We need to cap and flatten social security payouts

Skeptic Bob · Nov 9, 2015

MTAtech said:
I think that if one pays into Social Security they are entitled to its benefits. That's basic fairness.

Fairness? I thought we were talking about taxes here.

Critter7r · Nov 9, 2015

Visbek said:
Yes, it's a good tool. However....

I selected three changes:
• Create minimum benefit 125%
• Bump-up
• Divert 2% payroll tax to carve-out

This increased the shortfall by 23%. You are obviously making other changes that you haven't mentioned.

Yes, I mentioned that. You do realize that improving the minimum, plus means testing, only closes the gap by 3%?

You do understand that if we don't close the gap, then payroll taxes will not be able to fund Social Security after roughly 2032?

You do understand that right now, the average benefit is $1224 per month, per person? In other words, if we flattened out the benefit, and every single Social Security recipient got $1224 per month (which barely puts them above the poverty threshold), we'd be spending the same amount as we do right now.

However .... the money would be going to those that needed it more, instead of those that don't need it as much.

Here's my run-through with the SS calculator ...

Social Security will be sustainably solvent for the next 75 years and beyond due to a growing trust fund, although 2% of the gap between spending and revenue remains in the 75th year.

Your Policy Selections / % of gap closed

Slow Benefit Growth for Top Half of Earners / 37%

Index COLAs to "Chained CPI" / 20%

Create Minimum Benefit at 125% of Poverty / -5%

Means-Test Benefits for Higher Earners / 8%

Subject All Wages to Payroll Tax / 71%

Total = 131%

In 2050, your plan would reduce total scheduled benefits by 9% and increase payable benefits by 16%. Your plan would increase taxes by 17%.

It is completely unrealistic to imagine that most Americans are able to own a home, have 3 kids, AND save up $2 million (in today's dollars) upon retirement.

This is not because Americans are spendthrifts. The average American isn't buying a Maserati and vacationing at the Mirador in Ibiza. It's because it is not cheap to live in the US.

....

Even a fiscally responsible couple with 2 kids is not going to be able to save much for retirement.

I'm pretty much on the same page as you with this analysis.

Visbek · Nov 9, 2015

cpwill said:
Let's run an example. Joe (age 23) and Cindy (age 22) get married after meeting at college. Joe and Cindy both make $18,000 a year, and get the annual raises that Social Security assumes for it's forecasting tools (a rate of 2.5% a year). Joe and Cindy are young with no kids, and so they agree to save 15% for retirement. They are cooking with gas and doing well.

They are? They're earning $36k a year, which is much less than the median income. 2.5% raise per year barely breaks even with inflation.

So let's hypothesize...

Taxes = 17% or $6k (this includes EITC, mortgage credit, local taxes etc)
Housing = 30% or $11k (or $916/mo)
2 old cars = 17% or $6k
Food = 17% or $6k
Health insurance = 4% or $1450
Internet, 2 phones, clothing, presents = 9% or $3120

Remainder = 6% or $2160

Again, this is hardly a spendthrift family. This doesn't include any vacations, or cable TV, or fancy dining, or college tuition, or yachts or drones or any of that stuff.

Right off the bat, saving 15% sounds somewhat unrealistic. At best, it's an outlier for anyone in that income quintile.

Even with the 6% savings figure, under absolutely ideal circumstances -- starting at zero, earning 10% return, putting away all of it, never dipping into it except to buy a house -- they will end up with roughly $1.6 million after 45 years... or $540k in 2015 dollars, with 2.5% inflation.

That's not bad, and with the standard 4% draw they are above the poverty line (barely). Except it means they never take a vacation, never get sick, never get laid off, don't pay for any college expenses, and the kids never ask for money.

In the real world, people at that income level cannot save 6% of their income. It's not because they are all spendthrifts or irresponsible or lack all self-control. It's because life in America is expensive.

Let's compare this to a couple that earns $100k, which almost puts them into the 4th quintile. We'll have them spend a little more.

Taxes = 20% or $20k (this includes EITC, mortgage credit, local taxes etc)
Housing = 30% or $30k (or $2500/mo)
2 Ford Fiestas = 13% or $13k
Food = 8% or $8k
Health insurance = 2.5% or $2500
Internet, 2 phones, clothing, presents = 4.5% or $4500

Remainder = 22% or $22k

By tripling their income, even with higher expensive, the remainder has increased tenfold. A family with this level of income has a lot more latitude. As is typical for people in the top 20%, they are significantly more likely to have savings (and own a home) at retirement.

As to the "blame the Boomers" thing, that's another mistake. Most of them have paid their taxes (payroll and otherwise) for decades, with most of the tax cuts benefitting the super-wealthy. The vast majority of them are at the tender mercies of global capitalism; specifically, wages for almost all employees have stagnated or eroded since the 1970s. A variety of factors have eroded the fiscal health of Boomers and their retirement, including but not limited to:

• Women entering the workforce, faster than men leaving it, since the 1970s (more workers = downward pressure on wages)

• Erosion of manufacturing employment in the US, due to both automation and international labor competition (as manufacturing used to provide decent middle-class wages without higher education)

• The deterioration of unions, who used to protect many middle-class jobs

• CEOs and top-ranking executives taking almost all of the wage increases

• The rising costs of, and greater need for, higher education

• Numerous recessions, including the worst economic downturn since the 1930s

• Stagflation and high inflation for much of the 1970s

• Elimination of pensions in favor of 401(k)s, which pay less and are less secure

• Higher job turnover / less job security than in the past

In other words: During the time that you claim Boomers had a "great chance" to build wealth, those opportunities were largely lost to a variety of externalities.

