The Mythical Demise of Social Security
About the author: This guest post comes to you from Mr. ToughMoneyLove, a baby boomer who dishes the hard truth about money and personal finance at his Tough Money Love blog.
I cannot count the number of times I have seen or heard statements proclaiming with great certainty that Social Security will “disappear” or that “it will not be there for me.” The frequency and intensity of these dogmatic statements seem to be inversely proportional to the ages of the people making them.
Social Security disappearing? It’s a myth.
Social Security may evolve and change but it’s not disappearing.
Believing in the mythical demise of Social Security is bad policy for anyone planning their financial future. Such a belief is also unfair to those generations ahead of you.
Before I explain, let me distinguish rash predictions of the end of Social Security from more level-headed proclamations that “I am not counting on Social Security.” Statements that fall in the latter category are actually beneficial because they create personal incentives to save and invest for retirement.
Why Social Security is not Going Anywhere
Baby Boomers won’t let Social Security fail. There are approximately 77 million baby boomers preparing to retire. A few have just now reached retirement age. According to numerous research studies, millions of middle class baby boomers are woefully unprepared for retirement. These millions will clearly need Social Security to have any chance at a decent standard of living in retirement. Does anyone honestly believe that Congress will stand idly by while Social Security crashes and burns, undermining the financial stability of millions of middle class baby boomers?
Even if Congress was inclined to let Social Security unravel, boomers would vote them out and replace them with AARP-friendly politicians. We boomers vote in big numbers. The AARP is a strong Social Security advocate. It has 35 million members, which is ten times the size of the National Rifle Association. The AARP has an $800 million budget, five times that of the U.S. Chamber of Commerce, the country’s largest business association. The AARP is surpassed in membership only by the Roman Catholic Church. As boomers continue to age, AARP membership and voting clout will only increase. Do you know who killed Bush’s plan to privatize part of Social Security? It wasn’t the whining Democrats. It was the AARP. Can you feel the power?
Simply put, Social Security is going to be rock solid necessary for at least the next 30-40 years, until the last of the boomers moves on to the next life.
Younger generations will need Social Security. The younger readers are still skeptical. I’m not a boomer, you say, so why should I think Social Security will be there for me? The answer is that post-baby boomers – the younger generations – are also going to need Social Security.
Let me explain with some numbers, using my wife and me as an example. If I wait until age 70 to claim Social Security retirement benefits, and when my wife reaches retirement age, we will be entitled to receive a combined monthly retirement benefit (in today’s dollars, using current calculations) of $4600. Now let’s assume that Social Security is not there and I needed to replace that $4600 with income from investments. Using a 4% rule of thumb annual retirement withdrawal rate, I would need a retirement nest egg of $1,380,000 just to replace our Social Security benefits.
How many of you are counting on having well north of $1 million (in today’s dollars) in place, just to replace the Social Security benefit that you think won’t be there? Maybe you had confidence a year ago that you would, but how about after the 40% market drop that we’ve all experienced? There has been a paradigm shift in investment confidence levels at all age groups. We are recognizing that 10%-12% annual market returns are gone indefinitely and perhaps for our collective lifetimes. We actually need to do better than that to recover from the damage of the past four months. With that recognition in place, all but the wealthiest working adults in all age groups must embrace the continued existence of a Social Security retirement system. When it comes to building multimillion dollar retirement portfolios, many are called but few are chosen.
Social Security Fixes are Doable. If I have persuaded some of you that maybe this Social Security thing isn’t so bad after all, you may still doubt whether it can be fiscally sustained even with good intentions. The reality is that although the Social Security system needs work, many experts believe that the funding crisis has been grossly overstated. (Medicare is a separate problem.) The misconceptions about the financial stability of the Social Security Trust Fund are many and are nicely summarized by the Center for Economic and Policy Research as a solution in search of a problem.
I am not going to detail all of the different options that are available to improve the actuarial health of the Social Security system. They include bumping the retirement age by a year or two or slightly increasing the limit on the Social Security wage base. Heck, even immigration reform could solve the problem by adding millions of younger workers paying into the system. The key point is that there are fixes.
What does all of this mean to you? Probably the most important take-away from what I have written is that you should not automatically write-off Social Security when formulating your retirement plan. If you do, you may end up taking excessive investing risks as you attempt to compensate for having no income stream outside of your retirement investments. That could backfire on you in a big way.
And by the way, if you younger folks decide you don’t want Social Security at all, please keep quiet about it. Otherwise, the AARP may use its clout to get some new laws passed that you won’t like one bit.
Photo credit: Fabricator of Useless Articles
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Article comments
Sarah, I will not debate the Iraq War with you. Unlike the fickle Senate Democrats, who let polls dictate their votes, I NEVER supported the invasion of Iraq. It was stupid and costly. However, in comparison to entitlement spending, the cost is pretty much insignificant.
“You said it, alright, and you said it again in that paragraph.”
You are arrogant and presumptuous to think that you know my political stance better than I do. I am not and never have been accepting of government waste. I don’t know how I can say it any more clearly. If you choose to ignore this unambiguous declaration, there’s nothing I can do about it. That’s simply your problem.
“I don’t see how you can obsess about a Social Security deficit that BEGINS in 2041, and not consider the national debt TODAY.”
The deficit will not begin in 2041, it will begin 2017. At that point, funds will have to be taken from general revenue to prop up Social Security. The sooner we take steps to fix the problem, the easier it will be. And unlike the selfish baby boomer generation, I don’t believe in indulging myself at the expense of future generations.
If an asteroid were going to strike the Earth in 2041, wouldn’t you start worrying about it now? Or would you just pass that problem off to future generations, too? Sorry kids – it’s not my problem.
Furthermore, I AM concerned about the national debt, today. I have never said otherwise. Again, you’re putting words in my mouth. If I had my way, we would not only balance the budget, we would put in a plan to to start paying off the national debt IMMEDIATELY. Did you go back and read comment 56? Or are you just going to continue ignoring what I’ve written and make up stuff?
“Every dollar we lose TODAY through fraud, waste, and abuse, adds to our deficit TODAY”
That’s true, but it’s not just true of wasteful spending. It’s true of ALL spending beyond the government’s receipts.
“In Social Security spending, we get Social Security benefits, however you feel about them. In abuses by military and homeland security contractors, we get less than nothing”
Social Security benefits go to seniors. You know, people who have had their entire lives to accumulate wealth. People like Warren Buffett, John Kerry and John McCain. Military and homeland security spending goes to defense contractors, who, in turn create jobs. That’s not nothing. You may not believe this is the optimal use of these funds – I don’t necessarily disagree. But do you think that giving government money to millionaires and billionaires IS the optimal use of those funds?
Warren Buffett collects roughly $20K in Social Security benefits each year. From my understanding of your position, you’re OK with that. What if, instead of going to Warren Buffett, that money went to Berkshire Hathaway? Would that be better or worse? Personally, I would MUCH prefer if Buffett’s Social Security checks went to Berkshire Hathaway. At least then, as a shareholder, I’d get a piece of it.
“The GOP’s privatisation vision is a real possibility, and that’s what I thought we were debating.”
I disagree that it’s a real possibility. The President’s privatization idea was DOA. Furthermore, I never supported it. I don’t believe substituting one huge government bureaucracy for another is progress. Did I even once mention the President’s proposal or endorse it? With 100% certainty, I can say the answer is no. You are, once again, putting words in my mouth.
“Phasing out Social Security in favour of privatised Thrift Savings Plans, or something along those lines, is a realistic possibility, but I suspect you’ll be as unhappy with it as I am.”
I would certainly prefer it to the current setup. The TSP has an S&P 500 index fund with a 0.015% expense ratio. If I could buy shares of that fund that had my name on them and belonged solely to me, I would be pretty happy with that. But I still think it would be a far better idea to just let people keep their money.
@Bill
“No, you couldn’t and no, we wouldn’t. To date, the cost of the Iraq war is roughly $577 billion. ”
Actually, the figure rose to $653 billion while you blinked. But I’ll remind you that this is only the funding with the “Iraq” label on it. Recruitment dropped, worn out equipment needs to be replaced, some veterans are going to need treatment for life, and this, along with State Department funding do not carry the “Iraq” label. Here’s BBC’s breakdown from last May:
http://news.bbc.co.uk/2/hi/business/7304300.stm
Direct costs: $750bn
Future direct costs: c$500bn
Cost of US casualties: $600bn
Losses to economy: $400bn
Added interest: $600bn
Macro-economic impact: $1-$2 trillion
Did you drive in 2003 when we invaded Iraq? If so, then you’ll remember that oil prices started their steep rise at that time, and it took the recession to stop that rise. Gasoline prices rose, heating oil rose, electric utilities raised their prices, and you are ignoring that effect on our economy: Foreclosures, bankruptcies and delinquencies, “stimulus” rebate checks, financial companies collapsing, $700 billion to feed starving hedge-fund managers, accelerated use of unemployment benefits and reduced tax revenue, and who knows what 2009 will bring. Iraq is NOT the SOLE cause of our recession, but the effects on our economy are documented.
By the way what do you think the price of losing Afghanistan to the Taliban while we wasted our military in Iraq will be? http://news.bbc.co.uk/2/hi/south_asia/7770463.stm
“I am NOT accepting of government mismanagement. I have never said anything that indicates I am. That’s you putting words in my mouth. But Social Security and Medicare represent the greatest mismanagement of all.”
You said it, alright, and you said it again in that paragraph. The greatest mismanagement of all, “a $100 trillion problem”, that can’t be solved. Legislation that artificially increases the cost to taxpayers, can’t be changed to benefit taxpayers instead of drug companies. There’s not a thing we can do about it. This mismanagement was carved in stone on the third tablet Moses carried down, praise the Lord.
“It’s clear that you have latched on to this issue of government waste and profiteering. I get that. It’s a problem. But compared to Social Security and Medicare, it’s an insignificant problem. To draw an analogy, you’re worried about a heart attack patient’s genital warts.”
A better analogy would be comparing dieing from a heart attack with dieing from an untreated infection, which happens to a significant number of people without health insurance today. I don’t see how you can obsess about a Social Security deficit that BEGINS in 2041, and not consider the national debt TODAY. Every dollar we lose TODAY through fraud, waste, and abuse, adds to our deficit TODAY, and probably won’t even be paid back by 2041. In Social Security spending, we get Social Security benefits, however you feel about them. In abuses by military and homeland security contractors, we get less than nothing: Our deficit skyrockets TODAY, and these abuses will cost Americans their lives.
