So on my way back from Chennai, I had an opportunity to listen to Freakonomics Financial Literacy 2017 and it was so depressing to learn that "roughly 70 percent of Americans are financially illiterate." To be deemed financially literate one only had to answer 3 questions.
Question 1: Suppose you have $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?” The answers were multiple choice. A) More than $102. B) Exactly $102. C) Less than $102. D) I don’t know.
Question 2 is about inflation: “Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, how much would you be able to buy with the money in this account?” The answers: A) More than today. B) Exactly the same as today. C) Less than today. D) I don’t know.
Question 3 has to do about risk diversification: “Do you think the following statement is true or false: buying a single company stock usually provides a safer return than a stock mutual fund.” “True,” “false,” and of course you can say, “Do not know.”Answers posted below.
Then I read this piece and was even more depressed... CNN Who is Benefiting from Stock Market Rise?
"On average across the United States, only 18.7% of taxpayers directly own stocks. Now, these numbers only include stock portfolios, not the roughly half of Americans who participate in the market through an employer-sponsored retirement plan, according to a Pew analysis of Census Bureau data. Access to those plans also skews towards higher income people, Pew found. In addition, more white people invested this way than black or Latino people, as did more older people than younger people."The idea that people do not understand the simple concepts and value of wealth management truly has me stunned. NO WONDER POOR PEOPLE ARE POOR !!! If they can not understand simple rate compounding and the impact of inflation, we have a big problem.
In the Freakonomics link they also talk to Harold Pollack who was not too informed regarding finance initially. However after doing some research he wrote the most important principles down on an index card. He did note that some people can not set aside 20%, however even 10% will compound over time.
With this in mind, how can we get citizens to understand these simple and critical concepts?
And it certainly confirms my belief that our forced savings / insurance programs (SS, SS D & Medicare) are absolutely necessary. I mean if 70% of individuals can not answer those simple questions, there is no way they are capable to be prepared for retirement when that time comes.
From Forbes Money Rules
Answers to the above questions
Answer to Q1: The correct answer is: A), more than $102. Because 2 percent interest on $100 in a year is $2, so after year 1 you have $102 — and then over the remaining four years, the interest grows on that $102, and so on. And that’s why compound interest has been called “the eighth wonder of the world.”
Answer to Q2: The answer is C) “less than today” because if inflation is 2 percent, prices go up 2 percent. But if you only earned 1 percent in your saving account, you basically can buy less.
Answer to Q3: And the correct answer is … true! Buying a single stock is safer than buying a mutual fund. Just kidding! That’s false.
93 comments:
People don't know how money works. They certainly don't understand what the stock market does, and what role it plays and doesn't play in the economy. And that lack of understanding is hardly limited to the unsuccessful.
Ignorance of economics is hardly limited to the unsuccessful. Base on what he says, Trump doesn't know how the stock market works. And why should he? His companies aren't publicly traded, so he doesn't have to worry about stock prices, one way or the other.
==Hiram
Inflation is another thing people don't understand. I haven't come close to figuring out what it is myself.
Here are some questions?
Does inflation occur when money becomes cheaper? Or when stuff becomes more expensive? Or are they the same things? Do the answers depend on what stuff is? Or on what we think of as money?
--Hiram
Food for thought then:
Investopedia Inflation
US News Why Target 2 Percent
Since you are interested in moving into Finance 401, does that mean you understood Finance 101?
Finance 101 does boggle my mind, a bit, I must admit.
As with any complex subject, a lot depends on the perspective from which you view it. One can look at inflation in finance terms. But one can also look at inflation in political and economic terms.
Inflation is a general rise in the prices of things. Simple right? But doesn't that definition rely on at least three assumptions, that we know what's general? what's the price? and what things we are talking about? I am skeptical of things I can't measure. Can you point to a metric a price index that measures all of these things effectively? Or can you, in the alternative, find a number of different indices intended to measure inflation, which yield different even contradictory results? Do any of these indices tell you how much your household dollar is changing or not changing in value?
--Hiram
By the way, my favorite is "If you portfolio goes down 20% and then goes up 20%, have you:
a. Lost money?
b. Gained money?
c. Broken even"
d. Not have had anything happen at all because you haven't sold your stock?
Bonus question: How does inflation or lack thereof affect your answer?
--Hiram
I believe the answer to Hiram's question is one would have lost money (if one were to sell at that point - as compared to the high point)
Best investment advice ever: "Buy low and sell high."
Worst investment advice ever: "You can count on Social Security."
Simple answer on inflation: It is too much money chasing too few goods, so when government prints new money to cover profligate spending...
That is kind of funny since even my Father who questioned social security said that the yields are not too bad. Well that is if one lives long enough to collect...
And Lord knows the yields are huge if you end up disabled.
And if you die early the returns are abysmal because your family gets $250. Total.
One simple change: "force" me to put that money in a private account and it will grow faster, more securely, and if something happens to me at ANY age, my heirs get it.
It is insurance... Not a savings account...
If you use more than you have saved at the time of your death, should we send your children a bill for your care...
If you die without saving enough should we not make survivor payments to your minor children.
If you become disabled without saving enough, should we kick you off disability when your balance hits $0.
You keep thinking of it as a savings account when it is so much more.
SS Survivors Benefits
SS Disability Benefits
By the way, where do you get these total fabrications?
"your family gets $250. Total."
See links above for the actual details.
Now the reality based on the point that only 30% of Americans are financially literate is that they need to be trained, or forced to spend on SS / Medicare Insurance. The latter is the much more fool proof option.