There is no question that some people are financially irresponsible, or make poor decisions. E.g. there is no doubt that millions of Americans bought homes they could not afford, or took out second mortgages and used them unwisely, while the housing bubble was still building.

At the same time, it doesn't make sense to ignore every single structural change in the economy that has impacted the economy over the past 50 years, and declare that the only reason people are short on retirement savings is due to personality flaws.

Visbek · Nov 9, 2015

As to the adjustments.... Let's consider a scenario that seems to be along the lines of what you're describing.

Since it's a bit tough to see:

• slow benefit growth top 50%
• minimum benefit 125%
• means-test high earners
• tax all wages
• divert 2%

This gets to 98% of closing the gap. The problem is, it doesn't close until 2058 -- that's where the blue and red dashed lines meet.

Before then, it peaks at a 2% payroll tax gap. This is better than the current projected 4% gap, but is still going to be very expensive.

We should also note that this plan socks high earners with higher taxes, and reduces their benefits, along with reducing the benefits of the top 50%. That won't be an easy sell, especially as it won't close the gap for another 40+ years. And that's if everything works out right.

aaaaand... I pointed out in post #39 that the superannuation system has a lot of problems, not the least is that so far it isn't forcing people to save enough to cover them for more than 10 years of retirement.

Absentglare · Nov 9, 2015

Visbek said:
They are? They're earning $36k a year, which is much less than the median income. 2.5% raise per year barely breaks even with inflation.

So let's hypothesize...

Taxes = 17% or $6k (this includes EITC, mortgage credit, local taxes etc)
Housing = 30% or $11k (or $916/mo)
2 old cars = 17% or $6k
Food = 17% or $6k
Health insurance = 4% or $1450
Internet, 2 phones, clothing, presents = 9% or $3120

Remainder = 6% or $2160

Again, this is hardly a spendthrift family. This doesn't include any vacations, or cable TV, or fancy dining, or college tuition, or yachts or drones or any of that stuff.

Right off the bat, saving 15% sounds somewhat unrealistic. At best, it's an outlier for anyone in that income quintile.

Even with the 6% savings figure, under absolutely ideal circumstances -- starting at zero, earning 10% return, putting away all of it, never dipping into it except to buy a house -- they will end up with roughly $1.6 million after 45 years... or $540k in 2015 dollars, with 2.5% inflation.

That's not bad, and with the standard 4% draw they are above the poverty line (barely). Except it means they never take a vacation, never get sick, never get laid off, don't pay for any college expenses, and the kids never ask for money.

In the real world, people at that income level cannot save 6% of their income. It's not because they are all spendthrifts or irresponsible or lack all self-control. It's because life in America is expensive.

Let's compare this to a couple that earns $100k, which almost puts them into the 4th quintile. We'll have them spend a little more.

Taxes = 20% or $20k (this includes EITC, mortgage credit, local taxes etc)
Housing = 30% or $30k (or $2500/mo)
2 Ford Fiestas = 13% or $13k
Food = 8% or $8k
Health insurance = 2.5% or $2500
Internet, 2 phones, clothing, presents = 4.5% or $4500

Remainder = 22% or $22k

By tripling their income, even with higher expensive, the remainder has increased tenfold. A family with this level of income has a lot more latitude. As is typical for people in the top 20%, they are significantly more likely to have savings (and own a home) at retirement.

As to the "blame the Boomers" thing, that's another mistake. Most of them have paid their taxes (payroll and otherwise) for decades, with most of the tax cuts benefitting the super-wealthy. The vast majority of them are at the tender mercies of global capitalism; specifically, wages for almost all employees have stagnated or eroded since the 1970s. A variety of factors have eroded the fiscal health of Boomers and their retirement, including but not limited to:

• Women entering the workforce, faster than men leaving it, since the 1970s (more workers = downward pressure on wages)

• Erosion of manufacturing employment in the US, due to both automation and international labor competition (as manufacturing used to provide decent middle-class wages without higher education)

• The deterioration of unions, who used to protect many middle-class jobs

• CEOs and top-ranking executives taking almost all of the wage increases

• The rising costs of, and greater need for, higher education

• Numerous recessions, including the worst economic downturn since the 1930s

• Stagflation and high inflation for much of the 1970s

• Elimination of pensions in favor of 401(k)s, which pay less and are less secure

• Higher job turnover / less job security than in the past

In other words: During the time that you claim Boomers had a "great chance" to build wealth, those opportunities were largely lost to a variety of externalities.

There is no question that some people are financially irresponsible, or make poor decisions. E.g. there is no doubt that millions of Americans bought homes they could not afford, or took out second mortgages and used them unwisely, while the housing bubble was still building.

