401(k)'s Aren't Working Now, and Never Worked In The First Place

[chemistk]

http://finance.yahoo.com/news/retirement-revolution-failed-why-401-101900460.html

I won't reveal any spoilers other than the author's conclusion:
 

"The 401(k) experiment was a historical accident...We are driving more and more retirees to the brink of poverty and robbing them of their dignity in old age, and it has to stop."

[onlykelsey]

Honestly, I agree with this.  It is a ticking time bomb.  We either need to force people to save in their own accounts somehow, or fund their retirements ourselves.  I think there should be an opt-out option for retirement savings at every job so you have to actively turn it off.  Maybe we can send peopl eyearly updates on how much their current expected SS benefits are so it scares them a bit. 

I'd also love to see more employers be required to offer 401Ks.  This is the first job I"ve had that had that option, and my husband has never had a job that offered one. 

[NoStacheOhio]

I didn't think it was that bad. I definitely feel like I'm swimming against the current when it comes to paychecks covering expenses and still saving, but wow. That California plan sounds like a tiny improvement, but I have a feeling it'll still be a cash cow for the chosen few "investment professionals."

[zephyr911]

Thaaaat's just fucking stupid.

We still have Social Security. Pensions were never universal. 401(k) is just a tool, like many thing. Use it, or don't, but if you never pick up the ruttin' hammer, don't bitch about the nails not getting pounded in and the roof blowing off.

[I'm a red panda]

Maybe we can send peopl eyearly updates on how much their current expected SS benefits are so it scares them a bit. 

They already do that. I get a SS statement every year.

[acroy]

I disagree with the underlying assumption that there must be some sort of system to guarantee 'retirement'.

[runningthroughFIRE]

Ingredients for a generic shiticle about 401(k)s:
1. Assume absolutely everyone had a pension "in the good old days".                             Check
2. Assume pensions don't exist anymore for anyone.                                                     Check
3. Mention how Social Security just isn't enough to maintain a reasonable lifestyle.          Check
4. Add a statistic about how little people are saving for retirement.                                 Check
5. Take personal responsibility out of the equation.                                                        Check

At this point, your shiticle will be ready for uploading, but might seem a little bland, so you could also add in a dash of mentioning income inequality and politics into the mix to spice things up.

[nobody123]

Thaaaat's just fucking stupid.

We still have Social Security. Pensions were never universal. 401(k) is just a tool, like many thing. Use it, or don't, but if you never pick up the ruttin' hammer, don't bitch about the nails not getting pounded in and the roof blowing off.

+1000.  The rules of the game are what they are.  Retirement isn't a right.  SS and Medicare provide for an existence so you don't have to eat cat food.  If you want a retirement where you can spend some amount above the amount this safety net provides you, figure out how to save and invest to make it happen.  I find it hard to believe that people are so stupid that they don't understand the concept of having to save to stop working.

Now, one could argue that a country as wealthy as the US can do better for its citizens, but that's a debate for another day.

[AZDude]

I think the conclusion that SS benefits need to be raised is valid. Average monthly benefit is $1300. Slightly above the poverty line. It should probably be ~$2,000 a month.

[onlykelsey]

It's a crappy article, for sure, and it doesn't really offer a real policy solution, but the problems it diagnoses are real:

• when more people have defined benefit plans, the effect of racism and sexism on your retirement plans is minimized.  when people are saving for their own retirement, and black women can expect to earn .60 for every $1 earned by a white man, it's very very hard for them to save for retirement.
• people are bad at making less impulsive decisions.  They should get better at self-denial and saving, for sure, but I still don't want people dying of malnutrition in environment.  Our policies seem to be based on an ideal citizen, and not the citizens we actually have.
• the move to 401(k)s has heavily lined the pocket of advisors, at a cost to the US taxpayer and the average retiree.  Sort of like student loans.  Great for lenders! Shitty for students, and for the rest of them underwriting loans.

Long term I think we should move to required self-funding on top of SS, but in the short term we're going to have to pay for the 401(k) revolution for the next couple decades.

[mm1970]

I think the conclusion that SS benefits need to be raised is valid. Average monthly benefit is $1300. Slightly above the poverty line. It should probably be ~$2,000 a month.

I don't think my dad got more than a few hundred bucks on SS.

[Jack]

I think the conclusion that SS benefits need to be raised is valid. Average monthly benefit is $1300. Slightly above the poverty line. It should probably be ~$2,000 a month.

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

[AZDude]

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

Why? Assuming you hit the minimums for qualification(age: 62, ~25 years worth of earned income), benefits should all be the same.

