Americans Are Putting Billions More Than Usual in Their 401(k)s
bloomberg.com
bloomberg.com
The stock market recovered years ago from the Great Depression and is doing really well again.
The Dow Jones Industrial Average (a common benchmark index such as the Standard and Poor's 500) is literally at an all time high and is on the cusp of 20,000: https://www.google.com/finance?cid=983582
Edit: Changes "shares in instruments to shares or instruments". It was a bit ambiguous and I was originally trying to make it more obvious that shares are considered instruments (along with several other things traded).
I could have gone into more detail, as you have done here, but that's not the point. The point is that downturns like the Great Recession do not permanently harm someone's retirement.
Shares are instruments [1]. (You say this later, but nobody buys "shares in instruments").
Exchanges, together with ECNs, OTC markets, broker-dealers, other market makers, buyers, sellers, arbitrageurs, investment banks, et cetera make up the stock market.
OP is discussing a 30+ year time horizon, though. I can think of a few potential things that would precipitate not just a crash, but a long-term economic malaise:
- Climate change - Political/social unrest (extrapolate Brexit, Trump, etc) - Mass unemployment caused by automation (you can't "retrain" 5MM 50yo truck drivers) - Empire collapse (has happened with every single empire in history - what makes the U.S. exempt?) - Nuclear exchange (tensions with Russia steadily increasing) - Grey goo / UFAI (I know, crazy, but still, 30+ year time horizon)
While I'm sympathetic to the view that alarmist "the crash is coming" thinking is likely incorrect, whenever one discusses decades-long time horizon in an era of accelerating technology and political uncertainty, I don't think it's unreasonable to suggest that the VIX is not considering tail risk of unlikely, but highly impactful events.
...
> Climate change
The climate change consequences big enough to cause a long-term economic malaise are far enough out to not affect most of today's workers. We'll mostly just get things that cause short term disruption, like more large storms, more weather variability, more record high tides, and similar things.
The big things, like sufficient sea level rise to require abandoning significant parts of many major cities, long term changes in water availability that significantly change agriculture for whole regions, and so on are usually forecast to be in the 100+ year timeframe.
This is one of the frustrating things about climate change. Over the long term it likely has disastrous consequences for humanity, but it can be largely averted or at least limited if action is taken early enough. But "early enough" puts you a time when the consequences are still localized and intermittent, and so it is easy for people to overlook it (especially when they can make more money by doing so).
Source?
The US isn't anything like traditional historical empires for one. It hasn't built its prosperity on invading other nations to annex them and plunder their national wealth, which is traditionally how empires temporarily sustain themselves. The US built its immense wealth today (just under half of all private wealth on earth is owned by Americans) overwhelmingly through invention, engineering, industry, trade, manufacturing, radical productivity gains spanning two centuries, and lots of immigration. Historical empires have always run out of lands to conquer and wealth to steal from other nations, and then they collapse as they fail to placate their own people or get defeated militarily by the lands they previously conquered.
The USD global reserve is a vulnerability? That's one potential issue. However, the US was the world's largest economy - by about 1890 - long before it had the global reserve currency. Japan has a disastrous situation on its hands economically, and a currency they're very aggressively abusing, and yet they're still the world's #3 economy with a substantial GDP per capita. The notion the US would just wilt without the global reserve currency, is absurd.
What lands has the US annexed that it's going to get pushed out of (and lose the plunder/tax from said nations)? What nation/s is the US stealing all of its prosperity from, such that that is going to end soon? Are we taking $5 trillion annually from Vietnam and Mexico (it's actually the other way around given the vast US trade deficit, we're sending hundreds of billions to the rest of the world)?
Further, the US was the first Capitalist nation. From day one it was heavily built on the principles of the free market and trade, not invasion and plunder. (and before anyone chimes in to loudly proclaim that the US has never been a perfect Capitalist nation: no kidding, such wasn't implied) Otherwise there would be no Canada, at some point in the last century we would have invaded for their natural resources. The US also would have pulled a Russia, and taken Japan and parts of Europe, using its rather wild military & resource advantage at the end of WW2.
First, Bretton Woods established a system that heavily favored US interests -- it was based on dollars and gold, and the US had most of the gold supply. The US was able to achieve this favorable position thanks to its place as the major merchant-state, lender, and latecomer ally/victor in WWII. Among other effects, this system led to the dollar becoming accepted as the foundation for most international trade in the latter 20th century.
After the dollar's position became less favorable in the late 1960s, the US ended the Bretton Woods system and worked out agreements with OPEC to shift oil trades into dollars. This had the effect of cementing the USD as the currency of global trade (among other benefits), as all countries needed to hold dollars in order to purchase oil. This "agreement" was backed up by US military and economic hegemony.
Additionally, during this time, the global "south" was being pillaged for resources -- particularly oil, but also cropland (see bananas and sugar) and other scarce resources. The US established and propped up dictatorships that were favorable to its aims under the guise of fighting Communism. The USSR was doing the same thing in reverse, of course -- a grand game of chess, with the spoils to the victor.
Finally, the US "won" against the USSR through a combination of clever psychology, propaganda, and economic warfare, as well as Soviet mismanagement. When the USSR collapsed, the US obtained some economic benefits from the disentangling of the Soviet system, prolonging its advantage.
The US position was unsustainable, though, and this is when the shift occurred. With the relative increase in global stability and international "free" trade, as well as the power of the Internet, corporations no longer needed the protection of the US system quite so badly. Outsourcing and distributed operations became more and more common. The US position is not so rosy as it once was. The petrodollar system seems to be unwinding as well.
I do live in the US, so I do hope that the inevitable correction is a slow one. I also hope that we can avoid starting new conflicts in an attempt to prolong or reestablish our advantage.
1. Bretton Woods worked out to the disadvantage of the U.S. in the long term. Massive budget deficits brought on by Vietnam War borrowing and ballooning social programs, as well as trade deficits, led European countries to withdraw gold from the U.S. in order to preserve the value of their currency reserves. Leaving it was the only option to both stop the drain of gold and also to escape currency pegging so the dollar could be floated to reflect the trade deficits.
2. The reason why OPEC adopted the dollar was for maximum convertibility; at its inception, the dollar was the most circulated currency in the world. It was, at the time, the one backed by the most gold. The Euro did not exist and the Yen was not as strong or stable.
3. Resource pillaging surely occurred, but in that time period, massive improvements in domestic manufacturing, resource extraction, and agriculture accounts for the largest increase in U.S. citizens' wealth. Multinationals accounted for a small proportion of U.S. revenue.
4. The U.S. didn't "win" against the USSR despite what Mr. Reagan may told you on TV. The USSR failed economically due to a drop in oil prices due to its undiversified economy and the political impossibility of stopping social and military expenditures without upsetting Communist Party elites. The U.S. received paltry economic benefits from the Soviet unraveling. If anything, it received increased competition from suddenly available labor pools. Political advantage does not translate to economic advantage.
5. Outsourcing began long before the internet was significant. The cause of outsourcing was the improved political stability of countries with competing pools of labor and the improvement and commoditization of technology.
It's convenient to adopt a zero-sum outlook on global trade, to assume that if a country does well it must be at the expense of others. However, study of history does not support this conclusion.