At the same time, it doesn't make sense to ignore every single structural change in the economy that has impacted the economy over the past 50 years, and declare that the only reason people are short on retirement savings is due to personality flaws.

Nah man you have no idea.

Minimum wage family could be millionaires if they'd stop buying crap they don't need like iphones, cars, shoes, and food.

Lol... Privatize social security! Why? Because you're on your own !

cpwill · Nov 9, 2015

Visbek said:
They are? They're earning $36k a year, which is much less than the median income. 2.5% raise per year barely breaks even with inflation.

So let's hypothesize...

Taxes = 17% or $6k (this includes EITC, mortgage credit, local taxes etc)
Housing = 30% or $11k (or $916/mo)
2 old cars = 17% or $6k
Food = 17% or $6k
Health insurance = 4% or $1450
Internet, 2 phones, clothing, presents = 9% or $3120

Remainder = 6% or $2160

Again, this is hardly a spendthrift family. This doesn't include any vacations, or cable TV, or fancy dining, or college tuition, or yachts or drones or any of that stuff.

:lol: dude. you are spending $3,000 a year on entertainment, phones, and clothing, and assuming that they buy new cars every year.

Secondly, people in the lower income strata have negative tax rates. They get out more than they pay in. When I ran the numbers on a family with two adults and two children, people making $36k were paying a rate of about -10%. They definitely aren't paying a 17% rate, or anything close to it.

Here is a more typical way that a budget would be set up:

Monthly Take Home Pay (most folks don't know or work with their pre-tax income, they work with their takehome pay, meaning that health insurance etc., isn't part of the budget): $2250
Apartment: $750
Food: $500
Utilities: $175
Gas: $200
Phones: $80
Life Insurance: $45
Health Insurance: Pre Tax
Fun (this includes buying new clothes, giving gifts, etc): $100
Savings for investment: $ 250
Savings for anticipated expenses: $150

etc. It is tight, agreed. But doable. The annual tax rebate helps out a lot of families at this level.

And, again, it's worth noting, that we are discussing "the vast majority of people, including middle class citizens", the majority of whom make more than this couple, and whom you claimed were unable to save much for retirement.

And, if they get really into it, then Joe does what I did when we decided we wanted a downpayment for a house, and gets a second, part-time job. You can bring in about $800 a month delivering pizzas, for example, or mow lawns on a Saturday. You aren't limited to a single, 8 hour workday when you have goals.

In the real world, people at that income level cannot save 6% of their income.

In the real world they can and do. I've done it myself and I've helped others do it. :shrug:

It's not because they are all spendthrifts or irresponsible or lack all self-control. It's because life in America is expensive.

The expensiveness of life in America is significantly controlled by you, as is your income (see above discussion on delivering pizzas). You can live expensively, or you can live cheaper. Most Americans have tried to live beyond our means, which is why we are in debt.

Let's compare this to a couple that earns $100k, which almost puts them into the 4th quintile. We'll have them spend a little more.

Taxes = 20% or $20k (this includes EITC, mortgage credit, local taxes etc)

:doh People making 100K a year do not get the EITC. What is your source for your tax rates?

Housing = 30% or $30k (or $2500/mo)

Holy Moly! why?

2 Ford Fiestas = 13% or $13k

Why are you buying cars on debt? Again, a car is a one-time purchase that you save against, not a debt load you carry forever. Buy two cars that each cost $13K over two years and then drive them for a decade and a half.

Food = 8% or $8k

Actually at this level, I think this is low, given that they are going to be eating out, etc.

Health insurance = 2.5% or $2500

:shrug: depending on your employer

Internet, 2 phones, clothing, presents = 4.5% or $4500

That's almost $400 bucks a month on that stuff.

Remainder = 22% or $22k

By tripling their income, even with higher expensive, the remainder has increased tenfold. A family with this level of income has a lot more latitude. As is typical for people in the top 20%, they are significantly more likely to have savings (and own a home) at retirement.

I would agree heartily that it is easier for those at the upper income strata to save. I simply reject the claim that the vast majority of American's can't.

cpwill · Nov 9, 2015

Visbek said:
The vast majority of them are at the tender mercies of global capitalism

No they aren't - they are thinking, capable, human beings who have the ability to make decisions for themselves and point themselves at the goals they'd like to achieve and work to get there, not hapless victims of a life out of their control.

My uncle was a high-intellect lawyer whose parents paid for undergraduate and law school. He was a well known attorney, had his own practice, and was set up for success. Today he's a fiscal wreck, because he kept cheating on his wive(s), meaning he went through multiple divorces, he chose to consume high-quality goods (he has a special penchant for fine wines) that took the rest of his money, and was generally irresponsible, but hey, If It Feels Good, Do It, right? My wife's uncle, in contrast, found himself at 21 living with her aunt in a trailer working for a construction firm, and deciding that, man, this life kinda sucked. So he went and got a technical (associates-level) degree on his own dime, worked insane hours for years, built a company from the ground up, and retired years ago as a multimillionaire to basically live at his lakehouse as a competitive fisherman.