It requires almost no financial knowledge, personal will power, maturity, etc.
For those of you who struggle with this topic.
Here are some free learning options.
Another Link
Khan Academy Personal Finance
The conventional wisdom about Social Security is that it does three different thing. It's a pension program, it's an insurance program and it's a welfare program, That's why the job of running it is so complicated, and why the politics of it is so difficult.
Most people don't know how money works. You look at Donald Trump and his talk about the stock market. It's perfectly obvious that he knows nothing about stocks or their roles in the economy. Politicians who do venture into such discussions make the most routine mistakes. Often, they don't seem to know how marginal tax rates work.
--Hiram
It is too much money chasing too few goods,
There is a lot of money in the world and only a few Van Goghs. So each Van Gogh costs millions of dollars. Is that evidence of inflation?
Back in the 1970, I used to go to the stores to buy stuff. The shelves then look pretty much like the shelves today, full of stuff on sale. There was no evidence of any shortage at all. Yet inflation was rampant. How could this be? Would inflation have been more stuff to sell?
I flunked out of Econ 101. But one thing I seem to recall is that inflation, whatever it might be, has to do with the value of money, not the value of what money buys.
--Hiram
For most people money only has value because of what it can buy.
Be it housing, food, toys, entertainment, feeling of security, healthcare, power, pride, charity, etc.
I am not sure what other value it has unless you want to:
- burn it to stay warm
- shred and stuff your pillow with it
- turn it all into coins and put it you car's trunk to improve traction
- other?
For most people money only has value because of what it can buy.
I don't think that's true. For most people lots of things have value.
"Value" is a problematic word because it has so many different meanings. Oscar Wilde said, "A cynic is someone who knows the price of everything and the value of nothing." implying a distinction between money and value.
I have heard it said that the best things in life are free. Maybe it's because they are more valuable.
--Hiram
Well, I can tell that you are not a big fan of logic...
I think there are 2 issues here.
What has value to an individual?
What is the value of money?
I personally value many things that little or no monetary value. And I don't value somethings things that have a great deal of monetary value.
That is unless I could get someone who values that item more to give me a lot of money for that item...
Not because I want the money for the money's sake, but because I like the money for what it allows me to do, buy, feel, etc.
As for Oscar's quote, I guess I know the price of a great many things.
However that is not a measure of the item's value to me personally.
I believe that beauty / value is in the eye of the beholder, and money is just an instrument to help humans make transactions more conveniently.
Otherwise we would be need to go back to bartering items and services. I wonder what one would swap to obtain the Van Gogh they value so dearly.
Value is subjective. Money is more valued by some more than it is by others. That's what makes it so difficult to talk about. People are simply talking about different things, and end up talking past each other.
--Hiram
I agree with that...
Liberals love to talk about unsuccessful people being entitled to food, housing, healthcare, higher educations, etc no matter their life choices...
When in reality they are talking forcing successful people to transfer their hard earned / invested money to the government so it can be given to the unsuccessful people... :-)
Have you noticed that the people who say "they don't value money much" and "that is greedy to value money" are the first to demand access to someone else's money via government services and handouts?
I can't remember if it was Moose or someone else who was adamant that our society should spend more money on the arts, low cost healthcare, higher ed, etc so that citizens could pursue their passions without having to be so concerned about what it pays... That was of course right after the usual "people with money" are selfish and have their priorities screwed up speech.
So the "Artist" values art and expression more than money...
And the "Investor" money / wealth...
Yet the "Artist" has no problem demanding more money from the "Investor" to support what the "Artist" values.
So does the "Artist" really not value money? Or are they just being insincere?
Liberals love to talk about unsuccessful people being entitled to food, housing, healthcare, higher educations, etc no matter their life choices...
The liberals I know, love to talk about affordable health care. The other stuff doesn't seem to come up.
Have you noticed that the people who say "they don't value money much" and "that is greedy to value money" are the first to demand access to someone else's money via government services and handouts
Could it be because they value other things more than money?
Yet the "Artist" has no problem demanding more money from the "Investor" to support what the "Artist" values
Well, Van Gogh paintings are valued at millions yet he sold only a handful during his lifetime. I guess that what comes from valuing art over money.
--Hiram
Hiram,
Oh come now... You just brought up that people you know have a hard time paying their property taxes...
And how can these people not value money, and still expect to receive what it can pay for?
Do they expect Doctors to work on them for free?
Do they expect someone else to pay their property taxes?
Now I personally don't value money very highly... However I value the security, vacation, healthcare, home, food, college educations, etc my efforts and money have provided to my family and the charitable causes I have freely shared with.
I think they value money very much, however they are not willing to make the personal effort, sacrifices, trade offs, etc to earn it. They would prefer to use some else's money.
I was referring to Social Security-- the retirement program-- as a terrible investment, and it is. Now if you want to add a life insurance and welfare program and disability and survivors insurance to that... wait, why would you do that to your IRA? If you want those other things, buy them. You shouldn't be forced to subsidize them for others, especially if you are barely making enough for your own retirement.
Go to a FAIR tax, and SS reform is automatic. Just add a mandatory minimum (%) retirement savings account to the FAIR tax, for the "economically illiterate," and you have it.
You can keep saying that FICA (ie SS, SSD, Medicare, etc) is a terrible investment, words are cheap...
Please provide some source or rationale that explains why you believe that getting the following for 15.5% of your income up to $127K is a bad investment:
- Long term disability insurance
- Health Insurance when retired
- Dependent care benefits if you die
- Pension payments when you retire
Seems like a pretty good deal for most Americans. Especially those with lower levels of financial aptitude and a risk averse nature.
