Author Topic: Two pioneers of the 401k system now consider it a failure for most Americans  (Read 17500 times)

prognastat

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And it is also a fact that governments can do things to stop it in lots of cases. You just don't like how they do it.

Saying government shouldn't when it can actually do a lot to stop it is effectively saying "fuck em".

Gin1984

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We tried that, it was called the Great Depression and people died.  They did not  come out of it 10x better than before, stronger, wiser, etc, they died.  That is why we have SS and Medicare.
Some people probably died, that's called life.... even some people died during our last recession, what a concept.

I don't see it that way. Some of the toughest people I know came out of that era, they were stronger in life because of it, and so were their kids, and possibly their grand kids. The lessons learned in that era made the whole country stronger, we didn't stay down in the dumps forever, we learned and moved on.

SS and Medicare are safety nets yes, but how good they are, and how much of a price we will pay is still yet to be seen.

Ah the good old fuck em. I thought that according to you this would help people. Seems that facade is slipping a little.
That's not what I said, and that was not what I was implying, don't twist my words.

"Some people probably died, that's called life"

Does not show much caring, does it?
It is a fact, people die, no whimsical gov ferry program can stop it... Sorry, yea that's life, but I didn't say I like it or F them.
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Except the SS and Medicare DID stop people from dying from lack of funds, just as it was intended.  People were dying on street because they could not afford food or medicine.  Ignoring that is either ignorant or idiotic.

Greenback Reproduction Specialist

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And it is also a fact that governments can do things to stop it in lots of cases. You just don't like how they do it.

Saying government shouldn't when it can actually do a lot to stop it is effectively saying "fuck em".

I just want to point out that the whole relation between a retirement program and people dying was not something I brought up. Also, saying the government should not be forcibly taking my hard earned money and then deciding how it would best be spent is not saying F them. I did not say I would have a problem helping a person in need out, or helping them get by. Who would? That's just heartless....My problem is the line of thinking that the gov is the ONLY solution to keep people from dying in those situations? What about all the neighbors? churches? non profits? I support those efforts, but to throw out "we tried doing that, its called the great depression and people died".... its not even an honest statement when talking about if we should allow people to run their own finances.

I was pointing out that I don't think people are stupid, like someone else stated, then it turned to "but people will die"..... How in the world did we make such a jump? I cant believe anyone here would be arguing in favor of the gov managing peoples finances because they might die... Is that what I'm hearing? This is the conversation we are having right?

Yes I agree, gov do in a lot of cases do a good job providing an organizational structure and resources to help save lives during emergencies. It is the one thing they are excellent at.
« Last Edit: January 06, 2017, 04:04:02 PM by Greenback Reproduction Specialist »

Greenback Reproduction Specialist

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Except the SS and Medicare DID stop people from dying from lack of funds, just as it was intended.  People were dying on street because they could not afford food or medicine.  Ignoring that is either ignorant or idiotic.

Neither provide food..... and I would guess medicine for the common cold or flue cost more back then than it does today, so its not really apples to apples.
« Last Edit: January 06, 2017, 04:09:00 PM by Greenback Reproduction Specialist »

Quidnon?

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At what cost though? Maybe its cheaper, but I bet there is a novel of rules attached to participating. I don't know that I would give up freedom over my money just because its cheaper.... I will have to read up on the program though.
It's cheaper because the government isn't running the program to try and make a profit. In theory, given similarly run organizations, the non-profit should always be cheaper than the for-profit.

In theory maybe.  It's almost never true in practice.  The TPP program is not cheaper, all costs considered, than private 401k programs are.  Maybe some ran by unscrupulous, tiny or disorganized sponsors; but certainly not all of them, nor the average of them. The TPP program has it's own hidden costs & fees, they are just (mostly) absorbed by the administrative budgets of the sponsoring agencies; and this is after the TPP program has a massive advantage of scale.  If you disagree, I ask you to present your evidence.

Quidnon?

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Unfortunately some laws would need to be changed to make the 401k system work for most Americans.