It's not forces that control your life. It's only even a small portion (maybe 20%) what you're given. It's what you do with it. The Baby Boomers generally decided to be more like my uncle than my wife's.

wages for almost all employees have stagnated or eroded since the 1970s

A claim which comes with two problems:

1. Compensation has actually continued to rise, as employers simply gave their employees more pre-tax. As an example, 401(k) matches.
2. Even within an aggregate stagnant system, the incomes of individuals continue to rise as they work their way up the workforce.
3. Baby Boomers made more than their parents, who still somehow managed to save for retirement.

Women entering the workforce, faster than men leaving it, since the 1970s (more workers = downward pressure on wages)

As women entered the workforce, that meant that households had two incomes. Unless, of course, they do what the Boomers did, and become the first generation to really decide to go through mass-divorce. This is another key data point that is lost in the "wages are stagnating" debate. If a single-income household of a Father, Mother, and 1.8 kids in 1975 earning an (inflated adjusted) $50,000 became two households, each headed by a divorced member of the former family, with the father making $60,000 and the mother making $40,000 by 1990, then that means that actual income for the individuals involved has doubled, even while "median household income" has remained flat.

The deterioration of unions, who used to protect many middle-class jobs

Yeah. Don't we just wish we could all be doing as well as Detroit is. :roll:

The rising costs of, and greater need for, higher education

THAT is true. Ditto for healthcare.

Which is interesting. There are two industries in the US that the government is heavily involved in funding... and they are the same ones whose costs have skyrocketed well past inflation year, after year, after year...... Gosh. I wonder what the common factor is.

Numerous recessions, including the worst economic downturn since the 1930s

Yup. As I pointed out to you earlier, those who retired in 2009 would have seen the worst post-war performance of any other cohort, receiving an inflation-adjusted return of about 5%.

Elimination of pensions in favor of 401(k)s, which pay less and are less secure

I'd much rather have my 401(k). It's mine, it's doesn't go away when the company does, making it more secure. And furthermore, I can pass it on to my kids.

Higher job turnover / less job security than in the past

Actually most of this was people moving from position to position - and demonstrates why the previous talking point about Pensions is made moot by the modern economy. If we change jobs every 4-5 years, why would we want a pension system that only rewards us if we remain trapped in the same place for three or more decades?

In other words: During the time that you claim Boomers had a "great chance" to build wealth, those opportunities were largely lost to a variety of externalities.

No, they weren't. Your decisions are your own.

There is no question that some people are financially irresponsible, or make poor decisions. E.g. there is no doubt that millions of Americans bought homes they could not afford, or took out second mortgages and used them unwisely, while the housing bubble was still building.

Yeah. Also see: Credit Card Debt, Car Debt, Student Debt.

MTAtech · Nov 9, 2015

cpwill said:
I am saying that we can reduce the growth of payouts to the upper earners who don't need them, in order to avoid reducing actual payouts to the poor who need it.

We can be Germany, who reformed their entitlements a decade or so back.

Or we can be Greece, who didn't.

Which country is it better to be a low-income retiree in?

Ah Greece. The Greek problem is complex and has less to do with entitlements than it does about using the Euro or that few actually pay their due taxes.

tech30528 · Nov 9, 2015

Just need to stop spending on being the world police and giving money to other countries and there would be enough to pay for it.

Visbek · Nov 9, 2015

cpwill said:
:lol: dude. you are spending $3,000 a year on entertainment, phones, and clothing, and assuming that they buy new cars every year.

Phones are not optional. 2 phones = $90. Clothes $75 (for a family of 4). Internet is $60. That leaves an average of $25/month for presents.

I budgeted $500 per month for everything linked to 2 cars, including gas, maintenance, insurance, etc. That sounds low to me.

people in the lower income strata have negative tax rates.

And yet, somehow people in the 2nd income quintile pay an effective 7% federal tax rate. Most of the people who aren't paying federal income tax are retired, in school, or earning less than $36k/yr. I threw in some extras for local and sales taxes.

Historical Average Federal Tax Rates for All Households

I did make one mistake -- federal is 7% for that tax bracket. So we should do around 12%, or $4320. That saves them a little bit of money, but they are still a long way off from saving 15% (and never touching their savings).

And, again, it's worth noting, that we are discussing "the vast majority of people, including middle class citizens", the majority of whom make more than this couple, and whom you claimed were unable to save much for retirement.

I already did a rundown of the $50k household, which is the median. It didn't look much better. It doesn't look very good until you get well into the upper half.

And, if they get really into it, then Joe does what I did when we decided we wanted a downpayment for a house, and gets a second, part-time job. You can bring in about $800 a month delivering pizzas, for example, or mow lawns on a Saturday. You aren't limited to a single, 8 hour workday when you have goals.

This isn't based on how many jobs you're working. It's based on income, and how many people are earning that income.

We should also remember that jobs are not always there for the pickings, especially minimum wage jobs, doubly so during a recession with 10% unemployment. In case you haven't tried to get a minimum-wage job lately, it's a little different now. Among other things, employers use computer programs to determine when employees get their shifts, and they base them not on employee availability, but on the needs of the business. If you tell Walmart you're only available in the evenings, they're going to hire someone else who is willing to work on their terms.

