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

[JZinCO]

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?

http://www.ers.usda.gov/topics/farm-economy/federal-tax-issues/federal-estate-taxes.aspx

[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?

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?

Lots of people lose their jobs every day for reasons out of their control.  A farm is a business like any other, IMHO, and should be treated as such.  I would assume that once a farm reached a certain value of assets where an estate tax would come into play, it would be incorporated anyway.  If you want to pass the farm on and keep it in the family, do the proper planning to do so.

A quick Google search shows that only 20 small businesses / farms owed estate tax in 2013, so it's not like this is a huge problem. 

[maizefolk]

....

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.

Thanks! Plotting the ROI would look very boring. From 0-$10k/year the ROI of money paid in social security tax is about 21%/year. From $10k-$62k/year of average annual income the ROI of money paid into social security is about 7.4%. From there on up the ROI is 3.5%.

Based on the formula, I agree with dandarc, I don't see how you could actually get a negative ROI from increasing income. As long as you are still paying SS taxes, the worst case scenario is that an increase of income for one year of $350 dollars (so an extra $350*12.4%=$43.40 in extra SS taxes payed) translates into an extra $1.50/year in social security income.*

*$350 dollars of extra income raises your average annual earnings over the top 35 years used to calculate your benefit by $10/year. At the lowest income levels, social security replaces 90% of your average annual income but at the highest income levels, the marginal replacement of income is only 15%. $10*15% = $1.50 of additional income per year from social security.

[maco]

(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?

From what I was told in history class: yes. The point was to make it possible for older workers to retire and free up jobs for younger workers.

[MgoSam]

(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?

From what I was told in history class: yes. The point was to make it possible for older workers to retire and free up jobs for younger workers.

And secondly, a ton of elderly citizens were close to poverty. It was meant to help them as well.

[beltim]

Based on the formula, I agree with dandarc, I don't see how you could actually get a negative ROI from increasing income. As long as you are still paying SS taxes, the worst case scenario is that an increase of income for one year of $350 dollars (so an extra $350*12.4%=$43.40 in extra SS taxes payed) translates into an extra $1.50/year in social security income.

Not that it's terribly germane to this audience, but the way to have a negative ROI is to work more than 35 years.  Since Social Security only takes 35 years of benefits into account, each additional year displaces one year's worth of contributions.  Note that this doesn't necessarily result in a negative ROI - it depends on what the salary history of that individual is.

[TheGrimSqueaker]

(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?

From what I was told in history class: yes. The point was to make it possible for older workers to retire and free up jobs for younger workers.

And secondly, a ton of elderly citizens were close to poverty. It was meant to help them as well.

Economy-wise, if you want money to circulate the best way to make it do that is to give it to poor people. That way the money gets spent. If you want money to be invested, you give it to Mustachians or to wealthier folks. If you want it to go overseas, you give it to the class of people who have offshore accounts.

[JLee]

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.

THIS. Having the only reasonable retirement plan ($5500/yr is effectively nothing in comparison) tied to an employer offering is absurd.

[Apples]

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.

And this is one of the major reasons why the mid-size farm is going away.  Large farms (generating over, say $4,000,000 or $5,000,000 in revenue a year) can usually pay to support the owner/operator and some employees and also, at least on good years, throw off extra money to cover loans.  But the profit margin is usually less than 5% including the owner's income as "profit".  So a farm grossing even $1,000,000 is going to have trouble making those loan payments.  Land can be valued at $4,000-$10,000 per acre from what I've seen.  Suddenly the acreage, equipment, and buildings is a lot of money you have to pay taxes on.  Small farms usually are supported by one or both spouses having an off-farm job or someone new either staring their own little farm or buying a small farm using their savings from a previous job.

[Marus]

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.

THIS. Having the only reasonable retirement plan ($5500/yr is effectively nothing in comparison) tied to an employer offering is absurd.

This.  And I would extend the same logic to employer based health plans.  Let companies focus on generating revenue.  Let the government worry about guaranteeing basic levels of human welfare (though I'm sure we'll all disagree about what exactly this would entail).

[randymarsh]

THIS. Having the only reasonable retirement plan ($5500/yr is effectively nothing in comparison) tied to an employer offering is absurd.

This is simply unfair as well. 401ks are most common in higher paying jobs, so white collar professionals receive an income advantage and a savings advantage. Much has been written on this forum about bad decision making skills of the poor, but I think payroll deductions would help make up for this. Out of sight, out of mind.

I'm not sure why the TSP couldn't be available to every US citizen? The gov could let you contribute tax refund money too instead of just payroll deduction. That might encourage people receiving high refunds to put at least some away.

[Scandium]

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.

THIS. Having the only reasonable retirement plan ($5500/yr is effectively nothing in comparison) tied to an employer offering is absurd.