"The Social Security Administration (SSA) announced that the maximum amount of wages in 2017 subject to the 6.2% Social Security tax (old age, survivor, and disability insurance) will rise from $118,500 to $127,200, an increase of more than 7%. By comparison, the 2016 wage base was unchanged from 2015.
The maximum amount of Social Security tax a taxpayer could pay will therefore increase from $7,347 in 2016 to $7,886.40 in 2017, an increase of $539.40.
The SSA also announced that Social Security beneficiaries will get a 0.3% increase in benefits in 2017, after receiving no increase in 2016. The average retiree will receive an increase of $5 a month.
Among the other increases is the amount a worker under full retirement age can earn before he or she has Social Security benefits reduced. The limit increases from $15,720 a year to $16,920 for 2017, after which $1 in benefits is withheld for every $2 earned above the limit. Last year, this limit also did not increase because of low inflation.
There is no limit on the amount of wages subject to the other portion of the FICA tax, the 1.45% Medicare tax."
In evaluating whether SS is a terrible investment, it is important, at least for me, to consider all of what SS does. Bear in mind, it does three things, only one of which is an investment function.
The fact is, Social Security is not, perhaps an optimal investment, but few are. Americans are financially illiterate, and for most of us, Social Security is what we will mostly have in retirement.
--Hiram
Gee, wouldn't it be nice for the financially LITERATE folks to have a CHOICE as to what investment, medical, and other insurance programs they want to buy, and for how much? My IRA will pay out WAY more than my SS ever will. So will me 401K. And you continue paying for Medicare; it is not a "free" benefit. As I said, if you are so worried about the financially illiterate, do as Chile did. Eliminate the public SS system and switch to a mandatory minimum private account system. Worked wonders for both private and public economies. I've seen it.
I think if you compare SS to a pension rather than a 401K it makes much more sense and is a pretty great investment.
Some people win big time by living longer, some people lose by dying earlier... Like wealth accumulation in general, there is a certain amount of luck involved.
Since folks in my family usually live to 80+, it is a great deal.
Jerry,
That is not proof or even rationale...
And you have no idea which will pay out more...
That is unless you already know the day you will die and how much healthcare you will require between now and then.
That must be quite crystal ball you have there.
Of course I know which will pay out more. I know how much is in my IRA and how much is in my pension plan. SSA used to send out notices of how much was in "MY account" though they have quit lying about that. A simple comparison of those two numbers is proof positive, and the pension and IRA are vested, where SS is not.
Again, Medicare I paid for, so whatever healthcare I get is irrelevant to SS, other than being "taken out of" my investment, like it or not.
I am so curious as to why you are defending this government-run Ponzi scheme?
Actually you have NO IDEA how much Social Security will pay out to you if you don't know how long you will live. No one does.
Your IRA is finite and will run out unless you have a balance that is big enough that you can live off the interest only.
As for Ponzi scheme, I do agree that it is too bad that you were not required to pay higher FICA rates. But it is kind of like the National Debt, people seem to be happy with lower taxes now even it will harm their children.
And they always want lower "premiums" up front and higher "benefits" later on.
Please remember that SS, SSD and Medicare are simply welfare programs for the most part. As long as younger folks like me keep paying in, the older free loaders will keep getting their checks and healthcare. :-)
I defend the "Ponzi scheme" because the realities are:
- Most American citizens are apparently financially illiterate
- Most Americans are way underinsured with regard to long term care
- Most Americans are not willing to let the unprepared suffer the natural consequences when they run out money
Therefore it is SS, SSD and Medicare (ie forced "insurance premiums") are the best answer.
I told you the simple solution is to simply accept that they are welfare programs and start "means testing" if people should get benefits.
There really is no sense to Warren Buffett getting a SS check...
wouldn't it be nice for the financially LITERATE folks to have a CHOICE as to what investment, medical, and other insurance programs they want to buy, and for how much?
The financially literate folks I know are huge fans of Social Security.
--Hiram
That's why I mentioned my Father. He is a Conservative who lives for investing and growing his net worth... If he says the return is okay, that is pretty telling.
Plus the fact that it accomplishes that while helping the financial knowledge challenged folks is excellent.
"As long as younger folks like me keep paying in,..." Exactly like every other Ponzi scheme. Having the government be the perpetrator doesn't magically transform it to something economically viable. Even now, SSA is in the "red" in paying out benefits.
"Most American citizens are apparently financially illiterate..." So why not mandate the set aside a certain amount for their retirement in private accounts? A much superior investment all the way around. Require "qualified investments" and no literacy required.
"...the simple solution is to simply accept that they are welfare programs..." Ah, but that is not what we were PROMISED, is it? As I said, SSA used to send out these "here is how much money is in your SS account" letters. They do not do that because it's a lie. You do not have ANY money dedicated to you, just the promise that the kids behind you will "pay you back" and more-- just like every other Ponzi scheme. Put that money in a REAL investment account, and you actually have a tangible asset, rather than unkeepable promises.
Actually, there is an easy way to keep SS "solvent." By law the SS surplus is invested in special government bonds paying a fixed (3%, I think) interest rate, and those are cashed in and used to pay current benefits when the FICA income isn't sufficient. Simply make that rate 100% and the money will overflow, right?
"If he says the return is OK..." OK means getting something on money that you never got in the first place, IMHO. But I KNOW what SS will pay me, per month, and if I simply invest my 401K and IRA at 5%, I'll make twice what SS provides. Put into an annuity, I could draw more, and for life.