The expensiveness of life in America is significantly controlled by you....

lol

Not so much. People have very little control over rent, taxes, the price of gas, the number of miles they have to drive, the price of food, or health insurance. They don't pick when they get sick or when they get fired, or when their car breaks down.

People making 100K a year do not get the EITC. What is your source for your tax rates?

I copied and pasted from the $36k example. And you can always Google.

Historical Average Federal Tax Rates for All Households

Holy Moly! why?

Spending 30% on housing is considered normal. In fact, people are starting to exceed the 30% mark now. And it's not because they are spendthrifts, it's because there is a shortage of rental units. After the housing bust, no one wanted to build anything for an extensive period of time, the market overcorrected, and vacancy rates fell. Basic supply & demand.

Forbes Welcome

By the way, the typical rent for a 3BR in a city is around $1800, and outside a city is around $1400. The numbers I'm citing are certainly not crazy.
Cost of Living in United States. Prices in United States. Updated Nov 2015

Why are you buying cars on debt? Again, a car is a one-time purchase that you save against, not a debt load you carry forever.

1) Most people don't have (or don't want to spend) the cash to buy a halfway decent car outright.

2) Interest rates are very low, meaning that buying a car with a loan is almost as cheap as buying it in cash, and you're spreading the cost out over several years.

3) FYI, it's good to have some credit to your name.

4) The loan doesn't last forever. It may only be for 3-4 years, after which you own the car, and you can keep it as long as it will run.

That's almost $400 bucks a month on that stuff.

So? They're earning $100k a year. They can afford to spend a little bit, get some nicer stuff, and still save, without blowing their budget.

Not everyone wants to live like a mendicant. And spending more than you doesn't make someone a complete fool.

Visbek · Nov 9, 2015

cpwill said:
No they aren't - they are thinking, capable, human beings who have the ability to make decisions for themselves and point themselves at the goals they'd like to achieve and work to get there, not hapless victims of a life out of their control.

Individuals do not control the economy.

Is it easier or harder to get a job, when there are 200 job seekers for every job, or 100 job seekers for every job?

If there are 200 people with equal qualifications looking for a job, is the employer going to pay top dollar for that position?

Does an individual decide how much gas costs? Or their tax rate?

Can you wish a decent manufacturing job into existence?

It's very clear here that you are downplaying, if not denying, numerous externalities. That just does not fly.

My uncle was a high-intellect lawyer whose parents paid for undergraduate and law school. He was a well known attorney, had his own practice, and was set up for success. Today he's a fiscal wreck, because he kept cheating on his wive(s).... etc

I'm sorry to hear that, and I do think it's good that you apparently learned from his mistakes.

However, anecdotes are not data, and his poor choices do not make externalities disappear. Nor does everyone act like your uncle.

A claim which comes with two problems:

1. Compensation has actually continued to rise, as employers simply gave their employees more pre-tax. As an example, 401(k) matches.

Wages have only really risen for the top 5% of earners. Everyone else is flat.

2. Even within an aggregate stagnant system, the incomes of individuals continue to rise as they work their way up the workforce.

Most workers are barely keeping up with inflation.

Economic mobility is also not doing great in the US. But that's a whole other thing.

3. Baby Boomers made more than their parents, who still somehow managed to save for retirement.

They did make more than their parents for many years, mostly because union-protected manufacturing jobs paid decent wages. However, they are the ones retiring now, and they are the ones who have not saved much for retirement (see GAO docs already referenced many times).

As women entered the workforce, that meant that households had two incomes. Unless, of course, they do what the Boomers did, and become the first generation to really decide to go through mass-divorce....

LFPR started rising in the 1960s or so, and peaked in 2001. Despite women joining the workforce, household income really hasn't changed over the decades.

The average household size has changed a little bit, but not much. In 1975 it was 2.95, and today it is 2.54. Divorce had some effect, but not much. It also may have harmed wealth, but it's not going to change income.

Yeah. Don't we just wish we could all be doing as well as Detroit is.

Detroit did well for years because of unions. Unions, though, can't stop automation or globalization. Anyway...

THAT is true. Ditto for healthcare.

Which is interesting. There are two industries in the US that the government is heavily involved in funding... and they are the same ones whose costs have skyrocketed well past inflation year, after year, after year...... Gosh. I wonder what the common factor is.

1) Higher education costs are skyrocketing because of both increased demand, and reductions in government spending on higher ed.

2) Government spending certainly does not drive the costs of health care higher. In fact, Medicare has generally helped control costs, because as a single-payer-like entity, it can play hardball with doctors and hospitals.

I'd much rather have my 401(k). It's mine, it's doesn't go away when the company does, making it more secure. And furthermore, I can pass it on to my kids.

Tell that to the ex-Enron Employees.

Pensions normally allow inheritance. They were also more generous, and more secure.

The ability of people to choose their 401(k)s usually backfires, because people suck at investing.

No, they weren't. Your decisions are your own.