This.  And I would extend the same logic to employer based health plans.  Let companies focus on generating revenue.  Let the government worry about guaranteeing basic levels of human welfare (though I'm sure we'll all disagree about what exactly this would entail).

Always thought it weird that the republicans don't support decoupling 401k and health insurance from the employer (if they do I haven't heard about it). Not to transfer it to government, but to other private companies. If they are pro business, less regulation and more flexible workforce this would seem like logical policies? Getting rid of these arcane burdens on businesses I'd think would look great to them. I'm running Uncle Bobs tire store, and now I also have to manage a health insurance and retirement investment company? Idiotic.

[NoStacheOhio]

THIS. Having the only reasonable retirement plan ($5500/yr is effectively nothing in comparison) tied to an employer offering is absurd.

This goes back to why the 401k was invented though. It was intended to be a perk, and a way for highly-compensated employees to defer taxes on a portion of their income. It was never meant to be the primary retirement vehicle for the general public. Employers offered the plans as a way to attract top talent. Now that the focus is shifted, we should probably re-evaluate the system.

On the plus side, BECAUSE my 403b is tied to my (large) employer, I can purchase institutional class Vanguard shares without the requisite $10m initial investment.

[onlykelsey]

Or we should get rid of 401(k)s and up the IRA contribution limit significantly.

[Vanguards and Lentils]

#checkyour401(k)privilege

[Marus]

THIS. Having the only reasonable retirement plan ($5500/yr is effectively nothing in comparison) tied to an employer offering is absurd.

This is simply unfair as well. 401ks are most common in higher paying jobs, so white collar professionals receive an income advantage and a savings advantage. Much has been written on this forum about bad decision making skills of the poor, but I think payroll deductions would help make up for this. Out of sight, out of mind.

I'm not sure why the TSP couldn't be available to every US citizen? The gov could let you contribute tax refund money too instead of just payroll deduction. That might encourage people receiving high refunds to put at least some away.

I'd say there are a lot of promising retirement alternatives that we could poach from other countries.  Unless you believe that Americans are uniquely incapable among first world citizens of properly planning for their futures, it's clear that our retirement crisis is a failure of policy, not a failure on the individual level to be sufficiently rational.

[Scandium]

THIS. Having the only reasonable retirement plan ($5500/yr is effectively nothing in comparison) tied to an employer offering is absurd.

This is simply unfair as well. 401ks are most common in higher paying jobs, so white collar professionals receive an income advantage and a savings advantage. Much has been written on this forum about bad decision making skills of the poor, but I think payroll deductions would help make up for this. Out of sight, out of mind.

I'm not sure why the TSP couldn't be available to every US citizen? The gov could let you contribute tax refund money too instead of just payroll deduction. That might encourage people receiving high refunds to put at least some away.

I'd say there are a lot of promising retirement alternatives that we could poach from other countries.  Unless you believe that Americans are uniquely incapable among first world citizens of properly planning for their futures, it's clear that our retirement crisis is a failure of policy, not a failure on the individual level to be sufficiently rational.

yes, european countries at least simply take 10-20% of your salary no matter what, and you can have it back as a low-payout annuity once you reach 65 or so (but not a second before!). No personal responsibility required, glorious! You don't have to decide how much to save, how to save, when to save, when to retire. Sounds fantastic right?!

Oh and you want to save on your own? Too bad, no tax advantaged accounts, and we'll tax capital gains at 30% (so a 2.8% SWR?) because those only go to capitalist pigs. At least the country I'm familiar with this drive people to pile into expensive homes as their "retirement savings" since they are somewhat tax efficient. Interest-only loans FTW! Maybe 20% of the population have any stock ownership.

[Midwest]

I'd say there are a lot of promising retirement alternatives that we could poach from other countries.  Unless you believe that Americans are uniquely incapable among first world citizens of properly planning for their futures, it's clear that our retirement crisis is a failure of policy, not a failure on the individual level to be sufficiently rational.

The failure of the vast majority of the populace to save nearly enough (or anything) for retirement is substantially due to a lack of rational thought on the part of the individual.

There are many opportunities in the US and many vehicles for saving/investing.  The problem is that most spend nearly every dollar they make rather than saving.  For those in poverty that's understandable, but many are in a situation where they can save and choose not to. 

[onlykelsey]

The failure of the vast majority of the populace to save nearly enough (or anything) for retirement is substantially due to a lack of rational thought on the part of the individual.

There are many opportunities in the US and many vehicles for saving/investing.  The problem is that most spend nearly every dollar they make rather than saving.  For those in poverty that's understandable, but many are in a situation where they can save and choose not to.

I'm not sure wondering about the "why" is all that interesting.  For what it's worth, I don't entirely agree with you (i am in a distinct minority of graduate school educated 20-somethings by having access to a 401(k)), but i"m not sure it matters all that much.