And would that IRA provide long term disability coverage?
And if you fail to invest wisely, can we send the bill to your children or leave you in the streets to die?
You keep claiming "better returns" and "SS is in the red". But without sources it is just an unsupported opinion.
According to the actual Trustees the depletion dates for the trust funds are:
SS Retirement: 2034
SS Disability: 2028
Medicare: 2029
Make sure you look at the Q and A at the bottom. It has some excellent charts.
As for your expected benefit statement. It looks like they went green.
And for more detail.
"We currently mail Social Security Statements (Statements) to workers age 60 and over who aren’t receiving Social Security benefits and do not yet have a my Social Security account. We mail the Statements three months prior to your birthday. "
So are you under 60 or collecting SS?
If you ever got a notice saying how much was in your account... It must have been before 1960.
"You keep claiming "better returns" and "SS is in the red"."
Yes, because I can see it with my own eyes and read a calculator. You quote the "depletion dates" of the so-called "trust fund" as when SS runs out of money, but that's not the date SS is "in the red." THAT date is when they start spending down the Trust Fund, which was years ago, by redeeming those bonds FROM the GENERAL FUND and driving up the deficit.
It could not have been 1960 when the "expected benefit" letters stopped, because I remember them. I scoffed and did not save them to show you as the proof you seem to crave. Call it poor foresight on my part. Anyway, it projected my benefits at retirement. Comparing that to what I will receive from my 401k, it's about half. And the amount I contributed was less. Poor returns from SSA. Calculate it yourself. You can find the estimated benefit, I suspect, on the website, and figure what your IRA/401k will provide if invested at a modest 5%, or if placed in a life annuity.
They discontinued mailing out the "Expected Benefit Letters" just a few years ago when they went online. (ie save money)
That was not your claim... "SSA used to send out notices of how much was in "MY account" though they have quit lying about that." My point is SS never sent those out.
Now as for returns... This what a source looks like...
Reuters SS Returns
"Overall, they found that the current Social Security program is a good deal. However, your mileage will vary by lifetime earning history, longevity and your year of birth. The payroll tax rate for Social Security’s retirement and disability programs reached its current peak level - aside from the current payroll tax holiday - in 1990 (6.2 percent each for workers and employers).
Since we do not know what will happen on the policy front, I focused on the SSA’s numbers assuming no change in current law. They found that every age group received a positive return. Among current workers and retirees, the rates of annual return varied by about two percentage points - from a high of 6.52 percent (for single-earning couples born in 1920) to 4.52 percent (for their counterparts born in 1985)."
Now you are calling me a liar. I RECEIVED those letters, spelling out what my monthly benefit would be at normal retirement age, if I continued to earn the same wages until that time, and claiming that was "in my account." I remember distinctly because it was AFTER 1960 when the courts ruled I had NOTHING "in my account" except some government IOUs. The were doing the same analysis as your "SSA actuaries." Remember, those are the same actuaries that said the 1985 reforms would make it solvent "forever"?
But I may have an explanation for that "great" return. You put in about 7% of your wages, and right away your employer puts in 8% of your wages. Right off the bat, that is a 114% ROI!! 40 years later, it turns into a 6% return, if you do all the right things? Take that same 7% and put it in a bond that pays a very modest 3%, for 30 years, and at the end of that time you have an INSTANT 62%. And notice (not an exact quote, but) "86% of those who live to age 87 will come out ahead." Terrific. Average life expectancy is somewhere around 78. I'll ask again, what do you have against freedom of choice?
Please feel free to disagree with those financial experts and their simulation if it makes you feel better.
And if you saw an "account balance", you must have been a unique situation.
I think I /should/ disagree when the people running the Ponzi scheme tell me how rich I am going to get, don't you? When I can run the numbers for myself and see it isn't so?
I assure you the SSA sent those letters not just to me, but to everybody paying in SS taxes at the time. They were attempting to keep everybody satisfied with what a good "savings plan" they had, back when SS reform was on the table. Why do you insist that I am a liar for telling you what I had in my own hands?
Because I used to receive those same statements. Now after some digging I did find one example with a "balance forecasting graph. Appendix C is apparently a document for young newer investors. However it is actually notifying young people that SS will not be enough and shows how outside investment can grow in value.
"In February 2009, SSA began sending an insert to workers aged 25 to 35, What young workers should know about Social Security and saving (see Appendix C). This insert described the future finances of Social Security, the nonretirement benefits provided by Social Security (such as disability and survivor benefits), and the importance of saving to supplement Social Security benefits. It also listed websites providing information about saving and investing."
Here is a pretty Cool Presentation Regarding SS
Now I kind blew through this bunch of poppy cock since I was really busy at work earlier.
"You quote the "depletion dates" of the so-called "trust fund" as when SS runs out of money, but that's not the date SS is "in the red." THAT date is when they start spending down the Trust Fund, which was years ago, by redeeming those bonds FROM the GENERAL FUND and driving up the deficit."
So based on your logic, I am "in the Red" because after decades of growing my family's wealth and creating college savings accounts... I am now spending on college faster than I can contribute to the funds. Meaning that those funds are shrinking... OH NO !!! I am shrinking!!!
So even though I have plenty of cash to pay tuition, books and lodging each semester... Somehow "I am in the red"... That is SO STRANGE... I don't feel in the red.
Now as for the silly second half of your statement...
When my siblings and I were younger we had inherited some money for our college fund. Now as I have mentioned my Father loves loves loves money and investing, so he came up with an idea that benefited the whole family.