First off it should be illegal for a person/company managing a 401k to not be a fiduciary.

Congratulations, this law has already passed, and goes into full effect in April.

Fomerly known as something

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Btw, the TSP is a stellar retirement plan - run by the government - and if you had access to it you'd be pretty stoked on how cheap it is. 

At what cost though? Maybe its cheaper, but I bet there is a novel of rules attached to participating. I don't know that I would give up freedom over my money just because its cheaper.... I will have to read up on the program though.

Yes there are rules that the general public would call for an end too.  The rules are established to keep costs low.

Limited fund options; Five base funds (3 stock, 2 bond) and then Target date funds that balance the underlying funds.

A person can only rebalance 2x a month.

Slow (glacial) to change.  There was only 1 stock fund for the first 15-20 years of the program.

kite

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Their criticisms of 401k are somewhat illogical, saying both "they are not suitable" and "they are under utilized."  That's like "this food doesn't taste good and you didn't give me enough of it."

If 401ks are bad (the fees, returns, investment options) then they should be relieved that the accounts aren't used so much.
But if the goal is to make 401k type accounts more available, that belies some faith in the tool as being one of the valid options available.  So which is it?


Quidnon?

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Their criticisms of 401k are somewhat illogical, saying both "they are not suitable" and "they are under utilized."  That's like "this food doesn't taste good and you didn't give me enough of it."

If 401ks are bad (the fees, returns, investment options) then they should be relieved that the accounts aren't used so much.
But if the goal is to make 401k type accounts more available, that belies some faith in the tool as being one of the valid options available.  So which is it?

Actually, I suspect those issues are related.  If the fees are high in a particular 401k plan, is the utilization lower than average?  And if the fees are reasonable, is the utilization high?  I know that I, personally, consider the fees before deciding between my 401k and my IRA; and favor my IRA beyond my 401k match because my fees are higher than the IRA and the options suck, but not so much that I would forgo the matching funds.  But I typically don't contribute more than the max match amount into my 401k because the fees and options suck so much.  Instead, I'd rather put extra funds beyond my IRA limit into a taxable brokerage account.

sokoloff

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I know that I, personally, consider the fees before deciding between my 401k and my IRA; and favor my IRA beyond my 401k match because my fees are higher than the IRA and the options suck, but not so much that I would forgo the matching funds.
I strongly suspect that the mere fact that you even considered the fees on your 401k puts you into the top 0.1% of informed 401k users.

I'm extremely financially savvy and I haven't even looked for/at the fees and just cram in the max allowed per year, and save any surplus in Vanguard.

Quidnon?

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I know that I, personally, consider the fees before deciding between my 401k and my IRA; and favor my IRA beyond my 401k match because my fees are higher than the IRA and the options suck, but not so much that I would forgo the matching funds.
I strongly suspect that the mere fact that you even considered the fees on your 401k puts you into the top 0.1% of informed 401k users.

Maybe so, but the users don't need to know exactly what kind of fees they are paying, or how much, to get the 'vibe' that it's not as good a deal as the company might pretend.  Anyway, I tend to think that the problems that the two pioneers are talking about aren't actually problems with the 401k, so much as it is an issue with short-sighted human nature.  Perhaps 401k's should be opt-out, not opt-in; but the rest might be unsolvable.  I didn't pay anything into my 401k till I was about 35, either.

rpr

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The Federal tax expenditures on 401k's, IRAs, and other retirement accounts  is upwards of $100 billion per year. They should completely get rid of this tax deduction.  I don't know why the government should be in the business of giving tax breaks to save for retirement. That should certainly simplify things a lot from the tax code standpoint.

sokoloff

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The tax benefit is primarily one of timing. The money that isn't taxed today will be taxed upon withdrawal, including the principal and the growth. If you tax the principal today, you can tax the growth later upon withdrawal.

It's not nearly the "giveaway" that the headline number today might imply.

rpr

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The tax benefit is primarily one of timing. The money that isn't taxed today will be taxed upon withdrawal, including the principal and the growth. If you tax the principal today, you can tax the growth later upon withdrawal.