I listed 7 major externalities that have severely damaged middle-class wages since the 1970s. No individual worker decided to have her job automated out of existence, or to start a recession.

Yeah. Also see: Credit Card Debt, Car Debt, Student Debt.

Actually, those forms of debt are a small part of the pie. The vast majority is housing, which has fallen since the bubble popped, and generally goes towards building equity.

Absentglare · Nov 9, 2015

Visbek said:
Phones are not optional. 2 phones = $90. Clothes $75 (for a family of 4). Internet is $60. That leaves an average of $25/month for presents.

I budgeted $500 per month for everything linked to 2 cars, including gas, maintenance, insurance, etc. That sounds low to me.

And yet, somehow people in the 2nd income quintile pay an effective 7% federal tax rate. Most of the people who aren't paying federal income tax are retired, in school, or earning less than $36k/yr. I threw in some extras for local and sales taxes.

Historical Average Federal Tax Rates for All Households

I did make one mistake -- federal is 7% for that tax bracket. So we should do around 12%, or $4320. That saves them a little bit of money, but they are still a long way off from saving 15% (and never touching their savings).

I already did a rundown of the $50k household, which is the median. It didn't look much better. It doesn't look very good until you get well into the upper half.

This isn't based on how many jobs you're working. It's based on income, and how many people are earning that income.

We should also remember that jobs are not always there for the pickings, especially minimum wage jobs, doubly so during a recession with 10% unemployment. In case you haven't tried to get a minimum-wage job lately, it's a little different now. Among other things, employers use computer programs to determine when employees get their shifts, and they base them not on employee availability, but on the needs of the business. If you tell Walmart you're only available in the evenings, they're going to hire someone else who is willing to work on their terms.

lol

Not so much. People have very little control over rent, taxes, the price of gas, the number of miles they have to drive, the price of food, or health insurance. They don't pick when they get sick or when they get fired, or when their car breaks down.

I copied and pasted from the $36k example. And you can always Google.

Historical Average Federal Tax Rates for All Households

Spending 30% on housing is considered normal. In fact, people are starting to exceed the 30% mark now. And it's not because they are spendthrifts, it's because there is a shortage of rental units. After the housing bust, no one wanted to build anything for an extensive period of time, the market overcorrected, and vacancy rates fell. Basic supply & demand.

Forbes Welcome

By the way, the typical rent for a 3BR in a city is around $1800, and outside a city is around $1400. The numbers I'm citing are certainly not crazy.
Cost of Living in United States. Prices in United States. Updated Nov 2015

1) Most people don't have (or don't want to spend) the cash to buy a halfway decent car outright.

2) Interest rates are very low, meaning that buying a car with a loan is almost as cheap as buying it in cash, and you're spreading the cost out over several years.

3) FYI, it's good to have some credit to your name.

4) The loan doesn't last forever. It may only be for 3-4 years, after which you own the car, and you can keep it as long as it will run.

So? They're earning $100k a year. They can afford to spend a little bit, get some nicer stuff, and still save, without blowing their budget.

Not everyone wants to live like a mendicant. And spending more than you doesn't make someone a complete fool.

Seriously though he's just going to continue to make flawed assumptions to come to his desired conclusions.

Old people remember how easy it was for them and assume it's even easier now. The idea that a cell phone is an optional luxury these days is plainly obscene but they'd never see it putting together these flawed poor people budgets that assume nothing ever goes wrong.

Neomalthusian · Nov 9, 2015

MTAtech said:
In any case, I don't understand the logic of reducing payouts now so we don't run the risk of reducing payouts later.

We know benefits (at least relative to cost) must decline for future beneficiaries. Today's retirees enjoy a greater benefit relative to the cost they incurred than future beneficiaries can or will. So reducing payouts now would be in conjunction with also reducing future payouts such that the program is permanently solvent. It's a matter of generational equity.

JoeTheEconomist · Nov 9, 2015

cpwill said:
This is important because the purpose of Social Security is supposed to be to protect seniors from poverty, and yet there are people on SS who don't get enough to escape from below the poverty line. Because the poorest among us are also the least-attached to work, many don't have anywhere close to the full 35 years that get scored.

If Social Security really were supposed to "protect seniors from poverty" then the system would not deliver the most to those with the longest and most productive careers. In fact, all Americans would be covered. You want it to be a welfare program, and "protect seniors from poverty". Call your Congressman, but let's not pretend that your idea is actually the purpose of the program when it does virtually the exact opposite.

JoeTheEconomist · Nov 9, 2015

ttwtt78640 said:
If you wish to fund a general retirement program for all seniors (drop tying individual benefits to individual "contributions"?) then why fund it with the most regressive federal tax scheme possible? Unlike the federal income, tax which is quite progressive, the SS tax is extremely regressive - a flat rate on every $1 of wages alone earned up to about $110K with no deductions, credits or exclusions.

Social Security is anything but regressive. The last $1000 of income of a max income earner costs about $106 in taxes. It generates about 1/20th of that in income retirement incremental monthly income - assuming that the worker only contributes for 35 years. There is nothing regressive about that.