[Giro]

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

Why? Assuming you hit the minimums for qualification(age: 62, ~25 years worth of earned income), benefits should all be the same.

Why should they all be the same?  Everyone doesn't pay in the same.

[AZDude]

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

Why? Assuming you hit the minimums for qualification(age: 62, ~25 years worth of earned income), benefits should all be the same.

Why should they all be the same?  Everyone doesn't pay in the same.

Answering a question with a question? Social security is meant as a fail safe retirement mechanism. Which means it should provide everyone with the minimum retirement amount needed as long as you qualify. Paying more or less based on lifetime earning is silly, and basing it on the age you start collecting is just a way to push out needed reforms.

Now, I am asking again, why should the amount paid out be proportional to what you pay in? To screw over low income workers?

[onlykelsey]

Yeah, I know they vary based on how long you worked, how much you earned, whether you had a spouse who predeceased you, and of coruse retirement age.

I'm 29 and it says I'd get ~2,854 a month (based on my actual reported income so far in life) if I retired at 67.  I'm not banking on it, but interesting to know.

[nobody123]

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

Why? Assuming you hit the minimums for qualification(age: 62, ~25 years worth of earned income), benefits should all be the same.

Why should they all be the same?  Everyone doesn't pay in the same.

Answering a question with a question? Social security is meant as a fail safe retirement mechanism. Which means it should provide everyone with the minimum retirement amount needed as long as you qualify. Paying more or less based on lifetime earning is silly, and basing it on the age you start collecting is just a way to push out needed reforms.

Now, I am asking again, why should the amount paid out be proportional to what you pay in? To screw over low income workers?

So you want to screw over high income workers instead?

I do think there should be a floor to the SS benefit that is equivalent to the federal minimum wage available at age 62 without any work requirement to meet the social insurance aspect of the program.  However, you can't expect folks who pay significantly higher premiums (as a result of higher earnings) to accept the same bare-bones benefit.

[Undecided]

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

Why? Assuming you hit the minimums for qualification(age: 62, ~25 years worth of earned income), benefits should all be the same.

Why should they all be the same?  Everyone doesn't pay in the same.

Answering a question with a question? Social security is meant as a fail safe retirement mechanism. Which means it should provide everyone with the minimum retirement amount needed as long as you qualify. Paying more or less based on lifetime earning is silly, and basing it on the age you start collecting is just a way to push out needed reforms.

Now, I am asking again, why should the amount paid out be proportional to what you pay in? To screw over low income workers?

Of course, low income workers do get proportionately greater benefits vs. what they pay in, so screwing them over isn't obviously the answer. The amount isn't proportional to what you pay in---the relationship of the monthly benefit to what one paid in decreases as one pays more. I know you don't like answering questions with questions, but what purpose is served by your mischaracterization?

As to why there is at least a positive relationship between the amount paid in and the amount received, my suggestion is "to gather sufficient support."

[onlykelsey]

Another reason benefits may be tied to what you pay in is because what you pay in is based on what you earn, which, for most people, is basically their yearly spending (or, to be generous, they're spending 90% of what they earn).  This way benefits key to your lifestyle, which people are maybe hardpressed to change at 67.

[Apples]

Another reason benefits may be tied to what you pay in is because what you pay in is based on what you earn, which, for most people, is basically their yearly spending (or, to be generous, they're spending 90% of what they earn).  This way benefits key to your lifestyle, which people are maybe hardpressed to change at 67.

Also, I think it helps to normalize the SS payouts for HCOL areas.  Now obviously there are minimum wage people everywhere, but the middle class in NYC should be making more than the middle class in podunk town, Midwest.

[AZDude]

So you want to screw over high income workers instead?

I do think there should be a floor to the SS benefit that is equivalent to the federal minimum wage available at age 62 without any work requirement to meet the social insurance aspect of the program.  However, you can't expect folks who pay significantly higher premiums (as a result of higher earnings) to accept the same bare-bones benefit.

How would high income workers get screwed over? Everyone would get the same amount at retirement age. Social Security should be the ultimate safety net since its obvious most of the public refuses to, or is unable to save for their own retirement. People pay significantly more in taxes all the time and receive the same benefit. That is kind of the whole idea of a progressive tax system.

The amount isn't proportional to what you pay in---the relationship of the monthly benefit to what one paid in decreases as one pays more. I know you don't like answering questions with questions, but what purpose is served by your mischaracterization?

As to why there is at least a positive relationship between the amount paid in and the amount received, my suggestion is "to gather sufficient support."

