oneself with or base a system upon those who are already privileged with a high income?  As for California, I'm sure their ability to save is no greater on CA's minimum wage, as rents are much higher. 

I also question your Thailand figures actually (the standard of living in Thailand is going up - and rapidly), but I digress.

Sure, the per capita GDP is going up, but not the standard of living - just like everywhere in the world, the benefits flow to the few.  True, not quite so badly so as in the USA, but still, the common workers most definitely make do on $200-300/month.