JoeTheEconomist · Nov 9, 2015

Gimmesometruth said:
Social Security benefits are relatively evenly distributed among retirees. The vast majority of benefits
go to people who are low- or middle-income by any standard. This means that a means test that is
focused on taking back benefits from upper income retirees is likely to raise very little money. The
savings from means testing Social Security benefits are even smaller when factoring in any sort of
behavioral response to what is effectively a substantial increase in the tax rates by seniors. When this
response is taken into account, even a means test that would begin at levels that would hit middle income
retirees leads to savings that are just over 2.0 percent of the program’s outlays. This suggests
that means testing is not an effective route for reducing the cost of Social Security.

http://www.cepr.net/documents/publications/ss-2011-03.pdf

Nice. Another antiquated reference to the census data which understates retiree income. You quote it even though you know it is wrong.

JoeTheEconomist · Nov 9, 2015

cpwill said:
Insurance is a transfer of the risk of large, expensive, and unforeseeable life events (sudden death, disability, house-fires, cancer, and the like). Turning 65 is neither a large and expensive, nor an unforeseeable event. You can literally predict it with almost perfect accuracy 65 years in the future. SS is not insurance, it just has it in the name.

That is a strange definition of insurance. Are you saying my health insurance which covered my office visit is not insurance because the cost was neither large nor unforeseeable.

JoeTheEconomist · Nov 9, 2015

cpwill said:
If you are getting 2-4% real returns, you need to fire your financial adviser.

Estimating out the Combined Annualized Growth Rate (which lets you account for losses hurting you more than follow on gains helping you), gives you the average returns over working-life periods of time. Since 1950, the inflation-adjusted return has been 7.55%. Since 1960, 5.92%. Since 1970, 6.09%. Once you start looking at 35-year spans, the average for all year-cohorts is about 6.93%. Since 1980, however, returns have trended upwards.

The problem with your thinking is that markets and wages are correlated. So you will statistically buy more tops, and you are unemployed at market bottoms. You are also comparing SS which is insurance that provides a hedge against risk to a savings (100% stocks no less) that profits from taking risk. This aren't the same thing. Comparing SS to market returns is like saying Michael Phelps is slow because he swims slower than I run. It is not a meaningful comparison.

JoeTheEconomist · Nov 9, 2015

Absentglare said:
But that's progressive and so the republicans will never go for it.

Actually it is the basis of much of the conservative thought on the issue. AEI publishes similar material. Heritage Foundation publishes similar material. They think that SS will be cheaper as welfare.

MTAtech · Nov 10, 2015

Neomalthusian said:
We know benefits (at least relative to cost) must decline for future beneficiaries. Today's retirees enjoy a greater benefit relative to the cost they incurred than future beneficiaries can or will. So reducing payouts now would be in conjunction with also reducing future payouts such that the program is permanently solvent. It's a matter of generational equity.

Not necessarily. We can decide to raise taxes and we don't know the effect of inflation on these projections. The money paid in is more valuable dollars than what is paid out.

JoeTheEconomist · Nov 10, 2015

Neomalthusian said:
We know benefits (at least relative to cost) must decline for future beneficiaries. Today's retirees enjoy a greater benefit relative to the cost they incurred than future beneficiaries can or will. So reducing payouts now would be in conjunction with also reducing future payouts such that the program is permanently solvent. It's a matter of generational equity.

The guy who ran SS in 1944 agreed with you. He almost used the exact words.

cpwill · Nov 10, 2015

Visbek said:
As to the adjustments.... Let's consider a scenario that seems to be along the lines of what you're describing.View attachment 67192632
Since it's a bit tough to see:

• slow benefit growth top 50%
• minimum benefit 125%
• means-test high earners
• tax all wages
• divert 2%

This gets to 98% of closing the gap.

I also added in reducing overpayments/fraud (4%), covering state and local workers (4%)

This is what it looks like:

85% of the shortfall is solved by the 75th year. The top line reads:

Social Security will be sustainably solvent for the next 75 years and beyond due to a growing trust fund, although 15% of the gap between spending and revenue remains in the 75th year.

Then, I toggle the "divert 2%" option. Now the chart looks like this:

Now, 112% of the shortfall is closed in the 75th Year. The top line portion reads:

Congratulations! Under your plan Social Security will be sustainably solvent for the next 75 years and beyond.

This is because the returns from the accounts offset the costs.

Now, the changes took effect in 2016, and revenues dropped from 15.25 to 14.08, a 1.17 point revenue loss for a 2% diversion. Extrapolating that out, a 10% diversion would lose us 5.85 points.

However, you'll also note that the costs dropped dramatically once the accounts started really producing. With a 10% diversion, that date gets pushed significantly to the left.

The problem is, it doesn't close until 2058 -- that's where the blue and red dashed lines meet.

Before then, it peaks at a 2% payroll tax gap. This is better than the current projected 4% gap, but is still going to be very expensive.

Agreed. However, I'm not proposing a 2% payroll diversion. I'm proposing a 5% diversion of your side and a 5% of your employer's side.

We should also note that this plan socks high earners with higher taxes, and reduces their benefits, along with reducing the benefits of the top 50%.