“Then cut out the 401k. Easy. Simple.”
Do you really think so? Current retirees planned their retirement with Social Security in mind. There is no way legislation will pass to take it away from them before 2041 if ever. Just stopping Social Security and Medicare simply won’t happen, and Bush’s privatisation “plan”, for lack of a better word, acknowledges this and discusses phasing out the current system.
The GOP’s privatisation vision is a real possibility, and that’s what I thought we were debating. There has been no serious discussion in DC about stopping Social Security and Medicare cold turkey.
Here are a few things Bush has said about his plan: It will be based on the Federal Employee’s Thrift Savings Plan (TSP), which is mostly like a 401k. The TSP is administered by the federal government, and employees contribute through pre-tax payroll deductions. It will avoid investment in the stock market, which leaves your Vanguard out in the cold. Read it and weep: http://www.csss.gov/reports/Final_report.pdf
I have never found any real details of the Bush plan, and can’t even guess at its final form, but I expect it to be consistent with the privatisation of Medicare Part d, which is why I keep bringing that up.
I’ll respect your desire to just throw Social Security and Medicare away, but I don’t believe it’s realistic. Phasing out Social Security in favour of privatised Thrift Savings Plans, or something along those lines, is a realistic possibility, but I suspect you’ll be as unhappy with it as I am.
“You’re numbers are accurate enough in themselves, but they omit the rest of the federal budget.”
Half the federal budget IS Social Security and Medicare. And in the future, Social Security and Medicare will become more like 80% of the federal budget. At least then, you won’t have to worry so much about government waste. There won’t be any money to fund it.
“I’d rather not go there, but I COULD blame the entire deficit on the Iraq war, and then we have a stalemate.”
No, you couldn’t and no, we wouldn’t. To date, the cost of the Iraq war is roughly $577 billion. That’s less than we spend on Social Security IN ONE YEAR. And that’s THREE orders of magnitude smaller than the entitlement shortfall.
“I’m curious about your acceptance of government mismanagement.”
I am NOT accepting of government mismanagement. I have never said anything that indicates I am. That’s you putting words in my mouth. But Social Security and Medicare represent the greatest mismanagement of all. It’s simply a matter of magnitude. I’m worried about a $100 trillion problem and you’re worried about a $1 trillion problem.
“Vanguard’s expense ratio is excellent, however when it is managed through a 401k plan, the manager of that plan gets a piece of the action.”
Then cut out the 401k. Easy. Simple.
“THAT is where the financial companies win and you lose by privatizing.”
How would financial companies win? If Social Security and Medicare were ended tomorrow and I were allowed to keep my FICA dollars, how would financial companies win? I would take my money, send it to Vanguard, and that would be it. Easy. Simple.
It’s clear that you have latched on to this issue of government waste and profiteering. I get that. It’s a problem. But compared to Social Security and Medicare, it’s an insignificant problem. To draw an analogy, you’re worried about a heart attack patient’s genital warts. Yes, they’re ugly, disgusting and embarrassing. But they’re not going to matter if the patient dies, are they?
I encourage you to put things in perspective and take emotion out of the equation. You’re upset about your portfolio dropping 40%. I understand that. But that doesn’t mean that Social Security is superior to investing in equities. As I’ve said many times, even with that 40% drop, the S&P 500 has FAR outperformed Social Security. You’re upset about government waste, fraud and abuse. I understand that, too. But that is a mere drop in the bucket compared to the problem presented by entitlement spending.
The public school system may have all but eliminated illiteracy in this country, but it’s clear that innumeracy is still rife.
@Dustin
Dustin, I’m truly sorry. I get a lot of verbal abuse from knee-jerk Republicans, who don’t even know what the issues are, let alone understand them. Yet, here I lump you with them, and treat you like they treat me. I sincerely apologize.
“I don’t know what course of action should take us forward. I do know that looking at history shows the government failing time after time to effectively administrate any sort of long-term program. This leads me to believe that whatever sort of solution for our problems we come up with probably shouldn’t include massive government administration.”
I don’t know what to do either. I really want to believe Obama will make a difference, but I can’t see an unethical government reforming itself. The fraud, waste, and abuse piss me off, but what really gets to me is our lawmakers singing the praise of free markets, while at the same time denying Americans the benefits of competition as they did with Medicare Part D.
I really believe Social Security is a scapegoat, brought to us by lobbyists of investment companies, to justify handing them fund management fees. To me, Medicare Part D amounts to theft of taxpayer money, and that Bush’s push to privatise is more of the same.
History supports your views of government, but there HAVE been times when Americans came together, like World War II, and we accomplished amazing things.
I must be delusional to think it could happen again.
@Bill
“However, the numbers agree with me. You’re talking about a few billion here and a few billion there, maybe as much as $1 trillion in fraud, waste and abuse. I’m talking about a systemic $100 trillion shortfall due to entitlement spending. My issue is larger than yours by two orders of magnitude.”
You’re numbers are accurate enough in themselves, but they omit the rest of the federal budget. I’d rather not go there, but I COULD blame the entire deficit on the Iraq war, and then we have a stalemate.
I gave you two documents, not the whole picture. The one from the Oversight committee only covers what they have held hearings on, and frankly, even though their figures are accurate, their selection IS based on sour grapes over Bush. There are lots of others that made the news, like the Littoral Combat Ship, and FBI Virtual Case file. Pay attention to the news, and you’ll see a lot more, and let me give you a hint: A cable news station that has to tell you that it is ‘fair and balanced’ is not.
The GAO report I provided on Homeland Security is only one report. They have a monthly summary email list, and this report as well as the budget forecast were both in the email I received yesterday before replying. why don’t you subscribe and let me know what you think.
I’m curious about your acceptance of government mismanagement. I was a Republican back when that meant small, transparent government. Today, I’m a Democrat, but I’ll be independent for the next election. Both parties stink.
But think about that Homeland Security report. That’s YOUR tax dollars that were intended to save YOUR life, and whether deliberately through fraud, or unintentionally through ineptitude they have squandered YOUR protection.
I’m not even going to bring up the subject of Pork.
We are facing a Grand Canyon of debt, but I’ll remind you that the entire Grand Canyon was carved out by a single river over time. Your trillion dollar figure would account for a single year, and that would have turned our pre-bailout deficit of $400+ billion into a surplus of roughly the same size.
“What’s wrong with turning a profit? If you have a problem with turning a profit, perhaps you should work for free for a while. See how not turning a profit works for you. Besides which, I have no problem paying Vanguard a 0.18% expense ratio to manage my investments. It’s a small price to pay for a decent return. By the way, Social Security’s overhead expenses are about 1.2% or receipts.”
If you read what I said above about risks, success and rewards, you know I’m for profit. Vanguard’s expense ratio is excellent, however when it is managed through a 401k plan, the manager of that plan gets a piece of the action. In my company’s 401k plan, the manager receives from 0.08% to 0.48% beyond a particular fund’s fee, and THAT is where financial companies gain. I expect that the financial company fees will be rigged by whatever law privatizes Social Security to screw the taxpayer, just as it was done with Medicare Part D. You’ll be lucky if you only lose 1.2% if a law passes.
THAT is where the financial companies win and you lose by privatizing.
@Sarah:
Do you think that we see those problems and DON’T want to fix them? The difference arises when you apply a little rationality to a complex issue.
I’ve had no Koolaid, I didn’t realize you were being facetious in calling the US a superpower but I wasn’t going to address that point at all. The whole idea of a superpower is an ill-defined, stupid meme.
For some reason you seem to think that I’m a fan of the Republican party and social conservatism. I’m not. I think Palin would’ve been a disaster for America. The Republican party has become a joke. You’ll do well to remember that the idea of a left-right spectrum of political viewpoints is a lie propagated by humans’ built-in biases to favor the group they’re a part of.
It seems like to further your agenda you’ve resorted to lumping me in with those you consider the ‘bad guys’. I advise you that this sort of attitude will lead you to a distorted view of reality.
I think the government should do all that is possible to protect babies, provide health care, provide options for retirement. Unlike you, I’m not deluded by the sentiments that “We’ve got to do SOMETHING, think of the children!” All this sort of sentiment will lead to is the same mistakes that you’ve shown the government committing so well in your previous posts. I realize that we’ve got to apply thought and reason to how we regulate our economy. This doesn’t automatically mean handing the reigns over to the government. It also means accepting the possibility that it’s not possible to provide freedom, guaranteed retirement benefits, guaranteed health care, reasonable taxes, and all the other things we’d like to have to everyone. We should strive to do our best, but just because people aren’t getting the things they need doesn’t mean the best isn’t already being done. (I don’t think the best is already being done, but the thought process illustrates the general point.)
I don’t know what course of action should take us forward. I do know that looking at history shows the government failing time after time to effectively administrate any sort of long-term program. This leads me to believe that whatever sort of solution for our problems we come up with probably shouldn’t include massive government administration.
As far as you not believing that people mismanaged their retirement funds: All you said is true, and always has been true. Which is EXACTLY why you don’t keep all your retirement funds in the stock market as you approach retirement age. This is basic financial planning that almost every financial advisor will give you, and which everyone who lost such large chunks of their nest eggs didn’t follow. If there’s a way around the lost savings, and the way around is well known, and you didn’t follow the advice….that is mismanagement, no?
Your whole comment reeks of a strawman. No one here has advocated many of the positions you’re attacking.
@Dustin
Dustin, your theories seem well though out, and consistent, yet they fail the reality test. I’m showing you sample after sample of real problems that I not only acknowledge, I want to fix. I may be delusional in thinking that a government which is bought and sold by lobbyists would ever fix their own ethics, but the problems this causes taxpayers is very real, and they are hurting YOUR standard of living.
“Just because the US is a superpower doesn’t mean that it’s possible to prevent people from dieing from inadequate health coverage.”
First of all, you drank the Koolaid. America is on the brink of true poverty, because Americans are considered some sort of food source for corporations. I was being sarcastic about us being a superpower. We’re leaning over the same cliff that the USSR fell over when it broke apart. In all probability, in 10 years, wealthy countries like Somalia and Yemen will be outsourcing their call centers and manufacturing to us for the cheap labor.
Second of all, superpowers prevent death through education and health care. Abstinence ‘programs’ have lowered abortions, but increased unwanted pregnancies, in people like Sarah Palin’s daughter. Do you really think someone who doesn’t know where babies come from is going keep America’s lead in technology? They’ll be too busy hiding under the bed when God makes thunder and lightening because He’s angry..
