Under the plan, Social Security would guarantee that all retirees, regardless of work history or earnings, are lifted out of poverty in old age. Thus, while Social Security currently offers no minimum benefit, a strong minimum benefit would be established at the poverty threshold. Over time, however, the maximumUnder the plan, Social Security would guarantee that all retirees, regardless of work history or earnings, are lifted out of poverty in old age. Thus, while Social Security currently offers no minimum benefit, a strong minimum benefit would be established at the poverty threshold. Over time, however, the maximum Social Security benefit would be reduced so that eventually all retirees would receive essentially the same monthly benefit. Social Security benefit would be reduced so that eventually all retirees would receive essentially the same monthly benefit.
Much of the essay tries to debunk some myths about saving for retirement. Some people, myself included, have bought into “facts” that show that Americans do not save. But Biggs writes,
But recent Census Bureau research that relied on IRS administrative data, which counts IRA and 401(k) withdrawals in whatever form they are made, found that from 1984 to 2007 the percentage of new retirees receiving private retirement-plan benefits doubled and median benefit payouts more than doubled. (This study focused on retired women, but it looked at total household incomes and included male spouses, if present.) Thanks to rising private retirement benefits, real total incomes for the median retiree household rose by 58%. In the CPS, which undercounts private retirement benefits, total household incomes rose by only 21%.
Why not do something like extend that to every adult citizen for their lifetime…and drop every other government transfer program (and the bureaucrats that go with them)? W need a grand bargain: Lifetime minimum BIG for citizens, less government transfer programs/bureaucracy and replace income/fica/etc taxes with a national sales tax or flat tax (getting rid of the large tax bureaucracy)?
Because it would never fly politically.
Way back in 2008, the government was spending over $26,000/yr on each elderly person, and that’s probably in the low $30,000 range today. We’re not going to ever be able to cut that down to just $11,400 (Bigg’s poverty BIG).
Aside from the elderly being made worse off, many poor households and rich households will be worse off too, due to lower transfer payments for the poor and higher taxes on the rich. The only people who would really benefit from it are the lower middle class.
A BIG doesn’t work. Either it is too generous and therefore too expensive with deleterious labor market effects, or it is too stingy, and makes wide segments of the population worse off.
It also ignores health insurance. Even a high deductible catastrophic insurance plan, say Obamacare Bronze with >$6,000 deductible, is $4,200 per year for a healthy single 40 year old. That’s a huge chunk of the BIG. If your 60, and keep in mind the old are subsidized under Obamacare, that’s about $9,000/year. You can do the math on what it would cost an average family.
Until you reform healthcare, you aren’t going to reform welfare.
How confident should we be that measures like the personal savings rate are telling us what we’d like to know as to whether people are saving enough?
Let’s say I was seeking advice from a financial counselor.
Well, the first question is “enough for what?”
So let’s say I explain some retirement lifestyle goals that are in the feasible range and which don’t require a sudden drop off in consumption when I stop working, and which provide a little cushion against the risk of living longer than expected, or bad shifts in market conditions.
The financial counselor would not just look at the kind of simple savings rate calculations that economists like to use for suspect international comparisons, but take every other relevant factor into account. What is the equity position in your home? Do you plan on staying and living in it? Will you be helping your kids out? What about government benefits like Social Security and Medicare, pensions, and other kinds of retirement accounts or even ‘life insurance’? How are you likely to build up all your various valuable positions from now until retirement? Are you expecting any inheritance?
He would then try to see – to the extent anyone can predict anything about an uncertain future – whether the combination of expected streams of in-kind benefits, cash, imputed incomes, and monthly savings draw-down, seems to be consistent with my consumption goals, expected longevity, and risk tolerance.
Then he could answer whether I was saving ‘enough’. “You need to reduce your current consumption by at least 10% to have a better probability of stable consumption through the end of your life.”
When I think about some of my retired relations, the ‘Big 4’ income streams of Social Security, Pensions, Medicare, and Home Equity are able to preserve the bulk of their consumption profile. They don’t seem to be dipping into their savings very much, and indeed seem to be slowly giving it away to their kids, but then again, that’s a very private detail, so it’s hard to tell.
How much ‘should’ they have been saving? If the goal was to stay out of elderly poverty, it’s possible they saved ‘too much’.