To me, what matters is the outcome of the failure to save.  It results either in poverty, or in higher burdens on the rest of us to keep elderly people from living in poverty.  Either we're supporting our parents, or we're paying through taxes, or we're paying higher interest on money the US borrowed.  A forced savings plan (modest, maybe 5 or 10%) could really alleviate a large portion of this problem, without doing much harm to those of us set on a 90% SR and retirement at 32.

[Scandium]

A forced savings plan (modest, maybe 5 or 10%) could really alleviate a large portion of this problem, without doing much harm to those of us set on a 90% SR and retirement at 32.

Maybe 12.4% of salary that pays out an amount scaled for the age from 62-70 when you claim it? Yeah that's a thought..

Oh, what's that? We're already doing that? Ok then, another 12.4% on top of that again..?

[Midwest]

A forced savings plan (modest, maybe 5 or 10%) could really alleviate a large portion of this problem, without doing much harm to those of us set on a 90% SR and retirement at 32.

Maybe 12.4% of salary that pays out an amount scaled for the age from 62-70 when you claim it? Yeah that's a thought..

Oh, what's that? We're already doing that? Ok then, another 12.4% on top of that again..?

Maybe we should adjust the hypothetical plan such that low wage earners receive higher benefits per dollar paid in as compared to high earners as well.

[onlykelsey]

Maybe 12.4% of salary that pays out an amount scaled for the age from 62-70 when you claim it? Yeah that's a thought..

Oh, what's that? We're already doing that? Ok then, another 12.4% on top of that again..?

Sorry, I meant more of a conservative-style real forced savings plan that you are the beneficiary of.  That the government can't use for other things.  Even just making a 5% contribution the default on each paycheck might change a lot.  People should be able to opt out if they want, but the default could be in.

I'm not strongly advocating this particular policy solution, though it seems workable.  I'm just saying that we can point fingers and say people are lazy all we want, but I'd rather pass legislation making savings more attractive or forced now than pay for my retirement, and that of my parents' generation, and that of my non-savings compatriots in 40 years.  We know the problem is there, let's find a way to solve it.

[JZinCO]

I understand where you are coming from Only Kelsey. An example of this is a 401a DC plan. For example, I must save 8% of my salary. There is no wiggle room. I am free to invest that amount however I choose.
Of course this is employer-specific.

I wonder if making this sort of plan mandated, even with a government contribution would be cheaper than the social safety net that we provide retirees who have not been prudent during their working years.

[Vanguards and Lentils]

Maybe 12.4% of salary that pays out an amount scaled for the age from 62-70 when you claim it? Yeah that's a thought..

Oh, what's that? We're already doing that? Ok then, another 12.4% on top of that again..?

Sorry, I meant more of a conservative-style real forced savings plan that you are the beneficiary of.  That the government can't use for other things.  Even just making a 5% contribution the default on each paycheck might change a lot.  People should be able to opt out if they want, but the default could be in.

Mandatory retirement savings and social security tax are really not comparable... one of them is literally saving money for future you, and the other is the (arguably high) cost of having a social safety net.

Australia has been doing mandatory, tax-advantaged, retirement savings (the "Superannuation Guarantee") for over 20 years now. The rate is ~9% of salary now and is supposed to rise to ~12% in a few years. The result has been that the average Australian has many times more in retirement savings than the average American. Sounds good. But apparently for the Australians, the wealth effect has caused spending to increase as well, to the point where consumer debt is keeping pace with retirement savings. People see their super accounts, think they're rich, and spend more, using borrowed money. They'll reach retirement age, use their savings to pay off the debt they've accumulated, and be back at zero. And with the added bonus of being a more spendy consumer => having higher lifestyle costs.

The greatest beneficiaries of this plan would be the high earners, who likely form the bulk of the ~1 in 5 people who make voluntary contributions on top of the mandatory 9%, for the tax savings.

Source: Report from an Australian accounting body

[onlykelsey]

INteresting, supermatthew.  I'm more familiar with the Swedish and German systems, having lived long-ish term in both countries.  Swedes definitely have (or had, maybe I"m out of date) co-existing systems of voluntary self-saving and mandatory sort of Social Security-like tax nets.

From what I can see, it seems like the UK, US, Canada and Australia are all consumer debt happy.  I get that the US incentivizes mortgage debt, but do you think consumer debt is just a cultural thing?

[Marus]

Always thought it weird that the republicans don't support decoupling 401k and health insurance from the employer (if they do I haven't heard about it). Not to transfer it to government, but to other private companies. If they are pro business, less regulation and more flexible workforce this would seem like logical policies? Getting rid of these arcane burdens on businesses I'd think would look great to them. I'm running Uncle Bobs tire store, and now I also have to manage a health insurance and retirement investment company? Idiotic.