Third of all, we keep people from dieing every day. Not enough of them. While Cheney runs around every day to his various undisclosed locations with a team of medics, Americans die from undiagnosed illnesses, diseases that are not treated until they are terminal, and lack of basic medicine every day. Part of that lack of medicine is throwing Capitalism out the window when Americans lost the right to negotiate for medicines in Medicare Part D. This law enriches drug company execs at the cost of American lives, and by the way, in keeping drug prices artificially high, they are stealing YOUR tax money.
On second thought, maybe you’re right… If a baby is stupid enough to be born to a poor family, the chump deserves to die. Here’s a second opinion on this subject. Google the author if you don’t recognize it.
‘Truly I say to you, to the extent that you did it to one of these brothers of Mine, even the least of them, you did it to Me.’
As far as people being at fault for “mismanaging” their funds, I have to disagree. In a Capitalist system, competition in a free marketplace provide an invisible hand that self regulates the Market. This invisible hand was in shackles from corporate abuses. It is this self-regulation that failed, and the market collapsed. It isn’t that the retirees mismanaged their funds, the problem is that the government mismanaged the Market. From the former chairman of the Fed:
“As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined. “
Alan Greenspan, October 23, 2008
I’ll stick with Greenspan. If the Market will not regulate itself, then it needs to be regulated.
“I agree with you about the dangers of our national debt, it’s the cause of that debt that I disagree with.”
However, the numbers agree with me. You’re talking about a few billion here and a few billion there, maybe as much as $1 trillion in fraud, waste and abuse. I’m talking about a systemic $100 trillion shortfall due to entitlement spending. My issue is larger than yours by two orders of magnitude.
“Medicare Part D, which did make the Oversight Committee’s list, enacted as PUBLIC LAW 108–173—DEC. 8, 2003, was deliberately written to prevent negotiation of prescription drug prices.”
So it’s not enough that workers be forced to pay for senior’s prescription drugs, but now you want the drug companies to give them a discount? Perhaps Medicare should pay them less than cost, like primary care physicians. In Texas, only 38% of primary care physicians are accepting new Medicare patients because they lose money on every Medicare patient they see. My mother was visiting my sister in Texas over the summer. She spent a week trying to find a doctor that would accept Medicare. She finally ended up going to a cash-only practice. Yay Medicare.
“In privatising Social Security, we enact into Law the same corporate profits for investment companies that Medicare gave to the drug companies.”
What’s wrong with turning a profit? If you have a problem with turning a profit, perhaps you should work for free for a while. See how not turning a profit works for you. Besides which, I have no problem paying Vanguard a 0.18% expense ratio to manage my investments. It’s a small price to pay for a decent return. By the way, Social Security’s overhead expenses are about 1.2% of receipts.
“How are your portfolios doing?”
My portfolio is beaten up, just like everyone else’s. But let’s keep thing in perspective. The fact is that, even including Monday’s 8% drop, the S&P 500 has yielded a 4.54% annualized, real return over the past 40 years. That’s a whole lot more than any retiree can hope to get from Social Security. If I had retired on Monday, I wouldn’t exactly be happy about the plummet. But what I would be upset about is that I wasn’t able to invest my FICA dollars. If I had, I’d be much better off.
“As far as Medicare goes, it is hideously mismanaged, and the law was WRITTEN to take advantage of taxpayers as I showed above.”
If by “take advantage of taxpayers”, you mean take money from workers and give it to seniors, then yes, I agree that the law was written to take advantage of taxpayers. But then, that’s what seniors want.
“I favour nationalized health care, that would render obsolete the current Medicare/Medicaid system.”
From a strictly mathematical standpoint, a single-payer health care system is the way to go. But you have to ask yourself who is going to be running the system. Oh, that’s right, it’s Congress and, by extension, special interest groups. If their (mis-)management of Medicare is any indication, a single-payer health care system would be a disaster. I’ll pass, thank you.
“No one has mentioned Social Security’s survivor or disability benefits. Are these OK, or did you just not know about them.”
No, I’m not OK with them. Everyone with earned income pays Social Security taxes, even those living in poverty. That’s not OK. Furthermore, I don’t think a disabled billionaire or a billionaire’s widow(er) should collect Social Security. But, hey, if you’re on board with that, everyone’s entitled to an opinion.
“My argument is that it is NOT Social Security that is unaffordable. The financial problems we face are primarily due to government’s terrible mismanagement
…
it is my position that after raising, or eliminating that cap, no further sacrifice is necessary for anyone in a well managed system.”
Again, you’re entitled to your opinion. However, the numbers do not support you. Social Security obligations are expected to hit 6.2% of GDP by 2030. Earned income is about 49% of GDP. Even if the Social Security tax were applied to all earned income, the tax rate would have to be increased to 12.67%. No big deal, right? It’s just 12.4%, today. Not so fast.
First of all, if you extend the Social Security tax to all earned income, you’re giving people more incentive to dodge the tax. Just ask John Edwards about that. Also, are you going to pay higher benefits to those now paying higher taxes? That’s what you said before. The more you work, the more you get, right? You took risks, you succeeded and you deserve the reward, right? Well, that’s going to add to Social Security’s obligations. Or did I misinterpret you? (As an aside, I’d like to hear how the risks you took compare to the risks many a cleaning staffer took by leaving their home country and coming to the United States.)
Furthermore, Social Security is less than half of the story. By 2075, Medicare obligations are expected to 9.6% of GDP. Add that to the 6.2% for Social Security and you have 15.8% of GDP going to Social Security and Medicare. So now we’re talking about increasing payroll taxes to 32.29%. That’s more than double what it is today; almost three times what it was in 1973. Obviously, you have no qualms about leaving such a heavy burden to future generations. But personally, I think it’s a crime of Biblical proportions.
@Sarah: It brought a little smile to my face to see you provide example after example showing how inefficient and wasteful the government is and then go on to champion fixing our inefficient health care system by turning it over to the government. Just because the US is a superpower doesn’t mean that it’s possible to prevent people from dieing from inadequate health coverage.
Additionally, if losing money in your retirement saving for 5-10 years (100% of the 10 year periods in the stock market have made money and something along the lines of 80-90% of the 5 year periods) is not acceptable, follow the advice of nearly every financial advisor…don’t leave all your money in the stock market as you near retirement!
I’m also not sure why people think it’s some unalienable right that they have to/get to retire at xx age. If your portfolio has lost more money than you can afford to live off of at your retirement age, then guess what? You’re going to be working a while longer. That’s the way life works. You’ve gambled by leaving your retirement in the stock market, or by waiting too long to start saving, and now you’ve lost the gamble that would allow you to retire at your target age.
The solution to people having grossly mis-managed retirement funds isn’t to turn their management over to the greatest money mismanager in the world. The best way we have to predict the future is to look at history. Well-managed funds with a solid base in the stock market have a 100% success rate at delivering a sufficient retirement nest egg. The US Government has a horrible success rate at managing…anything. Just because many people haven’t managed their retirement well doesn’t mean the solution is to give it over to the government. People seem unable to accept the possibility that the best system will still leave people behind. Unfortunately, there’s nothing that shows us that a system that covers everyone well can exist.
This kind of reminds me of the same thought process that people who used the current financial downturn as “proof” that free markets/capitalism was a bad thing. I wrote a bit about that here:
http://blog.contriving.net/2008/11/08/no-the-economic-downturn-doesnt-prove-you-right/
@Bill,
Frighteningly enough, those waste, fraud, and abuse figures are accurate, and most of them have been in the news over the past few years. The items in this list are only what there have been hearings on. It is in no way complete. Coming from Wexler’s office, I can understand your suspicion of it being sour grapes over Bush. I hope you show that skepticism towards our entire government, and not Just Democrats. You have a world of information at your fingerprints, and you should check out some of the items in the bibliography at the bottom of the oversight committee list.
The Government Accountability Office (www.gao.gov) is an organisation of non-partisan auditors. They do excellent work, and their figures were always accurate to the best of my ability to verify them when I didn’t believe their reports. This report, titled “The Nation’s Long-Term Fiscal Outlook: September 2008 Update”, makes your earlier forecast of our national debt look optimistic in comparison. I agree with you about the dangers of our national debt, it’s the cause of that debt that I disagree with. http://www.gao.gov/products/GAO-09-94R
Please read that report, which validates your earlier posting, and then read this report, published last month, which validates my assertion of waste and abuse, if not fraud. It is titled, “Department of Homeland Security: Billions Invested in Major Programs Lack Appropriate Oversight”. http://www.gao.gov/products/GAO-09-29
Some of it overlaps the Oversight Committee’s summary, but this report was produced this year, for 2007, both years under Democratic House and Senate. This report indicates no partisan favouritism, and I hope you will find the GAO as credible a source as I do.
The real problem is that our government is horribly mismanaged, and if it was a private company, it would be dead broke…. Wait a minute, the United States IS dead broke.
Medicare Part D, which did make the Oversight Committee’s list, enacted as PUBLIC LAW 108–173—DEC. 8, 2003, was deliberately written to prevent negotiation of prescription drug prices. This hurts the taxpayer, and increases the profit to drug companies. The link I posted above was bad, this one works: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s3rs.txt.pdf
In privatising Social Security, we enact into Law the same corporate profits for investment companies that Medicare gave to the drug companies. Well over 100 million working customers along with all of their management fees and charges.
Of course, we the taxpayers are better off because historically, the stock market always goes up over time. This works just fine, unless your part of history falls in 1929 or 2008. I have two employees with less than 3 years to go until they are 65, and both of them have lost 50% of the value of their 401k. How are your portfolios doing?
Tough luck! They should have put their money into safe money market accounts if they are close to retirement, just like these investors in the Reserve Primary Fund, who are now wondering how much of their primary investment they might get back and when they might see it.
http://www.nytimes.com/2008/12/04/business/04reserve.html?
The same hold true these 401k investors who are forced to take money out of their accounts before the market can recover, or just have the penalties taken from them. It’s their fault for not putting their money in savings accounts, and just embracing poverty as their spending power shrinks due to cost of living. When the money runs out, they can start shoplifting, like they do in Japan.
http://www.heraldextra.com/content/view/288762/18/
http://www.washingtonpost.com/wp-dyn/content/article/2008/11/29/AR2008112901913_pf.html
I’m not getting a sense of security in this picture, are you?