I don't necessarily see the US's actions in the late 20th century as predatory, per se -- in fact, they were very likely a logical response to the cutthroat political situation of the time. With perspective, we now understand more intuitively that the global economy is not a zero-sum game. It's not clear to me that this was the perception in the postwar period, especially since the USSR was seen by many as an existential threat to freedom.
1. I disagree that the agreement was a negative for the US in the long term. Bretton Woods actually led to a trade surplus in the short term, putting the US on a solid footing for international investment and foreign military deployments. During this time US trade relationships and influence were firmly established. In the longer term the financial situation changed, which is why the US decided to leave the agreement.
2. Partially true; this situation was due to the success of Bretton Woods in establishing the dollar as a worldwide reserve currency. However, the other side of this is that OPEC nations had a huge surplus and needed a way to invest their earnings. The US established a relationship with them encouraging huge purchases of US treasuries (often without public awareness) in exchange for military aid. See this article for more info: https://www.bloomberg.com/news/features/2016-05-30/the-untol...
3. I was just stating that this was an added factor. It certainly didn't drive the entire economy.
4. This ignores the effect of US operations (such as the "Star Wars" defense) that were almost entirely for show, as well as an increasingly erratic and aggressive US military posture. The effect of this was to drive the Soviets to "spend themselves to death," which they certainly did. Again, I also agree that Soviet mismanagement was certainly a factor.
5. It began before the Internet, but only really took off once technology made international communication easier. Otherwise I agree with you here. (The post-Soviet era certainly looked more secure for investment though.)
That is exactly how it has built its wealth, what?
Even if the US experienced severe economic, military, and social decline, Illinois isn't going to turn back into the Illiwek Confederation. Those people don't exist anymore.
To put it more simply, America isn't a patchwork of nations and nationalities. Empire's are several nations aggregated into one political union.
If America were in decline, we might lose parts of the southwest to Mexico (due mostly to heavy immigration, not because we stole the land from them), maybe Hawaii, and the colonial territories (Guam, Puerto Rico, etc.).
In a total collapse (post apocalyptic), new nationalities would form, but that takes a long time.
It did plunder their underlying wealth in natural resources. That's not to mention what we've done in the Middle East, South America, Africa, Asia, and even Europe if you go back to the world wars.
I get what you're saying about there not being enough of substrate national power to undermine the US on its own territory but I think externally anti-imperialism is gaining currency just about everywhere. And that will come back to bite us one way or another.
Let's say you have been doing around $10,000 the first 10 years of your career and the economy tanks. You now have 30-40 years until retirement, and you start doing $15,000 or so a year. That money that you put in before this huge crash may not grow that much before retirement, but the money you put in after the crash will be bought at low rates and will grow for a long time. You will also have put in a lot more money post crash anyway.
And you can also do other savings vehicles outside of your 401k to save even more money. I just wanted to illustrate that it's not like people put all of their money into their retirement account on one day and if a crash happens the next they are screwed.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/...
We are already to the point where there's so much private equity that startups don't need IPOs. So it's entirely possible that the next Google, Facebook, Amazon, Apple and Microsoft will never be exchanged on open markets.
Note that I am not actually recommending investing in gold just making your abstract fearful thesis into something real. IMO unless you are talking about some civilization hurting disaster (like yellowstone .. not even then perhaps) markets recover from crashes. in a way they are a measure of optimism for future. so I'd factor than into my plans.
I think this is definitely a common sentiment amongst us youngsters.
I read lots of thoughtful articles about how SS was broke, wouldn't last, etc.
As I got a little older, I started reading more about the history of SS, how it's always needed various adjustments over time, how people have always said it's going broke, it's unsustainable, etc.
I realized that, for most of its history, the people who have said those things are actually more likely the ones who'd like it to go away entirely.
While everyone else just makes the changes necessary to keep it going.
After a while, I found I'd move into the "let's just make the changes necessary to keep it going, because it's a good program and has always had its detractors" camp. (which is where I am now.)
So if you are saving a lot it could, ironically, be a self fulfilling prophecy that you get no social security.
So, when the trustees say that Social Security can pay 75% of the benefits, what they mean is that there are enough IOUs in the trust fund to pay 75% of the benefits. But when we start redeeming the IOUs, we will quickly discover that the money isn't in existence. We are going to have to raise taxes or cut spending or otherwise get the money from somewhere else. The trust fund is just a very very clever way of obfuscating the fact that the government has no money saved at all for Social Security.
> But when we start redeeming the IOUs
You are aware, I'm sure, that said IOUs have been redeemed every year of SS's existence.
By buying stock in a given company you increase demand for that company's stock and increase its value. A company's market cap is a very real thing that allows it to engage in economic activity that it would otherwise be unable to execute on.
Buy a lump of gold for $100 and turn it into a $110 bracelet -> value created.
Buy a lump of gold for $100 and sell it to someone 1 second later for $110 -> no value created.
Again, I'm not arguing for or against Social Security, just whether or not the original analogy is apt. If it's not, it does no harm to those arguing against Social Security unless the argument relies largely on the analogy being sound. I can't imagine that's the case at all. If it is apt, I think it likely can be expressed in a way that more clearly shows its intent.
Social Security is paid out entirely by proceeds from people paying into the system. If ever the number of new people paying in is not enough to cover the outflows, then the system collapses. That is how a Ponzi scheme works.
If, for instance, we get rid of the contribution cap tomorrow, Social Security becomes 100% funded - in perpetuity.
Madoff was in no position to do so. Congress is.
I have not heard this sentiment from younger blue collar and service workers, who are much more likely to need to rely on social security. I'm planning our retirement without needing any SS money, and whatever we get will just be some extra on top. Many non-professionals don't have this luxury.
I think it _could_ still be around, but I expect it to be replaced with something else or scrapped entirely.
IMO, it's life or death to save properly for retirement.
Social Security may become unable to pay the benefits that you're expecting at some point because the input from workers will not be enough to pay those benefits. But that doesn't mean it will pay nothing. It will just pay less. You'll still get some payments.
Large adjustments were already made to accommodate the baby boomer generation. That's why we have a $2.8 trillion-dollar trust fund. With current demographics, we should be able to pay 100% of promised benefits until the late 2030's. Afterwards, with a pure pay-go system, we'd only be able to pay ~80% of benefits.
There are simple fixes that could dramatically extend the reserve depletion date to sometime in the 2050s. Not doing so is purely a political question.
Trust fund stats: https://www.ssa.gov/oact/STATS/table4a3.html
Increasing the marginal rate of income tax for anyone making more than $120,000 by 12%+ may be a "simple" fix or just a matter of politics, but it's some pretty hard politics! (And also might lead to some unfortunate economic outcomes.)
Two things come to mind; The politics shouldn't be that hard in the current populist environment since only ~6% of taxpayers earn above the max.[1] Secondly, employees would 'only' see a 6% marginal tax increase since the employer portion isn't included with AGI.