It's not nearly the "giveaway" that the headline number today might imply.

Yes, it is a "giveaway" that usually people in the upper income categories are disproportionately benefited. That is pretty much true of most tax expenditures. The rich write the laws and to no surprise they are the ones who are benefited the most :)

I assume that the Congressional Budget calculations take into account both the tax benefit from those who save currently into retirement accounts and the taxes paid by those who withdraw from them. Then there is the question of Roth IRAs where the growth is not taxed at all. Plus the fact that even in traditional tax deferred accounts, when doing the withdrawals people are usually in a lower tax bracket.   

sokoloff

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If it is the case that Americans don't save enough for retirement AND it is the case that tax incentives will cause them to save more, it seems reasonable to entertain the question of whether the government should enact such tax policies. The answer might be no, but it's hard to listen to simultaneous complaints that we don't save enough and tax programs designed to get us to save more are bad ideas without at least addressing that elephant in the room.

On the Roth IRA issue, take the following thought experiment to convince yourself that it's not any worse than any other "only tax the money once" program. For whatever tax revenue the government receives as part of the current tax obligation for the Roth IRA taxpayer, have the government take that money and invest it the same way the Roth IRA would be invested. The net effect will be that the government gets "growth on the tax" rather than "tax on the growth" but it amounts to the same thing (by simple factoring, (T% of X) * (1+G%)^ Y) is the same as (T% of (X * (1 + G%) ^ Y)), except for any rate differences that might happen over that period. The government is still getting "all its money", IMO, just the same as if it was a regular IRA, provided the government is willing to invest like the taxpayer is.

rpr

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If it is the case that Americans don't save enough for retirement AND it is the case that tax incentives will cause them to save more, it seems reasonable to entertain the question of whether the government should enact such tax policies. The answer might be no, but it's hard to listen to simultaneous complaints that we don't save enough and tax programs designed to get us to save more are bad ideas without at least addressing that elephant in the room.

Given the dismal accumulations in 401ks and IRAs in a majority of accounts, it is fairly obvious that the tax incentives have not worked as all for a vast majority of people. Therefore continuing down this same path is downright stupidity. It is time to jettison the 401k and other related accounts completely. People who are currently saving will continue to do so irrespective of the tax incentive, while people who don't wont. I don't see anything wrong with saving in taxable accounts.

Quote
On the Roth IRA issue, take the following thought experiment to convince yourself that it's not any worse than any other "only tax the money once" program. For whatever tax revenue the government receives as part of the current tax obligation for the Roth IRA taxpayer, have the government take that money and invest it the same way the Roth IRA would be invested. The net effect will be that the government gets "growth on the tax" rather than "tax on the growth" but it amounts to the same thing (by simple factoring, (T% of X) * (1+G%)^ Y) is the same as (T% of (X * (1 + G%) ^ Y)), except for any rate differences that might happen over that period. The government is still getting "all its money", IMO, just the same as if it was a regular IRA, provided the government is willing to invest like the taxpayer is.

If it is really true that it doesn't matter one way or another, then why bother with the Roth IRA. Just get rid of it. Plus your formula needs to be modified to take into account the fact that tax is paid every year. The effective return thus becomes G*(1-T).

sokoloff

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I don't see anything wrong with saving in taxable accounts.
Me either, and I do, but I also know that it will reduce marginal saving by some amount.

Basically no one saves *less* because a 401K program exists. Some save more. It should be no surprise that some of those who save more, starting at an early working age, end up with a lot and so when they are 45 [like me], it looks like "See, we didn't even need that program; sokoloff was saving anyway!" If I didn't start with $1000 in my IRA from my first year of work, which I only did because of tax deferral, I wouldn't have gotten into the habit.

Tax policy puts "Hey, your retirement savings is important enough that we have specifically incentivized it" into people's minds. It provides a reason for parents to talk t their kids about retirement savings. It provides a label to ask about. (Literally, I recall my dad asking me about my IRAs every year, multiple times per year, asking me how much I was putting away, etc. If it was all mixed together in post-tax savings/investments, those conversations wouldn't have happened or wouldn't have been as rich [pun halfway intended].)