For large corporations it's not really that idiotic which is largely why you aren't going to see them go away either.

In the United States, health insurance started to be offered as a benefit to workers back during World War II to allow companies to be competitive in the labor market at a time of wage controls. After the war people wanted to enact a national health insurance program, but settled for an employer provided once since the national one was seen as "socialism." Thanks to the tax advantages that are now in place with insurance, employers now treat it as part of your compensation, but it is cheaper than a larger paycheck since they don't have to pay the payroll taxes on it. Thus, if the option went away, people would expect their income to go up enough to pay for non-employer health insurance, but the cost to the employer would be higher since that would then be payroll.

Not necessarily.  Most policy proposals to eliminate employer based healthcare would be bundled with single payer or public option plans, either of which would allow for significant cost savings both by reducing overhead and negotiating better prices with pharmaceuticals.  As long as we can establish a health plan reasonably similar to any other first world nation the employers should stand to benefit from losing the responsibility to provide healthcare.

[Reynold]

yes, european countries at least simply take 10-20% of your salary no matter what, and you can have it back as a low-payout annuity once you reach 65 or so (but not a second before!). No personal responsibility required, glorious! You don't have to decide how much to save, how to save, when to save, when to retire. Sounds fantastic right?!

Providing they can even pay those; as an article in the Wall Street Journal pointed out on March 6, most European countries don't even have the pseudo "savings" the U.S. Social Security system has for their pensions, they just pay them directly out of current worker contributions.  They have much worse demographics going forward than the U.S. does.  They are going to have some serious issues in 10-20 years trying to pay those pensions, and its not just
Greece, Italy and Spain. 

[JR]

yes, european countries at least simply take 10-20% of your salary no matter what, and you can have it back as a low-payout annuity once you reach 65 or so (but not a second before!). No personal responsibility required, glorious! You don't have to decide how much to save, how to save, when to save, when to retire. Sounds fantastic right?!

Providing they can even pay those; as an article in the Wall Street Journal pointed out on March 6, most European countries don't even have the pseudo "savings" the U.S. Social Security system has for their pensions, they just pay them directly out of current worker contributions.  They have much worse demographics going forward than the U.S. does.  They are going to have some serious issues in 10-20 years trying to pay those pensions, and its not just
Greece, Italy and Spain.

Thus the reason that countries like Germany are welcoming refugees with open arms.

[Shane]

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.

Good idea. I agree that it makes sense for everyone to get the same livable payout from SS no matter what he paid into the system. I also agree with the poster above who said the reason the system is not that way is because it would be more difficult to get voters to accept it.

Why not have a national 401k type option that anyone could choose to pay into and the federal government would match her contributions up to a certain %? It seems to me like the problems with 401ks are related to the fact that they are connected to employers and the unscrupulous investment firms they are in bed with.

[NoStacheOhio]

Good idea. I agree that it makes sense for everyone to get the same livable payout from SS no matter what he paid into the system. I also agree with the poster above who said the reason the system is not that way is because it would be more difficult to get voters to accept it.

Why not have a national 401k type option that anyone could choose to pay into and the federal government would match her contributions up to a certain %? It seems to me like the problems with 401ks are related to the fact that they are connected to employers and the unscrupulous investment firms they are in bed with.

Because those same unscrupulous investment firms make large campaign contributions to various legislators who would decide that sort of thing. Also, the aforementioned corporate payroll tax reasons. Honestly, I think you'd have more traction trying to enact mandatory 401k availability for W-2 employees than separating it from employment. It would be better than nothing?

[onlykelsey]

Honestly, I think you'd have more traction trying to enact mandatory 401k availability for W-2 employees than separating it from employment.

Agreed, realistically.

Although what would be the benefit of doing that over raising the IRA contribution limit? I guess if Congress hates freelancers (or loves big companies, more accurately), the 401K availability would produce less loss in taxes.

[dandarc]

Honestly, I think you'd have more traction trying to enact mandatory 401k availability for W-2 employees than separating it from employment.

Agreed, realistically.

Although what would be the benefit of doing that over raising the IRA contribution limit? I guess if Congress hates freelancers (or loves big companies, more accurately), the 401K availability would produce less loss in taxes.

Freelancers already have high deferral limits available - Individual 401K.  It is awesome - currently deferring in excess of 40K / year into mine.  Many brokers offer a prototype plan for no fees these days.

[onlykelsey]

Brainfart, dandarc, thanks.  I'm actually looking into setting one up for my husband at the moment, as well.  Offtopic, but have any recommendations?  He doesn't earn 18K through his business (sole proprietor, part time, has a full time gig (with no 401K)), and doesn't need a vast amount of investment choices or anything.