But there are numerous other options to extend the program as well. The top 5% of taxpaying households earned at least ~$170k in 2011. As a simplifying assumption, let's just say they all meet the cap. There were 6.8 million returns above this level, which would mean that only $800 billion of the $2.8 trillion in AGI earned that year was subject to the social security tax. If you levy a 1% tax on income above the FICA limit, it would raise an additional $40B/year which with simple perpetuity math would mean an additional $1.2 trillion into the trust fund.[2]
Alternatively, since the top 5% of income payers receive something like 1/3 of their income from capital gains (which aren't subject to any FICA taxes), a 1% levy on capital gains would likely raise a similarly large amount.
I don't have any specific preference for those two ideas, but they're just a few examples.
[1] - https://www.ssa.gov/policy/docs/policybriefs/pb2011-02.html
[2] - Base figures from here: http://www.mybudget360.com/wp-content/uploads/2015/06/irs-ta...
I think voters (especially the high income voters who would be affected) aren't likely to be fooled by the employer/employee split, even putting aside those who are self-employed. And raising taxes on a whole bunch of "moderately" high earners in deep blue, high cost-of-living cities isn't particularly popular even with Democrats: They worked hard in the last go-round to push President Obama to only end the Bush rate cuts for the "truly" wealthy households at $400K+.
I also think you're slightly over-estimating the money available over the cap: There are presumably many more households with two earners closer to $85,000 each than households with one earner at $170k, and SS taxes are collected per-earner.
A little calculation from here...
https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2016/f...
...suggests that the total taxed income base of Social Security is around $6.4T. Total AGI is somewhere around $9T, so 1% of the difference is $26B (and of course that AGI includes capital gains, so that's all you can get in total with both tweaks). Maybe another $10B or so since the taxes could come off gross income rather than adjusted gross.
Anyway, it's certainly not impossible to make the numbers work, especially if the economy doesn't go into a Trump-induced tailspin.
The Baby Boomers will be dying off at a hefty rate by 2030. It includes people born between 1946-1964, which will mean they will be between 64-84.
Generation X is quite a bit smaller than the Millennial generation, so SS should start running a surplus again by the 2040s. There are plenty of things that can be done to bridge the 10 year gap. But reverting to pay-as-you-go for a short time isn't a terrible outcome.
Likely will not happen while the Boomers are still alive because as a generation they're huge and they vote, but I can't imagine that today's Millennial generation is going to keep Social Security around for us relatively few Gen-Xers when we need it.
You need to change that attitude or your complacency will allow politicians to take it from you. The fact is you pay ~16% of your paycheck into social security and medicare, it is designed to be like a pension. It is not an entitlement, it's your money.
This is the best attitude I have seen in the whole thread. Social Security is an authoritarian play, or a power play.
Another way to look at it: if every single US tax payer had to manually pay their taxes, instead of them being auto-drawn from their respective W2 employer, you'd see more people asking the question "who's money is this really?"
This is why the fair tax or similar plans will never pass. The power to silently tax people is too good for big brother.
A more charitable view would be that social security is an attempt to provide a minimum standard of living for all seniors and the disabled. How do you propose that society cares for these people, particularly the disabled, if it's not done at a societal level?
Retirement also benefits the young/middle aged by ensuring jobs open up.
It should not be the governments job to manage retirement funds. That's why I said it's a power play, because if you made social security an open market with competition, you would probably see more positive support and results.
Please, don't tell me about my duties as a son, I've supported two family members through cancer, simultaneously. If/when it comes to it, he will be taken care of by me & siblings. How about the millions? who don't have children able to care for them? The streets is it? More welfare? I'd love to hear about a more sustainable option that doesn't include 'probably'.
Robbing Peter to pay Paul isn't sustainable [1], but that's what social security is. Social security is not a guaranteed solution. If we have to raise taxes or collect additional taxes, that makes it a ponzi scheme. Cutting benefits is similar: you either lose the money now or later.
Discussion forums such as this are one of our few hopes for generating s sustainable solution. Just because a solution doesn't currently exist doesn't mean we should be complacent with how things are.
[1]: http://money.cnn.com/2016/06/22/pf/social-security-medicare/
This is kicking the can down the road.
The population of any closed system, whether country, continent, or even planet, cannot grow indefinitely. And any system that expects indefinite growth to sustain itself will invariably become exhausted when rate out exceeds rate in for a sufficient duration.
Immigration alone may be a stopgap, but it is by no means a solution.
IANAEconomist.
It should not be the governments job to manage retirement funds.
Sez you. I'd like to outsource that job to them as private financial advisers often seem to put their own interests ahead of their clients', and I really don't know how to evaluate competing investment vehicles except int he most shallow way. I'd really like to delegate that job to someone, and I'd really like to join up with enough other people to feel the same way to delegate it to the same entity and enjoy the resultant economies of scale.
If enough people decide they want government to perform some function on their behalf, and it seems like a majority of people over several generations of western democracy in multiple countries do want the government to run a pension system, then it damn well is the government's job.
If instead there was a list that said, "Here is the amount of money that went to each of the major federal departments", maybe people would say, "really? that's cheap!" or "really? we spend that much on defense???" Who knows, but they'd be better informed.
As I recall to a rough first approximation only about 1/5 of government spending isn't Defense, Social Security, Medicare, Medicaid. That's the first thing to keep in mind when talking about deficits, taxation and priorities.
Personally every time I look at my pay statement the taxes sting badly. However, I think the more interesting discussion to have is, "what are we spending money on?"
As a self-employed libertarian I think the same thing :O
I think most of the services that are offered through the government are noble or necessary..I disagree that it should be the government that runs many of them.
Yes...we could call it a 'budget.'
If the majority of the workforce works as independent contractors, the government will not be able to use employers to collect ("withhold") taxes automatically from workers' paychecks. The IRS will need to wait for the contractors to explicitly pay their own taxes.
I suspect this will have a big impact on cash flow for incoming taxes. Also, it could give more power to the people should they ever choose to execute a tax boycott.
You can even run a self-managed superannuation fund and make all the investment choices yourself if you want but people rarely do better than a standard fund.
My grandmother is sitting in a multi million dollar inner suburb property and claiming a pension. It seems harsh but I think she should be required to get her pension via the Pension Loans Scheme: https://www.humanservices.gov.au/customer/services/centrelin...
That's not how social security works. Every dollar you pay in flies out to fund promises made in years past. "Your" social security money needs to be earned by our children.
You're describing a distinction without a difference, as other parts of the USG have already spent the surplus.
The US government will be in debt for the rest of its existence and the balance of that debt will likely increase every year. The Federal Reserve openly targets a 3% inflation rate and that inflation is going to come from ye olde printing press.
IMHO, better this inflation come in the form of SS payments than payouts to military contractors.
I'm coming from the perspective that there is neither a short term nor long term plan to address the inevitable default of the US government, decades hence. We WILL either default, monetize, or sell federal land. Math won't stop working in my lifetime.
Yes, but that is $25B out of total receipts of $884B[0]. For every $1.00 paid in over $.97 was paid back out to beneficiaries. In 2015 it was $.975 and 2016 will probably be higher still.
According to this page[1] the trust fund will be depleted by 2035. I know that is a projection and things can change, but to say there is no room for concern borders on hubris.
[0] https://www.ssa.gov/oact/STATS/table4a3.html [1] https://www.ssa.gov/oact/trsum/
Which, as you can see from comments upthread, is -- even though I personally don't think it's true -- one of the arguments that people regularly make in favor of SS when they feel it's under threat ("it's your money", "you paid into it and you should get your money out", etc.). Positioning it in this way makes voters feel like they have a personal investment in the system that they need to protect, which is clever because people generally hate having something taken away, much more than they dislike not receiving something (even if the amounts are the same).