If it is really true that it doesn't matter one way or another, then why bother with the Roth IRA. Just get rid of it. Plus your formula needs to be modified to take into account the fact that tax is paid every year. The effective return thus becomes G*(1-T).
Partially right. Unrealized capital gains are not paid every year in post-tax accounts on positions held. Dividends and realized gains are taxed annually, of course. I was making a point that the government still gets money on the growth of the Roth principal if they also invested it; I wasn't trying to author a finance textbook in the comments on an internet forum. As it was, I was pushing the boundary of complexity that can be understood from a short blob of text.
« Last Edit: January 07, 2017, 05:47:45 AM by sokoloff »

rpr

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Sokoloff -- the concept of saving has existed well before 401ks and IRAs existed. People manage to save even money more money in other countries without any such plans. Why?

It is just time to admit to the colossal failure of this existing 401k/IRA system and come under with a better system.

sokoloff

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Sokoloff -- the concept of saving has existed well before 401ks and IRAs existed. People manage to save even money more money in other countries without any such plans. Why?

It is just time to admit to the colossal failure of this existing 401k/IRA system and come under with a better system.
You mean like:
all of which have substantial tax breaks analogous to our 401(k) system.

Since those are not the countries where people are saving more without government tax incentives, which are the countries where people are?

There may be ways to improve the retirement savings systems and rates in the US, but we're far from the only developed country that makes tax incentives available for retirement savings to individuals...

wenchsenior

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Their criticisms of 401k are somewhat illogical, saying both "they are not suitable" and "they are under utilized."  That's like "this food doesn't taste good and you didn't give me enough of it."

If 401ks are bad (the fees, returns, investment options) then they should be relieved that the accounts aren't used so much.
But if the goal is to make 401k type accounts more available, that belies some faith in the tool as being one of the valid options available.  So which is it?

They weren't illogical if you consider them as related but separate problems. Shitty 401ks are often better than none, IF people utilize them when they might not otherwise save. Saving anything is better than saving nothing, even if the 'anything' ends up (as it has) completely insufficient for most peoples' retirement needs. The goal of the founders was not to expand use of 401ks necessarily. It was to help people save sufficient funds for retirement (which at the time they hoped 401ks would do).

Now, they acknowledge that the 401k system is not working for most people.

If the system isn't providing sufficient retirement funds for the majority of Americans, then either you could scrap it entirely (which they discussed) and develop a completely different system (e.g., develop something on top of SS that worked like a forced savings plan into a federally guaranteed annuity); or alternatively, if that is a political non-starter, then you could tinker with the existing private account 401k system (e.g., standardized consistent worker education, better 401k options with lower fees and easily accessed regardless of what job you work ie opening the TSP to all workers, automatic enrollment with opt-out provisions instead of opt-in) to try to improve outcomes.
« Last Edit: January 07, 2017, 10:43:05 AM by wenchsenior »

kite

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Their criticisms of 401k are somewhat illogical, saying both "they are not suitable" and "they are under utilized."  That's like "this food doesn't taste good and you didn't give me enough of it."

If 401ks are bad (the fees, returns, investment options) then they should be relieved that the accounts aren't used so much.
But if the goal is to make 401k type accounts more available, that belies some faith in the tool as being one of the valid options available.  So which is it?

They weren't illogical if you consider them as related but separate problems. Shitty 401ks are often better than none, IF people utilize them when they might not otherwise save. Saving anything is better than saving nothing, even if the 'anything' ends up (as it has) completely insufficient for most peoples' retirement needs. The goal of the founders was not to expand use of 401ks necessarily. It was to help people save sufficient funds for retirement (which at the time they hoped 401ks would do).

Now, they acknowledge that the 401k system is not working for most people.