[Midwest]

Brainfart, dandarc, thanks.  I'm actually looking into setting one up for my husband at the moment, as well.  Offtopic, but have any recommendations?  He doesn't earn 18K through his business (sole proprietor, part time, has a full time gig (with no 401K)), and doesn't need a vast amount of investment choices or anything.

Fidelity.

[dandarc]

Brainfart, dandarc, thanks.  I'm actually looking into setting one up for my husband at the moment, as well.  Offtopic, but have any recommendations?  He doesn't earn 18K through his business (sole proprietor, part time, has a full time gig (with no 401K)), and doesn't need a vast amount of investment choices or anything.

I'm at eTrade which is fine, but the funds available aren't great.  At the time I set this up I really wanted a Roth option, and eTrade had one then.  Stupid because I've only got like 15% or less in Roth now with all new contributions going traditional, and knowing what I know now, that would be 0%.  Hadn't fully seen the light on traditional vs. Roth until year 3 of my soloK experience. 

Thinking about switching to TD Ameritrade - lots of commission free Vanguard ETF's there - I could have my 3 fund portfolio there in Vanguard ETFs at close to Admiral costs - VTI, VSS, BND.  That is if the commission-free ETF list doesn't change.

Vanguard's plan is OK, but you're stuck with investor shares and no Admiral shares or even ETFs there, last I checked.  They didn't even have a Roth option for quite a while.  Frustrating, because it seems like it could be so much better.  But if you're inclined to go with a target date or life strategy fund anyway, the "no Admiral shares" thing is not a problem.

[ETA]: Vanguard's $20 per account annual fee would be a deal breaker for me, but if you qualify for Voyager or above, it is waived.[/Edit]

There are others out there, of course as well.

[dandarc]

Brainfart, dandarc, thanks.  I'm actually looking into setting one up for my husband at the moment, as well.  Offtopic, but have any recommendations?  He doesn't earn 18K through his business (sole proprietor, part time, has a full time gig (with no 401K)), and doesn't need a vast amount of investment choices or anything.

Fidelity.

Can you get Spartan funds in the SoloK there?  If so, this might have just moved to the top of my list.

[Jack]

Good idea. I agree that it makes sense for everyone to get the same livable payout from SS no matter what he paid into the system. I also agree with the poster above who said the reason the system is not that way is because it would be more difficult to get voters to accept it.

Why not have a national 401k type option that anyone could choose to pay into and the federal government would match her contributions up to a certain %? It seems to me like the problems with 401ks are related to the fact that they are connected to employers and the unscrupulous investment firms they are in bed with.

Because those same unscrupulous investment firms make large campaign contributions to various legislators who would decide that sort of thing. Also, the aforementioned corporate payroll tax reasons. Honestly, I think you'd have more traction trying to enact mandatory 401k availability for W-2 employees than separating it from employment. It would be better than nothing?

I think the ideal solution would be some sort of middle ground where companies could still make payroll-tax-exempt 'employer contributions,' but into a tax-deferred account of the employee's choosing instead of one chosen by the company. After all, direct deposit into normal checking accounts works now; why should it be any different for 401ks (or HSAs)? All you really need is a mechanism for the payroll people to be able to verify that the account is of the right type (that the employee isn't trying to direct their 401k contribution into a regular non-tax-deferred savings or checking account or something).

[Midwest]

Brainfart, dandarc, thanks.  I'm actually looking into setting one up for my husband at the moment, as well.  Offtopic, but have any recommendations?  He doesn't earn 18K through his business (sole proprietor, part time, has a full time gig (with no 401K)), and doesn't need a vast amount of investment choices or anything.

Fidelity.

Can you get Spartan funds in the SoloK there?  If so, this might have just moved to the top of my list.

I suspect yes.  My SIMPLE is with fidelity and own FUSVX in it.  If I recall the prototype plan is free.  Keep it under the $200k or 250k limit and no 5500 on the 401k.

[TheOldestYoungMan]

The graph in the article surprised the hell out of me.  I think I knew the info, but it really brought home to me just how much whatever it is that is available right now just isn't working.

This thread went down a road of arguing about all the reasons why, no, in fact, it's all working fine.

But it isn't working.  The median retirement savings for someone in my age group is $480.00?  What a bunch of assholes!  Save some money!

It doesn't matter if the reason is that people are stupid or if its wage stagnation or if it's lack of personal responsibility.  It truly doesn't.  That's a broken system.  That's a system where for all intents and purposes retirement is not a thing the average person is actually working towards or thinks is a thing.

Which might be true.  I mean, if you build railroads in the sun all day every day, you can't reasonably expect to do that job until you drop dead.  There's a very good chance you'll reach a point where you are unable to do that job.

But if you just type things into twitter all day, maybe you really can expire at your desk.