When it becomes a straightforward tax, then it'll be attacked like every other tax during the periodic political pendulum-swings in favor of lower taxes and fewer government programs in general. And by removing the contribution cap, it'll suddenly have a lot of very wealthy enemies who have a significant vested interest in making sure it goes away. I would not expect it to last long under those conditions.
So bloody what? I've got no problem taking from the rich to fund a basic income to keep the elderly off cat-food. I've got parents and a grandmother left who need Social Security.
>When it becomes a straightforward tax, then it'll be attacked like every other tax during the periodic political pendulum-swings in favor of lower taxes and fewer government programs in general.
It already is attacked during regular political pendulum swings. Both Clinton and Bush 2 tried to privatize Social Security.
That shows a grave misunderstanding of both proposed solutions to the SA insolvency problem.
It would have been called mandatory social savings if that was its intended purpose. It's not. It never was. It's social security.
>one of the arguments that people regularly make in favor of SS when they feel it's under threat: "it's your money"
This is actually one of the arguments used to try and justify privatizing it and handing over the money to Wall Street to invest instead (Bush tried to do exactly this and Obama made noises about it).
>And by removing the contribution cap, it'll suddenly have a lot of very wealthy enemies
It ALREADY has a lot of very wealthy enemies who are trying to privatize it. One of the most prominent is Stan Druckenmiller, who is fairly open about inciting intergenerational warfare - telling "millenials" that "boomers" are the cause of their problems and that the "fix" is privatizing social security and austerity:
http://www.nakedcapitalism.com/2013/10/who-should-young-peop...
http://www.nakedcapitalism.com/2016/05/the-7-biggest-myths-a...
Social security's 2030 "insolvency" was a political decision not an economic inevitability.
http://www.politifact.com/florida/statements/2014/sep/24/car...
Which is exactly what is happening now with the lopsided ratio of retirees and new incoming workers.
They seem to have marked the assertion as "False" based off of really semantic technicalities
Read up on it, it's a lot more interesting than the "it's going broke!!" stuff makes it out to be.
That future probably wasn't terribly obvious to the politicians who created them (given that most public pension plans were created roughly between World War I and a bit after World War II).
In fact, based on some of the literature of the time (eg The Population Bomb -- https://en.wikipedia.org/wiki/The_Population_Bomb -- etc.) I'd say it's more like people were fearing the reverse.
http://www.pewresearch.org/fact-tank/2016/04/25/millennials-...
This is terrible legalistic reasoning. It essentially says the government cannot create a Ponzi scheme because Ponzi schemes are by definition illegal and governments define what is legal.
Better reasoning would incorporate the government's indirect control of inflation, direct control of federal wages and ability to "restructure" social security benefits and taxes, as well as the fact that the economy grows in real terms. This reasoning is more complex, but it is behind why investing in a start-up that plans to go public isn't a Ponzi scheme.
-There are no promises of huge returns
-The inner workings of the program are public knowledge
-There is no fundamental demographic or mathematical reason the system (a pretty straight-ahead social insurance program involving a certain amount of wealth transfer) should ever become insolvent, assuming the political will exists to keep it running.
Seriously, just google "is social security a pyramid scheme".
You'll find a LOT of breathless articles from personal blogs and sites like World Net Daily calling it a pyramid scheme.
You'll also find a lot of, for lack of a better way to put it, content of actual substance that describes how it's not a pyramid scheme, but a sustainable government program that's worked out just fine for decades (with regular adjustments, as all human endeavors need).
A ponzi scheme is quite different. You pretend to invest an initial investor's money. The returns to that investor are paid out of money coming in from later investors.
Social security works in this way. The money paid into social security is not invested at all. The returns from social security (money going out to current retirees) come entirely from new investments (money going in from current workers). This is the basic definition of a ponzi scheme. It is a sustainable ponzi scheme so long as taxes collected from current workers exceed benefits paid out to current retirees. The designers of this system did not count on two things: (a) ever increasing life expectancy and (b) the baby boom. The former has increased the length of time each person collects benefits and the latter has resulted in a demographic bulge that is now hitting its retirement years.
Thank you Mr. Bismarck![0]
[0] https://en.wikipedia.org/wiki/Otto_von_Bismarck#Old_Age_and_...
I understand the comparison to Ponzi schemes, but I consider these comparisons rather hyperbolic. The intent of a pay-as-you-go pension never is fraud. There are some definite problems with pay-as-you-go systems, especially now due to the fertility decline in the West, but the issues do not stem from pure malice.
A ponzi scheme has an intent to defraud. That's why they're illegal.
Social security has no intent to defraud. It's not "legal cause the gubmint says so," it's legal because it's not a fraudulent money-making scheme designed to enrich the leader.
Social Security and other pay-as-you-go schemes aim to reduce poverty, especially elderly poverty. By this measure, it has succeeded quite well (http://www.nber.org/bah/summer04/w10466.html), and the probable reason pay as you go was chosen I imagine was to provide immediate benefit (recall this scheme was launched during the Great Depression). I would consider it radical (and would want one to provide considerable justification) if one wanted to ditch Social Security entirely.
A better debate in my mind, of course, would be whether to phase Social Security into a fully funded model versus pay-as-you-go model. I can buy that kind of argument, a fully funded retirement scheme is more secure than a PAYGO type.
But even as it stands, the current Social Security gap doesn't sound like a complete disaster. Part of it actually is because Social Security is not completely pay as you go -- Congress raised payroll taxes in 1983 in part to cover this gap (http://www.pewresearch.org/fact-tank/2015/08/18/5-facts-abou...). Part of it is because we have some variables to play with -- raising the retirement age or raising the payroll tax cap, for instance. Medicare actually sounds like its in worse shape at this moment.
I think it is more likely that the attempt to try and cover Social Security shortfalls by importing labor will backfire, and that the new citizens will vote against paying more to cover retirement expenses for Boomers and Gen-X.
Because they'd like a similar system to take care of them in their old age, same as if they'd been born here? Why are you adding race into it as if the economic factor weren't the primary driver? If participants in the system have access to the benefits, in the future, why should they care about ethnic disparities between the current workforce and the cohort of retired people?
Your argument is that people of differing ethnic identity cam't have or perceive common or mutual economic interests.
And what a surprise - rates today are much lower, yet tax evasion continues to be a problem.
And what cash will they give to the SSA in exchange for those bonds? Where will that come from?
The same place cash comes from now when the Fed buys t-bonds in order to manipulate the interest rate: nowhere. The Federal Reserve has the authority to create money to redeem any US government security.
We're all aware. Whether the money is taken from the next generation or from the federal reserve is irrelevant. The point is that it's not yours until the government takes it from them and gives it to you.
The federal reserve can create new US dollars, and it can buy US Treasuries - but this is not the same as redeeming them. The fed becomes just another bondholder that needs paying by the treasury dept. The money goes to the person who previously held the bond as payment for the bond.