Mischaracterization of you, or of SS? I am just saying that the current SS system is illogical for its intended purpose. Given that people seem unwilling or unable to self-fund retirement, the government needs a better public pension system.

Another reason benefits may be tied to what you pay in is because what you pay in is based on what you earn, which, for most people, is basically their yearly spending (or, to be generous, they're spending 90% of what they earn).  This way benefits key to your lifestyle, which people are maybe hardpressed to change at 67.

I suppose, but SS should be used as another way to redistribute wealth, considering the current wealth and income gap.

[Jack]

(Note: all of the following questions are hypothetical, and should not be construed to represent my actual opinion on the issue.)

Social security is meant as a fail safe retirement mechanism. Which means it should provide everyone with the minimum retirement amount needed as long as you qualify. Paying more or less based on lifetime earning is silly, and basing it on the age you start collecting is just a way to push out needed reforms.

Now, I am asking again, why should the amount paid out be proportional to what you pay in? To screw over low income workers?

First, is that Social Security's purpose?

Second, if the amount paid out should be equal for everyone, why shouldn't the amount everyone is required to pay in be equal too?

In general, this line of discussion seems analogous to the debate between progressive income taxes and flat sales taxes -- it is highly dependent on what one considers "fair" based on his or her ideology.

Also, I think it helps to normalize the SS payouts for HCOL areas.  Now obviously there are minimum wage people everywhere, but the middle class in NYC should be making more than the middle class in podunk town, Midwest.

Why?

More specifically, why should people currently in a HCOL area have a government-provided advantage towards staying in that HCOL area? Shouldn't the residents of Podunck Town, Midwest have an equal opportunity to move to NYC if they want?

[AZDude]

First, is that Social Security's purpose?

Second, if the amount paid out should be equal for everyone, why shouldn't the amount everyone is required to pay in be equal too?

In general, this line of discussion seems analogous to the debate between progressive income taxes and flat sales taxes -- it is highly dependent on what one considers "fair" based on his or her ideology.

SS is 80+ years old, so its purpose may have changed. Regardless, that *should* be its primary purpose. As to why shouldnt everyone pay the same amount in taxes, the answer is because we have a progressive tax system in place(and rightfully so). This means higher income pays more as a way to redistribute wealth to the lower rungs of society.

[onlykelsey]

Quote from: Apples on Today at 02:25:54 PM
Also, I think it helps to normalize the SS payouts for HCOL areas.  Now obviously there are minimum wage people everywhere, but the middle class in NYC should be making more than the middle class in podunk town, Midwest.

Why?

More specifically, why should people currently in a HCOL area have a government-provided advantage towards staying in that HCOL area? Shouldn't the residents of Podunck Town, Midwest have an equal opportunity to move to NYC if they want?

I wonder if part of this is offset by the fact that people living in HCOL areas generally pull less on the federal dime and fund economic growth via higher taxes at state and local level.  I'm not saying that was a motivation for the set up, but I think it may be partially or fully offset.   Plus, I'm not sure retiree-friendly areas of the country want all the people living only off of SS to move their and draw on other local resources in their twilight years when they're not really contributing to tax base.

[JR]

My dad has a nice pension but he was required to contribute 15% of his pay to it for his entire career. Would people who want a pension be okay with a 15% "pay cut"? Maybe some, but I bet it would bankrupt quite a few people.

[onlykelsey]

JR- agreed that some people too close to the edge to lose 15% of their income, but I'd rather have a 30 year old with that problem figure out his spending or get a new job than a 75 year old eating cat food, I guess.  You can't really change much when you're 70, it's the 30 year olds we need to worry about.

[Undecided]

Mischaracterization of you, or of SS? I am just saying that the current SS system is illogical for its intended purpose. Given that people seem unwilling or unable to self-fund retirement, the government needs a better public pension system.

Giro didn't suggest the payouts should be proportional to pay-ins (s/he just asked why payouts should "all be the same"---which certainly allows for progressive payouts) and the current system's payouts are, in fact, progressive. But you responded to Giro's post with "why should the amount paid out be proportional to what you pay in?" Giro didn't say that it should be, and that's not how the system works today.

[nobody123]

SS is 80+ years old, so its purpose may have changed. Regardless, that *should* be its primary purpose. As to why shouldnt everyone pay the same amount in taxes, the answer is because we have a progressive tax system in place(and rightfully so). This means higher income pays more as a way to redistribute wealth to the lower rungs of society.