If the system isn't providing sufficient retirement funds for the majority of Americans, then either you could scrap it entirely (which they discussed) and develop a completely different system (e.g., develop something on top of SS that worked like a forced savings plan into a federally guaranteed annuity); or alternatively, if that is a political non-starter, then you could tinker with the existing private account 401k system (e.g., standardized consistent worker education, better 401k options with lower fees and easily accessed regardless of what job you work ie opening the TSP to all workers, automatic enrollment with opt-out provisions instead of opt-in) to try to improve outcomes.

First, I understood the goal to be to enable deferment of income tax for high earners. 

My problem with the 401k criticisms offered, it's that it's not really a 401k problem.  It's a problem of most mutual funds and of human nature: failure to act in one's own best future interst.. 
As a mutual fund problem, IRAs, 529s, HSAs and even taxable investments in high fee funds are subject to the same issue. 
In terms of the underutilization criticism, for some, that is overblown. If GenX-er Bob or  Boomer Mary each have $0.00 in 401k, but $200k and $400k in an IRA, then, once again, the lack of 401k isn't at all a problem.  For those who have access to a 401k with good investment choices, however, hearing from experts that 401ks are bad encourages inertia, which is even worse.  Many who should save or save more fail to do so.  This is human nature.  Man is an irrational and undisciplined animal.
How much non participation is inertia; how much is a wise decision given all the facts; and how much is simple lack of funds is not disclosed if it is even known.  But the answer matters if you hope to craft a replacement for what exists today.  You can only lead a horse to water.  IRAs, RothIRAs, HSAs, have been around.  The person who has zero retirement savings outside of SS, isn't going to be helped by yet another program or product.  The paradox in expanding SS "for their own good" is that taking a larger share of the lower paid person's wages to beef up his or her retirement savings in the future will take more money away from those least likely to live long enough to collect. 
My FIL, like a significant chunk of minority populations, particularly poor people like him, dropped dead before collecting SS or his pension.  It's the unspoken truth of Social Security and pensions that they are only solvent if enough participants die before being able to draw much of anything. 

wenchsenior

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Their criticisms of 401k are somewhat illogical, saying both "they are not suitable" and "they are under utilized."  That's like "this food doesn't taste good and you didn't give me enough of it."

If 401ks are bad (the fees, returns, investment options) then they should be relieved that the accounts aren't used so much.
But if the goal is to make 401k type accounts more available, that belies some faith in the tool as being one of the valid options available.  So which is it?

They weren't illogical if you consider them as related but separate problems. Shitty 401ks are often better than none, IF people utilize them when they might not otherwise save. Saving anything is better than saving nothing, even if the 'anything' ends up (as it has) completely insufficient for most peoples' retirement needs. The goal of the founders was not to expand use of 401ks necessarily. It was to help people save sufficient funds for retirement (which at the time they hoped 401ks would do).

Now, they acknowledge that the 401k system is not working for most people.

If the system isn't providing sufficient retirement funds for the majority of Americans, then either you could scrap it entirely (which they discussed) and develop a completely different system (e.g., develop something on top of SS that worked like a forced savings plan into a federally guaranteed annuity); or alternatively, if that is a political non-starter, then you could tinker with the existing private account 401k system (e.g., standardized consistent worker education, better 401k options with lower fees and easily accessed regardless of what job you work ie opening the TSP to all workers, automatic enrollment with opt-out provisions instead of opt-in) to try to improve outcomes.

First, I understood the goal to be to enable deferment of income tax for high earners. 