Also there is about $20 trillion outstanding public debt, and only $3.3 trillion in the whole money supply, so there is a big gap in money creation needed to pay off the debt. Would tank the currency and kill the economy (think hyperinflation).
https://www.treasurydirect.gov/NP/debt/current
http://www.tradingeconomics.com/united-states/money-supply-m...
The Fed does not get paid. It doesn't need to get paid, since the Federal Reserve by law has infinite liquidity.
https://www.quora.com/What-happens-to-all-the-bonds-that-the...
I really don't like the glibness of that sentiment, even if the idea is fine. As a voter or constituent, yeah, fight for Social Security, try to maintain it.
But as an investor? Recognize that your personal view has approximately no impact on whether Social Security exists unless you run for high office or devote your life to the topic. Make your best guess and save accordingly.
People shouldn't make their individual choices around the political views they support, because most individuals have virtually no influence on national outcomes.
No, of course the answer isn't to "vote really hard", but that phrasing is simply rhetoric built to disparage the poster you're responding to. Everyone has only one vote. But the people who make noise, the people who are politically active, gain power far beyond their single vote. And get enough of them together -- it doesn't necessarily take that many -- and you can orchestrate some real change.
So now our livelihood has resorted to a shouting match? Thanks but no thanks.
Voting is like praying, where if you pray with all your passion then god might listen. But there's also the saying pray for what you want, work for what you need.
Your not wanting to participate in this understandable but if you don't then you have no guarantee of retaining what you have worked for anyway.
People wonder why bitcoin is rising. It's because their competition is total crap. Government issued security is no security at all.
The politicians are itching to hand the pot of money over to Wall Street who will extract fees from it.
i'd put my vanguard expense ratios up against the ssa's effective expense ratios any day of the week.
With effort you could have run it through Vanguard but most people are confused by investing and would have ended up being robbed in broad daylight by borderline criminal "asset managers."
That's quite dismissive of his statement, and uncalled for. It's a pragmatic statement: politics aside, don't budget your retirement funds as if you'll still get the benefits promised to you as of today. Cram money in that 401K as if you won't be getting a dime of your money back from your SS contributions.
What you want to talk about is a different, and mostly unrelated, to what parent is talking about. Doesn't make it unimportant, just not relevant.
Not quite. This is actually split between the employee and the employer. With each contributing 6.2%.
https://www.ssa.gov/pubs/EN-05-10022.pdf
Also why are you admonishing the OP? He has every right to pessimistic about this current state of social security.
In practice the mechanism is that every employer figures it in to their offers, such that every offer you ever receive is ~6.2% lower than it would be if SS didn't exist.
[EDIT] With health care costs being fixed at crazy high amounts (in the US at least.)
Every offer is up to 6.2% lower. I have a business with employees but their pay is sufficiently low (compared to the revenue of the business; their pay is above market for the jobs they do) that SS does not enter into our calculations. If the employer portion of SS was eliminated tomorrow we would not give anyone a 6.2% raise, nor would future employees get offers 6.2% greater.
I'm sure somewhere there is an employee whose salary is a big piece of a business's income and they would have gotten a little more money had that tax not been there. But I'm pretty sure that's the exception rather than the rule, if for no other reason than SS taxes are capped so you reach a point where more salary does not equal more SS tax.
Indeed, social security isn't taxed on anything above 118K.
Tax cuts go straight into the employer's pocket, as the employer will happily tell you to your face:
https://theintercept.com/2017/01/05/corporations-prepare-to-...
Sure, it's theoretically possible that the employer could pass all tax cuts to its suppliers. McDonald's could call up and offer to pay more for frozen hamburgers and fries. Walmart could tell its Chinese shoe makers that it plans to pay double for all future pairs, just because. But, why would that happen as opposed to rewarding the shareholders?
The government strongly encourages belief in the myth that Social Security is something other than a welfare tax with no implied obligation to the taxpayer because that notion makes the tax much more palatable than the reality.
The other one nobody seems to want to talk about or understand is Medicaid. People think they are getting health insurance (or whatever they want to call it) when, in reality, they are accumulating debt with the government and a debt most states are required, by law, to collect.
This is one of the huge problems (outside of costs and lies) I have with Obamacare. The claim is that millions of people now have insurance when, in reality, millions of people were shoved into Medicaid and are accumulating a non-trivial financial obligation with the government. To say this is dishonest is probably cutting it short.
https://www.medicaid.gov/medicaid/eligibility/estate-recover...
It's true that Medicaid will seek reimbursement for procedures that should not have been covered, but that's not different much different than what happens when a private insurance company refuses to pay a benefit. The hospital is free to pursue the person directly for the balance they owe.
It's also worth noting that, in most of the US, the alternative to medicaid was/is filial support laws, in which the nursing home could take the assets of the children of the patients in their care.
This is very, very far removed from the idea of health insurance. Your property becomes the property of the government. With real health insurance nobody places a lien on your home for medical services rendered.
There is no asset test, and there is no paying back benefits if you are under 65 when you took them.
Medicaid expansion is quite literally the best insurance that money can't buy.
In CA, for example, a family of 4 earning less than $33,500 gets MediCal [1]. If you just want free coverage for the kids, you can earn $64,600. [2]
[1] - http://www.dhcs.ca.gov/services/medi-cal/Pages/DoYouQualifyF...
[2] - http://hbex.coveredca.com/toolkit/renewal-toolkit/downloads/...
A progressive tax system should not be paired with a regressive subsidy as massive as ACA. It adds up to nearly a 100% tax on the first $60,000 of income for unhealthy / chronically ill families, and a 60% effective tax rate for healthy ones.
Please read the info in the link I provided. It's from the Medicaid website itself so no bias or fabrication at all.
Medicaid is not health insurance. It provides access to health services but the patient is on the hook for the cost of those services. In certain states things are a bit different. With some 64 million people enrolled in Medicaid it is probably safe to say that tens of millions of people are accumulating debt with the government.
My point of contention is that almost nobody knows this because it is swept under the rug for the political gains afforded by saying that millions more have "health insurance" when, in fact, they don't.
It also really bothers me that a good number of those in the program are poor and probably not very educated and don't realize they are signing over their estate to the government.
This really bugs me. We need to provide health services to those who cannot afford the cost and we need to do so without making an underhanded grab for what little they may possess.
This, to me, is nothing less than fraud. A private enterprise would be destroyed by lawsuits and people would end-up in jail if they had such provisions in their contracts and they were not fully disclosed ad-nauseum as a condition for entering into that contract.
Not sure why we accept this from government other than, per my findings, almost nobody knows how Medicaid actually works.
If I wanted government to plan my life I would have lived in Cuba not in USA.
SS is not quite a pension fund, but it is also certainly _not_ a "tax on income like any other". The funds taken all go to directly to the SSA fund, they aren't available for general use like basic income tax is. For another difference, it is payroll tax, so if you don't have income from wages (e.g., all income is through interest and dividends) there is no SS tax at all.
Importantly, although it's possible that the fund could become exhausted if payments aren't reduced (as baby boomers age and the elderly grow to far outnumber the young), the size of payments would be reduced far before that point. Also, since there will always be at least some young people paying into SS, even if the fund itself was basically exhausted there would still be a continuous stream of incoming payments to distribute out to the elderly, just much reduced from the current size of outgoing payments.