As far as Medicare goes, it is hideously mismanaged, and the law was WRITTEN to take advantage of taxpayers as I showed above. Yes, changes have to be made. But look at the health care industry in general, where up to 50% of the $2.3 Trillion spent today is waste. http://www.washingtonpost.com/wp-dyn/content/article/2008/11/29/AR2008112902182.html?nav=rss_politics
One of my friends is being garnished for a medical procedure performed on his wife that his health plan doesn’t want to cover. Another friend’s employer was just absorbed in a merger, with a drastic cut in medical benefits. He can’t afford his medicine at all. Face it: The system we have does not work. I favour nationalized health care, that would render obsolete the current Medicare/Medicaid system. If managed with transparency and oversight, which are lacking in today’s system, I believe this would save taxpayers money and improve American’s standard of living. I’m talking about medical care, not cosmetic stuff. I find it odd that the worlds ONLY remaining Superpower lets its citizens die from neglect.
No one has mentioned Social Security’s survivor or disability benefits. Are these OK, or did you just not know about them.
The average monthly payment for retirement benefits in 2009 is $1,153. That doesn’t even make one month’s payment on my apartment, but for my 83 year old mother, who is living on a fixed income and requires a walker to get around, this is a lot of money. And, yes, I do pay part of her expenses. Her Social Security benefit translates directly to my own finances.
The figure above is an AVERAGE. The actual benefit that is paid is calculated on an individual basis based on a lifetimes payment into the system. In other words, the more I work, the more I get. That’s the way it should be. I think the technical phrase is “quid pro quo.” My retirement benefits will be more than the benefits my building’s entire night cleaning staff combined, and I am alright with that because I took risks, I succeeded, and I deserve the reward.
My argument is that it is NOT Social Security that is unaffordable. The financial problems we face are primarily due to government’s terrible mismanagement , and laws, such as the one that is proposed to replace Social Security with private accounts, which are written to benefit whichever lobbyist pays for them and not the taxpayer.
As I stated in my original comment, I’m already over the cap on Social Security contributions, and it is my position that after raising, or eliminating that cap, no further sacrifice is necessary for anyone in a well managed system.
1) It’s not subjective. There’s no “you should work harder” or “you’ve been on welfare too long” or “you’re just a bum” or “are you really disabled?” or “well, how disabled are you?” It’s completely objective – no questions asked.”
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Right, but those are the very things that help keep freeloaders off of the current system. (Help, not prevent)
You’re trading administrating the question-asking for paying for freeloaders. After all, the same incentive (to work hard to get above the poverty threshold) exists under the current system that you propose will keep people from freeloading under your proposed system. The difference is that, under the current system, a certain percentage of the freeloaders are caught by the subjective question-asking.
I’m not convinced that the other benefits you mention outweigh this downside.
“Where is the incentive to work? If the government is just going to give me the money, no questions asked…why would the millions of people in this category even get a job?”
I agree, it is a pretty serious moral hazard. But, as you pointed out, any kind of welfare program induces a moral hazard. In effect, such a program would create a 100% marginal tax rate on income below the poverty line. However, I disagree that there’s absolutely no incentive to work. The incentive is to work hard enough to get above the poverty threshold. Some may believe that’s impossible (and, indeed, they might be right) and so the incentive is eliminated. But that doesn’t mean it’s not there.
That said, I prefer this approach to the status quo for a number of reasons:
1) It’s not subjective. There’s no “you should work harder” or “you’ve been on welfare too long” or “you’re just a bum” or “are you really disabled?” or “well, how disabled are you?” It’s completely objective – no questions asked.
2) It’s cheap. OK, saying that $679 billion is cheap might be a little crass. But it’s cheaper than what we’re currently doing. The United States spent $1.1 trillion on social programs in 2006. Of course, $337 billion of that was recaptured in taxes, so the net amount was only $775 billion.
3) It’s 100% effective. Despite the impressive dollar amount currently spent on social programs, 32 million Americans still live in poverty and 70 million Americans can’t afford health care. Our current anti-poverty programs are only 39% effective and health care programs are only 25% effective.
4) It doesn’t tax people in to poverty. In 2006, social programs helped 34 million people out of poverty and get health care. Unfortunately, we taxed about 11 million people in to poverty. This is not a case of “you win some, you lose some”. That is simply unacceptable.
I’m not saying my proposal is the best possible. But I will argue that it’s a whole lot better than what we’ve got going on right now. And I’m always open to suggestion.
“3) Establish a new anti-poverty/health care program. If your family’s income is below your family’s poverty threshold, the government gives you the difference – no questions asked.”
I like the thought behind this whole comment, except this part just won’t work.
Where is the incentive to work? If the government is just going to give me the money, no questions asked…why would the millions of people in this category even get a job?
Granted, this conundrum faces all welfare programs, but this sort of program makes the decision to not work at all, or to work less to keep below the poverty threshold, a simple and obvious decision.
“On September 30, 2000, the Federal government closed the fiscal year (FY) 2000 with a $236 billion budget surplus.”
Yes, there was a surplus in FY 2000 (as well as 1998, 1999 and 2001). But don’t write the Vatican to nominate Clinton for sainthood quite yet. Recall there was a Republican Congress at the time. And the national debt still increased by $1.5 trillion (37%) under the Clinton administration. I’ll grant you that’s a lot better than the Bush administration has done. Speaking of President Bush, isn’t he a baby boomer?
“I would sacrifice a lot for my country, and the House Oversight Committee was kind enough to compile a list for me”
This is an excellent start. Assuming 100% of those dollar amounts are waste, fraud and abuse, the total is $1.7 trillion. Now if you could only come up with another $97.5 trillion to cover the unfunded liabilities of Social Security and Medicare. Also, I asked what YOU would sacrifice, not what you would tell others to sacrifice. Would you be willing to take upon yourself the sacrifices that you have forced upon future generations or not?
“Programs to allow Americans to lead a healthy life are quite affordable if we stop this redistribution of wealth.
…
Are you really telling me that you want these people to starve so you can have a few more bucks in your pocket?”
No. And if you go back and read comment #56, you’ll see that’s not my stance at all. I have absolutely no problem with taking from the rich to help the poor. I think it’s great. My problem is with taking from WORKERS (no matter how poor) to give to the SENIORS (no matter how rich). And that’s what Social Security and Medicare are all about.
@Bill Woessner,
There is an element of truth that boomers contributed to the problem, but you’re old enough to have voted since 2000. You are part of the problem too, and if you voted against the ‘tax and spend’ liberals, you’re a bigger part of the problem. In 2004, the Congressional Budget Office stated that “On September 30, 2000, the Federal government closed the fiscal year (FY) 2000 with a $236 billion budget surplus.” http://www.senate.michigan.gov/sfa/Publications/Notes/2004Notes/NotesMarApr04gso.PDF
That is a very responsible budget for a ‘tax and spend’ Democrat., and we were a wealthy nation that could take better care of its people. In April 2004, the same document states a deficit of $477 billion under Bush, and that’s with Republicans controlling both the House and Senate. Whatever administration is in power cooks the books to make it seem painless, http://www.usatoday.com/news/washington/2006-08-02-deficit-usat_x.htm, and I’m not really sure if ANYONE knows the true budget figures, but I’m sure we’ll agree that it’s grown much worse over the last 8 years.
I would sacrifice a lot for my country, and the House Oversight Committee was kind enough to compile a list for me at http://oversight.house.gov/documents/20081003181709.pdf
I won’t repeat the whole list, but these are some of the things I would sacrifice: Waste Identified in Contracting Database, $1.1 trillion; Unaccountable U.S. Spending In Iraq, $15 billion, Waste from Medicare Part D Switch to Private Insurers, $75 billion; Drug Expenses for Dual Eligible Beneficiaries, $3.7 billion; Waste and Mismanagement of Katrina Contracts, $8.75 billion; Wasteful Homeland Security Contracts, $81 billion; Excessive Crop Insurance Subsidies, $11 billion; and just imagine how much waste, fraud, and abuse will be added with the bailout.
If you want to talk about a ‘redistribution of wealth’, let’s start with that list above. Some of the waste above can be attributed to stupidity, as we have seen time and again since Jan 20, 2001, but personally I’d bet that most of this list is a redistribution of Taxpayer wealth into the pockets of crooks. Programs to allow Americans to lead a healthy life are quite affordable if we stop this redistribution of wealth.
And Bill, this is a disaster, just like Katrina. People have lost their homes. In New York, homeless shelters were overcrowded with 2,800 people last month, while the previous record in 2003 was 9,200.
We’re averaging over 500,000 INITIAL jobless claims per week. These INITIAL claims do not include people who are already collecting, or whose benefits have already run out. These are Americans who WANT to work, but can’t find a job. These are taxpayers who are not any problem to society.
30 Million Americans are on food stamps last month, the largest number since Katrina, and local food pantries have been experiencing a 20%-100% increase in visits over the last 6 months. Are you really telling me that you want these people to starve so you can have a few more bucks in your pocket?
@Ian,
You’re half right in stating “people wake up and realize that they can elect people who promise to give the most handouts.” That was true in the past, but I don’t think citizens have much representation any more. Lobbyists, with their ‘campaign contributions’, are writing the legislation. For example, Medicare Part D prohibits the government from negotiating lower prices for Drugs. This clearly benefits the drug companies at the expense of the taxpayer. Here is the bill that attempted to restore bargaining power for lower costs: http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.4:
Bill – Thanks for giving us credit for the dotcom era! And you are correct. Baby boomers are going to defend their well established economic turf. We do that by voting.
You are obviously a bright guy with strong opinions. I like that. It doesn’t appear that you are going to move off your position about baby boomers and that’s OK. So I think I will close my part of our dialog by sincerely inviting you to visit my blog now and then to share some more of your views there as well as here. Not only will I benefit but so will my other readers.
Thanks again.
Let’s work through an actual example: Single person making $100K in 2008 vs. 1973. This should be illustrative. For simplicity, we’ll just take the standard deduction.
Today, that person gets a standard deduction of $5,450 and a personal exemption of $3,500. So his taxable income is $91,050. Consult the handy tax tables and we see that his income tax is $19,472.25. His income is under the Social Security limit of $102K, so he pays the full 7.65% payroll tax. That’s another $7,650. The grand total is $21,122.25 or 27.12% of his income.
In 1973, the equivalent salary was $20,501.17. The standard deduction was $2K and the personal exemption was $750. So his taxable income was $17,751.17. Computing the income tax is a little laborious because there were so many brackets, but Excel handled it quite nicely. His income tax is $4,425.40. The Social Security base back then was only $10,800, so he only pays the 5.85% tax on that amount. His payroll taxes come out to be $631.80 for a grand total of $5057.20 or 24.67% of income.