The family business loaned money from us kids. The investment was super safe for us and paid slightly better than an instrument of similar security. And the interest was less than what the business would have paid elsewhere. A definite win/ win.
Now of course the business did have to find other sources of cash when it came time to send us to college. That is what one does when ones loans come due.
Now this is exactly what our government has done. They loaned money from the SS, SS D and Medicare trust funds.
The government had a steady stream of cash to borrow at good rates.
The trust funds had a safe investment that paid pretty good to put the "insurance / pension premiums" in that were being paid via payroll taxes. And since there was a bubble in our population, the funds grew a large balance to support them in retirement.
The only big mistake they made was that they kept the pay roll tax rate too low because those stingy Baby Boomers disliked taxes. And now they really still want their full benefits. (greedy folks want it both ways... cheap premiums and expensive benefits) :-)
So yes the government needs to exchange debt as this "investor" wants it's money back. Nothing unique here.
Now as for "driving up the deficit", I am not sure it works that way.
If you pay off bonds to one investor on the left side, and issue new ones on the right side... It is not like you are really spending money. You are simply paying off Peter and borrowing from Paul.
And as long as there are Paul's who want to buy your debt, there is no cash flow problem. Just like when my Father paid us off and found different sources of cash.
Now this Payroll Tax Holiday did increase the deficit for 2 years. Because the general fund made up the 2% discount in payments to the trust funds. So workers paid 2% less for 2 years...
"That is SO STRANGE... I don't feel in the red." That is because you are thinking that those SS bonds are a real ASSET, like your savings account, and they are NOT. Yes, if you had a private account for your retirement, it WOULD be an asset. The difference between the two is this: If you have a real asset, you can sell that asset, get the cash, and pay for things. But the Trust Fund, when it comes time to "sell" those bonds, must redeem them through Congress. They are not a real asset, just an IOU. When Congress redeems those bonds they take money out of the General Fund, DRIVING up the deficit (since they are already in deficit), and only then can SSA spend that money on current benefits that exceed payroll tax income. If you are spending more than you take in and are dipping into savings, you are in the red on the balance sheet. What SSA is doing is more like spending more than you earn, and having to go around and collect on a stack of IOUs that you won at the poker game.
Here is an idea. Take those SSA bonds and pass them out, on a pro rata basis, to current recipients of SS. Those folks would suddenly have a REAL asset they could sell or reap the interest from. All other benefits from SS would come directly out of the General Fund, exactly as they do now when SSA redeems those bonds, and it would be more "honest."
Well this link agrees with you. However if this logic holds, then for decades tax payers have been able to pay lower income taxes because FICA was lessening the deficit.
So like my Family Business... Should the government have taxed and borrowed more from else where previously? Instead of borrowing from the Trust funds?
"Budget experts use two main measures of the budget deficit: the "on-budget" balance, which includes everything except Social Security and the postal service, and the "unified budget," which merges the on- and off-budgets.
The unified budget approach is by far the most common for budget experts and the media -- and when the Obama White House talks about a 2013 budget deficit of $901 billion, it's the unified budget deficit that's being cited.
On a unified budget basis, when Social Security's financial position worsens, the budget deficit grows. Social Security contributes about $53 billion to the budget deficit."
Please remember... SS is not Vanguard...
It is a "fixed benefit" pension... I am too young to have had one, but a lot of people seemed to have liked them in the old days.
That is until some corporate raider decimated the pension fund.
The most frustrating thing about SS and Medicare from my opinion is that they have kept the forced contribution rate too low. They have known the Trust funds were not being funded adequately for decades and yet they put off raising the rate.
"Should the government have taxed and borrowed more from else where previously? Instead of borrowing from the Trust funds?"
The point here is that the Trust Fund is just bookkeeping. Those "bonds" are NOT an asset, they are IOUs. They cannot be traded in the open market-- the only one allowed to redeem them is the Congress. And since the money that goes into the TF must by law be invested in those bonds, it is NOT purchasing an asset and Congress MUST spend that money now. Yes, it reduced the deficit when there was a surplus, but now it adds to it.
And rates were raised the last time Social Security was "reformed." It hid the nature of the Ponzi scheme for a time. If your SS taxes were put into real assets instead of current benefits, it would benefit the economy and eliminate the Ponzi scheme aspects. What is wrong with that?
They definitely are an asset for the trust funds.
Well if the FICA generated Trust Funds were to invest in "real assets" rather than the USA... Our taxes would have needed to be higher for the last few decades...
So do you really think it would have been better to invest the funds elsewhere...
While removing the equivalent amount of money from the pockets of tax payers?
Or maybe we should have invested the FICA funds balance outside of the government.
Kept taxes low.
And increased the National Debt earlier?
Nah... That doesn't seem right either...
Since the SS surplus was used to "mask" the massive overspending, yes, it would have been better to keep taxes low-- both SS and non-SS, and curbed spending.
Three things wrong with investing FICA in the private sector:
1) That money cannot be used to mask the deficit, it is a real asset.
2) That amount of money would obviously create "winners and losers" in the private equity markets,and
3) The money managers would not have the incentives that private investors and private money managers have. They might be tempted to invest only in "politically correct" companies. The potential for corruption would be enormous.
Simple solution: Let everyone invest their own SS funds in "approved" asset classes. You create the asset, you stabilize the markets, the economy grows, Congress is forced to face its spending problem, and everybody's "IRA" grows better.
Let's remember again...
This is a pension, it has a trust account manager for a reason. It only pays out while you are living. And it pays out as long as you live.