Except the facts don't match up with this.
It is not designed to be like a pension. It is the workers of today paying for the retirees of today, on the assumption that when you retire there will be workers to pay for you. There is no guarantee, and there is no fallback. The money is spent just as soon as it's taken from you.
It is an entitlement because I'm paying for my parents and my peers' parents. If it's around when I retire, I will be spending other people's hard-earned money, not my own. I mean the Wikipedia "definition" of entitle is "a government program guaranteeing access to some benefit by members of a specific group" which is exactly what SS is.
Isn't that how pensions have traditionally worked too?
Defined benefit pensions are usually used for government roles and some large unions, where the unions can get large increases in total employee benefits without having the true cost show up on the organization's books. The union and employer generally agree to use unrealistic numbers for returns on investment (>=8%/yr).
And like every pyramid scheme, if the bottom becomes too small it will fail spectacularly.
I think you'd be on higher moral ground if Social Security was on sound footing from an actuarial basis, the US had balanced budgets for the last 30+ years and had invested heavily in the next generation (here or abroad) through education, infrastructure and social capital. Writing an IOU from the general fund to the Social Security "Trust" fund is no more legitimate than "saving" for retirement by funding an IRA with a credit card cash advance.
Money is just an implied promise with future workers. As the last person on planet earth I could have stacks of hundred dollar bills and it won't get me a sandwich.
If you look at US demographics the entire notion of retirement is at risk unless we assume some combination of massive productivity boosts, massive immigration and/or massive, sustained trade deficits or a next generation of workers that is willing to forgo children and embrace minimalism and self sacrifice that would make a monk look like a hedonist.
Otherwise the future will consist of lower standard of living for the vast majority of seniors; working longer; and some combination of lower asset prices and higher long term interest rates.
I can do zilch. Voting against SS would mean labeling yourself some kind of moron who is not paying his "fair share" senile libertarian.
I think the only practical way is to think of this as some kind of ransom money we are paying to mafia not get into jail at this moment. The SS when I get old would mean nothing.
I mean I want the money to be there and will fight tooth and nail to ensure it, but damn if my control over it isn't limited. We still need to look out for ourselves.
I mean, if we live in a society, for instance, three times richer (per capita) than today, it would be very strange that old people will have a hard time.
In the other hand, if it's a poorer society, even people with savings are probably to have a hard retirement.
Inequality, it seems, is rising over time.
The inequality thing is far from unavoidable. In a democracy, at least, a society perceived as more fair for the majority should be attainable.
This is a nice thought in theory, but not really true as long as campaigns themselves are funded by private capital. And any attempt to change that leads to private capital (cough Koch brothers cough) funding candidates to stop it.
I'm not super optimistic this will change without some kind of dramatic event (revolution, war, SS being defunded and lots of old people starve, etc.).
As long as funding correlates strongly with winning, or at least appears to correlate strongly with winning. If that ever goes away, legislators are going to look at lobbyists with a more skeptical eye.
There are far too many people who really can't save for retirement due to low wages for a significant part of the population. We aren't going to let these people live in abject poverty, and they aren't going to have any money to cough up to support themselves.
It's the same for Medicare. Paul Ryan wants a premium support system where seniors receive part of the cost of their insurance premium from the government and pay the rest on their own. For many people, the will absolutely not have the money to spend on this. If they can't afford it, they will go to the emergency room and receive care (they legally can't turn you away) once their condition becomes severe enough. We can either force the hospitals to care for these people (and jack up the prices for the rest of us to compensate) or we can have a sane system where we all pay a reasonable price and split the burden over a larger population.
I'm not arguing for some European style social welfare system. I think we ought to have a system that comports with the laws and norms we have in place now (norms/laws I understand: people can go to the ER and get care regardless of their ability to pay, elderly folks do not live in poverty).
The history of the US in the past several decades suggests that yes, we absolutely are going to let these people live in abject poverty. Unfortunately.
That sacred cow needs to be slaughtered, the sooner the better, and its flesh distributed.
So if Social Security (and don't forget Medicare it's part of the same FICA taxation) were to go away, it definitely means some nasty calamity happened first, like Yellowstone or a meteor just blew up half the country, in which case we've got other problems.
The thing to be concerned about is privatizing it. That's a con game to dump a shit ton of money into the stock market, with the ensuing distortion inflating the stock prices of the very wealthy. It's about helping them. It doesn't do squat to help the people who will depend on Social Security. They will not make more money. And just like with getting rid of it, there's no way it's tenable to tolerate the inevitable short term loss of asset value with recessions. We can't have retirees experiencing 5% let alone 20% loss of income for 1 month let alone 1 year let alone 5-8 years for a recovery. Old people would sooner pick up axes and make you shoot them, because shooting your grandma in the head is kinder than this Republican privatization of Social Security nonsense. Grandma is not going to go back to dumpster diving and living under a bridge again like the 1930's.
And you've got the same financial concern with an unbalanced 401K - that could leave you in a lurch the same way a privatized Social Security plan can. So take the risks in that 401k while you're young, but at some point probably in your 50's, you'll want to start moving it to inflation indexed treasuries.
Young people right now are more likely to be savers, because of 2007/2008. They saw what it did to the unprepared, so they know that sort of thing can happen. Gen X and the Baby Boomers didn't have anything nearly that scary.
I guess I'm afraid of a slow rollout. ie. everyone who's 40 and older gets normal social security, if you're ~35 now, you'll have to wait a few years more. It's exactly the kind of "we got ours" BS that the boomers are so known for.
Even if that weren't true, the idea that we have to keep putting the age up is predicated upon productivity remaining static.
Productivity has gone up consistently and will likely continue to go up.
Curiously some people are breathlessly optimistic about automation when it's a convenient scapegoat for high unemployment but immediately lose all faith in it when it comes to social security projections. These people probably don't have our best interests at heart.
The boomers are just recipients of an anomalous post-war economic order that heavily benefitted the US for a couple decades.
The average 60-year old had no role in pulling the rug out from millennials.
The Boomers were the beneficiaries of post-war prosperity, but they also decided to steal money from the future to finance their generational party/gravy train. The Greatests gave them a gift of some free money, but then they also decided to smash open their own childrens' and grandchildrens' piggy banks and fill them full of promissory notes. Except they aren't IOUs that are promises from the parents to pay their kids back. They are UOMEs that obligate the kids to pay their parents more money, if they ever actually get some.
I'm biased by anecdote, because I'm old enough to have seen typical (late) Boomer lifestyles and compare them to typical Gen X lifestyles in the same age range. In other words, I'm old enough now to compare my own life with that of my parents when they were the age I am now.
I hear this a lot, but what exactly do you mean?
The real reason we don't have the same great lifestyles our (let's be honest - mostly white, male) parents and grandparents did is because no one can get a good paying factory job right out of high school anymore - an inevitable, global, structural change that no one could've prevented.
If you're into documentaries, I'd really recommend some of Adam Curtis's stuff on the topic; he covers the topics much more completely and eloquently than I.
https://en.wikipedia.org/wiki/The_Trap_(TV_series)
https://en.wikipedia.org/wiki/All_Watched_Over_by_Machines_o...