My problem with the 401k criticisms offered, it's that it's not really a 401k problem.  It's a problem of most mutual funds and of human nature: failure to act in one's own best future interst.. 
As a mutual fund problem, IRAs, 529s, HSAs and even taxable investments in high fee funds are subject to the same issue. 
In terms of the underutilization criticism, for some, that is overblown. If GenX-er Bob or  Boomer Mary each have $0.00 in 401k, but $200k and $400k in an IRA, then, once again, the lack of 401k isn't at all a problem.  For those who have access to a 401k with good investment choices, however, hearing from experts that 401ks are bad encourages inertia, which is even worse.  Many who should save or save more fail to do so.  This is human nature.  Man is an irrational and undisciplined animal.
How much non participation is inertia; how much is a wise decision given all the facts; and how much is simple lack of funds is not disclosed if it is even known.  But the answer matters if you hope to craft a replacement for what exists today.  You can only lead a horse to water.  IRAs, RothIRAs, HSAs, have been around.  The person who has zero retirement savings outside of SS, isn't going to be helped by yet another program or product.  The paradox in expanding SS "for their own good" is that taking a larger share of the lower paid person's wages to beef up his or her retirement savings in the future will take more money away from those least likely to live long enough to collect. 
My FIL, like a significant chunk of minority populations, particularly poor people like him, dropped dead before collecting SS or his pension.  It's the unspoken truth of Social Security and pensions that they are only solvent if enough participants die before being able to draw much of anything.

Excellent points you make. It is what makes retirement and savings rates such a tough nut, politically and from a human behavior standpoint.

I find it interesting that although 401ks were obviously invented/established to benefit presumably higher earners, so many boosters (including, apparently, the two guests on the podcast) managed to convince themselves that this was also going to be a great thing for all workers.  Which, in retrospect, was silly.

Do you remember, about half way through W's presidency, he/his people proposed Lifetime Savings Accounts?

http://www.wilsonhall.com/LSA.htm


Two seconds of thought and you can see that these vehicles would have been a MASSIVE boost to high earners, and a teeny help to low earners. It would have allowed a tax sheltered savings vehicle outside the workplace, sure, but IRAs already offered that. It would have allowed you to withdraw funds without penalty, which means that lower income people would be constantly tempted to dip into them for emergencies, which is counter to the purpose of retirement funds, though it might encourage more participation (of course, the Roth IRA offers that within limits). It would have allowed rich people to tax-shelter TONS more money and not changed much about the plight of those of lower income.

Yet I am pretty sure quite a few people on the W team sincerely boosted this out of belief that it would be a true help for the working man.

Peoples' ability to ignore human nature in favor of ideology is astounding.

Quidnon?

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Sokoloff -- the concept of saving has existed well before 401ks and IRAs existed. People manage to save even money more money in other countries without any such plans. Why?

It is just time to admit to the colossal failure of this existing 401k/IRA system and come under with a better system.

I would not agree that 401k's & ira's are a failure at all, much less colossally.  But the tax advantages are not my primary reason for saving in this fashion over a taxable brokerage account.  I favor these accounts, in part, due to the fact that we live in a sue happy society, and retirement accounts are functionally immune from judgements.

kite

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Do you remember, about half way through W's presidency, he/his people proposed Lifetime Savings Accounts?

http://www.wilsonhall.com/LSA.htm


Two seconds of thought and you can see that these vehicles would have been a MASSIVE boost to high earners, and a teeny help to low earners.

In their defense, this is the nature of every single program and every single mandate.  Paid family leave helps people with decent, full time jobs, not those piecing it together in the gig economy.  Food stamps are ultimately an Ag subsidy that simultaneously boosts the bottom line at Wal-Mart.  Universal preschool means free childcare for people who CAN easily afford childcare.  Paradoxically, it puts the capable, but uneducated, caregivers of individual children out of work while putting children into classrooms with fewer number adults per child.  Anything that does the most good for the most people is going to be even better for those who are already quite priveleged. 

Pooplips

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At what cost though? Maybe its cheaper, but I bet there is a novel of rules attached to participating. I don't know that I would give up freedom over my money just because its cheaper.... I will have to read up on the program though.
It's cheaper because the government isn't running the program to try and make a profit. In theory, given similarly run organizations, the non-profit should always be cheaper than the for-profit.

...If they are as efficient.

Pooplips

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Except the SS and Medicare DID stop people from dying from lack of funds, just as it was intended.  People were dying on street because they could not afford food or medicine.  Ignoring that is either ignorant or idiotic.

Also to note, while they were starving, was destroying and limiting food supplies to try and raise prices. I would argue that the government caused teh starving in the first place only to intervene again to stop the problem they caused.