I can understand that feeling but what offers average Americans a better option for growing and securing wealth than investing (most) savings in the stock market?
The idea is basically the same as any insurance system: the bigger the pool of people participating, the more "shocks" can be absorbed without affecting the long term viability. If you have a tiny pension fund for just one person (e.g. your typical 401(k)), if it has invested its value in a way that makes it impossible to fund that person's retirement, then that person is totally screwed.
On the other hand, if you have 300 million people with upcoming retirements spread over a 45 year timeframe all as part of the same pool, the system can absorb short-term catastrophes without affecting the ability to pay people their expected pensions.
But you only get this by having a coordinated, centralized system. You do not get this by having every individual invest in the stock market, because there's no way to shift money from those currently well-ahead of expectations to those currently needing payout. There's also no way to "borrow" from the capital assets in the expectation that over a period of 30 years you'll be able to repay.
All of this was broadly understood in the 1930s-1980s. But then people were mislead to about the benefits of individual investing, of how their 401(k) would pay out more than the company or state pension plan. While that is certainly possible, it is also unlikely, and the side-effect is that the risk exposure to individuals is substantial. The only winner has been the financial services sector, which has made out like bandits on fees/commissions etc from managing these funds that used to be locked away in corporate/state pension organizations.
Centralized lets you move money as you said, but it leaves a major risk that the whole system is left in a bad state by the central manager. Particularly when they can gain stature by overpromising and leaving office before it’s time to deliver. Doubly so when they look at the investment opportunities as an opportunity to exert political control over the economy at large, like CALPERS currently strives to do.
We should be taxing people more, and guaranteeing much higher social security so we don't have to gamble our savings in a giant ponzi scheme. It shouldn't be on the individual to be lucky that a massive recession doesn't hit when they want to retire.. or depend on the market making a few percent a year just to survive.
What you're saying is young working age people should pay for those who didn't save for retirement? And what happens when a recession hits anyways and the tax base takes a hit?
Nice way to twist my words. If the system worked like I'm describing from the beginning, you wouldn't even be able to say that. Because you wouldn't need to save a substantial amount of money in a better system- everyone would have been paying it all along.
And a new young working age person would be paying more, but it's to benefit themselves in the future. So I don't even understand your point.
>And what happens when a recession hits anyways and the tax base takes a hit?
That should be planned for in whatever various ways it's being paid for. You pull in a little more money from taxes than you need to account for a buffer etc. This isn't rocket science.
I am pointing out the consequences of what you're suggesting.
> If the system worked like I'm describing from the beginning
I thought we were discussing the real world as it exists, not Narnia.
> You pull in a little more money from taxes
Even more taxes! Does it ever end?
Your 401k depends way more on people continuing to inflate it upwards. And you have ZERO guarantee, anything can happen.
At least social security is a government backed program, and they can ALWAYS find more money. Maybe it's the best solution at the time, but they can. They can raise taxes, borrow, simply print more money. And don't nitpick these points, because yes I understand there are issues and it's more complicated.. but they can do it.
Yeah because surely nothing could go wrong with having all your money in a volatile market you have no control over..
The government already guarantees social security, what is your point? If you trust the financial markets over the guarantee of the U.S. Government then I can't convince you otherwise.
We have already seen that in other countries.
How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k?
How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same.
Even just increase the standard tax on people. If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the long run, are you really saying the average person would be against that?
There are a billion ways to do this. I am not an expert, but I'm not clueless either. Plenty of other countries tax more and provide guarantees to the people. This country wants to make it seem like everything is a "choice" but it's completely to benefit the rich. "Oh I get to choose my healthcare and how much risk I want to take that I have to pay this year, great!" "Oh I get to choose what investments to put my money into even though I have zero control over the actual outcome, great!"
No argument there.
> How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k?
Why limit this to self employed people? The cap is there for all workers. And self employed people pay double the tax - if you are not self employed, your employer is paying half of it. Self employed people already have a larger burden.
> How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same.
Because then people won't invest in ... much. My guess is the majority of current investments that are profitable would no longer be if taxed as regular income.
That then means many businesses will stop existing since people will not invest in them.
> If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the long run, are you really saying the average person would be against that?
Definitely. Even though it likely is a good solution.
The real problem is that the US government, by law, is not allowed to keep the excess SS funds they collect in an "SS bucket". If the SS payouts are less than SS tax collected, the excess is required to be spent elsewhere. We've lost decades of excess SS collections because of this.
> There are a billion ways to do this. I am not an expert, but I'm not clueless either.
The CBO exists to do such calculations. Increasing SS/Medicare tends to work. Removing incentives to invest, however, is disastrous.
> "Oh I get to choose what investments to put my money into even though I have zero control over the actual outcome, great!"
There's a disconnect between saying "long term capital gains benefit the rich" and "investments are bad because I have zero control over the outcome." The latter statement is as true for you as it is for rich people. If you think investing is such a bad thing with low returns, then let them have their long term capital gains tax.
I know, I am self employed. I didn't think there was the same cap for all workers? If there is, then I agree it should be removed (or at least substantially increased).
>Because then people won't invest in ... much
Yes they will. There are always people who still want to make more money.
>If you think investing is such a bad thing with low returns, then let them have their long term capital gains tax.
I never said it's low returns- I said it's a bad thing that this is supposed to be the default way to make money. There's a huge difference there in philosophy.
And look.. the LT capital gains is not my first go to exactly.. but, I do think it's far too low and again it's something that just disproportionately advantages the rich.
Honestly that's my whole point on the investing front. This entire system was created to benefit people who already have lots of capital. My view is hoarding capital to make more capital should not be the goal of life.. but greed knows no bounds.
"There are always people" is a very different statement from "most people who invest will continue to".
Any time you lower taxes, you significantly increase investment opportunities because suddenly many unprofitable investments suddenly become profitable. In the investment circles I'm in, most people invest in things that perform lower than the S&P 500 because these are both safer, and more profitable due to the tax benefits. Remove the tax incentives, and easily 90% of the folks I know would pull out.
> I never said it's low returns- I said it's a bad thing that this is supposed to be the default way to make money. There's a huge difference there in philosophy.
It's not the "default" way. You can choose not to put in any money in 401Ks and go to more traditional approaches - things like real estate and other businesses where you have much more control over the outcomes. You can even use IRA money to do this, as well as some 401K plans.
And then you'll find out you're more likely better off with the "traditional" investing.
BTW, raising SS tax to 10% to double the returns - it's still not enough. The estimate is that SS will fund only a quarter of the expenses for most retirees. Doubling the returns means it will fund only half of their expenses.
> This entire system was created to benefit people who already have lots of capital.
This should not come as a surprise. There's a reason it's called "capitalism". For pretty much forever, the system in the US benefited those with capital, and the path to riches is to find a way to acquire some capital to let it grow. Being well off just by virtue of an salary is a fairly recent trend, and always has taken the back seat with respect to capital based investments, and always will in the US. It took a while for me to realize this (in retrospect) obvious aspect of the US economy. I can whine about it and try to change the collective psyche of a whole country, or I can find another place to live, or I can make compromises and put more focus in acquiring capital.