What I mean is that as Boomers took control of government and business from the previous generation, they overwhelmingly preferred current consumption over future growth. They preferred to benefit their own generation rather than attempt to improve the lot of future generations. And in many cases, they took on a lot of public debt, spent it for private benefit, and mailed the bill ahead to the year 2030. Then they forgot to build the businesses, infrastructure, and capital investments that are absolutely required to be able to pay not just the interest, but the principal, too.
So now we get events like interstate highway bridges collapsing into the Mississippi River. But we can't have that, so instead how about we sell an interstate highway bridge to a private company and let them collect tolls on it? Then maintenance is their problem, right? Oh, and hey, we're driving cities into bankruptcy with the benefits we voted to ourselves, so let's make sure that rather than avoid the bankruptcy by stepping back some of our own foolish economic choices, we instead focus our efforts on making sure they can't discharge those future obligations when the bankruptcy happens. And when retirement benefits finally exceed the productive capacity of all the working people in the nation, the Boomers will mostly be dead already, and the Gen-Xers will be the ones stuck scavenging meals from the garbage while dodging the roving bands of Gen-Z cannibal marauders in their spiky, Mad-Max-style wasteland buggies.
It's all just exactly what can go wrong when you have too much democratic leverage in your republic. The Boomers had just enough of a numeric advantage over other generational voting blocs that they got a disproportionately large share of representation. Then they just voted themselves all the cookies out of the cookie jar.
The risk to a stable society (the purpose of Social Security, which is part of its name) is essentially zero by raising the cap.
The risk is substantial by either reducing benefits or privatizing. And I know this because the instant the conversation goes down this road the contra agent devolves to this:
I will pick a pocket first, and shoot grandma in the head second, before this nonsense of reducing benefits or privatization. Benefit reduction, a risk of which is endemic to privatization (grandma might become rich, or she might get kicked out of her apartment, who is to say except the glory of the free market), is objectively more unethical than either picking pockets or shooting old people.
I max out my IRA each year, but my retirement plan is to basically work until I can't, then hop on an iceberg.
IMHO, between Americans being drastically underprepared for retirement and mass job automation, the country is on the cusp of a devastatingly colossal social disaster.
Aren't there giant companies that employ low wage workers (e.g. McDonalds and Starbucks) that might reasonably offer 401ks to all employees, even the minimum wage ones?
Ignoring the question if a minimum wage person can realistically afford to save, or course.
I'm assuming that SS wont be around but if it is, great! Unfortunately, I have a feeling Republicans are really going to fuck people my age (mid 20's) over with some sort of slow phase-out so I'm also hedging my bet.
I do think that privatizing SS & medicare will give markets a one time boost & generally help those who are 'better vested'.
But you assume your 401k will retain its favorable tax treatment?
Why? Because it was promised, implictly, when you paid into it?
- Employee portion: $18,000 that you can put as an employee.
- Employer portion: Up to 25% of W-2 wages.
The total of the 2 above cannot exceed 54K for 2017. One more thing, you can make contributions for employer portion until the calendar year end which is March. So even for 2016, you can still make the employer portion if you were enrolled in a self employed 401K. Another thing is that the employer portion can be shown as an expense of your business as well.
If you use Fidelity or Vanguard, stick most of it in an index fund and you have the S&P 500 returns by doing nothing.
I highly recommend any self employed to read this IRS publication.
[0] https://www.irs.gov/retirement-plans/one-participant-401k-pl...
It feels like everyone grew up hearing the same thing (people are poor planners, people go broke in retirement) and now as adults have vowed that will never be them.
The problem is that now everyone thinks this way - index funds are on the rise, people are saving into their 401k, I can't help but think that I should be zagging here when everyone is zigging. Unfortunately, however, I can't figure out what that other thing should be.
The first generation of people who were expected to save privately are yet to retire. 29% of 55 and older have ZERO savings, and the average of those who do is $104k, which is a $310/mo annuity (GAO, 2015). There is a generational crisis brewing.
What do you think people will value in the next 10, 20, 50 years?
REITs, small-cap funds, international stocks, and perhaps commodities seem like the best choices if you're looking to diversify. The reality is if everyone's investment behavior precipitates a large collapse, pretty much no sane investment strategy is going to do well. Diversify, hedge your bets, and just stop worrying about it. That's the conclusion I've come to, anyway.
My biggest fear is that in 30-40 years the US government and/or 401k funds are so poorly run that they tax 50/60/70% of the income (withdrawals) out of the 401k to sustain theirselves. Lots of people tell me "that won't happen" but when I study history, I realize that the only people who think that are ones who have never lived through a major war. Wars = higher taxes. To me, putting money in a 401k is trusting that everything will be ok for a long time to come, and it's just hard to justify that the way history books show the cycles of war.
It scares me so much that I'd rather pay the taxes now, and invest as I please.
Edit: as omouse mentioned, that is my other fear. That through technology and healthcare innovations, as well as the government recognizing the need to "adjusting" the retirement age, how do I know I will get my 401k at 65? What if it is 85? That's too risky for me :/
Canada's RRSPs are actually a much better system. They are straight up tax deferral. You can put money into your RRSP at any age up to 70 so long as you have contribution room (ie: you're employed). Later, if you wind up unemployed and therefore in a lower tax bracket than when you put money in, you can take the money out.
If the Canadian government instituted some sort of tax on RRSPs, they wouldn't be able to act fast enough to prevent people from massively draining their RRSPs before new rules took effect.
In the US, you have to wait until you are 59.5, or you begin collecting periodic payments (ie: as if it were a pension), or you pay a 10% penalty.
I also have this bad feeling Roth's will face some type of tax / fee in the future :/
This doesn't change the fact that the rules may be changed at some point, but given the ridiculously low limits on 401k contributions anyway you might as well put some money in one. Worst case scenario is you wind up paying taxes on t anyway, but then again you might not.
No matter how you slice it you won't wind up paying more taxes than you will if you pay them now and invest without any tax sheltering.
I'm not interested in Roth for arguments sake.
If you assume that, and you've paid off your mortgage by the time you retire, and aren't planning to blow lots of money on air travel and hotels, then probably the rate at which you withdraw from your 401k will place you in one of those low-rate, bottom brackets.
If government is desperate enough to tax retirement funds at 2x the previous rates, they're desperate enough to tax everything at higher rates, so "investing as you please" won't get you anywhere better.
> That's too risky for me
If technology and healthcare innovations raise the healthy life expectancy by 20 years, why would that be too risky for you? Is it because you have non-standard medical problems?
Those three legs consisting of pension, social security and savings when it was introduced.
For people in the private sector that is now a two-legged stool as pensions went the way of the evening news paper and indemnity health care plans.
Its interesting to note that law makers in Washington DC all have pensions and indemnity health care plans. Only the best for them. I've often wondered at how different things would be if they were subject to the same health care and retirement options as the rest of the population.
http://www.investopedia.com/ask/answers/09/three-legged-stoo...
The way your comment is written, it implies that 401(k)s are necessarily pre-tax and IRAs are necessarily post-tax. Both 401(k)s and IRAs come in Traditional and Roth forms, so you could also use pre-tax money for contributing to your IRA, and post-tax money for contributing to your 401(k), or any combination thereof.