Now, it doesn’t take a PhD in math to see that 24.67% is less than 27.12%. The absolute difference is 2.45% but the relative difference is almost 10%. And that doesn’t even take the employer portion of FICA in to account. If you toss that in, the disparity grows to 5.38% (20% relative difference). So I stand by my complaint of higher taxes, lower benefits and massive debt.
“BTW – I’m trying to remember which generation brought us the dotcom bubble. Do you recall?”
Well, let’s see… the dotcom bubble started in the late 90s – call it 1995. The average baby boomer was born in 1955, making them 40 years old in 1995: perfect age for middle management. Surely you don’t mean to pass the buck to Generation X. Generation X was just out of college in 1995. They weren’t in a position to effect anything in 1995, let alone the dotcom bubble.
“Start blaming politicians, not generations. There is plenty of blame to go around.”
“The government you elect is the government you deserve.” It’s a famous quote from a very smart man. Weren’t you the one who said that if Congress started to muck around with Social Security, you’d just give them the boot and vote in politicians more… amenable to the baby boomers’ demands?
Bill: You are entering the realm of the irrational. I don’t know and don’t care what marginal rate Buffet pays but I pay the top rate and so do many others. When I entered the workforce in 1973, the 50% marginal rate started at $32k and went up to 70% from there. My marginal rate right out of college was 29%. So, before you start complaining about SS payroll taxes, start paying income taxes at 1973 rates. Reagan and then Clinton lowered them. Last I checked Clinton was a baby boomer and also lowered deficits.
BTW – I’m trying to remember which generation brought us the dotcom bubble. Do you recall?
Start blaming politicians, not generations. There is plenty of blame to go around.
Is it generational warfare to ask to that the baby boomers get the same treatment as subsequent generations? And here I thought all men were created equal…
The high marginal tax rates are irrelevant for one very important reason. Just like today, no one really paid them. The top marginal rate today is 35%. Yet Warren Buffett’s OVERALL rate is a mere 17.7%. Obviously very little, if any, of his income, is taxed at the top marginal rate. And even if people DID pay those high marginal rates, it doesn’t matter, because the baby boomers STILL ran huge deficits.
What other flaws would you like me to address?
You’re right that we can’t rewrite history. So here’s plan B:
1) Throw out Social Security, Medicare, Medicaid, and all the other public assistance/welfare programs (unemployment, worker’s compensation, EITC, food stamps, school lunches, housing subsidies, etc.)
2) Increase the poverty threshold to include health care. I estimate this will essentially require doubling the threshold.
3) Establish a new anti-poverty/health care program. If your family’s income is below your family’s poverty threshold, the government gives you the difference – no questions asked. How much would it cost? About $679 billion in 2006. Compare that to $878 billion for Social Security and Medicare alone.
4) Cancel the portion of the national debt that is intragovernmental holdings (roughly 2/5 of it). Start paying back the rest. If we amortized it over, say, 20 years at 4.6%, the annual payment would be $360 billion per year – eminently doable.
4) Replace the tax code with a single, flat income tax on incomes above the poverty threshold. Include ALL income and treat it all the same. Wages, salary, rents, royalties, capital gains, gambling winnings, interest, dividends, inheritances, gifts… all income. I estimate the rate would have to be 32%.
5) End all those tax shelters like 401k, 403b, IRA, etc.. Tax any money that hasn’t been taxed, including Roth earnings. That will generate a $4 trillion windfall.
6) Use that windfall to make lump sum payments to everyone who paid Social Security and Medicare taxes. The lump sum is calculated based on how much you paid in, plus as high an interest rate as possible. The interest rate has to be at least 4% to keep up with inflation.
ahhh…gotcha. Thanks for clarifying.
I don’t think the baby boomer generation has “skated through” necessarily but they (politicians) have made things much more difficult for future generations.
castocreacions – Agreed but my last comment was directed at those who seem to suggest that baby boomers have skated through the last 35-40 years without paying into SS to support those ahead of us.
“boomers have been redistributing their wealth to the “greatest generation” for many years now. It’s not as if we have been immune to all of the problems you are concerned about.”
So because you’ve been wronged we should all be so?
My mother taught me that “two wrongs do not make a right” and it seems to apply heavily to this situation.
Ian – It seems that you and others have missed the essential point of the article, which is probably my fault as the author. The point is that Social Security is here and because of forces like the AARP, it is not going away. That is reality. Therefore, you should take it into account in your financial planning. Its existence offers both positives and negatives in that area.
You and others have referred to SS as a “redistribution of wealth” program. I don’t agree with that assessment but even assuming its true, boomers have been redistributing their wealth to the “greatest generation” for many years now. It’s not as if we have been immune to all of the problems you are concerned about.
I sense a lot of intimidation in the original article, which genuinely angered me. Essentially what I’ve gotten out of reading it and skimming through the comments is that the AARP is a powerful and threatening special interests group who can bend congress to their will, and that some people really do think that the government has the right to tax us as much as it wants and redistribute wealth. It’s really not the government’s job to make sure anybody is comfortable. It’s job is to make us safe from harm (starvation, foreign invasion, murder, etc.) I’m ready to have a congress that will stand up and do what’s right regardless of whether it’s popular or not. The flaw of all democracies is that eventually people wake up and realize that they can elect people who promise to give the most handouts. Social Security is a handout.
Bill: It seems you are all about generational warfare. Unfortunately for you, the war started a long time ago. According to your analysis (interesting but flawed) you’ve already lost. You can’t rewrite history. (If you do, maybe you can go after the 50% and 70% marginal income tax rates from the 70’s and 80’s which your analysis conveniently overlooks.) So time for a Plan B. What is yours?
OH my gawd Bill…if I weren’t married I’d be in love with you. *grin* I love your logic.
“As Americans, I believe we should come together in this crisis like we did on 9/11 or in the aftermath of Katrina.”
Sarah, I think that is a great idea. How about we start with the baby boomers? Let’s go back and retroactively increase payroll taxes on the baby boomers. We’ll just make it equal to what it is today. Adjusted for inflation, that would put 1964’s payroll taxes at 15.3% on the first $14,600 of income. Compare that to the actual historical rate of 7.25% on the first $4,800 of income. It’s pretty clear that the baby boomers got a sweet deal on that one.
In addition to raising payroll taxes, we’re also going to have to cut some benefits. According to the latest trustees report, Social Security will only be able to pay 78% of promised benefits come 2041. Coincidentally, I will have just turned 62 in 2041. So if my benefits are going to be cut by 22%, I think it’s only fair if your benefits are also cut 22%. I’m so glad you wanted to work together on this.
While we’re at it, we should also push back the full retirement age to what it is today. Some baby boomers are young enough that they’ve already had their full retirement age pushed back to 67. But if you really want us to “come together in this crisis”, then we’re all going to have to make some sacrifices. So let’s just push everyone’s full retirement age back to 67. That’s fair, isn’t it?
But let’s not stop there. Let’s also talk about the $6.4 trillion national debt the baby boomers ran up. Somebody’s got to pay for that. If the baby boomers had had the wherewithal to actually pay for their spending instead of just running massive deficits, we wouldn’t be stuck paying $320 billion a year in interest (yes, that’s $1000 per man, woman and child in the United States… in interest). So let’s also retroactively raise income taxes to pay off that massive debt. The baby boomers should have a few trillion to spare since they paid so little in taxes for the past few decades.
Yes, coming together is clearly the answer. But, you see, my generation is already making the sacrifices our parents forced upon us. We’re paying higher payroll taxes on more income. We’re going to have our Social Security benefits cut, both in duration and amount. We’re paying higher income taxes, just to cover the INTEREST on the baby boomer’s deficit spending. And I haven’t even touched on Medicare.
What sacrifices are you willing to make, Sarah?
@castocreations, Thank you for paying for my Social Security. Reread the part of the article about boomers who vote.
@Mr. ToughMoneyLove, Thank you, but you have more company than you think. I believe in taking care of myself, and would be humiliated to go to a food bank or welfare, but especially in today’s economy, we often don’t have a choice. As Americans, I believe we should come together in this crisis like we did on 9/11 or in the aftermath of Katrina.
That’s an interesting way of looking at the 401k/IRA. It isn’t a perfect analogy, though, for a couple of reasons. First, it’s entirely possible that you will never pay taxes on your 401k. All you have to do is limit your withdrawals so your taxable income is 0. In 2008, a married couple over 65 can have at least $20K in gross income before paying 1 cent in taxes. Second, there are RMDs. You can’t defer your taxes forever.
I’m not a huge fan of replacing the income tax with a sales tax. I agree that consumption and debt are out of control. I would go so far as to say it’s an epidemic. However, I’m not convinced that switching taxation from income to consumption would necessarily change that. Rampant consumption is, sadly, part of our culture. Is a change in tax policy enough to alter that? I’m not sure. Besides which, taxpayers aren’t even close to maxing out their current tax deferral options (IRA & 401k). Heck, I have hard time convincing my coworkers to contribute 8% to get our full employer match (and they’re mostly MSs and PhDs).
Another reason I don’t favor taxing consumption is Warren Buffett. In an average year, Mr. Buffett might make… $4-5 billion. How much of that is he actually going to spend? Personally, I have no idea, but let’s just say it’s 1% (how one can get by on a mere $45 million per year, I’ll never know…). And let’s assume the sales tax rate is 30%. Mr. Buffett will end up paying $14 million in taxes, which amounts to a whopping 0.3% of his income. I hate using the word ‘fair’ because doing so implies it has an objective meaning, but that’s just not fair.
I don’t have anything against Warren Buffett. I am upset that his overall tax rate is 17.7% while we mortals pay more like 25-30%. But he’s upset about that, too, so I think he’s probably one of the good guys. However, I don’t think the money-making machine that is Warren Buffett should be allowed to make money virtually unfettered. An income tax helps put the breaks on that machine and makes sure that he pays taxes just like the rest of us. A consumption tax, on the other hand, would have essentially no impact on Mr. Buffett.
Bill No I am not glad for tax shelters but a 401(k) is not a shelter but as you point out, a tax deferral. And yes I am glad for that because even though many marginal rates are going up, I will be paying taxes at a lower rate in retirement than I did during my peak earning years.
Tax advantaged plans do make it easier to save for retirement. A 401(k) plan essentially converts an income tax to a consumption tax. You do not pay anything on the income that goes in and then you pay tax only on what you take out, when you take it out, presumably to spend/consume. I am a proponent of consumption taxation as opposed to income taxation. What about you? Don’t you think that debt driven consumer spending and saving habits would improve if we were taxed on what we spend instead of what we earn? Doesn’t a 401(k) encourage that?