It's purpose hasn't changed, but society definitely looks at it differently.  Very few still view it as a way to keep poor widows off the street and instead look at it as a primary retirement vehicle.  You apparently view it as a wealth redistribution mechanism.  However, as long as it is theoretically funded by worker contributions, I have a hard time believing that a capitalistic country would accept a single benefit level without a hard dollar fixed premium.

I have no issue with the progressive income tax paying for roads, police, etc., because I have the same opportunity to us them as someone who pays a fraction of what I pay, and that infrastructure plays a part in my ability to earn an above-average income, which gives me benefits beyond those provided by the government.  I don't like the idea of paying more taxes so someone can spend the money I earned on things beyond basic necessities.

Coincidentally, I think that wealth redistribution would be better addressed through the estate tax.  I am not a huge fan of generational wealth. 

[onlykelsey]

Coincidentally, I think that wealth redistribution would be better addressed through the estate tax.  I am not a huge fan of generational wealth.

Agreed.  It appears to do literally no one any good, empirically.  I don't like dead hand laws generally, though, except maybe as they relate to treatment of your body/burial/etc.  I know there are exceptions, but so many of the trust fund kids I know are absolutely useless.  It's not good if you're a true capitalist, and it's not good if you believe in wealth redistribution, and it's not good if you worry about efficient taxation models.

[Undecided]

SS is 80+ years old, so its purpose may have changed. Regardless, that *should* be its primary purpose. As to why shouldnt everyone pay the same amount in taxes, the answer is because we have a progressive tax system in place(and rightfully so). This means higher income pays more as a way to redistribute wealth to the lower rungs of society.

It's purpose hasn't changed, but society definitely looks at it differently.  Very few still view it as a way to keep poor widows off the street and instead look at it as a primary retirement vehicle.  You apparently view it as a wealth redistribution mechanism.  However, as long as it is theoretically funded by worker contributions, I have a hard time believing that a capitalistic country would accept a single benefit level without a hard dollar fixed premium.

Relatedly, I think, many people seem to view Social Security very differently from other entitlement programs specifically intended for the "needy," talking about how they "deserve" social security because they "paid in" for all those years. I think that mental connection between their payments in during their working years and their collections in retirement goes hand-in-hand with the point I made above, that the structure of social security is part of what makes it broadly supported.

[onlykelsey]

Relatedly, I think, many people seem to view Social Security very differently from other entitlement programs specifically intended for the "needy," talking about how they "deserve" social security because they "paid in" for all those years. I think that mental connection between their payments in during their working years and their collections in retirement goes hand-in-hand with the point I made above, that the structure of social security is part of what makes it broadly supported.

Agreed. But then we've essentially just created a national defined benefit old school pension plan.  Which I'm fine with, but people don't seem to see it that way. 

[Tabaxus]

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

Why? Assuming you hit the minimums for qualification(age: 62, ~25 years worth of earned income), benefits should all be the same.

Why should they all be the same?  Everyone doesn't pay in the same.

Answering a question with a question? Social security is meant as a fail safe retirement mechanism. Which means it should provide everyone with the minimum retirement amount needed as long as you qualify. Paying more or less based on lifetime earning is silly, and basing it on the age you start collecting is just a way to push out needed reforms.

Now, I am asking again, why should the amount paid out be proportional to what you pay in? To screw over low income workers?

You want to turn SS into welfare.  It's not supposed to be, at least not fully; that's why there is a cap on income subject to SS tax, among other things.  Bernie wants to turn it into welfare by, among other things, removing that cap but not increasing the amount people receive from it on the back end to account for the greater payments in.   Ok to have a different policy view of what it should be, but acknowledge that what you're proposing is to very obviously transform SS into a straight welfare entitlement.

[One Noisy Cat]

   In the case of my grandparents (born circa 1890) their retirement was 1) men died in mid 60s 2) women live with their children for the next 20 years, getting social security (which I think was pretty minimal until the mid 1970s).

I don't think 401ks are fantastic beyond belief (although I always contributed, plus IRA) but at the same time there are a lot of companies that were stalwarts when I was young: Kodak, Pan Am, U S Steel, GM that have had problems staying in business and relying on a pension from them is problematic.

Some kind of mandatory 401/TSP system seems better. People usually don't think about the future. Or they don't think they can save unless they don't get the cash on Friday to begin with. And emphasizing savings commercials, investor education, etc should be as common as soda pop commercials.

[Midwest]

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

Why? Assuming you hit the minimums for qualification(age: 62, ~25 years worth of earned income), benefits should all be the same.

Why should they all be the same?  Everyone doesn't pay in the same.