It does the first two, not the third, and it only does the second for a short time. High income earners will be the first to benefit from the individual accounts, as they will have more in them.

cpwill · Nov 10, 2015

Visbek said:
The problem is, it doesn't close until 2058 -- that's where the blue and red dashed lines meet.

With the full figures I gave you, it's 2055.

With the diversion of 10%, however, and the gains from that offsetting the loss in revenue, it's going to get pushed to the left.

However, it has to overcome:

cpwill said:
Now, the changes took effect in 2016, and revenues dropped from 15.25 to 14.08, a 1.17 point revenue loss for a 2% diversion. Extrapolating that out, a 10% diversion would lose us 5.85 points.

and then some. Because that 5.85 point loss is assuming only 2/3rds of people sign up, and we are putting everyone on the system. So really, we are looking at an 8.775 point loss or 58.47%.

Using median income as a measure and weighing that against the average social security check of ~1200, we see that 50% of the costs are replaced in 2032, and costs are 100% replaced in 2040. The cross point is moved back to 2033 - so, a 22 year savings.

And that is before we juice up revenues by allowing people to invest extra in the program.

So let's play around with how that could work.

First COA: The inputs will work the same - 34.64% of what you pay in will go to the rest of FICA (5.3 out of every 15.3, leaving 10 for your account), shoring up those expenses, and the rest will go into your account, where it will grow tax-free. This means that those who pay a higher than 34% combined federal tax rate on that money will be able to reduce their tax bill AND put that money into a tax-free-growth vehicle, and those who are younger will have an incentive due to the tax advantage of their interest v their principle. So... that's all single filers making more than $91,000 and all joint filers making more than $152,000 (rough numbers, plenty of them will be able to pay effective lower rates than their nominal) as an immediate branch, with lower earners under the age of 50 also being incentivized.

Think of it as an extra IRA for rich and young people, but with a hook that has them fund FICA while they are taking advantage of it. We'd boost Medicare's financing, along with SS. Now that's exciting.

Example 1: I am a married couple making $225,000. My marginal rate is now 40.65% (33 in FIT plus we just popped the cap on FICA). I shave ~6% points off of my taxes for every extra dollar I throw into the program, where it then grows tax free, saving me an additional 15% on the earnings.

Example 2: I am a 35 year old. I decide to throw a thousand dollars in a year, meaning that $653.5 hits my SS account, instead of $750 into my regular savings/investment account. When I retire, my account has a little over $86,000 in it, raising my monthly retirement income by a little under $400. I put a total of $33,000 into the system, and saved $9,000 in taxes on it.

I think, obviously, we are going to get a lot more out of the wealthy, who will take advantage of the tax-shelter, than we will out of the young. But the incentive is there for them nonetheless.

cpwill · Nov 10, 2015

Absentglare said:
Seriously though he's just going to continue to make flawed assumptions to come to his desired conclusions.

Old people remember how easy it was for them and assume it's even easier now. The idea that a cell phone is an optional luxury these days is plainly obscene but they'd never see it putting together these flawed poor people budgets that assume nothing ever goes wrong.

:lol: I'm in my early 30s, and I actually put "phones" as an item in my example budget.

However, yes, a smartphone is a luxury item, not a requirement. Cellphones can be cheaper than the old houselines, but you don't need an iPhone 365. That's why low-income folks are more likely to use TracPhones and the like, if they are trying to live within their means.

My plan includes two smartphones, and has data, text, voice, all that jazz, though the data isn't really for watching movies, it's for looking up stuff on the internet. It costs us about $55 a month. I budgeted $80 in the list I gave.

Visbek · Nov 10, 2015

cpwill said:
Congratulations![/SIZE] Under your plan Social Security will be sustainably solvent for the next 75 years and beyond.

Your chart shows exactly what I've been telling you:

• The changes you recommend don't make Social Security solvent until roughly 2050.
• Your changes still result in a 2% gap, which is better than 4% but still means we will need to do something for the next 35 years.

Since the Trust Fund won't last, we either need to further cut benefits, or increase revenues, or fund SS from general funds.

Agreed. However, I'm not proposing a 2% payroll diversion. I'm proposing a 5% diversion of your side and a 5% of your employer's side.

You realize that's insane, right? You're talking about cutting revenues by 2/3, for a scheme that won't reduce outlays for 40 years.

And no, carving out more revenue won't make SS solvent faster. As it stands right now, we don't have enough revenue to pay for the current beneficiaries. Taking up 10% of the 12.4% of revenues will make this problem far, far worse, will empty the Trust Fund immediately, and generate a massive shortfall. Current workers who are 55 or 60 won't be able to earn enough to replace much of their SS benefit.

Plus, since you missed it: In Australia, the Super scheme often only lasts retirees for about 10 years, and after that they are drawing on a public pension. SS is going to need more than 3% of payroll tax revenues in the year 2050 in order to survive.

Privatization that radical can't happen for years, and has to be phased in, which means you STILL have to figure out how to pay for SS in the here and now, AND prepare for when the private accounts tap out.

We need to cap and flatten social security payouts

Skeptic Bob

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