And as I asked previously, if you managed your portfolio poorly like some do and run out of money. Do we get to kick you to the curb and/or bill your kids?
I don't think so.
And I am sticking with human nature being the problem... People demanding low taxes and high benefits. I mean just look the GOP is doing it again with their tax plan.
And as I have said, you can eliminate SS in favor of private accounts (phased in gradually) and with far better results both individually and as a national economy. Make those contributions mandatory and require them to be in "approved" investments, like bonds, if you want, because you fear financial illiteracy (and that isn't unreasonable), but SS is a failed Ponzi scheme and should be replaced. You may even want to require folks to take an annuity at retirement, if you are really concerned, or limit withdrawals.
Once again, though, I think you worry too much about people being irresponsible so you refuse to give them the chance to be responsible in their own best interest. How paternalistic of you.
Over the decades I have watched smart people make stupid financial decisions. I can not even imagine what the majority of people do.
The primary problem has been:
- that as the market climbs rapidly they finally get their nerve up and finally move into a stock fund. (buy mid to high)
- then the market starts to crash and they get scared so they sell their stock fund and move to cash. (sell mid to low)
The result of course is that their returns are less than SS.
Now you have avoided answering my question. Let's say that the same group that does well saving, investing, etc outside of SS does better by having more direct control of their SS funds. (ie makes sense) However a large group of people who are really bad at investing do worse than SS returns.
What do you want to do with the folks who run out of money?
You want to allow your kids to inherit any "excess"...
Do you want your kids to be billed for any "shortfalls"...
What if one's Parents live to 100 in poor health the last 10 years?
Are the kid's allowed to go bankrupt?
What will you do regarding old folks who have no kids?
Now for my own greedy personal gain I would love to have had 15.5% more in my pay check every month to put into savings. I would be even wealthier than I am today since I have been healthy (ie no disabilities) and I have invested pretty good.
However I accept that many people truly need the help, so I am happy supporting SS, SSD and Medicare.
OK, fine, separate the two functions. Require contributions, require private accounts to use "approved" (relatively safe) asset classes, and limit annual withdrawals or an annuity. The problem you have right now is that people "cannot live on SS," so getting them into a better "guaranteed" return is important. And if they do NOT manage to earn enough in a lifetime, you can allow them to keep working, without penalty, and if that is STILL not enough or the kids are poor, too, then we have welfare. Go ahead and support SS, etc., but you are wasting your money and denying recipients a better life.
Don't you ever get tired of saying things that are factually incorrect?
"You can get Social Security retirement benefits and work at the same time. However, if you
are younger than full retirement age and make more than the yearly earnings limit, we will reduce your benefit.
Starting with the month you reach full retirement age, we will not reduce your benefits no matter how much you earn.
We use the following earnings limits to reduce your benefits: If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit.
For 2018 that limit is $17,040.
In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit, but we only count earnings before the month you reach your full retirement age.
If you will reach full retirement age in 2018, the limit on your earnings for the months before full retirement age is $45,360.
Starting with the month you reach full retirement age, you can get your benefits with no limit on your earnings."
Here is another link regarding special payments
"We reduce benefits, if earnings exceed
certain limits.
• If you are younger than your full retirement
age, we deduct $1 in benefits for each $2
you earn above the earnings limit. In 2017,
the limit is $16,920.
• In the year you reach your full retirement
age, we reduce your benefits $1 for every $3
you earn above the earnings limit. In 2017,
the limit is $44,880.
• Starting with the month you reach full
retirement age, you can get your full benefits
no matter how much money you earn."
Criticize me all you want for things I have said, but really, things I have NOT said?
What is the issue? With private accounts, the mandatory retirement age becomes just another birthday. If you saved enough to retire early, you do that. If you don't have enough to retire, you keep working. Add in the FAIR tax, where SS is automatically phased out and where every savings or investment becomes a tax-free IRA, and what's not to like? The only drawback is that all those "senior discounts" might start to disappear.
You implied that SS applies some penalty to those who want to earn some extra money. Apparently that is incorrect.
And the reality is that Medicare, SS and SSD are WELFARE without income / wealth limits... They just have a defined funding method, kind of like the gas tax funds roads.
As we have acknowledged over and over, no person has a legal right to the SS, SSD, Medicare assets. And Congress can legally change the law and stop making payments, or change their amount whenever they choose.
As you note over and over, it is in your mind a Ponzi scheme... When in reality it is simply welfare for old people no matter their wealth level or income. The current workers pay 75% of the cost for the program, so the old folks can get healthcare and checks.
And they do this with the hope that young people will some day do the same for them.
I am not sure why you have heart burn over what are pretty great programs, fortunately since they are very popular I just see them being changed significantly.
And here is why they are so important.
So, the young people-- the "late entrants" into the Ponzi scheme-- are unlikely to get much, if anything, from their "investment"? That's a classic definition.
And I have no notion that is is NOT a "welfare program," other than that it was NEVER promoted as such-- that would be political poison-- and as you complain, it isn't means-tested. Yet at the same time you seem to believe that these old folks can get "something for nothing" without dipping into the general fund and increasing the deficit? It doesn't make sense.
Isn't the better solution to let people invest their own SS tax (on a gradually phased out basis)-- a mandatory net worth increase-- and then have an honest welfare program for those who do not earn enough in life to retire, or cannot work longer to get there? Mandatory retirement kills people, you know, and impoverishes others.
I understand these programs are popular. Like many government programs, they don't make sense and there are better ways to accomplish those same ends.