If instead we as a society have just failed to mandate either a level of financial literacy that avoids ruination, or mandatory savings that stave off ruination, then we should probably figure that out.

If you looked at the last 25 years as an experiment in how well people govern their own finances, then I think the empirical data is in and we can now see, the median person isn't taking care of their shit.

So two possibilities are coming:

People are going to be subsistence living off of social security, straining that system and exerting immense pressure to increase benefits right as it is running out of money, leading to a higher mandatory social security contribution rate and likely reducing the available 401k/IRA/403/457 options.

Or

Some supplemental retirement thing is going to be put into place, forcing people to save more, or (more likely) taxing those of us who have saved more.

So which option do you want as part of your ideological self-consistent worldview.  Because what's been expressed so far, "everything is fine and this is a non-problem" isn't really right.

I'm just grateful Cinnabon and Pizza-hut are out there doing everything they can to get your median American to drop dead prior to being able to claim social security.

God bless the food industry.

[Midwest]

Good idea. I agree that it makes sense for everyone to get the same livable payout from SS no matter what he paid into the system. I also agree with the poster above who said the reason the system is not that way is because it would be more difficult to get voters to accept it.

Why not have a national 401k type option that anyone could choose to pay into and the federal government would match her contributions up to a certain %? It seems to me like the problems with 401ks are related to the fact that they are connected to employers and the unscrupulous investment firms they are in bed with.

Because those same unscrupulous investment firms make large campaign contributions to various legislators who would decide that sort of thing. Also, the aforementioned corporate payroll tax reasons. Honestly, I think you'd have more traction trying to enact mandatory 401k availability for W-2 employees than separating it from employment. It would be better than nothing?

I think the ideal solution would be some sort of middle ground where companies could still make payroll-tax-exempt 'employer contributions,' but into a tax-deferred account of the employee's choosing instead of one chosen by the company. After all, direct deposit into normal checking accounts works now; why should it be any different for 401ks (or HSAs)? All you really need is a mechanism for the payroll people to be able to verify that the account is of the right type (that the employee isn't trying to direct their 401k contribution into a regular non-tax-deferred savings or checking account or something).

SIMPLE plan has many of the features you describe.  Unfortunately, limits are lower than 401k.

[Jack]

Good idea. I agree that it makes sense for everyone to get the same livable payout from SS no matter what he paid into the system. I also agree with the poster above who said the reason the system is not that way is because it would be more difficult to get voters to accept it.

Why not have a national 401k type option that anyone could choose to pay into and the federal government would match her contributions up to a certain %? It seems to me like the problems with 401ks are related to the fact that they are connected to employers and the unscrupulous investment firms they are in bed with.

Because those same unscrupulous investment firms make large campaign contributions to various legislators who would decide that sort of thing. Also, the aforementioned corporate payroll tax reasons. Honestly, I think you'd have more traction trying to enact mandatory 401k availability for W-2 employees than separating it from employment. It would be better than nothing?

I think the ideal solution would be some sort of middle ground where companies could still make payroll-tax-exempt 'employer contributions,' but into a tax-deferred account of the employee's choosing instead of one chosen by the company. After all, direct deposit into normal checking accounts works now; why should it be any different for 401ks (or HSAs)? All you really need is a mechanism for the payroll people to be able to verify that the account is of the right type (that the employee isn't trying to direct their 401k contribution into a regular non-tax-deferred savings or checking account or something).

SIMPLE plan has many of the features you describe.  Unfortunately, limits are lower than 401k.

Does it? I wish I'd known that back when I had one; my employer at the time had picked some sort of shitty annuity that cost me an annoyingly large amount of money just to exit and roll over to an IRA (let alone the ongoing fees had I stayed in it). If I had known I could have picked my own account somewhere else, I certainly would have!

[Midwest]

Good idea. I agree that it makes sense for everyone to get the same livable payout from SS no matter what he paid into the system. I also agree with the poster above who said the reason the system is not that way is because it would be more difficult to get voters to accept it.

Why not have a national 401k type option that anyone could choose to pay into and the federal government would match her contributions up to a certain %? It seems to me like the problems with 401ks are related to the fact that they are connected to employers and the unscrupulous investment firms they are in bed with.

Because those same unscrupulous investment firms make large campaign contributions to various legislators who would decide that sort of thing. Also, the aforementioned corporate payroll tax reasons. Honestly, I think you'd have more traction trying to enact mandatory 401k availability for W-2 employees than separating it from employment. It would be better than nothing?

I think the ideal solution would be some sort of middle ground where companies could still make payroll-tax-exempt 'employer contributions,' but into a tax-deferred account of the employee's choosing instead of one chosen by the company. After all, direct deposit into normal checking accounts works now; why should it be any different for 401ks (or HSAs)? All you really need is a mechanism for the payroll people to be able to verify that the account is of the right type (that the employee isn't trying to direct their 401k contribution into a regular non-tax-deferred savings or checking account or something).