Answering a question with a question? Social security is meant as a fail safe retirement mechanism. Which means it should provide everyone with the minimum retirement amount needed as long as you qualify. Paying more or less based on lifetime earning is silly, and basing it on the age you start collecting is just a way to push out needed reforms.

Now, I am asking again, why should the amount paid out be proportional to what you pay in? To screw over low income workers?

Social security is already heavily weighted towards low income workers.  I don't know how they are being "screwed" by receiving a much higher % of benefits per dollar paid in than high earners. 

[Mathew675]

Coincidentally, I think that wealth redistribution would be better addressed through the estate tax.  I am not a huge fan of generational wealth.

Agreed.  It appears to do literally no one any good, empirically.  I don't like dead hand laws generally, though, except maybe as they relate to treatment of your body/burial/etc.  I know there are exceptions, but so many of the trust fund kids I know are absolutely useless.  It's not good if you're a true capitalist, and it's not good if you believe in wealth redistribution, and it's not good if you worry about efficient taxation models.

A little surprised by the level of vitriol that I see from time to time on this site.  I'm sure that the "trust fund kids" you know is a statistically significant sample size so I won't try to dispute that logic, but to feel that you should have the right to lay claim on someone's life time earnings is extremely troubling.  Along this same line of logic we should probably nationalize all of the 529 plans as that is also just kids benefiting from their parents as well.  Take a look at the Mini Money Mustache section and you will see how many people work hard and sacrifice in order to ensure that their children have the best possible start in life.  I do not think it is fair to fault those that are supported by their parents as that is how they decided to spend (or not spend) their money.  No one else should have a say in this.  The fact is, that I do not lay claim on someone else's labors, just as I am offended when someone stakes a right to my own.  I am not naive in that I do agree there are shared responsibilities.  (roads, national defense, police, fire)  However, I have to draw the line at grave robbing.  As for these trust fund kids...  "A fool and his money are soon parted."  I think we can do without theft to speed that along.

Milton Friedman said it better than I could have. 
https://www.youtube.com/watch?v=MRpEV2tmYz4

[BlueHouse]

  I find it hard to believe that people are so stupid that they don't understand the concept of having to save to stop working.

I used to feel this way too, until I widened my horizons. I come from a high-achieving family, went to excellent schools and have always been surrounded by smart people. It wasn't until my forties that I witnessed people who just don't have the intellectual capacity to figure this stuff out. Then you have to figure out a way to get them to believe what you tell them without a fundamental understanding because learning is different for them.  Throw reason out and resort to rote. There are functioning, independent people who have very low IQs but are above the threshold for actual mental retardation. There are many more than you might believe.

[Abe]

My experience as a physician has tempered my opinion of people I may have previously though to to be stupid. Most of the time they are not, but are overwhelmed by the complexity of their situations. Whether these are self-induced or not is besides the point, but regardless they feel stuck and unable to make a decision. Some of them appreciate others with more experience helping make decisions for them, others regard themselves as experts despite clear evidence to the contrary.

During my training I found it helpful to have organized sessions to discuss retirement planning, and having such sessions in private companies may improve enrollment in 401k. The other option is being paternalistic and having an opt-out policy (found to be quite effective, but probably not popular).

[onlykelsey]

Coincidentally, I think that wealth redistribution would be better addressed through the estate tax.  I am not a huge fan of generational wealth.

Agreed.  It appears to do literally no one any good, empirically.  I don't like dead hand laws generally, though, except maybe as they relate to treatment of your body/burial/etc.  I know there are exceptions, but so many of the trust fund kids I know are absolutely useless.  It's not good if you're a true capitalist, and it's not good if you believe in wealth redistribution, and it's not good if you worry about efficient taxation models.

A little surprised by the level of vitriol that I see from time to time on this site.  I'm sure that the "trust fund kids" you know is a statistically significant sample size so I won't try to dispute that logic, but to feel that you should have the right to lay claim on someone's life time earnings is extremely troubling.  Along this same line of logic we should probably nationalize all of the 529 plans as that is also just kids benefiting from their parents as well.  Take a look at the Mini Money Mustache section and you will see how many people work hard and sacrifice in order to ensure that their children have the best possible start in life.  I do not think it is fair to fault those that are supported by their parents as that is how they decided to spend (or not spend) their money.  No one else should have a say in this.  The fact is, that I do not lay claim on someone else's labors, just as I am offended when someone stakes a right to my own.  I am not naive in that I do agree there are shared responsibilities.  (roads, national defense, police, fire)  However, I have to draw the line at grave robbing.  As for these trust fund kids...  "A fool and his money are soon parted."  I think we can do without theft to speed that along.