Silly question: We know that SS is already adding to the deficit as the "Trust Fund" is drawn down. When it is finally depleted, what do you think will happen? Will benefits be cut by 25%, as predicted, or will we simply draw the money needed to keep them up from the general fund, as a budget item? In other words, will honest bookkeeping finally take hold, or will honest policy- reduced benefits-- make the program far less "popular"?
Wouldn't it be nice to avoid that choice by starting to reform-- i.e. phase out-- SS today?
Not really...
Since you see it as "adding to the deficit" and drawing down the General fund already, then it really doesn't matter what happens in 2033...
We will really only need to fund the difference between FICA receipts and distributions for a decade or so from income tax receipts until all the extra large cohort called baby boomers die off.
Maybe then the boomers will acknowledge that they are accepting welfare from their children who they burdened with the extra SS / Medicare and National Debts because they were too cheap to pay enough taxes when they were younger.
Personally I hope they just cut all the benefits by 25%... That seems like a karma like solution.
We're both just speculating, here, but somehow the slight extra general fund spending added when the Trust Fund runs out is bound to be noticed, and it will make us finally recognize we were victims of a Ponzi scheme all along, of course. As financially illiterate as most folks are, though, I'm sure the Democrats can do some fast talking and avoid the price THEY should have paid all the way along.
And if they inflict that 25% cut, I can GUARANTEE that will be politically tragic, since every time someone even suggests reform today it is "cutting SS" and becomes immediate political poison. It won't happen. If it did, it would simply point out what a terrible investment it is for the late investors.
Odd, that when it comes to global warming, you think we have to "do something" to avoid some far off, almost imaginary consequence, yet here you seem quite comfortable with a disaster that we KNOW for certain is coming and that we know how to avoid, if only we act now. Choice of proposals on request.
1. Both parties and all older citizens should pay the price. They as a group decided to underfund the programs and/or over promise the benefits. However as I said, like most humans they want to pay less and get more, even if it means sticking their kids and grand kids with the tab.
2. See #1. Of course it would be a political non-starter because people want to pay less and get more.
3. Yes we should raise the payroll tax rates (premiums) and/or cut the services / checks (benefits)... But see unfortunately you can see #1 & #2 for why that won't happen...
How does that go again...
"When citizens learn they can vote to get themselves money at "someone else's" expense...
And based on your proposal rules #1 applies perfectly...
- Please let me keep more of my money so I can gain more for me.
- If financially inept people fail, let them go broke and go on welfare.
- If people become disable or chronically ill, let them beg at charity's door.
- Which means my kids and grand kids will then have to pay more.
How did Scrooge put it again?
"At this festive season of the year, Mr Scrooge, ... it is more than usually desirable that we should make some slight provision for the Poor and destitute, who suffer greatly at the present time. Many thousands are in want of common necessaries; hundreds of thousands are in want of common comforts, sir."
"Are there no prisons?"
"Plenty of prisons..."
"And the Union workhouses." demanded Scrooge. "Are they still in operation?"
"Both very busy, sir..."
"Those who are badly off must go there."
"Many can't go there; and many would rather die."
"If they would rather die," said Scrooge, "they had better do it, and decrease the surplus population."
Remember the last rule on the card
How about this proposal: Let us fix the system so that NOBODY pays the price, except maybe some politicians with the gumption to actually solve the problem (or in a perfect world those who stand in the way)? Both my proposals preserve retirement benefits for the younger, and keep the "promises" made to those nearing or in retirement. Government's objective should be to have most people self-sufficient and free to manage their own "golden years" as they see fit. The "social insurance" programs in that last rule should be a last resort, carefully tailored to only those who truly need help.
People should be smart, hard working and responsible enough to save for their retirement years. Unfortunately many of them are not.
Please remember as Sean may say... These programs were created for a reason.
People had 150+ years to prove that they were able to be responsible for themselves. Unfortunately far to many failed to do this.
Other people had 150+ years to prove that charity could meet the needs of those who were poor for what ever reason.
Both groups of people failed miserably so God decided that government mandated forced savings and "charity" was the only way to ensure people acted responsibly and the rich cared for the poor.
Now you don't really want to go against the will of God. :=)
History of SS
I am guessing we will need to disagree as is often the case.
Please remember that after the Baby Boomers die, things will get better for the system.
The system will NOT get better because it is a fundamentally flawed government program written by economic illiterates. And its purpose was to care for "widows and orphans" and to push people out of the workforce during the Depression so that younger people could have the jobs. We are not in the depression anymore, the program has outlived its usefulness. If you believe the SS trustees, the system goes broke, even with the Trust Fund, in about 20 years, whether the Boomers die off or not.
My proposals actually DO get better as current and near retirees die off, while preserving the promise for those younger. But if you want to believe the government knew 80 years ago how best to manage everybody's retirement today, feel free.
Seems pretty much like a defined benefit pension to me...
And apparently a LOT of Boomers are going to rely heavily on it since they were financially irresponsible.
"Yet, despite the gloominess, baby boomers are expected to lean nearly as heavily on Social Security as their parents did. According to a report from the Insured Retirement Institute (IRI) last year, some 59% of baby boomers surveyed anticipate that Social Security will be a "major" form of income during their retirements. This was up from just 43% in 2014.
The upward swing in Social Security reliance could suggest two factors at play. First, we had the Great Recession, which walloped boomers' stock portfolios, causing many to head for the sidelines. Many have since missed the rally in U.S. stocks to new all-time highs.
Secondly, savings rates are particularly poor in the U.S., which includes baby boomers. The same IRI report referenced above showed that 45% of baby boomers hadn't saved a dime toward their retirements. Comparably, the 2014 survey showed that a mere 20% weren't saving for their retirement. This lack of savings could preempt a reliance on Social Security income during retirement."