Then again, maybe they lived at just the right moment – a kind of middle class dreamtime – in which those collective retirement programs turned out to be reliable for just long enough before eventually going bust.
Current maximum social security, age 66, $2687/mo, ~$32k/yr. Sure, your local billionaire doesn’t need it, but it is already insignificant to them. Average, 2016, $1341/mo, $16k/yr. Defined benefit plans are generally designed around social security to provide a retirement equivalent to working. Don’t get me started on comparing wealth to income, for which 5% would be an appropriate conversion, so $1M is the equivalent of $50k/yr.
Politicians have sold Social Security and Medicare to the public as a wonderful, paid insurance plan administered by a wise government. In fact, it is an insurance scam which is well below being fully funded. People have not agreed to provide government charity to the old. They think they are paying for their own retirements and unduly trust the government. This will all unravel with great suffering, but the political scam artists will be dead or retired by then. In all, a very successful political operation.
( http://www.politico.com/news/stories/0412/75603.html )
Social Security Trustees: We’re going broke
04/25/12 – Politico by John C. Goodman
What the current value of the unfunded liability means:
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[edited] The latest report of the Social Security and Medicare trustees shows an unfunded liability for both programs of $63 trillion, about 4.5 times the U.S. gross domestic product GDP.
[$20.5 trillion of that is from Social Security, $42.5 trillion is from Medicare. Medicaid is on top of that, but not the responsibility of these Trustees]
The unfunded liability is the amount we have promised in benefits, looking indefinitely into the future, minus the payroll taxes and premiums we expect to collect. It’s the amount we would need in the bank today earning [3%] interest for these entitlement programs to be fully funded.
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So, those programs would be paid for, if we collect the current Social Security and Medicare taxes, AND if we had a fund in 2012 holding $63 trillion in cash (current resources) paying us 3% interest.
4.5 times US production in 2011 was 90 times total private savings (5% overall savings rate). It would take 90 years of all US savings to pay for the Social Security + Medicare shortfall, again not counting Medicaid health subsidies for the needy.
( http://www.youtube.com/watch?v=afuekTcSFfM )
This 90 second video highlights the upside-down priorities of Oregon’s Medicaid system. Lobbying groups have used the political process to benefit special-interests.
It is quite fun to describe a future utopia based on how “we” will spend this or that tax revenue. It is harder to make the books balance. Even harder after people come to believe that they will have a comfortable retirement regardless of how hard they work or save for it.
I suppose I shouldn’t be so skeptical, as there are many examples of this type of scheme working under prior socialist governments. Aren’t there? This couldn’t be another theoretical proposal which has never quite worked out. Could it be?
Sometimes people seem to assume that the alternative to fulfilling these obligations is a lower burden on the young. I’m not so sure. As Obamacare showed, cuts to Medicare don’t result in lower payroll taxes for the children of the elderly. They result in more money being around for other giveaways to different constituencies. Money taken from Medicare was used to pay for the healthcare of poor brown people. Or if you want to look at it another way to reimburse liberal urban professional healthcare providers for treating poor brown people which they were already doing. It didn’t mean that the child of people on Medicare got to pay lower taxes.
Realistically, could any grand bargain be struck on this issue? What would it look like given electoral realities? Personally, I would be against SS/Medicare reform despite being young. I think the likely outcomes would be:
1) My parents would need my support to replace SS, so that would be an extra expense
2) My tax rate wouldn’t change
3) The money would just end up in the hands of groups hostile to me
If that’s what you think is likely to happen, and already has happened, doesn’t
“Keep the governments hands off my Medicare” take on a whole new meaning.
We ought to acknowledge that the desire to “get paid back what your owed” and the desire to “get a free cell phone from Obama” are different impulses. If you want to strike some grand bargain on SS/Medicare you need to convince people that its going to their children, not somebody else’s children.
It’s hardly surprising that income from 401ks and IRAs increase a lot from 1984 to 2007. IRAs were only created in 1974 and 401ks in 1978, and those plans weren’t as widely available and had many more restrictions than they do today. For instance, anyone with a pension couldn’t contribute to an IRA until the law changed in 1981. So, at best, a new retiree in 1984 would have had 9 years to save in an IRA and 5 years in a 401k, and very very few if any people would actually be in that position.