Milton Friedman said it better than I could have. 
https://www.youtube.com/watch?v=MRpEV2tmYz4

I don't see how estate taxes are similar to grave robbing.  If you don't want the government to get your money, spend it or (better?) give it away during your lifetime.  Letting someone who's dead determine what to do with money (and in some cases for GENERATIONS after they're gone) makes no sense.  Why are we giving a dead person rights?  I understand an exemption for primary residence and $X (to be adjusted for inflation), maybe more if you're leaving minor children or other dependent family members, but that's it.

[maizefolk]

I find when arguing about patterns it is helpful to actually have the data in front of you.



As you can see, social security is both redistributive (those with lower incomes get more from social security proportional to what they've paid in than those with higher incomes) AND people's absolute payment continues to increase they continue to pay into the system.

Overall SS is an amazing deal for people with low incomes, and a reasonable one for people with higher incomes.* The people who lose out under the current system are those who die young, and the next generation (which would inherit the principle behind a retirement income stream if it had been funded by private savings).

Well managed private pensions work roughly the same way (reduced assets in estates and benefiting from people who pay in but die before collecting enable higher annual payouts) which is why the same amount of money can go farther in terms of expected income in retirement with a (again well managed) pension than a 401k. All in all, I'm much happier with private savings than pension plans, but I can see how the switch has been a negative one for others.

*Assuming they'd do what the social security trust fund does and invest their savings in government debt that basically keeps up with inflation. Which is a BIG assumption for people on this board but might actually count as a good outcome for the average person (savings accounts, stuffing it under a mattress, predatory investment scams).

Simplifying assumptions which will alter the absolute numbers but not the overall shape of the curves for the graph above: a single person who worked for 35 years before retirement yet retired at the full retirement age (maybe they went back to school or spent some time as a SAHP?). Factors in SS's adjustments to earnings for inflation each year. There are plenty of real social security calculators out there, don't use this graph to estimate anything about your own life.

[nobody123]

Coincidentally, I think that wealth redistribution would be better addressed through the estate tax.  I am not a huge fan of generational wealth.

Agreed.  It appears to do literally no one any good, empirically.  I don't like dead hand laws generally, though, except maybe as they relate to treatment of your body/burial/etc.  I know there are exceptions, but so many of the trust fund kids I know are absolutely useless.  It's not good if you're a true capitalist, and it's not good if you believe in wealth redistribution, and it's not good if you worry about efficient taxation models.

A little surprised by the level of vitriol that I see from time to time on this site.  I'm sure that the "trust fund kids" you know is a statistically significant sample size so I won't try to dispute that logic, but to feel that you should have the right to lay claim on someone's life time earnings is extremely troubling.  Along this same line of logic we should probably nationalize all of the 529 plans as that is also just kids benefiting from their parents as well.  Take a look at the Mini Money Mustache section and you will see how many people work hard and sacrifice in order to ensure that their children have the best possible start in life.  I do not think it is fair to fault those that are supported by their parents as that is how they decided to spend (or not spend) their money.  No one else should have a say in this.  The fact is, that I do not lay claim on someone else's labors, just as I am offended when someone stakes a right to my own.  I am not naive in that I do agree there are shared responsibilities.  (roads, national defense, police, fire)  However, I have to draw the line at grave robbing.  As for these trust fund kids...  "A fool and his money are soon parted."  I think we can do without theft to speed that along.

Milton Friedman said it better than I could have. 
https://www.youtube.com/watch?v=MRpEV2tmYz4

I'm not advocating a 100% estate tax like in the video.  Friedman points out that the incentive to provide for your family is a powerful motivator, and I agree.  I am sacrificing to pay for my children's educations and hope to leave them a modest estate when I die, because if I can that means I was not a financial burden to them in my later years.  However, I believe there should be limits to what you can horde.  We provide legal protections such as patents and copyrights to enhance the wealth creation of individuals while they are alive, their businesses benefit from property tax abatements and investment tax credits, so why is it such an issue to take some of that wealth back upon their demise and redistribute it for the common good? 

[ShoulderThingThatGoesUp]

One issue with the estate tax is that it can make passing down a capital-intensive family business (farm, as an extreme example) very difficult. All taxes have tradeoffs.

[Midwest]

I find when arguing about patterns it is helpful to actually have the data in front of you.



As you can see, social security is both redistributive (those with lower incomes get more from social security proportional to what they've paid in than those with higher incomes) AND people's absolute payment continues to increase they continue to pay into the system.