I mean look at these low median net worth values...
There are a lot of people working until they pass away...
SS is not a pension plan, because it never "vests." And the defined benefit has no contractual basis and can be changed or eliminated at any time. Kinda iffy, don't you think?
We have low savings rates because our "retirement account" is all in SSA IOUs. Force people to put their FICA into private accounts and the savings rate will soar, as well as net worth skyrocketing.
And why shouldn't people work as long as they like, and/or as long as they need to? As I said, retirement kills.
SS and Medicare vest as well as any other pension plan because of its political popularity. And at least some corporate raider can not drain the pension fund assets and wipe out all the payments.
Its biggest problem is that tax payers and the government are not legally obligated to keep the trust funds fully funded like private companies. In a normal pension fund tax payers / government would need to make big payments to the funds to stabilize them...
People were unable or unwilling to save adequately before SS, SSD and Medicare... That is why they exist today. However please feel free to ignore all that history if you wish.
As I documented above, SS allows people to collect full benefits and work as much as they want. No one is forced to retire and die...
A secondary issue is that the Trust funds were allowed to invest in their own "company", which is abnormal. Which in this case seems some what logic because it is a very safe investment as long as the USA stays a "going concern".
Something that I just noted if we want to count paying down these bonds as deficit spending...
Then I guess on the good side we are paying down some on the National Debt by doing so.
Of course that does not gain us much if the government is just issuing more bonds in equivalence to what they are paying down...
"SS and Medicare vest as well as any other pension plan because of its political popularity."
All well and good so long as the Trust Fund masks the nature of the Ponzi scheme and until benefits MUST be cut to maintain "solvency." At that point somebody is going to be VERY politically unpopular. And it is all so unnecessary, if we act now; we should have acted 20 years ago.
"Its biggest problem is that tax payers and the government are not legally obligated to keep the trust funds fully funded like private companies."
RIGHT! But there is yet another difference. Companies must by law set aside real assets to support their pensions. No matter how much is in the TF, it consists of IOUs, dependent on the General Fund and Congress' willingness and ability to pay up when due.
"People were unable or unwilling to save adequately before SS, SSD and Medicare..."
True, but if you are going to mandate that a certain amount of your income is going to be set aside for your own retirement (more optional), why must it go into the government's spending stream and you get an IOU? Why not mandate the savings to into a private account? The same with Medicare. Mandate that 1.75% of your pay goes into your personal HSA (more insurance optional), and if necessary the government can put something extra in that HSA for you.
You are correct about taking benefits and working. Either that has changed, or I have been thinking in terms of early retirement. But there is at least the presumption of "mandatory retirement" out there, and I've seen a lot of guys perish shortly thereafter.
"Then I guess on the good side we are paying down some on the National Debt by doing so."
The government does not run a GAAP balance sheet listing liabilities and assets. If those were real government bonds, bought on the open market, they would be an asset, but they are not. But since they are presumed to be "good as gold," they aren't counted as a liability, near as I can tell. It's all tricky bookkeeping.
And what they are doing now, since they are already running a deficit and issuing "worthless" bonds to cover it, is to simply add to the deficit. Now if we were to run a surplus in the general fund, it would be reduced by the amount of the SSA bonds redeemed, which would be GOOD bookkeeping.
Back on the original subject, how many people know the difference between the federal deficit, the debt, and the unfunded liabilities?
This is one option... "benefits MUST be cut to maintain "solvency." However with company pensions they just have to take the responsibility to catch up on its funding. Under funded pensions
And yes we should have raised the payroll tax rate 20 years ago. Or reduced the promised benefits.
Are you saying USA Savings bonds are not a real asset? I think the folks who own $20 Trillion of them would beg to disagree.
Now as we have noted... For decades FICA was used to fund the government via trust fund bonds... Now if we had not collected the FICA, other taxes would have needed to higher... There is no win in this game...
SS Trust Funds
"The Social Security Administration collects payroll taxes and uses the money collected to pay Old-Age, Survivors, and Disability Insurance benefits by way of trust funds. When the program runs a surplus, the excess funds increase the value of the Trust Fund. At the end of 2014, the Trust Fund contained (or alternatively, was owed) $2.79 trillion, up $25 billion from 2013.[4] The Trust Fund is required by law to be invested in non-marketable securities issued and guaranteed by the "full faith and credit" of the federal government. These securities earn a market rate of interest.[5]
Excess funds are used by the government for non-Social Security purposes, creating the obligations to the Social Security Administration and thus program recipients. However, Congress could cut these obligations by altering the law. Trust Fund obligations are considered "intra-governmental" debt, a component of the "public" or "national" debt. As of June 2015, the intragovernmental debt was $5.1 trillion of the $18.2 trillion national debt.[6]"
We DID raise the payroll tax 20 years ago, to make SS "solvent for all time." More empty promises.
"There is no win in this game..." Thank you, Mr. WOPR, you are absolutely correct. We should not be playing this "game" at all.
Notice the language: "...the Trust fund was OWED $2.79T." There is no money there! Interesting that the "intragovernmental debt" (i.e. bookkeeping entries) are part of the National Debt. So, we could cut the debt just by refusing to honor the TF obligations? That doesn't help much, of course, because government's unfunded liabilities are many times that. The problem is that promises have been made that vastly exceed any possibility of paying for them, starting with Social Security. The sooner we recognize the fact an provide a mechanism for people to "escape" from it, the easier it will be.
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