“but for many middle class boomers with little extra money to invest and kids to put through college, etc., pensions were the only realistic option other than reliance on SS. It is so much easier to invest for retirement now with various tax advantaged plans available.”
Part of the reason that a middle class baby boomer didn’t have a lot of money to invest for retirement is that they were paying payroll taxes. And they had it easy! Back in 1960, payroll taxes were only 5.8%. Today, they’re 14.2% (both numbers fairly account for the employer portion). In addition, the tax base has been increased way beyond inflation. To top it all off, today’s workers have had their benefits reduced by increasing the retirement age. Talk about a triple entente!
Also, tax shelters do not make it easier to invest for retirement. They just allow you to invest more. And even that is debatable. Assuming you’re in the 25% tax bracket, the federal government gives you a 25 cent tax break for every $1 you put in your 401k. In exchange, you promise not to touch that money until you’re 59.5 AND you pay ordinary income taxes on the entire amount. Of course, if you do touch that money before you’re 59.5, Uncle Sam will slap your hand with a 10% penalty.
But of course, that tax break doesn’t grow on trees. The government has to raise the money to cover it. That means they either raise other taxes or they run a deficit. If they raise taxes, you just get to pay for your own tax break now. If they run a deficit, you (and your descendants) will get to pay for your tax break over time (with interest). Aren’t you glad for tax shelters?
Not having a pension does seem like an excuse to me. I’ve never had access to a pension and didn’t even know what one was until a few years ago. No one in my family ever had one.
Just because you feel an amount of pain due to recent losses in the market does not make Social Security a viable or good program. If you had saved and invested appropriately (i.e. appropriate risk level for your stage in life) you should be fine. If you invested too aggressively then you will be hurting.
I’ve lost quite a bit out of my retirement too but I’m in it for the long haul and at my stage in life a more aggressive strategy is appropriate.
And who forced boomers to pay for their childrens’ educations? How about the kids pay their own way? I did. It’s hard but it’s doable and builds character.
I’m tired of all the excuses. Take care of yourself and your family and let me do the same. Stop trying to take my money to pay for “your” (collective) bad decisions.
Sarah…just because you’ve been paying into the system for over 20 years doesn’t mean YOUR money is still anywhere there. It’s been going to pay for OTHER people. You’ve gotten screwed and are demanding your money at the expensive of myself and others. So then we’ll get screwed…but you’ll be gone so you won’t care. Where does it end?
Bill – Not a cop out at all. I am speaking for all boomers, not me. I started investing in the market in 1973, added some real estate, etc. but for many middle class boomers with little extra money to invest and kids to put through college, etc., pensions were the only realistic option other than reliance on SS. It is so much easier to invest for retirement now with various tax advantaged plans available.
“For the boomers, keep in mind that a lot of us never had pension options”
That is a serious cop out. There was nothing impeding the baby boomers from investing in the stock market to save for their own retirement. True, they didn’t have the tax shelters we have today (401k and IRA), but they also didn’t have crushingly high payroll taxes. And while indexing wasn’t invented until 1975 (praised be John Bogle), mutual funds have been around since 1924.
“BTW – 4.5% return over a 35 year retirement is problematic when you factor in inflation.”
4.54% is the REAL return (i.e. after inflation). The nominal (before inflation) return over the same period was 9.13%. That’s a lot of inflation, but remember, that period includes the the 70s and 80s when we saw double digit inflation.
Bill – Your analysis is very good and I think a new plan needs to be started for our youngest adults. No I do not want them to transfer their wealth to me. I would be content to increase the Social Security earnings cap to fix the system.
For the boomers, keep in mind that a lot of us never had pension options where we worked and many of those that did (e.g., auto companies) are in terrible shape because of it. 401(k) plans were not even in the law until 1980. Contribution limits have also historically been low. This has handicapped a lot of us from doing everything that we can for ourselves.
BTW – 4.5% return over a 35 year retirement is problematic when you factor in inflation.
I think we need to try to put things in perspective. I realize that the human brain is hard-wired to focus on the short term. But planning for retirement is, by definition, a long-term endeavour. As I type, there are 7 occurrences of “40%” on this page. No one can deny that it’s been a rough year in the stock market. However, it’s been a pretty good 48 years. And that’s what matters.
Let’s go with Mr. ToughMoneyLove’s suggestion of someone who retired in November 2007. I’ll assume this person retired at his full retirement age, so he was born in January 1942. And for simplicity, let’s assume he started working in January 1960, at age 18. The real, annualized, dollar cost average return of the S&P 500 from January 1960 to today is 4.54%. And yes, that includes yesterday’s 9% drop.
Now, a 4.54% rate of return won’t make you rich, but it’s enough to retire on. And it’s definitely better than you get with Social Security. Even the most liberal estimates of Social Security’s rate of return only put it in the 2-3% range. What’s worse, today’s younger works are all but guaranteed a NEGATIVE rate of return. Given the choice, I would take the stock market every day of the week and twice on Sunday (except they don’t trade on Sunday).
That said, there’s a much more important question we need to ask ourselves. Do we really want a wealth transfer program that takes money from workers and gives it to seniors? If you’re inclined to say yes, please first consider that the population of workers includes everyone with earned income, no matter how poor; and the population of seniors includes Warren Buffett, the richest man in the world. In other words, workers are not necessarily wealthy and seniors are not necessarily poor.
I have no problem with taking care of the poor. But Social Security goes way beyond that. According to the 2007 Current Population Survey, the total cost to eradicate poverty in the United States is $191 billion. That’s not in addition to current anti-poverty programs, including Social Security – that’s total. Compare that with Social Security’s budget of $549 billion for the year and it makes one start to wonder where all the money is going.
Tax the wealthy to help the poor and leave the middle class alone. If we didn’t tax the living bejesus out of the middle class (and perhaps provided a modicum of education), they could easily afford to provide for their own retirement. There’s just no need for this unwholesome, unethical and unsustainable intergenerational wealth transfer scheme. And the sooner we do away with it, the easier it will be.
Sarah – Thank you. I was feeling badly outnumbered! I must say that thanks to the huge hit my 401(k) has taken, I’ve feeling a much stronger affiliation to the middle class.
I agree with the author. I’ve paid into the Social Security system for 26 years, and will not tolerate some politician taking it away from me.
The solvency “problem” is easy. Raise or eliminate the cap. I’m all for this, and my salary is already ABOVE the cap.
But I think the point is moot for the next decade at least. My pension has been frozen, and now almost all of my retirement funds will come from my 401k, which has lost 40% value over the past year. Any attempt to replace Social Security with a privatized version won’t happen until these memories fade, and I don’t think any politician will be foolish enough to advocate just getting rid of it.
Furthermore, I consider this current recession to be the result of systematic squeezing of the middle class, by allowing businesses to get away with more, and taking away consumer protections. The sheer volume of foreclosures argues strongly that it goes well beyond a few people who wanted more than they could afford. And no one really mentions that this same problem exists with credit cards and auto loans.
The wealthy at the top of the pyramid allowed their base to crumble, and now have to face the loss of their millions+ dollar bonuses. Any real real RECOVERY of our economy must begin at the base, with the American taxpayers. These bailouts for big businesses don’t address the issue, and at best just eases our collective slide into Poverty.
If you want a healthy economy, take away medical expenses and allow consumers more to spend. Increase Social Security to allow consumers to spend instead of hoard away in a 401k. Increase unemployment benefits so people don’t have to live off credit cards.
This recession is proof that trickle down doesn’t work. It’s time to take care of People, and Social Security is a good place to start.
@ Bill You are right in many ways. My original post was not really intended to be a defense of SS, only a matter of fact assessment that it is not going away.
I did my part – had three kids, two working and one still studying. I’m a small government guy but where is the plan to replace SS? There are workable plans to fix it but haven’t seen a replacement yet, except privatizing it. AARP says “no” which in today’s political environment usually means “no.” Maybe we can all get in the government Thrift Savings Plan? Or how about letting us withdraw our 401(k) funds (now depleted 40%) tax free?
“The baby boomers have paid billions into a SS system that we did not create. After paying into the system over 40 years, you want us to say “never mind – bad idea” and vote it out?”
Yes, that’s precisely what we need to do. Because if we don’t, the next generation is going to pay EVEN MORE in to the system and receive EVEN LESS in benefits. It’s a vicious cycle rooted in demographics. So until Congress is willing to legislate that people start having more children, there is really no way out.
The baby boomers hold most of the responsibility for the mess that is Social Security. After failing to have enough children to sustain Social Security, the baby boomer generation either didn’t have the foresight to see the pending demographic disaster or they were too lazy, too stupid or too selfish to do anything about it. And that’s on top of spending the United States in to $6.4 trillion of debt.
It’s time to make a stand and say enough is enough. We can’t keep borrowing against from future generations. Besides being unsustainable, it’s unethical and simply bad economics. I like your idea of the “do over” and I even have an idea of where to come up with the money. But I think expecting a full refund of your Social Security taxes with 6% interest is reaching. Everyone is going to have to make some sacrifices – even the baby bummers.
Pardon again…let me clarify what I mean by “top” … I don’t mean top earners. I mean top as in numbers. It looks like an inverted pyramid with more people on top collecting than on the bottom contributing. So as I move to the “top” there will be even fewer on the bottom contributing and less available to shell out. My money will be gone and I’ll be SOL. Which sucks but I am preparing for it now.
@ castocreations I understand your frustration. I just think it is more productive to refer to SS as an actuarial nightmare rather than a Ponzi scheme.
Just remember that none of us who are contributing in my generation are at the “top” of anything when it comes to SS. We are not on the sidelines pulling strings and taking out money. Also remember that we were at the “bottom” once just like you. Only by aging and paying in over many years, not by siphoning money, have we moved closer to collecting anything.
I have enjoyed exchanging views with you.
Pardon…I did not mean to imply that SS is illegal. Clearly that is absurd. My point is that it is built to benefit those at the top, just as a Ponzi Scheme is.
“attract investors into investing in little or nothing using promises of outlandish returns”
And how is that different from SS? As far as I see it … a few dollars come out of my paycheck and supposedly are for my benefit in the future. Except that they are being used now. I’ve been “investing” and promised my “returns” in the form of a (as currently calculated) $1,600 check each month when I retire. Seems pretty outlandish to me since I have no faith in seeing that actual check. So where will my benefit come from?
From those who start working in 10, 20, 30 years and start their own contributions to this system? If there are 14 workers for every one of you how many workers will there be for every one of me?