Overall SS is an amazing deal for people with low incomes, and a reasonable one for people with higher incomes.* The people who lose out under the current system are those who die young, and the next generation (which would inherit the principle behind a retirement income stream if it had been funded by private savings).

Well managed private pensions work roughly the same way (reduced assets in estates and benefiting from people who pay in but die before collecting enable higher annual payouts) which is why the same amount of money can go farther in terms of expected income in retirement with a (again well managed) pension than a 401k. All in all, I'm much happier with private savings than pension plans, but I can see how the switch has been a negative one for others.

*Assuming they'd do what the social security trust fund does and invest their savings in government debt that basically keeps up with inflation. Which is a BIG assumption for people on this board but might actually count as a good outcome for the average person (savings accounts, stuffing it under a mattress, predatory investment scams).

Simplifying assumptions which will alter the absolute numbers but not the overall shape of the curves for the graph above: a single person who worked for 35 years before retirement yet retired at the full retirement age (maybe they went back to school or spent some time as a SAHP?). Factors in SS's adjustments to earnings for inflation each year. There are plenty of real social security calculators out there, don't use this graph to estimate anything about your own life.

Maize Man - Great graphs.  You should run the #'s on the ROI when income goes from 80 or 100k to the maximum.  At some point, I believe high income earners get a negative ROI on their incremental contributions. 

[Scandium]

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

Why? Assuming you hit the minimums for qualification(age: 62, ~25 years worth of earned income), benefits should all be the same.

Why should they all be the same?  Everyone doesn't pay in the same.

Answering a question with a question? Social security is meant as a fail safe retirement mechanism. Which means it should provide everyone with the minimum retirement amount needed as long as you qualify. Paying more or less based on lifetime earning is silly, and basing it on the age you start collecting is just a way to push out needed reforms.

Now, I am asking again, why should the amount paid out be proportional to what you pay in? To screw over low income workers?

Interesting. I think I'd support that. Instead of a sliding scale make SS payouts a single number, or no more than a few. This way it would provide a floor/safety net of minimum wage for acceptable living. This is what I've though of as the purpose of SS from the start. As a high earner I'd be "screwed" by this system, but I'd be fine with that. Consider it a tax I pay to avoid stepping over old people dying of hunger in the street. Worth it to me. And would guarantee me few thousand dollars in retirement should I somehow loose all my money. If anything this might lower the SS tax, since the payout for many higher earners would lower from $50k to $30k, or whatever the new minimum is.

My opinion the failure of the 401k is the idiotic system where it's through the employer. Scrap that and let anyone set up a 401k with any provider outside their employer.

[JZinCO]

I find when arguing about patterns it is helpful to actually have the data in front of you.



As you can see, social security is both redistributive (those with lower incomes get more from social security proportional to what they've paid in than those with higher incomes) AND people's absolute payment continues to increase they continue to pay into the system.

Overall SS is an amazing deal for people with low incomes, and a reasonable one for people with higher incomes.* The people who lose out under the current system are those who die young, and the next generation (which would inherit the principle behind a retirement income stream if it had been funded by private savings).

Well managed private pensions work roughly the same way (reduced assets in estates and benefiting from people who pay in but die before collecting enable higher annual payouts) which is why the same amount of money can go farther in terms of expected income in retirement with a (again well managed) pension than a 401k. All in all, I'm much happier with private savings than pension plans, but I can see how the switch has been a negative one for others.

*Assuming they'd do what the social security trust fund does and invest their savings in government debt that basically keeps up with inflation. Which is a BIG assumption for people on this board but might actually count as a good outcome for the average person (savings accounts, stuffing it under a mattress, predatory investment scams).

Simplifying assumptions which will alter the absolute numbers but not the overall shape of the curves for the graph above: a single person who worked for 35 years before retirement yet retired at the full retirement age (maybe they went back to school or spent some time as a SAHP?). Factors in SS's adjustments to earnings for inflation each year. There are plenty of real social security calculators out there, don't use this graph to estimate anything about your own life.

Maize Man - Great graphs.  You should run the #'s on the ROI when income goes from 80 or 100k to the maximum.  At some point, I believe high income earners get a negative ROI on their incremental contributions.

ggplot2 makes everything better!

[mm1970]

I was about to disagree, then I re-read the word "average." IMO, the minimum monthly benefit should be exactly at the poverty line (because anything above it is at least adequate by definition). I don't think it's necessary for the "average" benefit to hit any particular number, except that amount paid out should at least tend to remain proportional to the amount paid in.

Why? Assuming you hit the minimums for qualification(age: 62, ~25 years worth of earned income), benefits should all be the same.