SIMPLE plan has many of the features you describe.  Unfortunately, limits are lower than 401k.

Does it? I wish I'd known that back when I had one; my employer at the time had picked some sort of shitty annuity that cost me an annoyingly large amount of money just to exit and roll over to an IRA (let alone the ongoing fees had I stayed in it). If I had known I could have picked my own account somewhere else, I certainly would have!

Let me clarify -

Your employer has to implement the simple plan (versus having a 401k).  Once they implement, you have more freedom in where/how you $'s are invested.  We have 3 choices at my employer one of which is fidelity.

[Jack]

SIMPLE plan has many of the features you describe.  Unfortunately, limits are lower than 401k.

Does it? I wish I'd known that back when I had one; my employer at the time had picked some sort of shitty annuity that cost me an annoyingly large amount of money just to exit and roll over to an IRA (let alone the ongoing fees had I stayed in it). If I had known I could have picked my own account somewhere else, I certainly would have!

Let me clarify -

Your employer has to implement the simple plan (versus having a 401k).  Once they implement, you have more freedom in where/how you $'s are invested.  We have 3 choices at my employer one of which is fidelity.

So are you saying that with a SIMPLE plan, the employer still chooses what company to hold the accounts? That sounds correct -- which makes it no better than a 401k, unless I'm missing something. It sounds like your company gave you three choices of brokerage (or whatever the right term is), while my company gave me only one.

[Shane]

Good idea. I agree that it makes sense for everyone to get the same livable payout from SS no matter what he paid into the system. I also agree with the poster above who said the reason the system is not that way is because it would be more difficult to get voters to accept it.

Why not have a national 401k type option that anyone could choose to pay into and the federal government would match her contributions up to a certain %? It seems to me like the problems with 401ks are related to the fact that they are connected to employers and the unscrupulous investment firms they are in bed with.

Because those same unscrupulous investment firms make large campaign contributions to various legislators who would decide that sort of thing. Also, the aforementioned corporate payroll tax reasons. Honestly, I think you'd have more traction trying to enact mandatory 401k availability for W-2 employees than separating it from employment. It would be better than nothing?

I think the ideal solution would be some sort of middle ground where companies could still make payroll-tax-exempt 'employer contributions,' but into a tax-deferred account of the employee's choosing instead of one chosen by the company. After all, direct deposit into normal checking accounts works now; why should it be any different for 401ks (or HSAs)? All you really need is a mechanism for the payroll people to be able to verify that the account is of the right type (that the employee isn't trying to direct their 401k contribution into a regular non-tax-deferred savings or checking account or something).

Agreed. That would be an improvement on the the system we have now where each employer chooses its own investment company for its employees' 401ks.

[Shane]

I'm just grateful Cinnabon and Pizza-hut are out there doing everything they can to get your median American to drop dead prior to being able to claim social security.

God bless the food industry.

LOL! That's one way to look at it.

[FINate]

Economy-wise, if you want money to circulate the best way to make it do that is to give it to poor people. That way the money gets spent. If you want money to be invested, you give it to Mustachians or to wealthier folks. If you want it to go overseas, you give it to the class of people who have offshore accounts.

I disagree. Yes, the poor will spend it, but they will spend it primarily on things like fast food, overpriced processed food, cheap Made in China products, etc. So the money will mostly be spent at big corporations and will be divided between the executives (the ones with offshore accounts) and the factory owners in the producing countries. All the while the government will come up with ways to extract more money from those who already pay taxes (such as Mustachians) in the name of spreading it around.

[Midwest]

SIMPLE plan has many of the features you describe.  Unfortunately, limits are lower than 401k.

Does it? I wish I'd known that back when I had one; my employer at the time had picked some sort of shitty annuity that cost me an annoyingly large amount of money just to exit and roll over to an IRA (let alone the ongoing fees had I stayed in it). If I had known I could have picked my own account somewhere else, I certainly would have!

Let me clarify -

Your employer has to implement the simple plan (versus having a 401k).  Once they implement, you have more freedom in where/how you $'s are invested.  We have 3 choices at my employer one of which is fidelity.

So are you saying that with a SIMPLE plan, the employer still chooses what company to hold the accounts? That sounds correct -- which makes it no better than a 401k, unless I'm missing something. It sounds like your company gave you three choices of brokerage (or whatever the right term is), while my company gave me only one.

With a 401k, you are typically stuck with one company to invest and often high fees at least partially due to the testing requirements. 

With SIMPLE, more choices (I believe ours is limited to 3 companies as an employer preference so they don't have to send funds to 30 different places).  No testing requirements either.