That seems very ponzi-like to me.
If it were a system that allowed me to invest MY money, taken out of my paycheck each month, it would be an actual retirement plan that I could rely on in the future. As it stands now I’m being snookered.
@castocreations FIrst, a true Ponzi scheme is an illegal pyramid plan set up by its creators to do nothing but attract investors into investing in little or nothing using promises of outlandish returns. SS is nothing like that and is certainly not illegal. SS does not require a pyramid structure to succeed. It helps but other actuarial adjustments can make it function. SS doesn’t promise anything to retirees except a modest monthly payout based on earnings history. And, if you analyze the algorithm that SS uses to determine the retirement benefit, it strongly favors those with low incomes paying in. There is no meaningful return on investment for high earners who have paid in.
That is why calling SS a Ponzi scheme is over the top rhetoric,
How exactly is my Ponzi scheme comparison illegitimate or somehow less worthy in this debate? Is that not exactly what SS has turned into? Those at the top benefit the most and those at the bottom are paying, not for their own retirement, but for those who are above them.
Just as a Ponzi scheme requires more and more people coming in on the bottom to continue and will fail if those incoming ‘investors’ disappear, SS has fewer and fewer contributors as our country ages. Those at the bottom will be left holding an empty promise after paying their dues that went to someone else.
Also…I do think that the AARP has clout but that’s not a good thing IMHO. They are a political lobby … no better than any other lobby doing business to get things from the government on behalf of their clients. Where is the lobby for me? It’s hard to be a lobby of one…not nearly the same clout.
@ Matt I did not refer to any commenters here or to younger folks in general as whiners. I do concede a certain lack of respect for whiny Democrat leaders, e.g., Reid and Pelosi, who will oppose a plan based more on who proposes it and less on its merits. If Bush proposes something, they oppose it. Period.
I will also concede that many Democrats opposed privitization of SS for the same reasons as the AARP. Nevertheless, I submit to you that the plan was DOA because the AARP opposed it, threatening Dems and Republicans alike. Whether you like the AARP or not, don’t you agree that it has that kind of clout?
“In addition, I previously thought we could all agree that Democrats are the biggest ally of the AARP when it comes to preserving Social Security. When you say “it wasn’t the whining Democrats”, that sounds pretty ungrateful for the support that you have received. You can’t pretend that politically this was opposed across the aisle, as virtually 100% of Republicans backed Bush’s plan and virtually 100% of Democrats opposed it.”
Not technically a question, but do you have any response to this? When you say your biggest political ally was “whining”, how exactly is that “vigorous and uninhibited debate” and not “lack of respect”?
@ Matt – Except for the “Ponzi scheme” remarks, I think all of the comments here are great and I respect the commenters for making them, regardless of their ages. Please don’t mistake vigorous and uninhibited debate for lack of respect. None of us has time for massaging egos online now do we? Serious blogs about serious money issues are not places to get your emotional needs met, don’t you agree?
I would be happy to respond to any unanswered questions if I can. Remember, I claim only to have opinions, not all of the answers. There has been a lot of stuff flying back and forth – what questions remain open for me?
@Mr. ToughMoneyLove – You do a good job of only answering parts of people’s questions, while ignoring the rest. You don’t appear to have a lot of respect for younger people, or many of the commenters here.
@castocreations – Please do not claim to speak for your generation, because you don’t.
@Mr. ToughMoneyLove: You miss my point. The main thing we have to gauge the future of the stock market is the history of the stock market. This means statistical analysis. 2 months means little compared to the history of the stock market. These figures are from memory, but they’re reasonably accurate: Something along the lines of 90% of the 5 year periods in the stock markets history have made money, and 100% of the 10 year periods have made money.
No one who is reasonable thinks that 10-12% is going to be earned every year! If you haven’t accounted for this in your retirement planning, shame on you.
@Bill Then I don’t understand your point. The baby boomers have paid billions into a SS system that we did not create. After paying into the system over 40 years, you want us to say “never mind – bad idea” and vote it out? That would be fine with me if the government would just go ahead and send me a check in the total amount of all of my SS contributions plus a lousy 6% annual rate of return. Call it a do over.
If someone retired last year and was invested in stock then they were idiots. Or they could afford to lose the money. The stock market is a gamble and there is always a risk. If your risk tolerance is low then you should not be invested in stocks. There are safer investments (though nothing is risk free). My mom is close to retirement and I think her financial adviser is steering her wrong with her allocations. She has lost a lot in the past few months due to her exposure to US Equities. It is NOT appropriate for someone her age, with her risk tolerance, to be invested so heavily in USEq.
I do not know what we do with current boomers. The sad fact is that when a Ponzi scheme fails, people suffer. And that is what Social Security became. The people underneath pay for those on top and it works fine as long as there are enough people coming in under neath. Unfortunately that is not happening.
So who suffers? The baby boomers. Or their kids? Or their grandkids? It has to stop somewhere. The whole system is messed up and wrong. My generation realizes that it is wrong and most aren’t expecting any of the money they put in back. We don’t have any choice except to bend over and say “Thank you sir may I have another” at the theft of our hard earned money.
I am fully aware of who created Social Security. However, you’re the one who wrote, “Even if Congress was inclined to let Social Security unravel, boomers would vote them out and replace them with AARP-friendly politicians.” So I stand by my accusation of Baby Boomers voting themselves money.
Dustin: Your comment proves how important and yet random market entry and exit points are. The last few months were indeed the most significant in the last 10 years but they are part of those 10 years aren’t they? Imagine if you decided to retire in November 2007 (at the market peak) then saw your nest egg lose 40% over the next 12 months. Now run the numbers as to what it would take to recoup that 40% loss plus gain 10-12% annually ON TOP OF THAT if that is your projection. Not gonna happen unless we hit another dot.com bubble.
“Also, if you are counting on a 10-12% annual return on your investments going forward from today, I think you will be disappointed. Look what the returns have been over the past decade.”
I’m pretty sure the whole life of the stock market is a larger sample size than 10 years.
________________________________________________________________________________
I was thinking this morning about this comment I made a few days ago and realized something.
Your sample size isn’t even 10 years. If you subtract the last two months the DJI shows a return of over 10% for the past 10 years. So, in fact, your sample size is 2 months.
@castocreations – I agree with your sentiments. But what do we do with the baby boomers who have poured the most money into the SS system over the years? Cut them off cold turkey? Can’t do it or you will have millions of starving old people wandering around (those boomers who did not plan and those who did but lost 40% of their “planning” in 2008). The system needs fixing but it must survive in some fashion. I don’t want my kids going broke paying ridiculous taxes although some might get used to it. In that regard, you might want to study the economic system in Denmark. I wrote about it a few weeks ago. Very interesting.
The “Greatest Generation” still had a lot of socialists who wound up in government. It was wrong of government to spend the SS money on anything other than its original intention but it did. Now you want to create MORE wrong by taxing those younger than you to pay for your (the collective your, not you specifically) lack of planning? It’s obscene. Two wrongs do not make a right. The government’s role was never intended to be wealth redistributor.
@Bill: Actually, SS was created by the “Greatest Generation”, i.e., the parents of the Baby Boomers. We (the baby boomers) are the generation that has poured billions after billions into the so-called SS Trust Fund during our working years to support the “Greatest Generation.” Those billions were loaned to the Federal government to spend on other stuff that I and a lot of other baby boomers oppose. Now we are expecting to get at least some of our contributions in return when we age. Is that so unreasonable?
“A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury,” – Alexander Tytler, “The Fall of the Athenian Republic”
It seems like we’re quickly approaching that point in the United States. Congratulations, Baby Boomers, on proving Mr. Tytler correct.
@Kevin I agree that Medicare is a more significant problem and if you will read my post and comment #10 carefully, that’s what I said. However, keep in mind that our newly elected President intends to completely overhaul our healthcare system, meaning that Medicare (or its replacement) will be expanded, not shrunk.
The employee to beneficiary ratio is not going to improve because the country will continue to age. (Unless the immigration floodgates are opened wide, which is a possibility.) However, there are a number of relatively easy actuarial fixes that can be implemented. I think you will see those coming soon. Also, I believe that future benefits will be “means tested” so that those with high incomes from retirement assets will either receive lower benefits or they will be highly taxed. This will call for some very careful tax planning and asset planning so that a retiree with a high net worth can still maximize benefits with minimal taxes. That’s what I am doing and you will be doing the same thing at my age. And when you retire and collect benefits, those behind you will complain. You will join the AARP.
Note that I am not complaining about having paid many thousands of dollars more into SS than I will ever collect in return as compared to having invested that money over what will be at least 45 year work history. As you say, that is one of the flaws of the system but what can we do when so many elderly have nothing else?
The original post was off point in so many ways. First and foremost, it’s not Social Security that’s really endangered. It’s Medicared and it’s REALLY on the brink and headed downhill by the minute. Second, the author’s obvious failing to look at both sides of the story make his post irrelevant. He touched on a feeling decades ago that Social Security would not be around. That was a feeling when there were somewhere in the range of 12-18 workers per retiree. We’re coming on 2 workers per retiree. Using his own example and assuming that benefits are split evenly between spouses, each and every employee is responsible to come up with $1150 ($4600/2 – 2300 per person/ two employees supporting that one person = 1150) per month to keep that check coming. If there were – I’ll be generous and assume 12 employees/retiree (in part becuse we haven’t quitereached the 2/1 level yet in above example), that would be about $191 (4600/2=2300 per person/12 employees per retiree = 191) that every employee would be responsible. So which would you rather pay, $191 or $1150? That brings me to my final point. Boomers can cling to AARP as much as you want, but when well’s dry and there aint no money to divy up, it REALLY doesn’t matter how much influence AARP may have in deciding how to divy up zero.
“@ Nate I do care about the younger generations. I have three adult sons. I think that if you evaluate the ages of the Wall Street MBA geniuses who leveraged their employers and shareholders into oblivion, you will find a high percentage in your generation. Oh Oh.”
And a high percentage of the ’employers and shareholders’ would be in your generation. Taking risks and knowing full well the government and the ‘aarp’ will be there to wipe your tush when you mess up. When in fact it’s your ‘three adult sons’ who will be taking the hit in the form of 6.2% pay decrease for them to clean up your mess? Proud of yourself yet?
Also the teachers who taught them how to be ‘genius’ would also more than likely be in your generation. Passing down the faulty knowledge of your generation to ours. The young trust the old. Too much it appears. We treat teachers and professors with reverence, maybe we should be a little more skeptical of our teachers and ask more questions of their knowledge.