Why should they all be the same?  Everyone doesn't pay in the same.

Answering a question with a question? Social security is meant as a fail safe retirement mechanism. Which means it should provide everyone with the minimum retirement amount needed as long as you qualify. Paying more or less based on lifetime earning is silly, and basing it on the age you start collecting is just a way to push out needed reforms.

Now, I am asking again, why should the amount paid out be proportional to what you pay in? To screw over low income workers?

Really only because at some point, it ceased to be a way to keep widows and children from starving.  At some point (I don't know when), it became an earned benefit, and it was sold that way.

"You pay in, you get back."  In fact, you find this out any time you call it an entitlement.  My grandparents, who had $1M net worth before my grandfather died, talked about the SS they earned, even though they really didn't need the money at that point.  Same with my older retired family members.

It depends on how you sell it.  Try selling it this way:
Well, when you retire at 70 (that's your only option), you will get $1000 a month (currently poverty line for a single is $12,000).
Of course, your taxes will be X% of what you earn, no matter what you earn.

vs selling it this way:
Your SS taxes will be X amount, same as everyone else's, so everyone pays the same.

In the first one, you have to sell it as - you are providing the poverty level support to people who are retired right now.
In the second one, you pretty much are selling it as "you get back what you pay in".

[dandarc]

Maize Man - Great graphs.  You should run the #'s on the ROI when income goes from 80 or 100k to the maximum.  At some point, I believe high income earners get a negative ROI on their incremental contributions.

Just so everyone is clear, what is being plotted on the graphs is not an ROI - it is the annual payout divided by the total amount of taxes paid in.  More akin to the "payout percentage" on an annuity than an ROI figure.

And social security ROI, even at high incomes is positive.  The benefit you receive is indexed to inflation, and it goes up, if even just a little, with every additional tax-payment you make (for 35 years anyway), so in real terms, you are getting ahead even at the very top of the income spectrum subject to social security taxes.  Often times small, but a positive real return.  Barring a change to the benefit formula, that is.

[nobody123]

One issue with the estate tax is that it can make passing down a capital-intensive family business (farm, as an extreme example) very difficult. All taxes have tradeoffs.

Either come up with the money to pay the taxes or sell the business to pay the taxes.  Why would I treat the business worth $50M any different than a $50M pile of gold?

[randymarsh]

One issue with the estate tax is that it can make passing down a capital-intensive family business (farm, as an extreme example) very difficult. All taxes have tradeoffs.

Either come up with the money to pay the taxes or sell the business to pay the taxes.  Why would I treat the business worth $50M any different than a $50M pile of gold?

If I've worked on my family's farm for decades, I'm not sure I should be forced to sell my day job to pay the taxes when a parent passes. Farms require a huge amount of assets to generate even a modest return, so I likely couldn't just "come up with the money".

I thought there were special exemptions for farms though?

[Jack]

One issue with the estate tax is that it can make passing down a capital-intensive family business (farm, as an extreme example) very difficult. All taxes have tradeoffs.

Either come up with the money to pay the taxes or sell the business to pay the taxes.  Why would I treat the business worth $50M any different than a $50M pile of gold?

If I've worked on my family's farm for decades, I'm not sure I should be forced to sell my day job to pay the taxes when a parent passes. Farms require a huge amount of assets to generate even a modest return, so I likely couldn't just "come up with the money".

I thought there were special exemptions for farms though?

If it's profitable (and thus worth continuing rather than liquidating) then it shouldn't be too hard to get some kind of loan to pay for the taxes, right?

[TheGrimSqueaker]

One issue with the estate tax is that it can make passing down a capital-intensive family business (farm, as an extreme example) very difficult. All taxes have tradeoffs.

Either come up with the money to pay the taxes or sell the business to pay the taxes.  Why would I treat the business worth $50M any different than a $50M pile of gold?

If I've worked on my family's farm for decades, I'm not sure I should be forced to sell my day job to pay the taxes when a parent passes. Farms require a huge amount of assets to generate even a modest return, so I likely couldn't just "come up with the money".

I thought there were special exemptions for farms though?

If it's profitable (and thus worth continuing rather than liquidating) then it shouldn't be too hard to get some kind of loan to pay for the taxes, right?

No, a loan secured by an income generating asset can only be obtained if the person taking out the loan is able to pay it. If the income generated by the asset (in this case the farm) generally goes to the person doing the work, then when that income has to be used to pay off taxes or a loan instead, the farmer ends up either working for free or abandoning the farm to find some other way to earn a living.