[Jack]

SIMPLE plan has many of the features you describe.  Unfortunately, limits are lower than 401k.

Does it? I wish I'd known that back when I had one; my employer at the time had picked some sort of shitty annuity that cost me an annoyingly large amount of money just to exit and roll over to an IRA (let alone the ongoing fees had I stayed in it). If I had known I could have picked my own account somewhere else, I certainly would have!

Let me clarify -

Your employer has to implement the simple plan (versus having a 401k).  Once they implement, you have more freedom in where/how you $'s are invested.  We have 3 choices at my employer one of which is fidelity.

So are you saying that with a SIMPLE plan, the employer still chooses what company to hold the accounts? That sounds correct -- which makes it no better than a 401k, unless I'm missing something. It sounds like your company gave you three choices of brokerage (or whatever the right term is), while my company gave me only one.

With a 401k, you are typically stuck with one company to invest and often high fees at least partially due to the testing requirements. 

With SIMPLE, more choices (I believe ours is limited to 3 companies as an employer preference so they don't have to send funds to 30 different places).  No testing requirements either.

As far as I know, with my SIMPLE plan I was stuck with one company just like I would have been with a 401k. Are you saying that I was actually allowed to go open my own account with some other broker and force my employer to contribute to it instead of the one they picked for me? (I mean, sure, I could rollover my SIMPLE account to some other broker after I quit working for that employer when employer direct deposits didn't matter anymore, but if I had the right to redirect the direct deposits then I sure as hell wish somebody had informed me of it!)

Because if you're saying what I think you are -- that the employer (not the employee) has the option (not the requirement) to allow multiple choice of brokerages -- then that's really no additional freedom at all and nothing like my initial proposal.

[Scandium]

Economy-wise, if you want money to circulate the best way to make it do that is to give it to poor people. That way the money gets spent. If you want money to be invested, you give it to Mustachians or to wealthier folks. If you want it to go overseas, you give it to the class of people who have offshore accounts.

I disagree. Yes, the poor will spend it, but they will spend it primarily on things like fast food, overpriced processed food, cheap Made in China products, etc. So the money will mostly be spent at big corporations and will be divided between the executives (the ones with offshore accounts) and the factory owners in the producing countries. All the while the government will come up with ways to extract more money from those who already pay taxes (such as Mustachians) in the name of spreading it around.

On addition to your thinly veiled disparaging of poor people, what exactly are you saying?

That cash transfers that favor the poor stimulate the economy more than giving more to the rich isn't really an opinion, it's a pretty established macroeconomic fact. Of course you run into issues of fairness, but it's no doubt that giving more to people who will spend it (and usually locally at that) is better at stimulating the broader economy than giving it to people who will pile it into equities (especially now with high valuations).

[FINate]

Economy-wise, if you want money to circulate the best way to make it do that is to give it to poor people. That way the money gets spent. If you want money to be invested, you give it to Mustachians or to wealthier folks. If you want it to go overseas, you give it to the class of people who have offshore accounts.

I disagree. Yes, the poor will spend it, but they will spend it primarily on things like fast food, overpriced processed food, cheap Made in China products, etc. So the money will mostly be spent at big corporations and will be divided between the executives (the ones with offshore accounts) and the factory owners in the producing countries. All the while the government will come up with ways to extract more money from those who already pay taxes (such as Mustachians) in the name of spreading it around.

On addition to your thinly veiled disparaging of poor people, what exactly are you saying?

That cash transfers that favor the poor stimulate the economy more than giving more to the rich isn't really an opinion, it's a pretty established macroeconomic fact. Of course you run into issues of fairness, but it's no doubt that giving more to people who will spend it (and usually locally at that) is better at stimulating the broader economy than giving it to people who will pile it into equities (especially now with high valuations).

It's not disparaging to point out that the poor, in general, tend to spend their money in the way stated. The poor are not typically spending their money on locally crafted artisan goods or at the farmer's market. Sure some do, but that is the exception. Is this spending still good at a national/global macroeconomic level? Yes. Is it good for the environment or for the health of the poor? Probably not. Is it good for the local economy? I think that depends on the specifics - much of the revenue flowing into the big stores and franchises actually ends up at corporate headquarters.

I'm simply questioning the status quo and suggesting that giving out a bunch of money for people to spend may not be the healthiest thing. We should provide an essential level of minimum support for the poorest, but beyond that just giving away more to spend is like a sugar rush - it feels great in the moment but it's not a good long-term plan. I would rather have people saving and investing. Savings in bank accounts end up back in the economy as a result of fractional reserve banking. Investments in real estate, rentals, businesses, and stocks grow our local economy and create jobs. Even index fund investing means that people are pooling money in equities which increases liquidity and makes it possible to raise large amounts of new capital for startups.