You can also split contributions - ie, contribute to all four accounts in the same year - as long as your total contributions are within the limits.
There are lots of situations where you would want to lower your tax burden now instead of go for the Roth.
Note that you can also have a Roth 401k or a traditional IRA.
The Roth also lets you pull out contributions later without penalty, which is a nice worry-free safety net in case the emergency fund runs out.
I know this doesn't affect many, but for the high-paid tech crowd, these limits right around the point in your career where you want to be pumping in money.
The thing I don't like about Roth is that you're contributing with post-tax money during your prime working years--the time when your taxes are probably as high as they will ever be. Especially true as a tech worker where your salary plateaus in your 20s. I'd rather save pre-tax now, and then pay taxes later when I'm 60 and back in the lowest tax bracket.
1: http://www.payscale.com/research/US/Job=Software_Engineer/Sa...
2: https://www.glassdoor.com/Salaries/san-francisco-software-en...
EDIT: Specify vested RSUs per reply below.
It doesn't include RSUs while they're only in paper - they get counted when you actually sell the stock and can spend the money.
You have a yearly contribution limit of $5500 and you're correct in that you would do this process every year.
[1] http://whitecoatinvestor.com/the-proper-ratio-for-retirement... [2] https://www.bogleheads.org/
What about Traditional IRAs and Roth 401ks?
Tax deferral strategy (Roth v Traditional) is orthogonal to the plan type (IRA v 401k).
A good recent discussion of this: http://brooklyninvestor.blogspot.com/2016/11/bonds-down-stoc...
http://qvmgroup.com/invest/2013/06/22/sp-500-pes-versus-10-y...
As long as people don't panic sell in the next crash, they should be able to ride it out and break even in a decade or two. Unless we end up like Japan, that is.
What sense does this make?
No. If you think this is how social security works then you have been tricked.
Social Security is a welfare program for old people.
A better analogy is if you paid for free lunches for kids, then you have a kid and also become poor, but they cancel the program, you'd feel ripped off.
The reason it doesn't intuitively feel the same way (even though it is) is because middle class people have a much higher chance of ever becoming old than ever becoming poor.
Also, auto-enrolling people into 401K sounds kinda like... ya know... social security.
Except that you have control over how your 401(k) gets allocated, along with additional ways to access those funds early (with a penalty) in case of emergencies.
Furthermore, 401(k)s are explicitly not comingled, whereas the entire premise of Social Security is that the funds are comingled.
But yes, I understand your point.
Companies auto enroll people into 401(k) programs because of participation requirements. For "highly paid employees" (i.e. executives) to be allowed to contribute to a 401(k), there requires a minimum level of participation from the rest of the workforce at the company. The easiest way to do so is to auto enroll people on day one.
Highly Compensated Employees are not just executives. Anybody who makes more than $115,000/year qualifies, which applies to a lot of engineers. Also, anybody who controls more than 5% of the business qualifies, whether or not they are an executive, and regardless of their salary.
Even if that was the rhetoric used when creating the rule, I'd be very skeptical of assuming that was the case, rather than it being motivated by a desire to increase tax revenue, as a lot of these tax rules are designed to do. $115,000 is a really low threshold to use to define "executive" - many blue-collar workers make far more than that.
(And furthermore, the rule still does not prohibit highly-compensated employees from contributing; it just requires them to pay taxes on the excess of the permitted amount.)
Quantify "many".
$115K/year comes out to an hourly rate of $57.5 (assuming 2K hours). Even factoring in overtime (1.5x) or double time (2x), I doubt a significant percentage of people make that much at a blue collar job.
Also, wouldn't this rule lower revenue because more workers end up contributing? (Assuming that executives would adjust their plans rather than pay extra taxes.)
For instance I imagine Apple's automatic 401k enrollment is in part because without the participation of retail employees, their engineers in Cupertino would be caught in this.
The Problem Safe Harbor 401(k)s Are Designed to Solve
Before you try to understand what a safe harbor 401(k) is, you should know why someone would want one. Most 401(k) plans face an annual non-discrimination test. The IRS checks to see if a highly compensated employee or business owner is maxing out 401(k) contributions for the year, while the rest of the employees lag in their savings.
The IRS wants to see that all employees are taking advantage of the retirement plan, not just those with the high paying jobs. So it tests the plan to find out if the average contributions of highly compensated employees (those who earned at least $120,000 in 2016 or own more than a 5 percent stake in the business) do not exceed the average contributions of everyone else by more than 2 percent.
If you're a business owner and your 401(k) has low adoption rates or saving rates among rank-and-file employees, it may raise a flag for the IRS. According to Plan Sponsor Council of America (a lobbying business for the retirement planning industry), most businesses pass the test, but around 40 percent claim to have reported refunding or restricting plan contributions to do so.
That's right, refunding contributions! The IRS can actually reject a retirement plan contribution that it feels is excessive.
https://www.thebalance.com/what-is-a-safe-harbor-401-k-28942...
The argument boils down to that you're going to have a default anyway, even if it's zero. So why not make the default a value that's is at least closer to the optimum.
Personally, I've also got some outside IRAs and mutual funds as well; better to not have all the eggs in one basket, I figure.
It's government rules that create that reality.
On the basis that technology will have changed the economic system (for good or worse) in such fundamental ways so we either have greatly expanded life span, "free" handouts such as basic income, or major financial busts that have wiped out most pension savers.
When I joined my current company I was given an option to join the pension (maybe the last year it was offered to new people??). I didn't take it for a couple reasons:
1. figured I probably wouldn't be here for 30 years (!!!!)
2. Stories of rampant pension mismanagement scare me off. (Reasonably sure it wouldn't happen with my employer, but...)My first software job was with a pensions administration firm, where I had to take numerous courses on the economics behind pensions. Boring stuff, but the one thing that the teachers drilled into us over and over was that, for my cohort (currently <30yo), pensions would be a waste of our money - with the exception of the few "gold-plated" ones still offered by certain employers.
If anyone's interested, I have instead chosen to aim for the so-called Lean-FIRE, and my "investment", if you can call it that, is in fertile land in a stable country and extensive experience in permaculture. I'm about 5 years away from being able to semi-retire and being reasonably self-sufficient in food, power and water.
Even if you're right, you will still want to have saved some money.
Basic income means "everyone gets a check for $1000 a month, regardless of how old or young they are, or whether or not they work."
Social Security means "everyone gets a check for $X a month, once they are old enough, variable based on how much they earned when they worked."
The benefit to the employees and ability for HR to feel positive about their position in the role are arbitrary. The employees could also suffer when business wants to do something that negatively impacts them, and HR can be used to carry that out too. e.g: Switching to a shittier health plan to save money.
>Companies auto enroll people into 401(k) programs because of participation requirements. For "highly paid employees" (i.e. executives) to be allowed to contribute to a 401(k), there requires a minimum level of participation from the rest of the workforce at the company.
Employees should only contribute to a 401k up to any employer match. Beyond that put your money in an IRA.
Also, if you're maxing out both your IRA and 401k limits, even if you have a lousy 401k, you now have tax-advantaged dollars that you can roll over to Vanguard or Fidelity when you change jobs.
https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...
But also having said that, they haven't been flat over the past year. 2015 was a flat year, maybe that's what you're thinking of?