I agree we need to take care of the old, and it’s up to the government to regulate it, but it’s a faulty system we have setup. I don’t want to get rid of it completely, and overhaul would do. I’m not sure how to fix it, i’m not a ‘genius,’ but it needs to be fixed, along with some other very in depth issues left by the great ‘baby boomers.’ Knight Kiplinger at least gave suggestions:
link
I agree with you SS probably isn’t going anywhere. Neither is murder or rape, but that doesn’t mean it’s a good thing.
Oh, and tell your sons not to vote, they don’t matter, the AARP will just squash them anyway. Teach them more of the ‘they don’t matter’ bs we get fed from various sources.
“Also, if you are counting on a 10-12% annual return on your investments going forward from today, I think you will be disappointed. Look what the returns have been over the past decade.”
I’m pretty sure the whole life of the stock market is a larger sample size than 10 years.
“@ castocreacion You don’t seem to like older folks too much. I assume that if SS is eliminated as you prefer, you will take care of your elders who do not have the resources to take care of themselves. Or will you tell them to eat dog food?”
You didn’t read my comments thoroughly, clearly. I specifically wrote that I would take care of my MIL if her SS went away. That is what family is SUPPOSED to do. Take care of each other, not foist them off on the government. Same with my grandfather and my mother. If it means I take another job then that’s life. It’s not fair and it’s not easy. I don’t expect the government to give me one damn thing.
SS was NEVER meant to be a retirement plan. It was meant to help those without family – widows and those with disabilities. I don’t have a problem helping those who are not able but if someone works their whole life and doesn’t prepare for a time when they can no longer work due to age… that is NOT my fault and there is no reason why my money should be taken for their bad planning. It truly pisses me off. It has ballooned to a welfare program masquerading as a retirement plan. My money is in the wind.
You also don’t seem to take into consideration private charity and church resources. What happened to a community taking care of its own?!? The federal government is inefficient, bloated, and in many cases corrupt. They take my money and pass it through so many middle men before it gets spit back out in the form of a welfare check to a baby boomer who failed to save.
It has nothing to do with “liking” older folks. It has to do with right and wrong. It is WRONG to take money that doesn’t belong to you just because you failed to plan ahead.
Such skepticism and hostility from you younger folks. I am not surprised. I would probably have had a similar reaction in my younger years. Let me see if I can set things right for you.
@Dustin My argument is that SS is here now, created in reaction to the Great Depression. In all of the proclamations I have read that “SS won’t be around for me” and indeed in all of the comments here, I have not seen any argument, let alone a plausible argument, as to why Congress would shut it down now, after what has happened in 2008. Name one politician in office who is calling for the abolition of SS. I don’t know of one. If there was, the AARP would be sure to go after him/her. Also, if you are counting on a 10-12% annual return on your investments going forward from today, I think you will be disappointed. Look what the returns have been over the past decade. Effectively zilch. If you assume that SS will be gone, you will probably take excessive risk to compensate. That may backfire on you.
@Matt Take a look at the AARP website to learn what it says and did about the privatization plan. Bush didn’t even bring a bill to the floor because lots of Republicans were afraid to buck the AARP.
@Andrew You may or may not be succesful in saving for retirement completely independent of SS. Imagine if you were close to retirement or early in retirement and experienced what happened this year. I personally lost well into 6 figures in market value and I had a very conservative non-correlated asset allocation.
@Kyle The most recent data we have (over the last 10 years) is that an extended period of 10-12% annual returns is fantasy. Also, I agree that inflation is certainly in our future but most of the money for future entitlement programs will have to come from higher taxes. Medicare is a problem that is even worse than SS.
@vh – Amen
@ Nate I do care about the younger generations. I have three adult sons. I think that if you evaluate the ages of the Wall Street MBA geniuses who leveraged their employers and shareholders into oblivion, you will find a high percentage in your generation. Oh Oh.
@ Anca – You can come on my lawn as long as you keep paying your SS taxes and Medicare taxes.
@ castocreacion You don’t seem to like older folks too much. I assume that if SS is eliminated as you prefer, you will take care of your elders who do not have the resources to take care of themselves. Or will you tell them to eat dog food?
@crapdetector I don’t think you can annuitize $4600/month with $700k and have it inflation adjusted and have most of the annuity continue after the death of one of the annuitants. That’s what SS provides with its annual COL adjustments and survivor benefit. Plus, why would I want to surrender $700k in principal to replace SS? So maybe you should do more fact checking of your own. I did not intend to be rude – only to provoke some thought on the part of the readers which seems to have occurred.
Anyway, I have enjoyed and appreciated your comments to my guest post.
Please get your facts correct before you write with such athoritative arrogance. If you and your partner had to generate $4600 per month at age 70 you would need NOWHERE near “…a retirement nest egg of $1,380,000 just to replace our Social Security benefits.” That amount could be supplied with a 700K annuity or less depending on the payout options selected. And age does not entitle the author to be rude to younger folks, who have a right to more factual statements than the article contains.
Wow. So the legalized theft of my hard earned money is going to go to selfish baby boomers who didn’t plan ahead (and have screwed up so much of the government anyway) and I should just STFU and deal with it, eh? I hate the AARP. They are a political lobby and nothing more. I am not planning on one dime of social security and YES I do plan to have over $1M in assets to help my husband and I in our old age. Nor do I plan to retire at 65. It’s called personal responsibility. I do not rely on the government for anything and do not plan to in the future. I’ve been saving for retirement since I was 18.
There are fewer workers putting money now into SS. It’s not a personal savings account. I’m putting money in now that goes to folks now. It’s nothing more than legalized theft and redistribution of wealth and it pisses me off. I see the “baby boomer” generation as nothing more than ill prepared selfish brats with hands out demanding more, more, more.
My MIL relies partially on social security and I’ve told her that I hope she appreciates my donation to her lack of planning. She had no savings or retirement. It was her own fault and she admits that. I’d much rather the government let me keep my money and not send her a check and WE will take care of her ourselves. The whole thing is nothing more than a Ponzi scheme and it will come crashing down eventually.
Should I get off your lawn too while I’m at it?
“And by the way, if you younger folks decide you don’t want Social Security at all, please keep quiet about it. Otherwise, the AARP may use its clout to get some new laws passed that you won’t like one bit.”
WOW! What a way to tell young people they don’t matter. After all the struggle to get them to ‘Rock the vote’ you tell them not to bother. Great Role modelling. The Baby Boomer’s have messed up so much, and now it’s the ‘Younger folks’ who are going to be left to clean it up. Well, I’m glad you have the AARP to cover your mistakes, which in turn we’ll pay for. Keep being foolish though, you’ve done it thus far, why stop now?
-Nate
P.S. Don’t break your nose sticking it in the air at young people.
The unfortunate fact of the matter, for those of you who think you can get by without collective aid in old age, is that most of us in the baby-boom generation — the most affluent and productive generation in this country’s history — cannot get by on 4% of savings. Neither will members of the next generation.
Before the “recession,” my total savings were (and probably still are) well in excess of the average household savings of most Americans. I could not even begin to get by solely on a 4% drawdown of what is left after the Bush implosion. To get by on a combination of Social Security and 4% of what remains of my conservatively invested savings will be a challenge, and will require that I never suffer an expensive illness. To live on Social Security alone — $1040 a month — is out of the question. And, my friends, in a country whose pervasive attitude toward the elderly is reflected in some of the comments above, getting another job at my age is out of the question.
If the money that my cohort and my parents’ cohort put into Social Security to help keep the aged free of poverty cannot be used for that purpose, then, you know, SOMEBODY will have to support us. That somebody is likely to be our kids. How do you plan to take on supporting your parents while you’re trying to build your own retirement (one you imagine will sustain you through your 90s with no subvention from the larger society), and trying to send your kids to school, and paying a mortgage, and trying to keep bread on your own table? Or do you expect to enjoy taking the kids to visit Granma for Christmas at her camp under the Seventh Avenue Overpass?
The fact is that Social Security is far from on the ropes. Reports of its demise have been greatly exaggerated… In fact, the system is not in bad shape at all, and in fact several highly feasible solutions exist. Social Security is a keystone to the economic health of American citizens, and we should do all we can do to keep it operating.
I don’t necessarily buy the idea that 10% annual returns are gone for the foreseeable future. 40% drops weren’t exactly unheard of in the past.
Social Security causes people to transfer the burden of preparing for retirement from themselves to the government. I’m 24 and save about 30% of my income for retirement because I don’t know what’s going to be going on in 40 years and I’m sure not going to be looking towards the government to take care of me.
“And by the way, if you younger folks decide you don’t want Social Security at all, please keep quiet about it.” I sure as hell won’t keep quiet about it. What law will AARP threaten to get passed that will make me afraid to express my opinion? Increase withholdings from my check to cover current benefit payments? If I had the option of putting a portion of my Social Security contributions into an IRA I would do it in a heartbeat even if it meant my benefits later on would be reduced my a corresponding percentage.
I guess we’re learning that nothing is too big to fail as long as the treasury can print new money.
“Do you know who killed Bush’s plan to privatize part of Social Security? It wasn’t the whining Democrats. It was the AARP.”
Do you have any facts to back this statement up? This is the first I’ve heard about it.
In addition, I previously thought we could all agree that Democrats are the biggest ally of the AARP when it comes to preserving Social Security. When you say “it wasn’t the whining Democrats”, that sounds pretty ungrateful for the support that you have received. You can’t pretend that politically this was opposed across the aisle, as virtually 100% of Republicans backed Bush’s plan and virtually 100% of Democrats opposed it.
The first commenter’s point are valid, too.
I have no idea if Social Security will go away or not, but you’ve failed to present a sound argument. Your argument amounts to:
1. We need it.
2. Replacing it’s benefits is hard.
3. Because of 1 and 2 something will be done about it.
That’s a long way from proving that it won’t go away.
Additionally, I don’t understand the difference between these two viewpoints from a “planning for your financial future”-standpoint:
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Believing in the mythical demise of Social Security is bad policy for anyone planning their financial future.
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“I am not counting on Social Security.” Statements that fall in the latter category are actually beneficial because they create personal incentives to save and invest for retirement.
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The result of the second belief is a strong motivation to save for retirement. The result of the first belief is an even stronger motivation to save retirement. Thus, I don’t understand how the first is bad policy whereas the second is not.
As far as confidence in investments: People’s current confidence in their ability to earn 10-12% on their investments has little bearing on whether they actually will be able to. Again, you’re conflating what will happen with what should or may happen.