From Eduardo Porter's column in the New York Times:
... Consider the following calculation by James Poterba, a professor of economics at M.I.T.
If inflation-adjusted investment returns averaged 2 percent a year — not an unreasonable assumption given low interest rates and a stock market likely to deliver subpar returns over the next decade or so — a worker would have to save almost 15 percent of each paycheck for 40 years to get an annuity stream equal to half of final earnings at retirement, assuming a 2 percent risk-free rate of return. A late starter who saved for only 20 years would need to set aside a full third of earnings.
Matters would be easier if investments yielded 4 percent: With a 4 percent risk-free rate, affording an annuity equal to half the last paycheck upon retirement would require saving less than 10 percent for 40 years, or just over 25 percent for 20.
How does that compare with what workers actually save? From 1990 to 2010, the typical contribution to 401(k) accounts ranged from 4.7 to 5.2 percent of earnings. ...
9 comments:
I think we should stick with what we've got (with minor changes like increasing the payroll tax rate if and when needed), since any significant change is likely to be worse. Before Social Security, there were a lot of old people living in poverty. Now, poverty rates for seniors are comparable to the rest of the population. Going to any type of privatized system is likely to reverse this, as people who don't save enough or invest in the wrong thing at the wrong time come up short of what they need.
I don't understand the pro-business crowd that wants to cut Social Security. Sure they don't like to pay taxes, but we are a consumer-based economy. Reduced Social Security checks would severely damage the economy, especially those small local businesses that rely on those folks spending those Social Security checks at their stores. I would think that they (Chamber of Commerce crowd) would be in favor of expanding Social Security.
But what would workers have saved in the absence of Social Security? That's sort of the relevant question, wouldn't you say?
The stock market, looking at an Index 500 plan, will routinely double every 7 years. That is phenomenal growth with very little risk as long as you don't have to take your money out when the market goes down. If you can leave your money in, it will always rebound. It always has. This is the best way to save money in the long run. Putting money is a 2% investment is crazy. Look at the history of the market.
When the stock market crashed in 1929, it took 25 years for it to recover (not even considering inflation). In the late 1960s and 1970s, it basically went nowhere. The trend is certainly upward, but there are big dips with long recoveries, as well as long flat areas. So I think there is significant risk.
I have a large fraction of my savings in safe investments that pay about 2% over inflation. I do not think it is crazy at all.
My banks and I don't think 2% is crazy; but then I am not a financial planner dealing with crazy investors so my perspective may be wrong. For 15 years, I worked at IRS and saw lots, and lots of tax sheltered "guaranteed returns". But what always impressed me with SSA was the insurance for my kids, for my non-working wife and for me if I became disabled. So I looked up the Standard and Poors 500. https://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=20&c=2001&d=00&e=20&f=2001&g=d During Bush-time 2001 to 2009 decrease of $537. From 1/20/2001 to now increase of 782...or a before inflation rate of 4.0%..or an inflation adjusted rate of 17% or 1.1% per year Crazy hun?
What is the interest rate earned on in the Social Security trust fund?
There must be principal in which interest can be applied, yet the principal was loaned to the Treasury to pay for other expenses.
So, interest is earned on an IOU from the Treasury, which is still an unfunded IOU.
It is unfunded, for the same asset value to the trust fund is a liability to the Treasury.
The value of the left and right pockets is zero.
Zero times 2% = 0.
Zero times 4% = 0.
I usually judge a nation on how they treat 1. children 2. senior citizens.
The SSA is basically there to help senior citizens (except the disability program). So if the U.S. Govt. comes up with a better solution to help seniors in retirement, I am all ears (e.g. privatization).
I do say SSA retirement is basically forcing people to save for retirement, which most do not do. It is saving them from themselves.
I don't own the SSA trust fund,I get a SSA benefit. So its growth is irrelevant to me. However the government received nearly 3.2 trillion dollars with a 1/3 from FICA. It will spend 1/3 on SSA, Unemployment and labor. pretty much a wash...
SSA is like a company that offers defined benefits to the employees. There is no 100% funding; but there is immediate vesting. As an employee, I don't own the company so I hope it does well, but my benefit does not depend on how much interest it earns. You don't know from what funds the benefits will be paid 40 years from now. The only guarantee is the earning promise of the company..that is the guarantee. When I worked for the USA gov they had Civil Service. Reagan said that was too expensive..but still there was no "fund" for that. Yet those unfunded Civil Service annuities would be highly sought after today.
SSA's non-insurance portion of benefits is an unfunded, defined benefit variable annuity, right?
If you want to compare investments in S&P's 500 and my investment in my SSA annuity. From 2001 the FMV of an annuity like mine increased many times over.In the last 14.5 years, besides that growth, the COLAs and the DR 8% I am a wealthier person. Besides, the fact that I had during this timelife insurance --at a time I could not afford to purchase it-- for my wife through the survivor program.
The only security for the payment of SSA is the contract with the government and its ability to pay. The government is not in business. If you want to look at the basis to pay then look at what is the GNP earning power of the government? What expenses could it cut? How much could it tax? Should people pay taxes on all income earnings?
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